Q4 2014 Market Commentary

We often get asked why, with markets making all-time highs, home prices having re-appreciated, employment
slowly improving and the general economy expanding, we continue remain as cranky as we have been about this
rally. After all, isnt a higher stock market a good thing?

Our feelings about this rally stem from our perception of how we got here and the risks that those actions created.
While we feel that those actions were necessary to keep the US, and by extension the global economy, from
spiraling into a Depression post financial crisis of 2007-2008, we cant stress enough that the steps taken were
singular in nature and as such there is no precedent for a better understanding of the potential negative
implications.

As we have discussed in previous Commentaries, the steps taken did many things for the economy from lowering
borrowing costs in general, and specifically mortgage rates, to creating demand for riskier assets (stocks) as
investors starving for yield where forced to take on more risk to gain their necessary return. This has created a
robust recovery for certain asset prices but very little increases in labor and wages.

This phenomenon troubles us, as it is our contention that long-term asset appreciation is symbiotically tied to
demand from consumers. For company stock prices to grow the company must earn more - not only by running
efficiently, controlling costs and expanding margins, but also by selling more. Cost cutting is a finite exercise; a
company can only cut so much until it is detrimental to its own ability to function well. Margins can be increased
on the fringes by new products or innovations and technological advances, but it takes greater overall demand to
allow for meaningful price increases in goods and services. The consumer must be willing and able to spend
more.

In a recent survey completed by Rasmussen 44 % of respondents stated they felt we were still in a Recession.
Likewise 43 % stated they felt their current employment situation offered the greatest potential for advancement
(http://www.rasmussenreports.com/public_content/business). These are two very telling results. Normally as
unemployment falls the labor markets tighten, slack is taken out of the system and wage competition takes hold.
But even as the unemployment rate declined we have seen little wage increase beyond the level of inflation.

This could be indicative of more slack that needs to come out of the labor market. Employees may be hesitant to
seek higher wages as they are either afraid to leave a job they already have and feel secure about or because they
perceive that better opportunities do not exist. Call it the thank you for a job outlook. Almost half of American
workers are holding onto their current jobs because in essence they feel it is less risky to remain static.
Unfortunately this hampers mobility, suppressing wage growth and, in turn, economic activity. Compressed
wages make it difficult for workers to spend for anything beyond core food, housing and transportation needs
(though more recent consumer spending numbers are encouraging).

So while it sounds great that the unemployment level has dipped to 5.9 % we must keep in mind that this number
is skewed in many different ways. It does not speak to the quality of the employment (part time versus full time)
nor the type of work being done and the subsequent level of income being earned. Below is an interesting chart
produced by Morningstar (http://www.morningstar.com/cover/videocenter.aspx?id=659385) that shows
unemployment relative to ones educational background.



This is not meant as a social commentary on education and what we need to do about it. It simply supports our
thinking that economic growth still has some roadblocks in front of it, as this recovery has left many people
behind people that need to participate in the future growth of the economy if that growth is to be sustainable. It
is our feeling that not only must the unemployment rate continue to fall, but higher quality incomes need to be
earned across the universe of eligible employees.

The disbursement of the income across the countrys population has become more concentrated and the impact of
the Great Recession has been likewise uneven. The Gini Coefficient is a statistical analysis of a countrys income
distribution. A zero level represents perfect distribution and 100 the most skewed. Since the 1960s this measure
of income inequality has been steadily rising in the US from a low of 35 in 1967 to 47 in 2013.



You can see the impact of the 2008/2009 crisis, as sudden and severe asset price depreciation pushed the ratio
down a notch. You can also see the resumption of its current trajectory as asset prices (particularly housing) were
re-inflated. Now this is not meant as an indictment to those that have become very successful in their lives. Again,
it simply supports our assertion that stable and sustainable growth requires a broader base of consumer
participation.

We arrive at this because it is our experience that the core spending number for most households is a fairly stable
number. By this we mean that beyond a certain level, house to house, increases in income or assets do not
translate into additional spending. Instead, we find that spending remains fairly constant as assets begin to more
rapidly increase. To put it a different way, at some level we have all that we need to live a comfortable and
enjoyable life - our capacity for spending may have risen, but our need to consume has not and so any excess
becomes savings.

Higher asset prices are beneficial to the saver and something we encourage (indeed, we live by it). But higher
asset prices do not increase consumption and so they cannot fuel the stable and sustainable growth that we all
depend on to make long-term plans. Consumption needs to be a broad action, driven by all parts of the population.
Every person that participates in the economy, each with their own individual spending and savings habits, must
be able to expand their purchasing power to some degree.

For example, if we were an investor in Ford Motor Company what we are interested in is how many vehicles are
being sold in a year. The broader the spectrum of individuals earning a wage in the US increases the probability
that someone somewhere, of some income level, some educational achievement, in some geographic region, will
want to buy a Focus or F150. The more individuals that participate in the growth of the economy directly
translates into the potential growth of sales, which generates earnings and appreciation of the stock we own. As an
investor we should want more people to participate in the growth of the countrys economy because it directly
translates into greater potential support, and appreciation, of my assets.

Our concern with current market levels is that they have been driven by the wrong factors. They have not been
driven by companies creating more bottom line earnings because the recovery has been inclusive across all
spectrums and now people are out there spending money and consuming goods and services. Instead, earnings are
up because companies have been buying back their stock, inflating earnings per share as there are now fewer
shares to divide into the actual earnings made. Yes it is a legitimate use of capital to buy back stock when
management feels their stock is underpriced. It not only has the earnings per share effect but it adds value to their
balance sheet as those repurchased shares become an asset of the company once again.

But we would rather see companies taking a long-term view and instead of investing in their own stock, invest in
their human capital. By utilizing their cash to provide their employees the latest technologies, updated machinery,
higher quality work tools, we contend that we would see a rise in productivity which will help future earnings. By
investing in the education and training of their work force, companies might find that many of the employees they
feel are currently unattainable are actually already working for them. In the process the quality of the work and
the wages being earned would rise, fueling potential consumption. If companies were to invest in innovation and
research and development we might find that new ideas are developed creating new products to sell and new
markets to sell to.

Short term market appreciation can come in many forms. It can be driven by speculation, by cheap monetary
policy, by artificial influence. But history has proven, time and again, that this type of appreciation is fragile.

Long-term, durable appreciation comes from something far more organic. It comes from people working, earning
a living, spending and consuming. It comes from companies thinking years ahead and staying ahead of the curve
on the quality of their corporate infrastructure, both human and machinery. It comes from creating and
maintaining a consumer experience that people want to participate in.

Time will tell if the catalyst of easy money has been enough to keep the flywheel spinning after financing
becomes more expensive. But it is our contention that the market is priced for that expectation. As such we
remain conservative in our view of future growth potential unless we see investors begin to focus beyond stimulus
and instead begin to demand that companies refocus resources on revenue generation and earnings growth
generated from that increase in revenues.

As always we remain diligent in our approach as we navigate this still very unique time in our global economy
and markets. Should you have any questions or thoughts on these themes or on your planning and investment
allocation please feel free to reach out to us by phone at 800.220.2161 or by email at steve@nstarfinco.com and
julia@nstarfinco.com.

Steven B Girard
President

The opinions expressed are those of Northstar Financial Companies, Inc. and are based on information believed to be from reliable sources. However, the
informations accuracy and completeness cannot be guaranteed. Past performance is no guarantee of future results.

Northstar Financial Companies, Inc, 1100 East Hector Street, Suite 399, Conshohocken, PA, 19428 Tel: 800 220 2161 www.nstarfinco.com Registered
Representative, Securities offered through Cambridge Investment Research, Inc. a Broker/Dealer, member FINRA/SIPC. Investment Advisor
Representative, Northstar Financial Companies, Inc. a Registered Investment Advisor. Northstar and Cambridge are not affiliated