STARCARE Associates

CARE Chronicles
Finding My Voice Again
By C. Richard Hearn

Quarter III, 2010

Many of you know I've been having a rough go of writing my newsletters for the last couple of years. Advertising compliance wants to make sure you know the opinions expressed are mine and are not necessarily shared by the sane, civilized world. They also don't want me scaring you as that is a regulatory no-no. If you are reading this, compliance and I have satisfied each other's concerns. Thank you, fine people at LPL. Thank you, financial faithful, for hanging with me during my blockage period. I feel like I have my voice back now and can get back to the unique, warm, and fun newsletters we share. Now that it's compliance-enhanced, it'll be even better. It reads a little longer since I have a lot to make up for, so, let's roll.

Much of my writing of late has been replaced by reading. My librarian daughter must be proud. Most of the nine books I've read this summer are somehow related to finance, economics, predictions of booms and busts, and how all of that impacts your investments. From those readings, I have formed these conclusions (MY OPINIONS): 1. You need to get the macro right, 2. Inflation versus deflation (Which ,When), 3. Markets can remain irrational longer than you can remain solvent, 4. All bubbles ultimately pop, 5. People will not walk around with a put very long, 6. Money is still made in crises, 7. Common sense is still common sense, just not common these days, 8. Denial rages more than the River, 9. A budget and a plan are still your tools and, 10. You can do this! In this next series of newsletters, let's talk briefly about each although several will overlap. We'll see how far we get today before boredom challenges your curiosity and we'll pick up from there in the next letter.

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You Need To Get The Macro Right! If you don't see the big picture, what you do with the small picture doesn't much matter. Where the economy is going and why is the big picture. Individual security selection is like rearranging deck chairs on the Titanic if you don't know where the icebergs are. The MACRO view suggests that several bubbles have already burst, including dot.coms, real estate markets, stock markets, credit markets, and consumer spending. Some may continue going down with real estate the most likely victim. Two bubbles have yet to burst. Those icebergs are the sovereign debt crisis and the value of the US dollar. The sovereign debt crisis will hit when bond holders who buy US Treasuries refuse to buy our bonds unless they can earn a more substantial yield (higher rates.) When rates go up, bonds go down. When rates go up, more of our tax revenues are needed to fund that debt and less is available for military, health care, schools and roads. When rates go high enough, all tax collections could be needed just to service debt. That's why the Federal Reserve is working so hard to keep rates low, but they may be running out of ways to do that if real spending reform is not brought to the party. In my humble view, the fed did what it had to do in the credit crisis of 2008 and beyond.

The reason my voice is sounding more passionate is because I'm singing directly from the heart. Sammy Hagar

It served as "the lender of last resort" to keep the wheels from coming off the train. I credit both Paulson and Geitner for executing in a scenario with zero good options. Despite the impassioned politics of the day, this isn't about Republican versus Democrat, or Liberal versus Conservative. It's about positive cash flow; if you have it, you're cool; if you don't, at some point you're in a world of hurt. This is very much about 60 years of spending money we didn't have for good reasons and bad, and with the help of every industry or agency on the planet that could make gazillions of bucks or hang on to political power out of encouraging leverage. Everyone to blame; no one to blame. It doesn't matter. Reality is reality and I believe it is en route to a theatre near you. Word up. Reality is traveling with his deleveraging friends including his instant recalibrator and his magical reset button. Evidently, deleveraging isn't near as much fun as leveraging or running amuck was, so reality isn't getting a lot of positive tweets these days.

Securities and financial planning offered through LPL Financial, a Registered Investment Advisor Member FINRA/SIPC

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CARE Chronicles

But, this isn't bad news for everyone. If your debt load is low and your positive cash flow is high, you may weather these coming storms just fine. We will get through this. We always do. However, in my humble opinion, we don't get through it until we have REAL deficit reduction and REAL financial reform. Meanwhile, let's keep working together to find the bright spots in the scary times. They are there. At the same time, let's keep up our life jacket drills. Test yourself with a few questions; Are you OK if your investments return less than 5% per year for the next decade? Are you OK if medical and educational inflation average 5+ % per year for the next decade? Are you OK if you live to be 90? What happens if one of you loses your job or becomes disabled?

What happens if your social security is reduced by 20%? What happens if a 15% spending tax (VAT Tax) is applied to everything but your groceries? Maybe none of those questions will apply, but they are worthy questions? Denial of the question may not provide an escape from the answer. I am truly sorry to sound these cautionary notes. I so hope they are proved unnecessary. It's no fun when your financial advisor isn't excited and optimistic. I am excited and I am optimistic about our investment models and the opportunities we see today. I'm excited about how most of you are investing, not just your money, but yourselves in learning more about your investments. I'm excited that my firm will provide you a complementary budget and financial plan to help you make sure you're OK. As always, I am honored you permit us to be the stewards of your dreams. We and you have worked very hard to trust one another. Please know how sacred that is for us and we believe for you. Time to put this puppy to bed. We'll pick up here next time.

Securities and financial planning offered through LPL Financial, a Registered Investment Advisor Member FINRA/SIPC

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P.S. Several newsletters and books influenced this newsletter including: John Mauldin, best-selling author and recognized financial expert; he is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to: http://www.frontlinethoughts.com/lear nmore Carmen M Reinhart and Kenneth S Rogoff, "This Time It's Different." Robert Frank, "Richistan." David Wiedemer PhD, Robert Wiedemer, and Cindy Spitzer, "AFTERSHOCK." I am appreciative of each of their insights.

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Sincerely,

130 Newport Center Drive, Suite 136 Newport Beach, CA 92660 T: (949) 756-CARE (2273) F: (949) 851-CARE (2273)

C. Richard Hearn President LPL Branch Manager STARCARE Associates, Inc.

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The opinions voiced in this material are meant to provide general information only and are not intended to provide specific investment advice. Please contact me prior to making any investment decisions.

Securities and financial planning offered through LPL Financial, a Registered Investment Advisor Member FINRA/SIPC