5000 Executive Parkway, Ste 420 San Ramon, CA 94583

2nd January 2016 Market Update

As of the writing of this letter, the market as a whole has continued its decline to around a drop of 10% year to date and close to 15% from the 2015 highs. Oil continues to dominate the headlines as it has fallen through $30 per barrel of West Texas Intermediate, nearing $25 per barrel and is anyone’s guess as to where it will end up. The good news is that we have taken steps to limit our portfolio exposure to energy and the high yield credit sector which are closely tied to the price of oil. Although we don’t think the current market trend is indicative of how the year will finish, the storm has yet to pass.

An important point to note is that we build our models to be a diversified mix of stocks, bonds and alternatives. For instance, the 10 Year Treasury Note has fallen to a 3 month low as the yield is now under 2.00%. The impact of this is that the fixed income portion of our portfolios appreciates in value when yields fall which validates their inclusion in our models. Despite their boring nature, bonds serve an important role in the diversification of our models and at times like this, their value is more evident.

The major difference that we see between today’s market environment and 2008 is that there were major impacts to nearly every American (either you or someone you knew). For one, leverage, putting little or no equity into a home with the hopes of flipping it for a windfall, was the name of the game. Now leverage is something that always exists, but it isn’t something that is running rampant like in the lead up to 2008. As for impact of the low price of Oil, Oil & Gas and Mining combined was only 2.6% of GDP in 2014. It is a stark difference when we compare that to Housing, which between both residential investment and housing services, has averaged roughly 17-18% of GDP. Also, corporate balance sheets are significantly better while Dodd-Frank and the subsequent capital requirements for banks and insurers, although not perfect, have added controls to the system that did not exist in 2008.

Any time the market reverses its upward trend, there is a lot of concern; but at this point in time, we do not see a reason to make a drastic cut to the risk of our portfolios by moving a large percentage to cash. We continue to monitor the markets closely and will alert you of any changes to our strategy. However, if you’re currently feeling that you are taking too much risk, that perhaps your risk tolerance or time horizon for your account(s) has changed, please reach out to us so that we can discuss those changes with you.