To our clients:


Below is the Archer Funds 2013 Outlook. The Archer Team tells you how they expect investments to behave in 2013. Included in this commentary is an evaluation of 2012 and how well the Team predicted its performance! Understanding the market is something you should expect from your financial professionals. They are working hard on the investments for all of you; leaving you free to pursue your own obligations and areas of interest.

 

For those of you invested in the managed portfolios, here are the results for the year 2012. If you were not with us for the full year, the performance of your individual account will be different.
 

    Model Portfolios

YTD

    Aggressive 13.15%
    Moderate Aggressive 11.34%
    Moderate 11.34%
    Income & Growth 10.29%
    Conservative   8.44%

 

The Archer Funds performed very well in 2012:

 

   

Funds

YTD

    Archer Stock Fund  11.02%
    Archer Income Fund   6.63%
    Archer Balanced Fund   6.83%


If you would like a copy of the Morningstar Reports for your portfolio or fund, please call us. The start of a new year is a great time to look at your financial goals and make sure you are on track to meet them. Give me a call and we will set a time to meet and discuss your individual situation. My direct line is 240 316-3564 or email me at kgrow@esullivan.net.

 

Kathy

 

Kathleen F. Grow, IAR, EA

Financial Advisor and Tax Professional

 

Investment Advisor Representative

Registered Investment Advisor (RIA) through Archer Investment Corporation.

 

Enrolled Agents (EA) demonstrate special competence in tax matters by written examination administered under the oversight of the IRS. They can represent clients before the Internal Revenue Service.


4709 Montgomery Lane | Bethesda, MD 20814

Direct Dial (240) 316-3564 | Phone (301) 657-8080 Ext 135 | Fax (301) 657-9055
Website:
www.esullivan.net | E-mail: kgrow@esullivan.net
 

The opinions contained herein are not intended to be investment advice or a solicitation to buy or sell any securities. Information obtained from sources deemed to be reliable, but accuracy or completeness is not guaranteed. Past performance is not a guarantee of future results. Performance figures contained herin do not represent actual client portfolios or results. Actual results may significantly differ from the model portfolio returns presented. Archer Investment Corporation manages the Archer Funds. You should carefully consider the investment objectives, potential risks, management fees, and charges and expenses of the Funds before investing. The investment return and principle value of an investment in the Funds will fluctuate so that an investorís shares, when redeemed, may be worth more or less than their original cost. The Fund prospectus contains this and other information about the Fund, and should be read carefully before investing. You may obtain a current copy of the prospectus by calling 800-581-1780.
 
 

 



                                                      Archer 2013 Outlook:

Before we comment on 2013, letís take a quick review of 2012 and how it is shaping up. We can also review the 2012 comments to see if the predictions we made last year were correct. Our 2012 outlook was fairly accurate. Our estimates on the S&P 500 for 2012 were between 1366 and 1660. Then in our March post we narrowed down the estimate to 1450 on the S&P 500. (see our monthly posts at www.thearcherfunds.com). The returns in 2012 were a largely driven by the weakness from the previous year. The third year in a presidential cycle is usually one of the strongest years in a four-year cycle. However, the market in 2011 was essentially flat. In 2012, corporate profits continued to expand and the market ultimately rose with those profits. The Price to Earnings multiple stayed relatively unchanged.

One area that turned out well for our clients again in 2012 was fixed income. This proves you can be wrong, but still be right in the end in terms of returns. For many years, our team has been anticipating a correction in the bond markets. To this date, we have been incorrect. Since 1994, we have seen positive returns in government bonds. 2013 could be the first year government bond returns are near break-even or have a slightly negative return. The only way this could come to fruition is if the Federal Reserve (The Fed) discontinues its buying spree of debt. The Fed balance sheet is expected to expand to $4 Trillion dollars in 2013. That is Trillion with a capital ďTĒ. You might ask, when will the Fed stop the Quantitative Easing (QE)? Great question. If only we knew. I suspect they canít stop any time soon. Let me explain why. If you took a nap every day at 1pm and did this for a year, you would develop a habit of taking naps midday. Sounds great, right? Now all of a sudden you had to work during that nap and your only time to sleep was in the evening. For a while, you would be tired at 1pm and feel like you needed that nap. It would be tough to break that habit. The Fed has let the country form a bad habit. It will be a tough one to break. With that said, once they stop buying, we do expect interest rates to rise to market demand levels. This should put the 10 year Treasury at a realistic rate of 3Ĺ% to 5%.

Letís turn our attention to the stock market. Corporate profits as percentage of the United States Gross Domestic Product are near an all-time high. Cash balances on corporate books are also at an all-time high. It is surprising hiring, although better, is not coming back like we had before the 2008-9 downturn. Most companies have cut all the costs they can in 2012. We have seen corporations refinance debt with record low interest rates and restructure corporate balance sheets. They have even borrowed at these low rates to pay special dividends at year-end with the impending increase in tax rates of dividends.

 

Letís take a look at where we think earnings will be in 2013 and 2014 to get a good idea of where the market will trade in 2013. We look at both years because the markets tend to look at the next year earnings to put a price on a stock. Obviously as we move into the second half of 2013, we will begin to focus on 2014 earnings to get a price for the market.

In 2013, we expect earnings to remain relatively in line with the earnings from 2012. Like we said earlier, corporations have been in a cost cutting mode and the lack of hiring has kept profits at all-time highs. In addition, corporate benefit costs (health insurance) will rise in 2013, helping to curb profits. Another area of potential expense increases will be additional hiring. Why is hiring a net-negative for profits? Any time a corporation hires one more individual, there is typically a lag time between the realized profit per new employee. So if we estimate profits at nearly $104 for the S&P 500 in 2013, and the average Price-to-Forward Earnings since 1976 is 13.7x, this gets us to 1425 at the end of the year for 2012.

We need to dissect this a bit further. In the first half of 2013, we have a looming debt-ceiling crisis and a so-called resolution to the fiscal cliff. These two items, depending on the outcomes could throw our economy into a soft landing which is where we are today or take it right to a recession. Much of this will depend on how Washington addresses these issues. In the second half of 2013, we expect earnings to again start to escalate to a $115-$120 level. I am optimistic that once we have a little more clarity in Washington with the Health Care Affordability Act and the debt ceiling we will see corporate profits expand once again.

 


 

The table above represents where we think the market will be at the end of 2013 as it looks forward to earnings in 2014. Letís call the mark 1550. You can see how the market can appreciate or depreciate either way based on earnings and multiple expansion. We have two factors to evaluate in determining where the year-end target for the S&P 500 will be. One factor is earnings, and the second is clearly the multiple.

Currently the market is pricing in the lower side of the multiple equation. There are two conflicting factors that are telling us there could be expansion, while the other is telling us it could stay low. Companies at this point are guiding their estimates lower which would either give you a higher multiple if the price of the market did not change or the stock market would have to come down. Either way is a near-term negative for the market. The fiscal cliff, whether fixed or not, will have an adverse impact on the markets for part of the first quarter and maybe the second. With higher taxes, comes less discretionary spending which will impact retailers and those companies where their goods are not needed for everyday life. (Think Hostess and Twinkies) However, longer-term as regulatory requirements are in place here in the United States and the playing field is understood, earnings are expected to improve. The United States is still one of the most business-friendly countries in the galaxy (that we know of).

The graph below also shows that multiples stay relatively depressed when Real Long-Term Treasury Yields are at an extreme low or high. The Fed has told us they expect to keep rates low by buying $85 billion of treasuries and mortgages until the unemployment gets to 6.5%. This should keep the multiple at check and close to current levels.

Once the fiscal cliff is behind us we believe most people who feel like they have missed the rally over the last several years will move into riskier assets to make up for lost ground. For this reason, there is usually some multiple expansion in the fifth year of a bull market.

 

 

If we continue to see expanding profits beyond the $115 level as our estimate is fairly conservative, we could even see the market expand to 1600.  Overall we expect an 8-10% appreciation in stocks and possibly a flat to negative outcome in government bonds. This would play out even more so if unemployment continues to decline and the Fed stops buying debt. This means the economy is working through the issues and profits are expanding. This is a welcome sight for all of us.

We will continue to keep you up to date on our posts at www.thearcherfunds.com. Remember to invest in a manner you are content with and focus on long-term investing. Although we speak about short term gyrations in the market, it is difficult to trade the market with any kind of long-term accuracy.

Regards,

The Archer Team


Steven C. Demas
Troy C. Patton CPA/ABV
John W. Rosebrough CFA
 

 

You should carefully consider the investment objectives, potential risks, management fees, and charges and expenses of the Fund before investing. The Fund's prospectus contains this and other information about the Fund, and should be read carefully before investing. You may obtain a current copy of the Fund's prospectus by calling 800-238-7701 or by downloading one online at www.thearcherfunds.com.

The Fund's past performance does not guarantee future results. The investment return and principal value of an investment in the Fund will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month end may be obtained by calling 800-238-7701

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