Market Commentary Q4, 2012

It only took five years. It was not easy, nor was it pretty, but we are encouraged by the fact that Democrats and Republicans rediscovered what negotiation and compromise were. At the 12th hour they put their stamp on the American Taxpayers Act of 2012. The Act, otherwise known as the Fiscal Cliff Deal, staved off sequestration cuts that had been set to hit in early 2013. Those automatic cuts, coupled with the elimination of all Bush era tax cuts, had the Congressional Budget Office (CBO) estimating that the US would lose 2-4 % of GDP growth in 2013 and, most likely, find itself back in Recession. While we would consider the deal to be watered down, we are pleased that something was done. As you may recall in our Q3 Market Commentary, the Fiscal Cliff was one of our ongoing concerns for future economic and market growth. With the creation of the Act that particular uncertainty has been removed from the market. While corporations may not like the particulars of the deal, they dislike uncertainty even more and, with specifics in hand can now plan accordingly. Some of the specifics of the deal are as follows. Income Tax Rates Increases from 35 % to 39.6 % for individuals making more than $400,000 and households making $450,000. Alternative Minimum Tax Permanently increases AMT for inflation. Capital Gains And Dividends Increases tax from 15 % to 20 %. Estate tax Increases the maximum tax rate on estates from 35 % to 40 % on those estates worth more than $5 million dollars and that number will be adjusted for inflation. Deductions and Exemptions Itemized deductions and personal exemptions will be limited for those making $250,000 as individuals and $300,000 as a household. Tax Credits Renewed the child care, tuition and R+D tax credits. While we feel AMT needs a much bigger fix (elimination would be our preferred route) we are satisfied that it will be at least indexed for inflation thus keeping more and more taxpayers from being caught in its grasp in the future. Capital Gains we had anticipated increasing back to 20 % but we were pleasantly surprised that dividends were not raised to personal income tax levels and instead were capped at 20 %. This is a boon for investors and large cap value stocks alike as it keeps dividend bearing companies, which tend to be more mature, financially stable. Municipal bond interest remains tax-free, but that may come back into the upcoming debt ceiling debate as part of the above mentioned limits on exemptions for individuals making over $250,000 ($300,000 as a household). We are steadfastly against any elimination of tax exemption for Municipal bonds for any investor. While protecting the middle class was front and center during the debates, we fear that it would be the middle class most affected if the tax-free status were removed, as that would mean an increase in the borrowing costs for municipalities. Those increased borrowing costs would likely be passed on to all state and local tax-payers and/or those that utilize the various revenue-backed services like water and sewer, for which these bonds are issued.

1100 East Hector Street, Suite 399, Conshohocken, PA, 19428

Tel: 800 220 2161

www.nstarfinco.com
Registered Representative, Securities offerred through Cambridge Investment Research, Inc. a Broker/Dealer, member FINRA/SIPC. Investment Advisor Representative,Northstar Financial Companies, Inc. a Registered Investment Advisor. Northstar Financial Companies Inc. and Cambridge are not affiliated.

Finally with the real estate market beginning to show some signs of life we were encouraged that the discussed elimination of mortgage interest did not make it to the final version of the bill. So moving forward what does this all mean? In our last commentary we discussed a number of the broad, systemic risks that we felt were still present that, if they came to fruition, could derail a global recovery and subsequently equity returns. At this time, the Fiscal Cliff is resolved but with the Act being more or less a last-minute patch, we must simply replace that risk with the upcoming, potential fight over the debt ceiling. So the issues we feel that are left to play out are; Corporate Revenue Growth, European Debt Resolution and the U.S. Debt Ceiling. Corporate Earnings As per FactSet Research Systems, Inc., as of year-end, 497 of the S&P 500s companies had reported their Q3 earnings. 64 % had reported earnings above estimates, which exceeds the long term average of 62 %. But only 40 % announced revenues that exceeded expectations, which is below the historical norm of 62 %. So we were admittedly off on our assumption that earnings would decline, but correct that revenues would continue to decline, following the trend for the last three quarters. This remains a concern for us. While the market has continued to reward increases in earnings with higher stock prices those earnings are continuing to come mainly from high levels of productivity and tight control of overhead costs. On one hand we applaud these efforts but on the other we still feel they are unsustainable. There are only so many cuts a company can make and only so much productivity a company can squeeze out of its workers. At some point the company must sell more, service more, produce more. We were encouraged by Alcoas announced Q4 earnings on 01/09/2013, not so much that they met expectations but more so that as a commodity producer they are a baseline indicator of economic growth. Much of their quarterly success was expressed as an increase in Chinese activity. This is good news. A growing China creates demand and the need for greater amounts of goods and services. But will China be enough? In our opinion, probably not. It will take a pick-up in global growth to increase demand enough to encourage US employers to add employees, which will then expand disposable income and consumption, thus feeding the need for greater production. But we also still feel that level of growth is a couple years away. Alcoas announcement marks the beginning of Q4 2012 earnings season. Our call remains unchanged and we see the results being similar at this time to Q3; lower revenues with marginally increasing earnings at best. European Debt Signs point to a reduction in European default risk and the Euro Zone slowly getting this issue under control. Our opinion remains that the upcoming Italian elections hold the key to continued resolution of the European Sovereign Debt issue. Should Italy elect a staunch anti-austerity government it is our opinion that they would find access to the capital markets more difficult. This would impede their ability to find new capital to run fund services or refinance debt and could spark fears that they will seek concessions from holders of their outstanding debt. A vote for pro-austerity would bolster the feeling that Europes is over its worst exposure and may set the stage for reduced market volatility based on that uncertainty.
1100 East Hector Street, Suite 399, Conshohocken, PA, 19428 Tel: 800 220 2161

www.nstarfinco.com
Registered Representative, Securities offerred through Cambridge Investment Research, Inc. a Broker/Dealer, member FINRA/SIPC. Investment Advisor Representative,Northstar Financial Companies, Inc. a Registered Investment Advisor. Northstar Financial Companies Inc. and Cambridge are not affiliated.

The U.S. Debt Ceiling The Fiscal Cliff debate and ultimate Act did little to put a dent into our own budgetary woes. It did increase revenues, which we felt was a necessary part of a deficit reduction plan, but did little to decrease spending. In February we will once again be bumping up against our own limit for debt. In 2011, when this debate last raged, we came very close to technically defaulting on our outstanding debt and subsequently our debt rating was reduced from AAA to AA- by Standard and Poors and was put on negative outlook by Moodys and Fitch. As we have seen this did not stem the desire for US issued debt but should we fail to come to consensus in February, and fail to reduce spending in a meaningful manner, we run the very real risk of being downgraded further by S&P and having Moodys and Fitch follow through on their ratings cut warnings. A cut could potentially mean a higher cost to service the US debt. Our outlook is mixed. On one hand we were encouraged by the ability of Congress to agree on the Fiscal Cliff deal, but we are already hearing the rhetoric of both parties come out as they circle their wagons. Republicans are calling for a dollar-for-dollar deal (a dollar of near term ceiling increase for every dollar of long term spending decrease) and the Democrats are stating that further cuts will require further revenue increases. We see this battle being hard fought. Republicans are already stinging from an election loss and a feeling that they rolled over in the Fiscal Cliff debates, and the Democrats feel emboldened by an election win and a feeling they got the better of the deal during the Fiscal Cliff debate. We also cannot ignore the fact that there will be some posturing for mid-term elections and a new Treasury Secretary by the time the debate heats up (Jack Lew has been nominated). We do feel a deal gets done, but both parties will push this to the brink yet again. 2013 Outlook We continue to see marginal improvement in many areas from unemployment to housing. Global growth slowly continues to improve and we are encouraged by a potential increase in Chinas growth prospects. Europe appears on the path to solving their debt issues, and as a whole we feel the US political factions will manage to avoid a dysfunctional stalemate at the expense of the country. Thats said, market growth, at its very basic level, is contingent upon companies increasing their earnings through not only their current efforts of cost cutting and productivity, but also from an increase in how much business they do. Revenue growth must return to the picture for the stock market to return to meaningful gains. At roughly 13 times expected 2013 earnings we feel the market is fairly priced at this time. If expectations are met we do not anticipate more than moderate returns in equities. If earnings exceed their expectations, and the outlook into 2014 and 2015 begins to strengthen, then equities have the ability to add a couple of multiples into their price. On the negative side, should global growth slow due to any of the remaining risks mentioned, we would see not only a reduction of actual realized earnings but also of the price willing to be paid for the risk of owning equities. For fixed income we think bonds face an uphill battle this year in certain sectors. We still feel that foreign bonds, of countries with solid balance sheets, offer upside potential. If the economy continues to strengthen then high yield and senior loan offer potential as they tend to get more attention when the economy looks better and default risk goes down.

1100 East Hector Street, Suite 399, Conshohocken, PA, 19428

Tel: 800 220 2161

www.nstarfinco.com
Registered Representative, Securities offerred through Cambridge Investment Research, Inc. a Broker/Dealer, member FINRA/SIPC. Investment Advisor Representative,Northstar Financial Companies, Inc. a Registered Investment Advisor. Northstar Financial Companies Inc. and Cambridge are not affiliated.

Municipal bonds future pricing is based solely on whether or not we lose their tax-exempt status for higher earning investors. If we do then we would see a reduction in price and the very real potential of billions of dollars of bonds being called by issuers who have built-in mandates that require such a redemption. This is one area we will be monitoring closely. Treasuries and high grade corporates may have a tougher road. With prices of these bonds so high, the slightest indication of a rise in rates would cause them to come down. This is another area we will be watching closely and we have mitigated this risk in portfolios to some extent by owning funds that can own various sectors of the bond market and can also short sectors as well. Finally, and most importantly, we feel we are beginning to reach a point where investors are looking beyond what governments are doing and starting to look again at fundamentals. If the global economy continues to strengthen we should see a strengthening in commodity prices. And should the US economy continue to show signs of life we should also see real estate continue its slow rise out of the ashes. This is a trend that we think will continue as we get through 2013 and into 2014 and feel very positive about as it will show that the healing is complete. 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.

1100 East Hector Street, Suite 399, Conshohocken, PA, 19428

Tel: 800 220 2161

www.nstarfinco.com
Registered Representative, Securities offerred through Cambridge Investment Research, Inc. a Broker/Dealer, member FINRA/SIPC. Investment Advisor Representative,Northstar Financial Companies, Inc. a Registered Investment Advisor. Northstar Financial Companies Inc. and Cambridge are not affiliated.