TREES INVESTMENT COUNSEL VIEWPOINT (Q4 2011) 

The US stock market, as measured by the Standard and Poor's 500 Index, was flat on a price basis for 2011 and had a total return of 2.09% when dividends are included.  The rest of the world, as measured by the MSCI World (non-US) Index, declined 11.8% in dollar terms.  Given the extreme correlation of equities in 2011, our stock returns closely echoed these numbers with the total return dependent on the balance of US and foreign holdings.  On average, our foreign percentage is around 40%.

Fixed income returns were significantly positive, and we had generally favorable relative returns as well.  You may have noticed that we also varied our cash reserves over the year, and we feel this aided the dollar-weighted returns as opposed to time-weighted returns, which are the only way we are allowed to report our results generally.

Today we have read forecasts from two of the largest investment firms in the world, Morgan Stanley and Citibank.  One predicted a down year, and the other predicted a new secular bull market.  Our approach remains to keep a higher quality, lower risk portfolio with solid income characteristics.

Bill Gross, the world's leading bond guru, talked of a bipolar outlook with a a high chance of both very good and very bad outcomes.  We feel our job is to keep the ranch, through both drought and flood, and still make some hay when the sun shines.

For our taxable clients, we also strive to achieve tax-efficient investing.  It is what you keep after paying Uncle Sam, not what you earn pre-tax, that makes the difference.  In the fourth quarter of 2011, we made a number of trades in accounts where we had realized substantial gains by buying additional shares and selling the high cost shares after 31 days.  The increase in share prices over the period made this a bit of a double bonus as more assets were in the market, and capital gains were reduced.

Expectations for the first half of 2012 are subdued.  The end of 100% depreciation for business assets, the continued uncertainty about payroll tax reductions and unemployment benefit limitations, and European economic weakness and financial turmoil make the modest economic progress seen over the past few months in the US difficult to sustain.

January 20, 2012