Third Quarter 2010

Volume VII
Issue #3

The Economy

The Great Debate raging is whether we are facing inflation or deflation. At the risk of sounding like a theatrical
economist teaching at a University, I’m going to say my outlook is both.

Before you think that I’m trying to talk out both sides of my mouth, please allow me to elaborate.

When most people think of inflation, they think of rising prices instead of the actual causes of inflation. This is
reasonable, since the ultimate outcome of inflation is always a general and sustained increase in price levels. It
is thus easy to define inflation in terms of its ultimate results – the price increases that it causes – and ignore the
underlying causes of inflation.

Price increases themselves are actually anti-inflationary. The reason is that price increases decrease demand
and increase supply so that inflation can be brought to a halt. Many people have vested interest in overly
simplistic and invalid concepts that define inflation in terms of the price increases that it causes. By defining
inflation simply in terms of the current rate of price increases, economists, politicians, and others with a vested
interest can not only pretend that inflation doesn’t exist but can also minimize its extent for the long periods
when inflationary forces manifest themselves in ways other than in pushing prices higher.

The real cause of inflation is too much money chasing too few goods and services. We have maintained that the
over printing of paper money will not only eventually debase our currency but has already caused massive
amounts of inflation in our economy. This type of inflation is also called monetary inflation.

But at the same time we also see deflation in the economy.

Deflation is generally defined as a general decline in price levels and/or a reduction in the supply of money. Of
course all we have to do to see deflation in our economy is look at the falling values of our homes.

In our view, this type of deflation will only increase as the over supply of housing increases as a result of the
on-going weak job market. The key to fixing our problems is the creation of real jobs that will sustain families,
not throwing money at Wall Street and a handful of too-big-to-fail banks.

Planning Resources | 700 NE Multnomah, Ste. 274, Portland, OR 97232

Ph. 503-227-7744 Toll Free 800-931-0049 | www.planningresources.com
We should all know by now that the economy is in fact slowing down, unemployment is high and people are
not spending like many in the government hoped they would. We also know that the Fed is printing money like
it’s going out of style because we can look at the Fed’s balance sheet.

The Fed is buying bonds and replacing those bonds in the economy with paper money. The curious fact that the
Fed is simply printing money to give it to the Treasury to buy bonds is for another discussion. So, if we can
agree that the economy is slowing down and the money supply is going up then why is M3 at one of the lowest
points since right before the beginning of the Great Depression. Wikipedia defines M3 as the broadest measure
of money supply which includes all physical currency, most saving accounts, retail money market funds, bank
reserves, time deposits, deposits of Eurodollars and repurchase agreements.

Planning Resources | 700 NE Multnomah, Ste. 274, Portland, OR 97232

Ph. 503-227-7744 Toll Free 800-931-0049 | www.planningresources.com
 Please note that M3 is no longer officially reported by the Government.

The fact that M3 is at such a low point seems to be at the heart of the argument that deflation is the greater
threat to the economy right now than inflation is.

M3 is a statistic that (like most statistics) is not very well understood. M3 as well as M1 and M2 do more than
measure the growth of the money supply; the formulas also measure the velocity of that money supply. It is this
lack of velocity (or as I think about it, the money multiplier effect) that might explain how we can have negative
growth in the money supply when we all know that the Fed has been printing money day and night.

Simply put, the dollars that are being printed right now are either being used to buy back our own enormous
debt or are sitting on the balance sheets of the big oligarch banks as excessive reserves because they don’t want
to lend out to Main Street America. It appears that the money is also being used to speculate in the capital
markets.

As of today (09/03/10) 20 year Treasuries are paying 3.49%, and 30 year Treasuries are paying 3.79%. The ten
year is paying 2.72%. For the sake of argument lets assume that inflation is around 1-2%.

If you were to buy a 10 year Treasury with a yield of 2.72% (09/03/10), after taxes and some inflation your real
yield is probably less than zero. So, why on Earth would anyone buy something that had almost a zero rate of
return for 10 years?

I would refer you back to the Fed’s balance sheet. The reason the Fed is doing so much of the buying is because
with yields as low as they are, the bonds are becoming harder and harder to sell to other investors like foreign
governments, institutions, and investors like you and me. Don’t forget that when interest rates go back up bond
investors will also suffer capital losses if they sell prior to maturity.

It’s a fallacy to believe that if interest rates go up (some) then our economy will crash. If you look at Canada
and Australia they have been raising rates and have some of the strongest economies and currencies in the world
today. This is a sure measure of the confidence investors have in these country’s fiscal and monetary policies.

The Bank of Canada (BoC) became the first in the Group of Seven central banks to raise rates from the
emergency lows introduced during the global banking crisis. The BoC lifted borrowing costs by 50-basis points
to .75%, with the last rate hike on July 20th. On August 6th, Canadian Finance Chief Jim Flaherty commented on
Canada’s impressive rebound from the “Great Recession”, saying that “Canada has virtually recouped from the
dire fallout of economic decline and, with more than 400,000 jobs created since July 2009, virtually all of the
jobs lost during the downturn”. Canada’s economy expanded at a blistering 6.1% clip in Q1, 2010.

I think this is a good indication that raising interest rates will not destroy the economy like some think. No
matter what is done, there is going to be some pain. Putting off what must be done only exacerbates that pain.

Planning Resources | 700 NE Multnomah, Ste. 274, Portland, OR 97232

Ph. 503-227-7744 Toll Free 800-931-0049 | www.planningresources.com
The Capital Markets

According to the Investment Company Institute (the mutual fund industry trade group), investors withdrew a
staggering $33.12 billion from domestic stock market mutual funds in the first seven months of this year. If that
pace continues, more money will be pulled out of these mutual funds in 2010 than in any year since the 1980’s,
with the exception of 2008, when the global financial crisis peaked. The notion that stocks tend to be safe and
profitable investments over time seems to have been dented in much the same way that a decline in home values
and in job stability the last few years has altered Americans’ sense of financial security.

What is so interesting about this is the big move into bonds and bond funds with the proceeds. Even though
corporate top line sales growth, a major concern of Wall Street, looks to be a healthy 10.4% year-over-year. The
financial sector is expected to be the largest contributor to overall earnings growth, with profits up $22.8 billion,
or 500% higher year-over-year. For the second quarter, the Union Pacific Railroad reported their net income
totaled $711 million, up from $465 million a year earlier. Total revenue carloads – a key gauge of economic
activity - was 18% higher from a year earlier. The fundamentals in corporate America don’t seem to be all that
bad but you would never know that as many investors stay away in droves and plow their money into a 19 year
bull market in bonds.

It seems that despite a decade or more of bad experiences, we have learned little about the buildup and bursting
of speculative bubbles. We ignored signs of a bubble in technology stocks and then early warning signs in the
housing market bubble.

It seems that some may be betting that the Federal Reserve will play its hand perfectly and prevent erosion of
the dollar’s purchasing power; despite the huge injections of liquidity into the economy. Others seem more
concerned about return of investment than return on investment.

Planning Resources | 700 NE Multnomah, Ste. 274, Portland, OR 97232

Ph. 503-227-7744 Toll Free 800-931-0049 | www.planningresources.com
Our Portfolios

We remain invested in companies that we believe will be involved in pending mergers, takeovers and other
corporate reorganizations. Typically the investments go long the potential takeover targets and short the
potential companies that are believed to be the acquirer. As my readers know, we have been invested in this
space now for several months and as of this writing those investments are starting to pay off for our investors as
M&A activity has been clearly picking up.

Our original investment thesis was based on the tremendous amounts of cash on corporate balance sheets and
very attractive valuations for many companies. There has been such a lack of fundamental investor interest in
acquiring U.S. company stock that the result has been many great buying opportunities for companies to go on a
buying spree. It seems pretty apparent at this time that this thesis was exactly correct as evidenced by the
tremendous number of deals coming to fruition. We remain very bullish on M&A and will remain invested.

As our clients know, we have been buyers of short term treasuries indexed to inflation with a 1 to 5 year
duration. While these bonds have increased in value as a result of the so called “flight to safety trade” that we
have been talking about, they are also indexed to inflation as measured by CPI, which in our view is being
significantly understated by this index.

Our short of longer term treasuries has unfortunately not done as well as we had hoped. We remain committed
to this trade however as we feel as strongly as ever that it’s only a matter of time before interest rates go back
up. We will continue to buy on strength in bond prices and weakness in yields. Remember, we will make money
with this investment when yields go back up and prices fall as a result. This may take some time but in the end
we feel that our investors will be well compensated.

We also remain very bullish on the emerging markets. In our opinion, the emerging markets offer one of the
best risk/return profiles in the capital markets today. The United States (along with the rest of the developed
world) has the opportunity to sell into these markets all manner of consumer goods, infrastructure, and later on
services like insurance, banking and other types of intellectual capital. Of course, this does not mean that there
won’t be set backs. Risk like corruption, political risk, and currency risk (to name just a few) will demand a lot
of due diligence and a well diversified approach but we feel the potential returns long term will offset those
risks for an attractive investment.

While our growth oriented U.S. equity investments (that are not in the merger and acquisition space) remain
hedged against a decline in the market, we are starting to see opportunities present themselves in high quality
dividend stocks. We are looking to buy these types of companies as they become available at what we consider
to be attractive prices. Many of these companies we are looking at are in mature industries with demonstrated
high quality cash flows and business models and in some cases pay dividends in excess of 4.5%, thereby
exceeding the dividend yield of the S&P 500 by 2.45% or more.

We remain long oil and other commodities like agriculture and gold. As we expected, gold seems to be trading
more like a currency than a commodity. If this continues we expect the price of gold will continue to go higher.

Baron Rothschild once said “buy when there is blood in the streets”. Our large cash position and other short
term and liquid investments will provide ample dry power to do just that, should the opportunity present itself.

Planning Resources | 700 NE Multnomah, Ste. 274, Portland, OR 97232

Ph. 503-227-7744 Toll Free 800-931-0049 | www.planningresources.com
We remain very bullish on our portfolios and very bearish on the economy and the capital markets.

Once again, we offer our expertise to any of our friends out there that would like a second opinion on their
portfolios. If you still own the same investments as you did a year ago or even longer, or if you have moved all
your money into a bond fund, then our first recommendation to you is that you take this advice and give us a
call.

As always, a very special thanks to all of our clients for their continued confidence and trust.

Michael K. Chrysler
Managing Partner - Planning Resources
mchrysler@planningresources.com

Michael K. Chrysler is a managing partner at Planning Resources Corp., with accounts held at Raymond James & Associates, Inc., member New York Stock
Exchange/SIPC and Fidelity Investments, Member NYSE, SIPC. All expressions of opinion reflect the judgment solely of Michael K. Chrysler as of this date.
Information herein has been obtained from sources considered reliable, but not guaranteed to be accurate or complete. Planning Resources, its affiliates, officers, or
directors may in the normal course of business have a position in any securities mentioned in this report.
Securities & Investment advice offered through fsic, member FINRA/SIPC.

Planning Resources | 700 NE Multnomah, Ste. 274, Portland, OR 97232

Ph. 503-227-7744 Toll Free 800-931-0049 | www.planningresources.com