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</table> </td> </tr> <tr style='mso-yfti-irow:1;mso-yfti-lastrow:yes'> <td style='background:#000066;padding:1.5pt 1.5pt 1.5pt 1.5pt'> <table class=MsoNormalTable border=0 cellspacing=0 cellpadding=0 width="100%" style='width:100.0%;mso-cellspacing:0in;mso-yfti-tbllook:1184;mso-padding-alt: 3.75pt 3.75pt 3.75pt 3.75pt' id="content_LETTER.BLOCK2" aria-posinset=0 aria-setsize=0 hidefocus=true tabindex=0 cols=0 aria-level=0 contenteditable=inherit datapagesize=0> <tr style='mso-yfti-irow:0;mso-yfti-firstrow:yes;height:45.0pt'> <td width="100%" style='width:100.0%;background:#000066;padding:3.75pt 3.75pt 3.75pt 3.75pt; height:45.0pt'> <table class=MsoNormalTable border=0 cellspacing=0 cellpadding=0 width="100%" style='width:100.0%;mso-cellspacing:0in;background:#000066; mso-yfti-tbllook:1184;mso-padding-alt:3.75pt 3.75pt 3.75pt 3.75pt'> <tr style='mso-yfti-irow:0;mso-yfti-firstrow:yes;mso-yfti-lastrow:yes'> <td style='padding:3.75pt 3.75pt 3.75pt 3.75pt'> <p align=center style='text-align:center'><span style='font-size:36.0pt; font-family:"Garamond","serif";color:white'>H</span><span style='font-size:24.0pt;font-family:"Garamond","serif";color:white'>ERON </span><span style='font-size:36.0pt;font-family:"Garamond","serif";color:white'>C</span><span style='font-size:24.0pt;font-family:"Garamond","serif";color:white'>APITAL </span><span style='font-size:36.0pt;font-family:"Garamond","serif"; color:white'>M</span><span style='font-size:24.0pt;font-family:"Garamond","serif"; color:white'>ANAGEMENT </span><span style='font-size:18.0pt;font-family: "Trebuchet MS","sans-serif";color:white'><o:p></o:p></span></p> <p class=MsoNormal align=center style='text-align:center'><span style='font-size:36.0pt;font-family:"Garamond","serif";color:white'>F</span><span style='font-size:24.0pt;font-family:"Garamond","serif";color:white'>INANCIAL</span><span style='font-size:36.0pt;font-family:"Garamond","serif";color:white'> M</span><span style='font-size:24.0pt;font-family:"Garamond","serif";color:white'>ARKETS </span><span style='font-size:36.0pt;font-family:"Garamond","serif"; color:white'>C</span><span style='font-size:24.0pt;font-family:"Garamond","serif"; color:white'>OMMENTARY <o:p></o:p></span></p> <div> <p class=MsoNormal align=center style='text-align:center'><span style='font-family:"Garamond","serif";color:white'>February 9<sup>th</sup>, 2010</span><span style='font-size:18.0pt;font-family:"Trebuchet MS","sans-serif"; color:white'><o:p></o:p></span></p> </div> </td> <td style='padding:3.75pt 3.75pt 3.75pt 3.75pt'> <p align=right style='text-align:right'><span style='font-size:10.0pt; font-family:"Verdana","sans-serif";color:white'>&nbsp;<o:p></o:p></span></p> </td> </tr> </table> </td> </tr> <tr style='mso-yfti-irow:1;height:4.5pt'> <td style='background:#000066;padding:3.75pt 3.75pt 3.75pt 3.75pt; height:4.5pt'></td> </tr> <tr style='mso-yfti-irow:2'> <td width="100%" style='width:100.0%;background:white;padding:3.75pt 3.75pt 3.75pt 3.75pt'> <table class=MsoNormalTable border=0 cellspacing=0 cellpadding=0 width="100%" style='width:100.0%;mso-cellspacing:0in;background:white; mso-yfti-tbllook:1184;mso-padding-alt:3.75pt 3.75pt 3.75pt 3.75pt' id="content_LETTER.BLOCK4" aria-posinset=0 aria-setsize=0 hidefocus=true tabindex=0 cols=0 aria-level=0 contenteditable=inherit datapagesize=0> <tr style='mso-yfti-irow:0;mso-yfti-firstrow:yes;mso-yfti-lastrow:yes'> <td style='padding:3.75pt 3.75pt 3.75pt 3.75pt'> <div> <div> <div> <p class=MsoNormal style='margin-bottom:4.5pt'><u><span style='font-size: 10.0pt;font-family:"Trebuchet MS","sans-serif";color:#000066'>Trust, illusion, values and the death of &quot;common sense&quot;<o:p></o:p></span></u></p> </div> </div> <div color="#000064"> <p class=MsoNormal style='margin-bottom:4.5pt'><span style='font-size: 10.0pt;font-family:"Trebuchet MS","sans-serif";color:#000066'>The S&amp;P 500 rallied 73.2% from the March 9th, 2008 low through the recent peak and declined 6.9% since January 19th.<span style='mso-spacerun:yes'>  </span>This is a normal correction and similar to the 7% decline we saw last June 15th-July 10th.<span style='mso-spacerun:yes'>  </span>If the correction extended to a 10% decline, we would not be surprised.<span style='mso-spacerun:yes'>  </span>We would not sell stocks at this time as we expect positive returns in the S&amp;P 500 by year end.<span style='mso-spacerun:yes'>  </span>No, we're not going to try to trade around the short-term fall and rally.<span style='mso-spacerun:yes'>  </span><o:p></o:p></span></p> </div> <div color="#000064"> <p class=MsoNormal style='margin-bottom:4.5pt'><span style='font-size: 10.0pt;font-family:"Trebuchet MS","sans-serif";color:#000066'>&nbsp;<o:p></o:p></span></p> </div> <div color="#000064"> <p class=MsoNormal style='margin-bottom:4.5pt'><span style='font-size: 10.0pt;font-family:"Trebuchet MS","sans-serif";color:#000066'>We're encouraged by corporate earnings, which show an astonishing rebound (up 148% compared to Q4 2008) after last year's wipeout.<span style='mso-spacerun:yes'>  </span>US GDP growth turned in the best performance in 6 years with a year over year gain of 5.7%.<span style='mso-spacerun:yes'>  </span>The US employment situation improved -job losses flattened and the unemployment rate fell slightly.<span style='mso-spacerun:yes'>  </span>By no means is the US economy, or the world economy for that matter, free and clear.<span style='mso-spacerun:yes'>  </span><o:p></o:p></span></p> </div> <div color="#000064"> <p class=MsoNormal style='margin-bottom:4.5pt'><span style='font-size: 10.0pt;font-family:"Trebuchet MS","sans-serif";color:#000066'>&nbsp;<o:p></o:p></span></p> </div> <div color="#000064"> <p class=MsoNormal style='margin-bottom:4.5pt'><span style='font-size: 10.0pt;font-family:"Trebuchet MS","sans-serif";color:#000066'>We have often described the economy as an automobile engine in which the production of goods and services are the pistons, cylinders and drive-shaft; designers, engineers and marketers are the gasoline, and the finance sector is the 5 quarts of oil that keep everything moving.<span style='mso-spacerun:yes'>  </span>The financial crisis last year was like losing most of that oil, at which point the moving parts overheat, jam and crack.<span style='mso-spacerun:yes'>  </span>We're back to 4 quarts in the pan with a raggedly running engine, and we don't yet know the extent of permanent damage.<o:p></o:p></span></p> </div> <div color="#000064"> <p class=MsoNormal style='margin-bottom:4.5pt'><span style='font-size: 10.0pt;font-family:"Trebuchet MS","sans-serif";color:#000066'>&nbsp;<o:p></o:p></span></p> </div> <div color="#000064"> <p class=MsoNormal style='margin-bottom:4.5pt'><span style='font-size: 10.0pt;font-family:"Trebuchet MS","sans-serif";color:#000066'>On balance, we remain cautiously optimistic.<span style='mso-spacerun:yes'>  </span>However, the average investor remains deeply pessimistic.<span style='mso-spacerun:yes'>  </span>Investors moved money out of stock funds and stock ETF's every month from August through December last year and were net sellers of stocks despite the monster run up.<span style='mso-spacerun:yes'>  </span>The last time investors were so pessimistic was in the years following the 1973-4 bear market, during which time the S&amp;P 500 declined 48.0%.<span style='mso-spacerun:yes'>  </span>Economic fundamentals actually were far worse in that era - US support of Israel during the Yom Kippur war triggered an OPEC oil embargo, which tripled energy prices in a very short time frame and caused soaring inflation.<span style='mso-spacerun:yes'>  </span>At the same time, the US was transitioning from a manufacturing to a service based economy with corresponding disruption and high unemployment.<span style='mso-spacerun:yes'>  </span>Stock prices did not eclipse the 1972 high until 1982.<span style='mso-spacerun:yes'>  </span>Investors who bought stocks in that era experienced returns of 2600% over the next two decades, but many more swore never to buy stocks again.<o:p></o:p></span></p> </div> <div color="#000064"> <p class=MsoNormal style='margin-bottom:4.5pt'><span style='font-size: 10.0pt;font-family:"Trebuchet MS","sans-serif";color:#000066'>&nbsp;<o:p></o:p></span></p> </div> <div color="#000064"> <p class=MsoNormal style='margin-bottom:4.5pt'><span style='font-size: 10.0pt;font-family:"Trebuchet MS","sans-serif";color:#000066'>We were reminded of that history during a recent annual review with one of our clients, the CFO of a Fortune 500 company.<span style='mso-spacerun:yes'>  </span>We routinely ask that client how much of his annual bonus he wants to invest, and this year we were surprised as his answer: &quot;I don't want to invest any of my bonus in stocks.<span style='mso-spacerun:yes'>  </span><u>I don't trust the market anymore.</u>&quot; Really?!?<span style='mso-spacerun:yes'>  </span>A CFO's job responsibilities include representing his company to research analysts and working with investment bankers to market that company's bond and secondary offerings.<span style='mso-spacerun:yes'>  </span>That person thinks stocks are too risky?<span style='mso-spacerun:yes'>  </span>Wow!<span style='mso-spacerun:yes'>  </span>How did we arrive at this sorry state of affairs? <o:p></o:p></span></p> </div> <div color="#000064"> <p class=MsoNormal style='margin-bottom:4.5pt'><span style='font-size: 10.0pt;font-family:"Trebuchet MS","sans-serif";color:#000066'>&nbsp;<o:p></o:p></span></p> </div> <div color="#000064"> <p class=MsoNormal style='margin-bottom:4.5pt'><span style='font-size: 10.0pt;font-family:"Trebuchet MS","sans-serif";color:#000066'>Stock markets exist to allow savers to spread their capital across multiple investments in corporations, thus reducing risk while earning a respectable return to support future needs.<span style='mso-spacerun:yes'>  </span>Corporations meanwhile have access to relatively unencumbered capital (compared, for example, to borrowing from a bank,) which enables faster growth.<span style='mso-spacerun:yes'>  </span>At the center of the stock market are &quot;market makers&quot; who facilitate transfer of ownership from one saver to another by taking temporary ownership of a position.<span style='mso-spacerun:yes'>  </span>Market makers are paid for providing their capital by taking a spread on each transaction (i.e. the price of a stock on offer is always a little higher than the bid for the same stock.&quot;<span style='mso-spacerun:yes'>  </span>The net effect is a &quot;positive sum game&quot; where every participant does better working within the market than working outside.<span style='mso-spacerun:yes'>  </span>In the US, this system functioned pretty well for over 300 years, enabling the US to grow to 25% of world GDP with only 5% of the world's population.<o:p></o:p></span></p> </div> <div color="#000064"> <p class=MsoNormal style='margin-bottom:4.5pt'><span style='font-size: 10.0pt;font-family:"Trebuchet MS","sans-serif";color:#000066'>&nbsp;<o:p></o:p></span></p> </div> <div color="#000064"> <p class=MsoNormal style='margin-bottom:4.5pt'><span style='font-size: 10.0pt;font-family:"Trebuchet MS","sans-serif";color:#000066'>In the last two decades, however, technology has transformed the relationship between savers, corporations and market makers.<span style='mso-spacerun:yes'>  </span>As Warren Buffet wrote as early as 2001, &quot;With each passing year, the noise level in the stock market rises.<span style='mso-spacerun:yes'>  </span>Television commentators, financial writers, analysts, and market strategists are all overtaking each other to get investors' attention.<span style='mso-spacerun:yes'>  </span>At the same time, individual investors, immersed in chat rooms and message boards, are exchanging questionable and often misleading tips.&quot;<span style='mso-spacerun:yes'>  </span>All these resources give average investors the illusion that they can invest for themselves.<span style='mso-spacerun:yes'>  </span>Our opinion is the average investor is no better equipped to research their own stocks and build their own portfolios than the average Saturday night poker player is equipped to compete at the professional tables in Las Vegas.<span style='mso-spacerun:yes'>  </span>We've been researching stocks for over 30 years and we're still amazed at the things that go wrong.<o:p></o:p></span></p> </div> <div color="#000064"> <p class=MsoNormal style='margin-bottom:4.5pt'><span style='font-size: 10.0pt;font-family:"Trebuchet MS","sans-serif";color:#000066'>&nbsp;<o:p></o:p></span></p> </div> <div color="#000064"> <p class=MsoNormal style='margin-bottom:4.5pt'><span style='font-size: 10.0pt;font-family:"Trebuchet MS","sans-serif";color:#000066'>Spreads on stock transactions, which averaged 25 cents/share in the 1980's, are now a penny a share.<span style='mso-spacerun:yes'>  </span>Many market makers have abandoned the major exchanges while an ever higher percentage of volume has shifted to &quot;electronic crossing networks&quot;(ECN's) where prices don't have to be disclosed and no capital exists to dampen swings in supply and demand.<span style='mso-spacerun:yes'>  </span>What's really irritating is that certain investors, called &quot;high frequency traders&quot; (HFT) are authorized to connect directly to the exchange computers, fire off millions of trades a day to take advantage of order flow, and extract up to $20 billion/year in &quot;profits.&quot;<span style='mso-spacerun:yes'>  </span>On the one hand, these traders provide the liquidity that market makers used to offer.<span style='mso-spacerun:yes'>  </span>On the other hand, with HFT accounting for 40-55% of daily volume, that liquidity comes at a cost to buy &amp; hold investors, traditional mutual fund and pension managers.<span style='mso-spacerun:yes'>  </span>HFT converts the stock market from a positive sum game, to a zero or even negative sum game.<o:p></o:p></span></p> </div> <div color="#000064"> <p class=MsoNormal style='margin-bottom:4.5pt'><span style='font-size: 10.0pt;font-family:"Trebuchet MS","sans-serif";color:#000066'>&nbsp;<o:p></o:p></span></p> </div> <div color="#000064"> <p class=MsoNormal style='margin-bottom:4.5pt'><span style='font-size: 10.0pt;font-family:"Trebuchet MS","sans-serif";color:#000066'>At a certain point, someone has to make some <u>value</u> decisions.<span style='mso-spacerun:yes'>  </span>Is the liquidity provided by HFT a sufficient benefit to offset its costs to overall investors?<span style='mso-spacerun:yes'>  </span>Is unrestrained liquidity necessarily a good thing?<span style='mso-spacerun:yes'>  </span>Just because you can buy and sell 100 shares of Intel within a 5 minute (5 second, 5 millisecond) period doesn't mean value is created.<span style='mso-spacerun:yes'>  </span>What is the value of being able to buy the SPDR's S&amp;P 500 EFT continuously through the trading day versus buying it at day end as the Vanguard Index 500 mutual fund?<span style='mso-spacerun:yes'>  </span>Buying the ETF incurs a commission, buying the fund does not.<span style='mso-spacerun:yes'>  </span>Is the $8 commission worth the extra opportunity to buy and sell, or does the continuous pricing promote over trading?<o:p></o:p></span></p> </div> <div color="#000064"> <p class=MsoNormal style='margin-bottom:4.5pt'><span style='font-size: 10.0pt;font-family:"Trebuchet MS","sans-serif";color:#000066'>&nbsp;<o:p></o:p></span></p> </div> <div color="#000064"> <p class=MsoNormal style='margin-bottom:4.5pt'><span style='font-size: 10.0pt;font-family:"Trebuchet MS","sans-serif";color:#000066'>We already have observed that shorting the narrowly defined Finance sector ETF's in fall 2008 allowed hedge funds to trash bank stocks without the inconvenience of having to borrow stock.<span style='mso-spacerun:yes'>  </span>We think the UltraPro Long and Short ETF's are particularly heinous.<span style='mso-spacerun:yes'>  </span>With up to three times leverage on the underlying S&amp;P 500, these &quot;products&quot; allow investors to completely bypass margin rules.<span style='mso-spacerun:yes'>  </span>Hedge funds love 'em, but individual investors got their eyeballs ripped out.<o:p></o:p></span></p> </div> <div color="#000064"> <p class=MsoNormal style='margin-bottom:4.5pt'><span style='font-size: 10.0pt;font-family:"Trebuchet MS","sans-serif";color:#000066'>&nbsp;<o:p></o:p></span></p> </div> <div color="#000064"> <p class=MsoNormal style='margin-bottom:4.5pt'><span style='font-size: 10.0pt;font-family:"Trebuchet MS","sans-serif";color:#000066'>What really kills investor's trust in markets is the creation of what we call &quot;negative sum&quot; products - an innovation where some trader profits, but others take a disproportionate loss.<span style='mso-spacerun:yes'>  </span>John Paulson was the principal of the relatively modest &quot;Paulson &amp; Co&quot; hedge fund.<span style='mso-spacerun:yes'>  </span>Like many, he recognized the bubble in housing from 2005 on.<span style='mso-spacerun:yes'>  </span>Unlike most, as documented in Gregory Zuckerman's <u>The Greatest Trade Ever</u>, he figured out a way to profit from the eventual bursting of the bubble.<span style='mso-spacerun:yes'>  </span><o:p></o:p></span></p> </div> <div color="#000064"> <p class=MsoNormal style='margin-bottom:4.5pt'><span style='font-size: 10.0pt;font-family:"Trebuchet MS","sans-serif";color:#000066'>&nbsp;<o:p></o:p></span></p> </div> <div color="#000064"> <p class=MsoNormal style='margin-bottom:4.5pt'><span style='font-size: 10.0pt;font-family:"Trebuchet MS","sans-serif";color:#000066'>Junk mortgages written against junk properties were packaged into junk securities called collateralized debt obligations (CDO's).<span style='mso-spacerun:yes'>  </span>Unfortunately, as no one could remember a time when mortgages were not good collateral, these securities were rated AA or AAA by the ratings agencies and sold to pension plans all over the country.<span style='mso-spacerun:yes'>  </span>As fast as the CDO's were sold, underwriters of these securities were also selling Credit Default Swaps (CDS) on the same securities.<span style='mso-spacerun:yes'>  </span>A CDS agreement says that in the event that the issuer (the CDO) defaults, the owner of the CDS has the right to sell (put) the bond back to the issuer at par (same price as issue price.)<o:p></o:p></span></p> </div> <div color="#000064"> <p class=MsoNormal style='margin-bottom:4.5pt'><span style='font-size: 10.0pt;font-family:"Trebuchet MS","sans-serif";color:#000066'>&nbsp;<o:p></o:p></span></p> </div> <div color="#000064"> <p class=MsoNormal style='margin-bottom:4.5pt'><span style='font-size: 10.0pt;font-family:"Trebuchet MS","sans-serif";color:#000066'>Paulson didn't own the CDO's but bought mountains of CDS.<span style='mso-spacerun:yes'>  </span>He actually went to Goldman Sachs and pleaded (colluded?) with them to issue more CDO's so he could buy more CDS.<span style='mso-spacerun:yes'>  </span>When the bonds collapsed in value in 2007 and 2008, Paulson's company made $20 billion and he personally made $4 billion.<span style='mso-spacerun:yes'>  </span>Good fun for all except that the pension plans, representing the hopes and dreams of millions of ordinary Americans, lost about $1 trillion.<span style='mso-spacerun:yes'>  </span>$20 billion gain offset by a $1 trillion loss?<span style='mso-spacerun:yes'>  </span>Sound to us like the <u>Worst Trade of All Time!</u><span style='mso-spacerun:yes'>  </span>Here's the <u>value</u> question: can we afford to live in a system where such trades are legal?<o:p></o:p></span></p> </div> <div color="#000064"> <p class=MsoNormal style='margin-bottom:4.5pt'><span style='font-size: 10.0pt;font-family:"Trebuchet MS","sans-serif";color:#000066'>&nbsp;<o:p></o:p></span></p> </div> <div color="#000064"> <p class=MsoNormal style='margin-bottom:4.5pt'><u><span style='font-size: 10.0pt;font-family:"Trebuchet MS","sans-serif";color:#000066'>The Death of Common Sense</span></u><span style='font-size:10.0pt;font-family:"Trebuchet MS","sans-serif"; color:#000066'><o:p></o:p></span></p> </div> <div color="#000064"> <p class=MsoNormal style='margin-bottom:4.5pt'><span style='font-size: 10.0pt;font-family:"Trebuchet MS","sans-serif";color:#000066'>We'd like to think that there's a regulatory agency or agencies that understands all of the above and has both the will and the means to reign in abuses.<span style='mso-spacerun:yes'>  </span>Unfortunately, &quot;common sense&quot; understanding of how markets work was sacrificed to the ideals of &quot;market efficiency&quot; and deregulation.<span style='mso-spacerun:yes'>  </span>As we have previously noted, the agencies to safeguard investors, in particular the SEC, were starved of funds and stripped of authority from the 1990's on.<span style='mso-spacerun:yes'>  </span>The Glass-Steagall Act of 1932, which separated risk taking investment banks from deposit taking commercials banks, was repealed in 1999. The Federal Reserve took a &quot;laissez-faire&quot; attitude to the leveraging up of bank balance sheets, despite the experience derived from the 1998 Long Term Capital Management crisis.<span style='mso-spacerun:yes'>  </span>By the mid 2000's US banks were as aggressively leveraged as LTCM in its heyday, with balance sheets a 100 times larger.<span style='mso-spacerun:yes'>  </span>At such leverage levels it took only 5 days for Lehman Brothers to go from fully capitalized to bankrupt in September 2008.<o:p></o:p></span></p> </div> <div color="#000064"> <p class=MsoNormal style='margin-bottom:4.5pt'><span style='font-size: 10.0pt;font-family:"Trebuchet MS","sans-serif";color:#000066'>&nbsp;<o:p></o:p></span></p> </div> <div color="#000064"> <p class=MsoNormal style='margin-bottom:4.5pt'><span style='font-size: 10.0pt;font-family:"Trebuchet MS","sans-serif";color:#000066'>We'd like to see:<o:p></o:p></span></p> </div> <div color="#000064"> <ul type=disc> <li class=MsoNormal style='color:#000066;mso-margin-top-alt:auto; mso-margin-bottom-alt:auto;mso-list:l0 level1 lfo1;tab-stops:list .5in'><span style='font-size:10.0pt;font-family:"Trebuchet MS","sans-serif"'>Implementation of the Consumer Finance Protection Agency to oversee the marketing of mortgages, car loans and credit cards.<span style='mso-spacerun:yes'>  </span>Millions of Americans are routinely gouged on interest rates and fees.<span style='mso-spacerun:yes'>  </span>That fact that the banking industry vigorously opposes such an agency tells us how badly it's needed.<span style='mso-spacerun:yes'>  </span>Many of our clients who are small business owners have complained to us that their credit lines have been slashed recently while their rates increased - not good for promoting economic recovery.<o:p></o:p></span></li> </ul> </div> <div color="#000064"> <ul type=disc> <li class=MsoNormal style='color:#000066;mso-margin-top-alt:auto; mso-margin-bottom-alt:auto;mso-list:l0 level1 lfo1;tab-stops:list .5in'><span style='font-size:10.0pt;font-family:"Trebuchet MS","sans-serif"'>The SEC enforcing its own rules on &quot;naked&quot; short selling, which is to say, without first borrowing the stock.<o:p></o:p></span></li> </ul> </div> <div color="#000064"> <ul type=disc> <li class=MsoNormal style='color:#000066;mso-margin-top-alt:auto; mso-margin-bottom-alt:auto;mso-list:l0 level1 lfo1;tab-stops:list .5in'><span style='font-size:10.0pt;font-family:"Trebuchet MS","sans-serif"'>A blanket ban on shorting ETF's, which have no location requirement.<o:p></o:p></span></li> </ul> </div> <div color="#000064"> <ul type=disc> <li class=MsoNormal style='color:#000066;mso-margin-top-alt:auto; mso-margin-bottom-alt:auto;mso-list:l0 level1 lfo1;tab-stops:list .5in'><span style='font-size:10.0pt;font-family:"Trebuchet MS","sans-serif"'>A blanket ban on &quot;inverse&quot; or &quot;bear&quot; ETF's, which have nothing to do with the capital raising function of the stock market and exist only as speculative tools.<o:p></o:p></span></li> </ul> </div> <div color="#000064"> <ul type=disc> <li class=MsoNormal style='color:#000066;mso-margin-top-alt:auto; mso-margin-bottom-alt:auto;mso-list:l0 level1 lfo1;tab-stops:list .5in'><span style='font-size:10.0pt;font-family:"Trebuchet MS","sans-serif"'>A blanket ban on leveraged ETF's, which as we have noted above, circumvent margin rules.<o:p></o:p></span></li> </ul> </div> <div color="#000064"> <ul type=disc> <li class=MsoNormal style='color:#000066;mso-margin-top-alt:auto; mso-margin-bottom-alt:auto;mso-list:l0 level1 lfo1;tab-stops:list .5in'><span style='font-size:10.0pt;font-family:"Trebuchet MS","sans-serif"'>A severe curtailment on issuance of Credit Default Swaps.<span style='mso-spacerun:yes'>  </span>Bonds are bought primarily by institutional investors.<span style='mso-spacerun:yes'>  </span>Those managers have a fiduciary responsibility to evaluate the credit quality of the bonds they invest in <u>independently</u> of what the rating agencies might say.<span style='mso-spacerun:yes'>  </span>If those investors have done their homework, there's no need to give away their shareholders' yield in CDS premiums.<span style='mso-spacerun:yes'>  </span>Meanwhile, by reducing the pool of CDS, you also reduce the instruments by which speculators can profit from a company's distress.<span style='mso-spacerun:yes'>  </span>This technique has been likened to buying homeowners insurance on all your neighbors' houses, then setting the town on fire.<o:p></o:p></span></li> </ul> </div> <div color="#000064"> <ul type=disc> <li class=MsoNormal style='color:#000066;mso-margin-top-alt:auto; mso-margin-bottom-alt:auto;mso-list:l0 level1 lfo1;tab-stops:list .5in'><span style='font-size:10.0pt;font-family:"Trebuchet MS","sans-serif"'>Enact a &quot;stamp tax&quot; of a hundredth of a cent per trade.<span style='mso-spacerun:yes'>  </span>Routine investors won't notice the pinch at all, but it sure would put some friction into HFT, perhaps shrink that activity to a reasonable percentage of daily flow.<o:p></o:p></span></li> </ul> </div> <div color="#000064"> <ul type=disc> <li class=MsoNormal style='color:#000066;mso-margin-top-alt:auto; mso-margin-bottom-alt:auto;mso-list:l0 level1 lfo1;tab-stops:list .5in'><span style='font-size:10.0pt;font-family:"Trebuchet MS","sans-serif"'>Reinstate some version of the &quot;up tick&quot; rule and also shrink the bands for triggering stocks market circuit breakers.<span style='mso-spacerun:yes'>  </span>At present, the market has to fall at least 10% in a day before triggering a one hour halt.<span style='mso-spacerun:yes'>  </span>Even during the volatile period in 2008-9, the largest daily decline was only 7%.<span style='mso-spacerun:yes'>  </span>Extend the rules to all exchanges and ECN's, not just the NYSE.<o:p></o:p></span></li> </ul> </div> <div color="#000064"> <ul type=disc> <li class=MsoNormal style='color:#000066;mso-margin-top-alt:auto; mso-margin-bottom-alt:auto;mso-list:l0 level1 lfo1;tab-stops:list .5in'><span style='font-size:10.0pt;font-family:"Trebuchet MS","sans-serif"'>Continued requirement that bank bonuses be paid partially in restricted stock.<span style='mso-spacerun:yes'>  </span>If bank employees as a company fail to regulate each other, then all should suffer together.<o:p></o:p></span></li> </ul> </div> <div color="#000064"> <ul type=disc> <li class=MsoNormal style='color:#000066;mso-margin-top-alt:auto; mso-margin-bottom-alt:auto;mso-list:l0 level1 lfo1;tab-stops:list .5in'><span style='font-size:10.0pt;font-family:"Trebuchet MS","sans-serif"'>Recognition of the &quot;Trader's Option&quot; in compensation schemes (&quot;Heads, I make a ton of money; tails, you lose, but I don't have to give back my bonus.&quot;)<o:p></o:p></span></li> </ul> </div> <div> <p class=MsoNormal><span style='font-size:10.0pt;font-family:"Trebuchet MS","sans-serif"; color:#000066'>&nbsp;<o:p></o:p></span></p> </div> <div color="#000064"> <p class=MsoNormal><span style='font-size:10.0pt;font-family:"Trebuchet MS","sans-serif"; color:#000066'>The probability of all these concepts being implemented is low.<span style='mso-spacerun:yes'>  </span>The benefit to average Americans is diffuse, while the profits that would be lost by those who currently benefit are high.<span style='mso-spacerun:yes'>  </span>Lobbying in Washington is intense right now to prevent or emasculate any regulatory reform.<span style='mso-spacerun:yes'>  </span>Luckily, all Americans have the right to weigh in.<span style='mso-spacerun:yes'>  </span>Go to <a href="http://r20.rs6.net/tn.jsp?et=1103021972585&amp;s=1&amp;e=001eJZ5HtdOV9_IOoFSzVOGVdCqCABbq3eMP0hUSB8aemMlKy3A53If6uworE0uNfXtqhj5RAihzHEa4-jw109VDcc_8UjjAjyoXdBUay-pVrg=" target="_blank" track=on shape=rect linktype=link>www.senate.gov</a> or <a href="http://r20.rs6.net/tn.jsp?et=1103021972585&amp;s=1&amp;e=001eJZ5HtdOV986NXFsA6_tB8xpl9ht7l_71TiHVw4xAnJOguRlHof6whg3UEbVnMwd_kVyEgFDrMrs9dnZNO1NmUEuScGA5etE4TNwyijJ9TM=" target="_blank" track=on shape=rect linktype=link>www.house.gov</a> to learn more about legislation under consideration and register your opinion.<span style='mso-spacerun:yes'>  </span>You can communicate with your own senator or representative, or you can write to those congressmen who have influence over the current legislation.<span style='mso-spacerun:yes'>  </span>For example, Barney Frank presides over the Financial Services Committee, while Christopher Dodd presides over Banking, Housing &amp; Urban Affairs (at least until his retirement.)<span style='mso-spacerun:yes'>  </span><o:p></o:p></span></p> </div> <div color="#000064"> <p class=MsoNormal><span style='font-size:10.0pt;font-family:"Trebuchet MS","sans-serif"; color:#000066'>&nbsp;<o:p></o:p></span></p> </div> <div color="#000064"> <p class=MsoNormal><u><span style='font-size:10.0pt;font-family:"Trebuchet MS","sans-serif"; color:#000066'>Strategy</span></u><span style='font-size:10.0pt; font-family:"Trebuchet MS","sans-serif";color:#000066'><o:p></o:p></span></p> </div> <div color="#000064"> <p class=MsoNormal><span style='font-size:10.0pt;font-family:"Trebuchet MS","sans-serif"; color:#000066'>A quiet time for us as we took our accounts fully invested last fall.<span style='mso-spacerun:yes'>  </span>We'll start the cycle of annual rebalancing shortly.<span style='mso-spacerun:yes'>  </span><o:p></o:p></span></p> </div> <div color="#000064"> <p class=MsoNormal><span style='font-size:10.0pt;font-family:"Trebuchet MS","sans-serif"; color:#000066'>&nbsp;<o:p></o:p></span></p> </div> <div> <p class=MsoNormal><span style='font-size:10.0pt;font-family:"Trebuchet MS","sans-serif"; color:#000066'>&nbsp;<o:p></o:p></span></p> </div> <p class=MsoNormal><span style='font-size:10.0pt;font-family:"Trebuchet MS","sans-serif"; color:#000066'>As always, please don't hesitate to call with questions and concerns.<br> &nbsp;<br> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Yours&nbsp;sincerely,&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<br> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <img border=0 width=180 height=69 id="_x0000_i1025" src="http://ih.constantcontact.com/fs004/1101847022438/img/8.jpg" alt=DSE name=ACCOUNT.IMAGE.8 contenteditable=false>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<br> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; David Edwards<br> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; President&nbsp;<br> <br style='mso-special-character:line-break'> <![if !supportLineBreakNewLine]><br style='mso-special-character:line-break'> <![endif]><o:p></o:p></span></p> </div> </img> <div> <p class=MsoNormal><span style='font-size:10.0pt;font-family:"Trebuchet MS","sans-serif"; color:#000066'><br> </span><span style='font-size:7.5pt;font-family:"Trebuchet MS","sans-serif"; color:#000066'>The Heron Capital Management client letter is published immediately following month end and when market conditions require comment. The views expressed in this letter represent HCMI opinion and strategy as of the date published and can change at any time upon receipt of new information. Data quoted in this letter are from sources deemed reliable, but no guarantee of such data is implied. <o:p></o:p></span></p> <div> <p class=MsoNormal><span style='font-size:10.0pt;font-family:"Trebuchet MS","sans-serif"; color:#000066'>&nbsp;<o:p></o:p></span></p> </div> <div> <p class=MsoNormal><strong><span style='font-size:10.0pt;font-family: "Trebuchet MS","sans-serif";color:#000066'>Heron Capital Management,&nbsp; Inc.,</span></strong><span style='font-size:10.0pt; font-family:"Trebuchet MS","sans-serif";color:#000066'> is affiliated with <strong><span style='font-family:"Trebuchet MS","sans-serif"'>Heron&nbsp;Financial Group,&nbsp;LLC,</span></strong>&nbsp;an SEC&nbsp;registered investment advisor providing fully managed investment and wealth management services to individuals, families, trusts, defined benefit plans&nbsp;and corporations.<o:p></o:p></span></p> </div> </div> </td> </tr> </table> </td> </tr> <tr style='mso-yfti-irow:3'> <td width="100%" style='width:100.0%;background:#000066;padding:3.75pt 3.75pt 3.75pt 3.75pt'> <table class=MsoNormalTable border=0 cellspacing=0 cellpadding=0 width="100%" style='width:100.0%;mso-cellspacing:0in;background:#000066; mso-yfti-tbllook:1184;mso-padding-alt:3.75pt 3.75pt 3.75pt 3.75pt' id="content_LETTER.BLOCK5" aria-posinset=0 aria-setsize=0 hidefocus=true tabindex=0 cols=0 aria-level=0 contenteditable=inherit datapagesize=0> <tr style='mso-yfti-irow:0;mso-yfti-firstrow:yes;mso-yfti-lastrow:yes'> <td style='padding:3.75pt 3.75pt 3.75pt 3.75pt'> <p class=MsoNormal align=center style='margin-bottom:4.5pt;text-align: center'><span style='font-size:10.0pt;font-family:"Trebuchet MS","sans-serif"; color:#000066'>&nbsp; </span><span style='font-size:24.0pt;font-family: "Garamond","serif";color:white'>H</span><span style='font-size:18.0pt; font-family:"Garamond","serif";color:white'>ERON </span><span style='font-size:24.0pt;font-family:"Garamond","serif";color:white'>C</span><span style='font-size:18.0pt;font-family:"Garamond","serif";color:white'>APITAL </span><span style='font-size:24.0pt;font-family:"Garamond","serif"; color:white'>M</span><span style='font-size:18.0pt;font-family:"Garamond","serif"; color:white'>ANAGEMENT </span><span style='font-size:10.0pt;font-family: "Trebuchet MS","sans-serif";color:#000066'><o:p></o:p></span></p> <p class=MsoNormal align=center style='margin-bottom:4.5pt;text-align: center'><span style='font-size:10.0pt;font-family:"Trebuchet MS","sans-serif"; color:#000066'><a href="http://r20.rs6.net/tn.jsp?et=1103021972585&amp;s=1&amp;e=001eJZ5HtdOV9_mUjinP3K2uS33Za-vPNI8WEShcygC5DSgfmfTC1gA108aJ_d4_NP5FgG4hPZQUulUVDUZRAyTMzgdF8YK1QHNRuvu72plQ3LgY_2MViTJdA==" target="_blank" shape=rect><span style='color:white'>www.HeronCapital.com</span></a><o:p></o:p></span></p> <p class=MsoNormal align=center style='margin-bottom:4.5pt;text-align: center'><span style='font-size:10.0pt;font-family:"Trebuchet MS","sans-serif"; color:white'>(800) 99-HERON </span><span style='font-size:10.0pt; font-family:"Trebuchet MS","sans-serif";color:#000066'><o:p></o:p></span></p> </td> </tr> </table> </td> </tr> <tr style='mso-yfti-irow:5;mso-yfti-lastrow:yes;height:3.0pt'> <td style='background:#000066;padding:3.75pt 3.75pt 3.75pt 3.75pt; height:3.0pt'></td> </tr> </table> </td> </tr> </table> </div> </div> <div align=center> <table class=MsoNormalTable border=0 cellspacing=0 cellpadding=0 style='mso-cellspacing:0in;mso-yfti-tbllook:1184;mso-padding-alt:0in 0in 0in 0in'> <tr style='mso-yfti-irow:0;mso-yfti-firstrow:yes;mso-yfti-lastrow:yes'> <td style='padding:0in 0in 0in 0in'> <div> <p class=MsoNormal style='background:white'><b><span style='font-size:8.0pt; font-family:"Verdana","sans-serif";color:black'><a href="http://ui.constantcontact.com/sa/fwtf.jsp?m=1101847022438&amp;ea=davidedwards%40heroncapital.com&amp;a=1103021972585" target="_blank">Forward Commentary</a> <o:p></o:p></span></b></p> </div> <table class=MsoNormalTable border=0 cellspacing=0 cellpadding=0 width=600 style='width:6.25in;mso-cellspacing:0in;background:white;mso-yfti-tbllook: 1184;mso-padding-alt:0in 0in 0in 0in'> </table> <p class=MsoNormal style='background:white'><span style='font-size:8.0pt; font-family:"Verdana","sans-serif";color:black'>Heron Capital Management Inc. | 670 West End Avenue | 14th Floor | New York | NY | 10025<o:p></o:p></span></p> </td> </tr> </table> </div> <p class=MsoNormal><img border=0 width=1 height=1 id="_x0000_i1028" src="http://r20.rs6.net/on.jsp?t=1103021972585.0.1101847022438.1&amp;ts=S0448&amp;o=http://ui.constantcontact.com/images1/s.gif"></p> </div> </body> </html>