Parallel News and Events Q22012

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1 August 2012 Q Investment & Planning Newsletter Parallel News and Events Q22012 In the second quarter we remained focused on helping clients navigate a volatile market while at the same time developing our team and giving back to the communities we serve. Bowen Huang joined Parallel Advisors becoming the newest associate of our firm. She is a recent graduate of UC Berkeley. Our summer interns, AJ and Mindy, have quickly proven themselves by leading various analytical, systems, and technology projects. Outside the office many of us have taken to the road to participate in various cycling events including Team Livestrong and The National MS Society. Parallel was also represented in the Pacific Coast Century and the Sonoma Grand Fondo. Additionally, we participated in events that supported the local chapters of the Audubon Society and Peer Health Exchange. About Parallel info@paralleladvisors.com Parallel Advisors LLC, with offices in San Francisco and Denver, is an independent wealth management firm registered with the SEC. We specialize in managing investment portfolios for individuals, families and trusts and creating plans to help our clients accomplish their financial goals. Parallel Advisors, LLC 150 Spear Street, Suite 950 San Francisco, CA Toll Free Denver Office: 7887 East Belleview Ave Suite 1100 Englewood, CO (303)

2 Parallel Advisors Investment & Planning Newsletter August Monthly Market Commentary Investors continued to monitor the situation in Europe, as news on Spanish financials moved markets both down (poor Spanish bank audits) and up (support loans for Spanish banks). Up to this point, there is still no long-term remedy for European countries, with the expectation that they will continue to struggle over the next several years under austerity programs, diminished growth prospects, and waning confidence. While economic data in the U.S. were generally weak, they were not weak enough to drive the Federal Reserve to introduce a new program. Instead, the Fed merely extended Operation Twist until at least late Morningstar economists doubt that the program will have much more than a symbolic effect on rates, given the already-low rates on long-term securities. Employment: June saw a disappointing 84,000 jobs being added, mostly from sluggish private sector job gains. While the economy actually added 815,000 jobs, 731,000 were subtracted because of the seasonal adjustment factor. The good news is that in July, the seasonal adjustment factor will add, instead of subtract, more than 100,000 jobs to the total number, so that s something to look forward to. The unemployment rate remained at 8.2%. Manufacturing: Manufacturing data in June fell sharply, mainly from a massive drop in new orders. This was the largest month-to-month decline since October 2001, and reversed 37 straight months of positive growth readings. Morningstar economists believe that many firms, faced with economic uncertainty in both developed and emerging economies, may have held back on new orders. However, at this stage of the recovery, the U.S. economy can tolerate some weakness in the manufacturing sector since it only represents 11% of overall employment. Month-to-month durable goods orders jumped 1.1%, but this was not enough to offset several previous months of decline. On a year-overyear basis, growth has slowed materially, falling to 4.6% from 6.9% in the prior month. the beginning of the year because of favorable weather conditions, growth has tapered off from March through May. Fortunately, auto sales in June jumped back up to 14 million units from 13.7 million in May, which was 21% above last year s tsunami-blighted numbers, putting a stop to the downward trend. Housing: Housing data in June have been highly optimistic, with uniformly positive pricing data, new home constructions trending upwards, existing home sales data driven up at least partially by a lack of quality inventory, and homebuilder-related financial data continuing to rise. Morningstar economists believe that the more predictive, earlier-in-the-cycle data is stronger than the more concurrent data, indicating more gains ahead. Furthermore, low rates, falling inventories, and higher sales levels should lead to better pricing results as well. Quarter-end insights: It has become more clear that the U.S. is less dependent on exports than many other countries (U.S. exports represented only 13% of GDP according to 2010 data), and so a general slowing of the world economy would not drastically affect the U.S. economy. However, the U.S. economy is not the same as U.S. stocks, so S&P 500 companies that have substantial overseas exposure are still at risk. Stocks with lower overseas exposure, such as utilities, communications, and health-care stocks, were among the best performers in the second quarter. The relative U.S. strength showed up in country-level data as well, with U.S. indexes down only 5% near the end of the second quarter, while both European and emergingmarket indexes were down 10-15% for the quarter. Overall, consumers continued to spend, fueled partially by falling gasoline prices. Unfortunately, low commodity prices were bad news for many basic material companies, as prices for their goods dropped while costs of production remained relatively high. Auto: Auto sales have been a key driver in the economic recovery, and while they exploded upward in

3 Parallel Advisors Investment & Planning Newsletter August The Implications of Sovereign Debt The recent European sovereign debt crisis has brought to light the insurmountable amount of debt that Greece has accumulated over the years relative to its size and the impact of this debt on its economy. One of the popular metrics used to analyze the health of a country is government debt as a percentage of GDP, more commonly known as the debt-to-gdp ratio. As we will see, there are good reasons why many are worried about the PIIGS (Portugal, Ireland, Italy, Greece, and Spain) economies. actually declined as investors shifted their money to Treasuries in a flight to safety. Increased uncertainty in the market equates to greater volatility, which in turn can alter what investors thought was a safe or conservative investment. Investors can still potentially lose significant amounts of money investing in government-backed sovereign bonds, even though they have traditionally been considered relatively safer investments. This risk is potentially exacerbated by currency volatility when investing in international markets. The graph shows the estimated 2011 gross debt-to- GDP ratios of 12 countries and how they compare with each other. Six of them have ratios greater than 100, indicating that their debt is greater than their entire annual economic output. While 100 is not a magic number to determine the probability of default, it may provide an adequate warning to look deeper under the hood. Of course, the numbers by themselves don t tell the entire story. One reason why Japan and the U.S. differ from countries such as Portugal, Italy, Ireland, and Greece is that unlike countries in the Eurozone, Japan and the U.S. are able to print their own money. Therefore, Japan and the U.S. could theoretically pay back their debt simply by printing the amount of money owed. On the other hand, the European Central Bank controls printing of the euro. By joining the European Union, participating countries give up control over their own monetary policies and their ability to print money. As the risk of default increases for a country, there are significant financial consequences. Typically, a country s credit rating will get downgraded, causing the interest rates of its sovereign bonds to rise as it becomes riskier to invest in that country. This means it will cost the government more to borrow in order to compensate investors for the additional risk of default. As domestic and international investors lose confidence in the country s equity and bond markets, a market decline may wipe out years of investors retirement savings. If a country does eventually default, its reputation will be severely damaged and this will likely impact its ability to borrow money in the future. In 2011, the U.S. credit rating was downgraded for the first time in history. What was unique about this instance was that, instead of rising as would have been expected, interest rates for Treasuries

4 Parallel Advisors Investment & Planning Newsletter August Dividends and Inflation As an investor, you may ask if an allocation to dividend stocks in your retirement portfolio will help keep up with inflation. Examining stock returns during periods of high inflation may answer this question. Dividend-paying stocks may offer benefits such as stability through income return and inflation protection. While stock prices tend to be volatile, dividends may serve as a stable component of total return and may provide better inflation protection compared with bonds. Between 1974 and 1980 (high inflation period), the average rate of inflation was 9.3%, much higher than the historical rate of 3%. During this time, bonds yielded 7.9% from income, but prices declined by 2.7%, resulting in a total return of 5.6% way short of inflation. On the contrary, stocks returned a total of 10%: 5.0% from dividend income and 4.8% from price return, outpacing inflation for this time period. Reducing the IRS Bite with Tax- Efficient Funds Handing over a portion of your investment earnings to the IRS is never pleasant. Fortunately, a specific category of mutual funds, called tax-efficient funds, might help you keep the amount you send to Uncle Sam to a minimum. Here's how tax-efficient funds work. Mutual funds must pay you almost all of the money they make from interest, dividends, or capital gains (money made from selling stock) in a year. That's called a taxable distribution (since you must pay taxes on that money). Tax-efficient funds keep their taxable distributions as small as possible, thus lowering the amount you have to pay in taxes. Tax-efficient funds can use several strategies to keep distributions low. They avoid stocks that pay dividends. They don't sell their stocks very often. When they do sell stocks, they might also try to sell some that have lost money to offset those that have made money. They could also hold stocks for more than one year before selling, since the profits are taxed at a lower long-term capital gains rate than short-term transactions. These methods, as well as some others, keep your tax bill lower. While tax-efficient funds seem extremely attractive, there are a few drawbacks to note. First, there are only a handful of these funds available from which to choose (relative to other categories). Second, of the funds that do exist, few have long-term investment records that you can analyze. Finally, most taxefficient funds stick mainly with large-company stocks and tax-free (municipal) bonds. That means you might have to look at non-tax-efficient funds to get exposure to other types of investments in an effort to build a diversified portfolio. Diversification does not eliminate the risk of experiencing investment losses. Past performance is no guarantee of future results.

5 Parallel Advisors Investment & Planning Newsletter August Disclosures Parallel Advisors, LLC is an SEC-registered investment adviser with its Principal place of business in the State of California. Parallel Advisors is in compliance with the current notice filing requirements imposed upon SEC-registered investment advisers by those states in which Parallel Advisors maintains clients. Parallel Advisors may only transact business in those states in which it is notice filed or qualifies for an exemption or exclusion from a notice filing requirements. This newsletter is limited to the dissemination of information pertaining to Parallel Advisors investment management services and general economic market conditions and is not intended as personalized investment advice. There is no guarantee that views or opinions expressed in this newsletter will come to pass. Past performance is not indicative of future results, and it should not be assumed that recommendations made in the future will be profitable or will equal the performance of any securities or other information set forth herein. The managers and products discussed herein are considered past specific recommendations. In compliance with SEC regulations, complete details regarding all manager recommendations made within the immediately preceding 12 months are available free of charge upon request. In addition, performance disclosed herein may vary client by client due to cash movements, tax situations or other client directed mandates. Any subsequent, direct communication by Parallel Advisors with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. For information pertaining to the registration status of Parallel Advisors, please contact Parallel Advisors or refer to the Investment Adviser Public Disclosure web site ( Morningstar, Inc. All Rights Reserved. The information contained herein (1) is intended solely for informational purposes; (2) is proprietary to Morningstar and/or the content providers; (3) is not warranted to be accurate, complete, or timely; and (4) does not constitute investment advice of any kind. Neither Morningstar nor the content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. "Morningstar" and the Morningstar logo are registered trademarks of Morningstar, Inc. Morningstar Market Commentary originally published by Robert Johnson, CFA, Director of Economic Analysis with Morningstar and has been modified for Morningstar Newsletter Builder. Parallel Advisors 150 Spear St. Suite 950 San Francisco, California info@paralleladvisors.com Tel: