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In This Issue
Lending to Family & Friends
History Speaks
Chart of the Month
Asset Class Returns
Market Commentary
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IHA Monthly
July 2012
Clean, smart advice from people you can trust. InnerHarbor Advisors is a fully independent financial advisory firm that embraces the fiduciary standard. At InnerHarbor we put the interest of our clients first.
Financial Planning Highlight
Lending to Family and Friends
History Speaks
The Commodore 
Cornelius Vanderbilt, descendant of an indentured servant, grew to become a shipping and railroad magnate and one of the richest men in American history. He bought his first ship at the age of 16 with a $100 he borrowed from his mother and was soon prominent in the New York shipping business. Vanderbilt was a key player in the landmark Supreme Court case, Gibbons vs Ogden, which brokeup a ferry monopoly that had been granted by the New York State legislature. This was the start of a pattern whereby Vanderbilt competed against a government subsidized monopoly by vastly underpricing them and expanding the market. Vanderbilt also profited during the California Gold Rush by establishing a shorter route there
 from the East Coast through Nicaragua. True to form he also lowered the price of that trip from $600 to $150. After the Civil War, Vanderbilt exited the shipping business in favor of railroads. His epic battles, both in the business of establishing rail lines and on Wall Street for control of their stock, resulted in a railroad empire. Vanderbilt was instrumental in the building of Grand Central Depot, as it was called in those days, as the main rail terminus in Manhattan. His mother got him started with that $100 loan but Cornelius undoubtedly also got some of his business toughness from her; she once foreclosed on one of her own daughters for falling behind on loan payments.
Chart of the Month
From the Wall Street Journal, more  credit, at lower costs, is flowing only toward those with the highest credit scores
Asset Class Returns

 Know your target audience. Who are your most important customers, clients or prospects, and why?

Market Commentary

  June saw broad rallies in most risk assets including U.S. and international stock markets, commodities and high-yield bonds. This was driven by a couple of events out of Europe; the election victory of the center-right party in Greece and the decision to structure the Spanish bank rescue as a direct investment in the banks from Eurozone bailout funds rather than a loan to the Spanish government.
The Greek election saved Europe from the possibility of an immediate default but does little to address the structural issues facing Greece. That nation is now in its fifth year of a recession. There has been little done to address its lack of competitiveness or government dysfunction.  The election shows that the Greek people recognize they cannot trust their own government to make the reforms necessary (they need EU institutions such as the Euro to do so) but are not willing to accept those reforms. In fact, the only point of agreement for the broad Greek electorate is that they don't want to accept the conditions on aid that they have already received. We still believe that the best route for Greece is a monetary devaluation, effectively an exit for the Euro. The center-right government has a greater ability to manage this change then their more confrontation electoral opponents but they cannot prevent the change.
The direct investment in Spanish banks was meant to help disassociate the fortunes of the sovereign debts from those of the national banking system. Spain had a low level of debt and  actually ran a fiscal surplus prior to its housing collapse in 2007-2008. Its current fiscal problems are in large part due to the bad housing loans issued by the banking institutions of the country. The hope is that isolating the banking debts would lower the interest rates in Europe's periphery nations, especially in Spain but also in Italy. Yields for those countries have remained flat since the announcement which is confirmation that their problems are not merely banking but also structural.

There is little doubt that the European crisis has led to a reduction in global economic activity. The following chart (from Index Strategy Advisors) shows the global Purchasing Managers Index, a broadly followed indicator of financial activity, at three year lows.


This has helped lead a flood of money into any investments seen as being "risk-free", most obviously U.S. Treasuries. But a host of European countries have seen yields on their bonds drop into negative territory. Investors are paying the Swiss government to take their money for five years. Somewhat unusually this has been accompanied by a reduction in European and American volatility measures. The following chart shows the VIX (a measurement of how much investors are demanding to be paid for expected volatility) for those two regions.


Generally, lower VIX measurements are positives for stocks but it is hard to reconcile that with the palpable fear  shown in sovereign bond yields. It will bear watching whether this represents a divergence, if that is possible,  in corporate fortunes and sovereign fiscal conditions.

InnerHarbor Advisors, LLC
420 Lexington Ave, NYC 10170
Managing Partners:
John O'Meara, CFP    
Michael J. Keating, CFP

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