First Quarter Financial Market Commentary
by Joseph A. Monaco, Ph.D.
Registered Principal - RJFS

The Stock Market and Johan Sebastian Bach, One And The Same?

The stock market's performance during the first quarter of 2011 was eerily similar to Johan Sebastian Bach's famous work entitled "Aria With Diverse Variations for Harpsichord with Two Manuals." Similar in that Bach's piece aggressively takes you up and down the musical scale yet begins and ends on the same note.

The stock market began the year with a healthy degree of optimism and then was hit smack in the face with renewed fears of the financial troubles of Portugal, Ireland, Greece and Spain (known in financial circles as the PIGS). This was followed by the civil unrest in Egypt, Bahrain and Yemen. Then, just when it looked as if things would settle down, Japan was hit with a 9.0 magnitude earthquake and one of the largest Tsunamis in history (destroying a nuclear power plant), and we finished the quarter by watching the beginnings of a new "mini-war" in Libya.

Yet through all of the political and geological upheaval just mentioned, the S&P 500 finished the quarter slightly higher than where it started. All in all we at Monaco Capital Management, LLC would call that impressive performance.

For the first time in quite a while, U.S. companies outperformed their global counterparts. Particularly those companies located in what is now known as The Emerging Markets. We believe the reason for domestic company share prices leading the way is because during times of potential crisis, money flows to what it is believed to be the safest havens. Therefore, money managers who are required to own stocks for their clients were more inclined to first move money into U.S. stocks, followed by companies located in other large developed economies. The investment assets that were mostly used as a source of capital for this were primarily stocks of companies located in either smaller or less economically developed nations (i.e. the emerging markets).

For the better part of the past decade we at Monaco Capital Management, LLC have over-weighted non-U.S. companies in our client's portfolios, with a particular emphasis towards Asia and South America, where we believe the demographic trends portend to more robust economic growth. Thankfully, such a portfolio structure helped our clients experience less volatility than they would have with a portfolio constructed exclusively of the S&P 500. Despite the fact that such an over-weighting has caused us to slightly underperform the U.S. market so far this year (the gyrations of the first calendar quarter of 2011 notwithstanding), our belief in that demographic scenario has not been shaken.

As for the balance of 2011 we expect to see continued improvement in the economy, both domestically and globally. We believe the continued unrest around the world is likely to cause domestic equities to outperform their foreign counterparts over the short term. And so while we have slightly increased our exposure to U.S. companies, our longer term belief in the Asia/South America story continues to keep us more focused on investment opportunities abroad.

Of course, past performance does not guarantee future results and no one can forecast future movements of the financial markets with total certainty. And so one must remember that successful investing depends more on managing risk than chasing opportunity. Still, that is how we see the world at this time.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Joseph A. Monaco, Ph.D. and not necessarily those of RJFS or Raymond James. Investments mentioned may not be suitable for all investors. International investing involves additional risks such as currency fluctuations, differing financial and accounting standards, and possible political and economic instability. Also, investing in emerging markets can be riskier than investing in well-established foreign markets. There is no assurance any of the trends mentioned will continue in the future. Investing involved risk and investors may incur a profit or a loss, including the loss of all principal.