Hyre & Associates Wealth Strategies, An Independent Firm
Spring 2011 Newsletter
Dear Friends,
Market and investor sentiment has changed sharply
over the last six months. Toward the end of 2010, the mar-
kets were beginning to price in the possibility of a double-
dip recession and the Federal Reserve launched its QE2
program to contain deflation. Today, the term double-dip
has almost vanished from the economic talk and concerns
of deflation have given way to worries of inflation.
It would be a mistake, however, to become complacent
about the state of the economy. Even before the earth-
quake in Japan and the turmoil in the Middle East, some
areas of economic weakness were becoming more wide-
spread. Energy and food prices have been moving higher,
the housing market has been weakening and we are still
feeling the effects of the ongoing deleveraging cycle. The
events in Japan as well as in the Middle East add to the
uncertainty and increase the potential downside risks to
economic growth, at least in the near term.
Despite these challenges, we believe the economy is
turning the corner. Helped in large part by a labor market
that is finally showing some meaningful signs of improve-
ment, we do believe the US economy is in the midst of
shifting into what is called a self-sustaining expansion.
Unless Skunked
I am of course referring to the budget deficit and
Washington’s inability to recognize the unmanageable:
75% of the budget is non-discretionary and entitlement
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Enjoy the Good T imes
While They Last
By Jim Hyre, CFP®,
Registered Principal, RJFS
based. Without changing entitlements –Medicare,
Medicaid and Social Security – we are going to be
smelling a $1 trillion deficit. Once dominated by de-
fense spending, these categories now account for
44% of Federal spending and are steadily rising. In
fact, if we took out all discretionary spending for
education, infrastructure and agriculture you would
still end up with a deficit of $700 billion. Entitlement
money is where the money is and it is going to have
to be reformed. Unless this occurs, our country will
default on its debt; not in the conventional way but
by picking our pockets through less obvious ways
like inflation, currency devaluation and low “real”
interest rates.
Who will buy Treasuries when the Fed doesn’t?
Most of the publically issued $9 trillion of Treasury
notes and bonds are now in the hands of foreign
countries and the Fed (60%) while private market
investors such as bond funds, insurance companies
and banks own the minority (40%). More alarming is
that nearly 70% of the issuance since QE II has been
purchased by the Fed, with the balance being ab-
sorbed by the Chinese, Japanese and other foreign
sovereigns. The game plan is as basic as the Buck-
eye’s old style of “three yards and a cloud of dust.” It
translates to this. The Treasury issues bonds and the
Fed buys them. It’s simple and who’s to worry. It’s as
foolproof as any ponzi scheme until…well, it isn’t.
Because at the end of the chain, the question will be
who will buy Treasuries when the Fed doesn’t and at
what price.
Recovery and Rebalancing
While most economic indicators and corporate earn-
ings continue to improve, global inflationary
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 Hyre & Associates Wealth Strategies, An Independent Firm
pressures and crises in the Middle East and Japan have
lowered near-term growth expectations and expanded
risk to the downside. Markets loathe uncertainty and
when uncertainty increases, it generally causes market
corrections and higher levels of volatility, which we have
seen over the past few weeks. At present, the markets
are in kind of a tug of war. Downside uncertainties are
being met with good economic and market news – solid
corporate profits, improving labor conditions, share buy-
backs and dividend increases. The main risk for global
equities in our view is higher food and energy prices.
Higher food prices would suggest that emerging mar-
ket’s central banks tighten further, while higher energy
prices take away from developed market incomes.
What concerns me the most in the long run is really
the way that inflation develops and where. Rates have
been held artificially low for so long, and quickly rising
rates will be a headwind for the stock market. We worry
that with the volatility in the commodity and energy sec-
tors that with a rapid rise in prices will bring a correction.
It is important to note that with heightened expecta-
tions come heightened risks, meaning the list of things
that can go wrong is growing. These risks include the possi-
bility of oil price spikes, ongoing disruptions associated
with the Japanese earthquake, the pending end of QE2,
housing market weakness, emerging markets inflation and
sovereign debt issues in Europe. For investors, the most
important questions should be: where are the investment
opportunities during this interim period of expansion, and
how does the U.S. economy stack up to the rest of the
world. In this regard, I believe that with the aforemen-
tioned turmoil that the U.S. economy is well positioned to
attack an increasing share of global capital.
Oil on the Rise
The escalating turmoil in the Middle East represents a
potentially serious risk for investors in the form of oil price
spikes. The growing rebellion in Libya and the implementa-
tion of the no-fly zone have been generating the most
headlines, but from an investment perspective, we are
focusing our attention on Saudi Arabia. The movement of
Saudi military forces into Bahrain certainly represents a
new dynamic and a widening of the geopolitical risks in the
broader region. As of now, however, unrest in Saudi Arabia
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Spring 2011 Newsletter
“It is important to note that with height-
ened expectations come heightened risks,
meaning the list of
things that can go
wrong is growing.“
itself remains con-
tained.
Given Saudi Arabia's
prominence in the global oil trade arena, political
unrest in the country has the potential to trigger an-
other major spike in oil prices. Oil prices have al-
ready jumped higher since the year began and ap-
pear to be pricing in a geopolitical risk premium of
somewhere around $20 a barrel. The good news is
that the importance of oil to many of the world's
major industrialized economies has been diminishing
for many years, but price spikes remain a threat.
A major disruption in actual supplies in Saudi
Arabia (or elsewhere) could push oil prices back to
their record levels of around $150 a barrel. If oil
prices were to reach that level (and remain there for
some time), it would certainly represent a serious
threat to global economic growth, and would proba-
bly be enough to trigger another recession. Should
this occur, policymakers have few tools left to stimu-
late the economy. That said, we think this hypotheti-
cal scenario has a low probability of occurring.
Outlook on Japan
There are a few consequences of the earthquake
and tsunami. First, Japan will have to rethink their
long-term energy policy. The country had planned to
derive about 60% of all its energy needs from nu-
clear power, up from 33% currently. However, after
what happened, we believe there is a very low prob-
ability that new reactors will be built in the next dec-
ade. Second, the government is committed to a
rapid rebuild of the Tohoku region. The Bank of Ja-
pan already flooded the financial system with
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Hyre & Associates Wealth Strategies, An Independent Firm
Spring 2011 Newsletter
liquidity and will continue to do so to ensure proper func-
tioning of the markets and to provide liquidity for recon-
struction. It is likely that political parties will put aside their
differences and rapidly agree on a reconstruction plan.
Japan has a history of having tragic events thrust on it,
either man made or environmental. One of the unique cul-
tural features of the Japanese people is their ability to deal
with crises with resiliency. Japan spends an extensive
amount of time training its citizens to cooperate, be part
of a larger group and be prepared for unexpected events.
Outlook on Emerging Markets
Emerging markets which have been positive perform-
ers over the last decade have underperformed developed
markets during the quarter. The asset class has come un-
der pressure as economic growth has begun to recover in
the developed world, and that this growth in the devel-
oped world is forecast to be at a higher pace than had
been expected. Investors’ focus on mature economies was
also influenced by negative events in the developing
world, where investors were concerned about the political
instability in the Middle East and inflationary pressures in
several fast-growing developing economies such as China,
India and Brazil.
However, we believe that emerging markets’ cen-
tral banks will be vigilant in addressing recent inflation
trends. We remain confident in the emerging markets’ ro-
bust fundamentals, and we believe that the longer-term
outlook for the asset class is bright. This long-term growth
story is contingent upon growing demand from a rapidly
“Japan has a history of
having tragic events
thrust on it, either man
made or environmental.
One of the unique cul-
tural features of the
Japanese people is their
ability to deal with crises
with resiliency.”
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increasing middle class from steady productivity and
wage gains. The advisors at Hyre & Associates have
long advocated some emerging markets (EM) equity
exposure. Our positive view on commodities has also
largely been driven by rising demand in EM econo-
mies.
From Precious Metals to Coffee Beans
Palladium, a precious metal, is used in fume-
scrubbing catalytic converters for cars, primarily
those with gasoline engines. In 2010, palladium de-
mand hit its highest level in a decade due to in-
creased environmental standards around the world
and strong auto sales in China. Consider also the de-
mand for iron ore, an important mineral in steel pro-
duction. China is now the world’s largest steel-
producing country, with a 44% production in 2010.
The point of these facts is this. Behind almost
every story about the long-term outlook for com-
modities is a story about China, India and other de-
veloping countries undergoing waves of building and
consumption. As the middle class grows in these ar-
eas of the world, there is bigger demand for raw ma-
terials needed to build homes, factories, water
plants and to supply people with cars and electron-
ics. You can’t turn on CNBC without hearing them
talk about a commodity. But selecting an individual
commodity is not the way investors, even sophisti-
cated ones like our clients, should be considering
adding commodities to their portfolios.
Diversification and Inflation Hedge
Commodities are rising in prominence as an
asset class as investors seek ways to improve
overall risk-adjusted returns in their portfolios.
Until fairly recently, many investors gained
exposure to commodities by investing in the
stock of companies in the exploration or pro-
duction of commodities. Few invested directly
in commodities – most investors have no in-
terest in taking physical delivery of hard as-
sets. Sophisticated investors now better un-
derstand the role of a well-diversified basket
of commodities in their portfolio. The attrac-
tiveness of adding commodities to a portfolio
is best summed up by two investing
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 Hyre & Associates Wealth Strategies, An Independent Firm
fundamentals currently on client’s minds – diversification
and an inflation hedge. Diversification is a direct result of
commodities’ historically low correlation with other asset
classes that are typically part of a broadly diversified port-
folio. There certainly are times when wheat, corn and soy-
beans move in sync but a more broadly diversified basket
of commodities include gas, crude oil and precious metals.
The huge federal stimulus programs and the Federal
Reserve’s QE1 and QE2 Treasury purchase plan, lead many
economists to project that inflation is on the near horizon.
While we still don’t expect an imminent rise in inflationary
pressures in the U.S., longer term, the odds for higher in-
flation increase as excess capacity is absorbed and policy-
makers look for ways to minimize a heavy debt burden.
Commodities can be an effective hedge during periods of
rising inflation. Intuitively, it makes sense that as the price
of basket of goods increases, so does the price of raw ma-
terials. For example, an increase in the price of cars, could
have been preceded by a rise in the steel, aluminum and
plastic needed to manufacture.
Making Sense of the Muni
Bond Market
The negative headlines about
municipal bonds are every-
where. Most of these reports
are focused on the fiscal chal-
lenges facing state and local
issuers of municipal debt, who
are struggling to balance budg-
ets and regain their fiscal footing after the Great Reces-
sion. Several highly publicized examples of projects gone
bad – defaults on bonds for a California golf course or a
recreational facility in New York (all non-essential projects
funded for annually appropriated funds) – are good exam-
ples of how isolated projects with overly optimistic fore-
casts that didn’t pan out can turn legitimate concern into
panic. The most notable commentary came from a Wall
Street analyst who said municipal defaults would total
“hundreds of billions of dollars.” But there is more to the
story than the headlines.
The fourth quarter of 2010 was the worst quarter for
municipal bonds since March 1994. It is important to note
that the “muni market” is actually many submarkets within
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Spring 2011 Newsletter
“The negative headlines about municipal
bonds are everywhere…
But there is more to the story
than the headlines.“
the larger public universe, a fact that is often lost on
the media. Only 36% of the issued debt is issued by
state and local governments (source: Wall Street
Journal). A large portion of the municipal market-
place has assigned revenues that are an identifiable
source of debt repayment, helping to insulate these
bonds from the challenges being faced by local and
state governments today.
While there is no question that states and mu-
nicipalities are experiencing fiscal stress and signifi-
cant budget gaps, the pessimists fail to mention the
revenue raising tools that states have at their dis-
posal: raising taxes and cutting spending to achieve a
balanced budget (Note that 49 of 50 states have a
constitutional requirement for a balanced budget).
In fiscal 2010, 31 states instituted job or salary cuts,
23 dipped into their “rainy day” funds and 22 experi-
enced revenue enhancements. In 2011, more of the
same is expected. According to Moody’s, the five-
year average default rate for municipal issuers from
1970 through 2009 is actually 0% for AAA-rated
bonds, .01% for AA-rated bonds and only .08% for
Baa-rated bonds. Of the 54 defaults of the 18,400
rated municipal bonds between 1970 and 2009, 42
were either housing or hospital backed issues. Even
if the default rate tripled for AA-rated bonds, it
would still be below 1%.
The advisors at Hyre & Associates focus on two
groups to support its due diligence for investing in
municipal bonds: credit analysis and examination of
individual states’ revenue improvements and ex-
pense cuts. The leading indicators of credit quality
for municipalities are the three big revenue
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Hyre & Associates Wealth Strategies, An Independent Firm
Spring 2011 Newsletter
categories – sales, income and property taxes. We dig into
the numbers. Our criteria are very stringent. We narrow
the municipal universe by 75-80% in order to construct
portfolios with higher than average quality and lower than
average volatility. Municipal bonds that don’t make the cut
include those for less-essential or non-essential services –
a public golf course is a nicety, not a necessity like roads or
water. In addition, Hyre & Associates doesn’t invest in
bonds with long maturities –we don’t believe investors get
adequately paid for that level of risk.
Ongoing Focus on the Client Experience
As an independent firm, the advisors at Hyre & Associates
focus on the client experience, providing intimate client
relationships, customized wealth plans and high-quality
client service. This past quarter, as part of our ongoing ef-
fort to enhance this experience, we have hired additional
staff. We have been focusing more than ever on you, our
client and your needs. During 2010, we implemented a
comprehensive service review process and are meeting
frequently on this initiative. This has helped us successfully
approach our client’s needs and business development
efforts as a firm and better focus upon solutions. Like all
business enterprises during challenging economic times,
we must work not only IN our business, but also ON our
business with precise focus. This along with being a good
partner in our community. Hyre & Associates and our team
members are actively involved (e.g. churches, Rotary, sev-
eral Chambers of Commerce, community boards, trustees,
ect.) and give back to the community whenever and wher-
ever we can.
We appreciate the confidence you have placed in our
team and hope our services at this time, as well as in the
future, will continue to warrant your faith, confidence and
goodwill. With this in mind, please do not hesitate to call
any of us with any questions or problems that might arise.
We always consider it a privilege to be of service to you.
Best Regards,
Jim Hyre, CFP®
Registered Principal, RJFS
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Featured Intern of the
Quarter
Over the next few quarters
we will be introducing each
of our interns here at Hyre
& Associates. This quarter,
we have Marketing Intern
Alex Peiffer.
Tell us about yourself:
I am a 4th year Marketing and
Finance student in the Fisher
College of Business at Ohio State. I grew up in Fostoria,
Ohio and my family now resides in Port Clinton, Ohio, on
the shores of Lake Erie. In addition to my internship here
at Hyre & Associates, I serve as a Reservist in the US Air
Force and also do broadcast consulting and graphic de-
sign.
What is your role at Hyre & Associates?
I started here in November as a Marketing Intern. I am
responsible for producing publications like this newsletter
and our video updates, managing our social media and
web exposure, and many other various duties.
What are your future plans and career aspirations? After
graduation, I’d like to work for a while and save up to
eventually start my own business. I’m unsure of what that
business would be at this point, but ideally I’d like to build
it up and sell it for millions at age 30-35, retire, and travel
the world for the rest of my life. Any ideas?
Outside the office and classroom, what are your hobbies
and interests?
I love action sports, my favorite being playing Rugby for
Ohio State. I also enjoy snowboarding, jet-skiing, water-
skiing, boating, and flying (I hold a Private Pilot’s License).
The information contained in this report does not purport to be a complete description o f the
securit ies, markets, or developments referred to in this material. The informat ion has been ob-
tained fro m sources considered to be reliable, but we do not guarantee that the foregoing material
is accurate or complete. Any informat ion is not a complete summary or statement of all available
data necessary for making an invest ment decisio n and does not const itute a recommendat ion. Any
opinio ns are those of Jim Hyre and not necessarily those of RJFS or Raymo nd James. Expressio ns
of opinio n are as of this date and are subject to change wit hout notice. Past performance may not
be indicat ive of future results. International invest ing invo lves addit ional risks such as currency
fluctuations, differing financial and account ing standards, and possible polit ical and econo mic
instabilit y. Also, invest ing in emerging markets can be riskier than investing in well-established
foreign markets. Invest ing invo lves risk and investors may incur a profit or a loss, including the
loss of all principal. Co mmodit ies may be subject to greater volat ilit y than invest ments in tradi-
tional securit ies. Investments in co mmodit ies may be affected by overall market movements,
changes in interest rates, and other factors such as weather, disease, embargoes and internat ional
economic and polit ical developments. There are special risks associated with invest ing in precious
metals, including but not limited to: price may be subject to wide fluctuation; the market is
relat ively limited; the sources are concentrated in countries that have the potential for instabilit y;
and the market is unregulated. There is an inverse relat ionship between interest rate movements
and fixed inco me prices. Generally, when interest rates rise, fixed inco me prices fall and when
interest rates fall, fixed income prices generally rise. Diversificat ion does not assure a profit or
protect against a loss.
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