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Change is Good

I am proud to announce, as of November 1, 2012, Hotaling Investment Management, LLC has transitioned to an independent investment advisory firm. All of us would like to thank you for your patience and helpful interaction. We have relocated to downtown Wayne, and invite you to come visit our new offices if you have not already. If that is not possible, please visit our new web site www.hotalingllc.com where you can experience a taste of our new presence in the investment management world.

I want your experience of the change in the structure of our business to be seamless. We will both need to become accustomed to some new aspects to our relationship, and we will help bridge this for you. From our end, transitions typically lead to challenges, new learning and ultimately an improved potential. We want to be open to new capabilities in the investment management world that will ultimately benefit you. My overarching goals are to continue to provide you direct access to us, quality investment management and customized financial planning solutions. We are now better positioned to do this than ever before.

Change can often help us step outside our box. It is often easy to slip into thought habits, or put on someone else’s blinkers. For example, even though we are confronting a list of global and domestic issues and most investors sense a high degree of anxiety, 2012 has been a good year to be an investor. Stocks and bonds have produced attractive returns. The S&P 500 has returned 14.9% through the end of November. To put this year’s results into some context, the average price return for the S&P 500 dating back to 1929 is about 7%. The average for the past 10 years is about 3%. These figures do not include dividends or the re-investment of dividends.

Change is ever present. At the moment, some investors are uncomfortable with what has been dubbed the “fiscal cliff” and it has become a bit obsessive. We owe this to a large degree to the media. The media’s ability to define the issues we face is extraordinary. This is vastly different than simply reporting the news. The choice of language, the nuance and the frequency of the message all have impact on our views.

My opinion is that the policy makers will resolve the tax and budget complications. While it is as politicized as ever, it is solvable. When we are on the other side of the “issue” looking back, like so many times in the past, it will seem so much less than it does at the moment. Markets reflect perpetual uncertainty. This has been the case throughout history. No outcome has ever been comfortably known, in advance. As soon as the most pressing concern of the day is resolved, another will take its place. It never gets “easy.”

Current economic data (home prices, employment, auto sales) shows signs of positive change – and the most important aspect of economic data is its directionally, not its absolute level. Corporate profits and thus earnings remain solid. Stocks look well priced (though not cheap) and are likely the asset category of choice for the next 12-18 months. Board room discussions today have to do with return to shareholder – things such as dividends and share buy-backs. Potential tax law changes will likely not have a dramatic impact on the investment merit of these discussions. Cash on balance sheets is high, and interest rates are low. You will likely hear of companies issuing debt to fund dividends, something unimaginable 4 years ago.

Investment grade corporate and municipal bonds look expensive to me. If you own bonds, by all means hold on to them, but at the moment, its no place to shop. Other sources of income such as higher yielding corporate bonds and certain real estate investment trusts are more attractively priced.

Patience in markets like these is of the utmost importance. As a rule, it is better to “sit on cash” than to over pay for an asset. Warren Buffett, who needs no introduction, commented on owning stocks over the last 100 years, “You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.” (NY Times, October 16, 2008) Though it is extremely difficult, we want to be sure we do not feed into the sentiment of the day.

Please feel free to check in if you have any questions or would like to review you portfolio prior to year end. Valerie, Eileen, Justin and I are always available to take care of you.

Bruce Hotaling, CFA

Managing Partner

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