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 IHA Monthly   
September 2011 
In This Issue
Market Commentary
August 2011 Asset Class Returns
Floods, Earthquakes - Your insured against that, right?
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History Speaks
The Great Vermont Flood of 1927
While much of the pre-storm hysteria about Hurricane Irene focused on the threat to the Eastern seaboard the most severely affected areas were inland New England, particularly Vermont. The mountainous terrain and the natural tendency of towns to develop alongside waterways makes the state vulnerable to flooding. In 1927, a wet autumn culminated in a storm in early November that dropped over 10 inches of rain on the state. The resulting floods killed 85 people (including the lieutenant governor), destroyed over 1000 bridges, and left 10,000 people homeless.
The 1927 flood also marked a change in how the nation dealt with the  natural disasters. Until that time, the federal government had a very hands off approach to such events. In fact, President Calvin Coolidge, a Vermont native, refused to visit the state for over a year to avoid the appearance of favoritism. However, the damage from the flood was so severe not only did the state issue $8.5 million in bonds to pay for the rebuilding duties it assumed from local governments but Vermont eventually received over $2.5 million from the federal government to aid in its recovery.  

Market Commentary

InnerHarbor Advisors, LLC is a Manhattan based financial planning firm catering to market professionals.  
If you would like a fresh perspective on your finances, please contact John O'Meara or Michael Keating at 212.949.0494 ...or simply 'reply' to this email.


The summer slump in stocks accelerated in August as fears of a burgeoning European bank crisis amidst a tepid US recovery and slowing world economy sunk stock indices worldwide.

While the European sovereign debt and banking predicament has been brewing for well over a year it reached an alarming crescendo over the summer. What started as an issue among Europe's small country periphery (Greece, Ireland and Portugal), spread to the larger Mediterranean countries (Spain and Italy) and now directly threatens the core through the French banking system. The following chart shows the performance of the three largest French banks since the financial crisis really swung into full gear in August of 2008.


Shares in all three major French banks are at, or below, their lows of March, 2009. In contrast the largest US banks are all well above the levels they were at that time (in fairness, some had fallen much further by March 2009 than the French banks had). This indicates the doubts the markets have on the marks these banks are giving their holdings in European sovereign debt. Doubts that have been reinforced by credit downgrades from Moody's this week. At the risk of repeating ourselves, the issue in Europe remains whether the southern nations will forfeit fiscal control to their northern neighbors (mainly Germany) in exchange for aid. We doubt the willingness of either party to agree to that deal and therefore believe the breakup of the currency union to be the likely outcome. In either case, doubts about European sovereigns and banks will keep moving higher up the food chain until the Europeans come up with some type of answer.

Zero. That was the number of jobs produced in the US last month according to the Labor Department. Also a pretty good description of the US economy of late, not showing any growth but not yet falling off a cliff. It is also the amount of growth the bond market is expecting from the foreseeable future judging by the sub-2% yields on 10 year US Treasuries reached in recent weeks. This is leading to increasing comparisons to the Japanese economy which has suffered through a decade of sub-2% yields amidst no growth.
Zero also describes the approximate chances of President Obama's re-election next year if unemployment is still above 9%. We imagine that was the prime motivation behind his speech to Congress calling for another $400 billion in stimulus. It is a fair bet that he is unlikely to get a package that large but Congressional Republicans seem amenable to some facets of his proposal so he may get some items passed in the next few weeks. In any case we would not expect any package to produce economic fireworks and to have minimal effect on the market, particularly in comparison to the macroeconomic issues that have so correlated all the worlds markets the last few years.

That correlation has been seen in emerging markets which have declined in step with developed nations this summer. This is the YTD performance chart for the primary stock indices of the BRIC (Brazil, Russia, India and China) nations.


The declines range from over 10% to nearly 19%.These nations are best situated to drive worldwide demand and they did so in the immediate aftermath of the financial meltdown but market action would indicate that they have lost steam and, in fact, still seem very vulnerable to the crises rippling through developed markets. There had been a lot of talk in recent years of the decoupling of developed and emerging markets but we think the evidence thus far shows that, particularly in times of stress, the two are linked more tightly than ever.

The issue with the greatest ability to move markets remains the debt crisis in Europe. At this stage it is too late to expect a soft landing as much of Europe is in recession and their plight has slowed growth worldwide.Of course at this stage, that fact is already priced into the market and an orderly resolution of the currency union's issue is now the optimal result to hope for. 


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Asset Class Returns

Through August 31st, 2011
Monthly and 52 week returns for major asset classes. Performance information is for total return assuming reinvestment of interest and dividends. It excludes management fees, transaction costs and expenses.   

A really ugly month for risk assets across the board. US stocks were down over 5% and international stocks, both developed and emerging, did even worse. The selling spread to REIT's and high yield bonds, as both had their worst month in over a year. US Treasuries continue to be the beneficiary of the risk-off trade and yields have dipped below 2% in recent days.

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Financial Planning Highlight

'Acts of God' Insurance Coverage 

Mother Nature unleashed some fury on the northeastern US during the final days of August- an earthquake quickly followed by Hurricane-turned-tropical-storm Irene.


So what happens when these calamities cause damage to your home? The British humorist Alan Coren defined the 'Act of God' exclusion on insurance coverage as meaning you cannot be insured  for the accidents that are most likely to happen to you ... but that is not exactly the case. This month we offer a primer on Homeowner Insurance... what is covered, what isn't, and how you can recover from disaster (even if you don't live in a house).

A Quick Guide:

Earthquake... Not Covered

Hurricane (wind, rain, hail)... Covered

Flooding... Not Covered

Because earthquakes and flooding are not covered by standard homeowner policies, a supplemental policy needs to be purchased. Some details on these policy types:


Flood Insurance... FEMA via the National Flood Insurance Program (888-379-9531) offers the majority of flood policies, although a few private insurers offer coverage. The cost to purchase flood insurance will depend on if and to what degree you are in a designated flood zone. Don't put off buying coverage until storms are in the forecast, there is a 30-day waiting period before federal flood coverage takes effect. What's FEMA doing in the insurance business?? Well, before Congress passed the National Flood Insurance Act in 1968 the national response to flood disasters had been to build dams, levees and other structures to hold back flood waters. This policy may have... you guessed it... encouraged building in flood zones. So instead of building levees, FEMA sells insurance. The lesser of two evils we suppose.


Since not all water damage to a home is the result of flooding, this video explains the different types of coverage.


Earthquake Insurance... available through most insurance companies. It provides protection from the shaking that can destroy buildings and personal possessions. Fire and water damage due to burst gas and water pipes caused by an earthquake are covered by standard homeowner insurance policies in most states.


One note of interest: Cars and other vehicles are covered for earthquake, flood and hurricane damage by purchasing optional comprehensive insurance.


What you can do now: *Be prepared*

Review your insurance specifics with the company representative or agent who provided your coverage and take inventory whether you own your home/condo/coop or rent. If your home were upended by a hurricane, flood, fire or theft would you be able to remember every item you own? Most people couldn't- especially during such an emotional time. We recommend taking an inventory of all your belongings and updating it when items are added or replaced. The more detailed the better.

This video demonstrates one way to document your inventory.


As mentioned in the video, a detailed home inventory will:

1)      Allow you to have the appropriate amount of insurance once the value of your possessions is determined.

2)      Bring speed and accuracy to the claims process if your property is destroyed.

3)      Provide documentation for an unreimbursed loss on your tax return.


Our thanks to the Insurance Information Institute and their easy to use website for providing clarity on many of these topics.


Thank-you for reading,

John O'Meara, CFP
Michael Keating, CFP



Mike and John InnerHarbor Advisors 

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InnerHarbor Advisors, LLC
212-949-0494 and