February 2, 2015

Dear Friends,
The stock market was extremely volatile over the past few months. Movements in market
averages of 200 points or more between one day and the next, as well as within a single day,
were commonplace. What brought about the increase in volatility? And if volatility is going
to continue to be high, what are implications for the management of your portfolio?
We believe a major force behind the increase in market volatility is the change in the value of
the dollar. The graph below shows the price of a bundle of currencies expressed in American
dollars. The currencies in the bundle are the Euro, Japanese Yen, British pound, Canadian
dollar, Swedish Krona, and Swiss Franc; the price calculation was made by Blumberg. The
graph below shows that between February and July 2014 the market price of the world
basket of currencies remained relatively stable at approximately 81 U.S. dollars. However,
between last July and this January, the dollar price of the bundle increased to 94.8 U.S
dollars.

This change in price means that if an investor sold a bundle of foreign currencies in July for
81 US dollars and held the dollars until January when it reached $94.8, she would have
earned 17 percent on the transaction; ignoring transaction costs, 94.8/81=1.17. Many people
who exchange their foreign currencies for dollars invest the dollars in stocks and bonds. If
the purchased securities also increased in price, the total return would be even greater than
the 17 percent return earned on the currency exchange alone.
Investors want to hold strong currencies that appreciate in price because of their positive
returns. The demand for American dollars also increased as people in Europe, the Middle
East, and South America began to fear for the value of their local currencies. As foreigners
saw the American stock market increase, their speculative demand for dollars increased even
more.
American businesses that export goods and services are also concerned when the dollar
appreciates but for a different reason. A strong dollar makes the goods and services more
expensive for their customers who pay in foreign currencies. The Wall Street Journal
recently carried several articles reporting how the stronger dollar is cutting into the sales and
profits of big American companies. Hershey, for example, posted weaker than expected
results in its fourth quarter and gave a soft earnings outlook for 2015. The candy company
joined a chorus of US companies such as consumer products giant Proctor and Gamble Co.,
technology stalwart Microsoft, and leading pharmaceutical companies like Pfizer in saying
the strong dollar is hurting their business because their foreign sales are shrinking in value
or not keeping up with dollar based costs.
In short, the strong demand for dollars from investors around the world lead to an increase
in the flow of funds into the American market and to an increase in stock prices. At the same
time the strong dollar raised the costs foreigners have to pay for American products and
contributed to a slowdown in the foreign sales and profits of large corporations. Such
declines lead to lower stock prices. I believe that both the increased demand for American
securities (because the dollar is becoming stronger) and the slowdown in sales and profits of
large firms (because the dollar is becoming stronger) contributed to the recent volatility of
the market.
We began this letter by asking If volatility is going to continue to be high, what are
implications for the management of your portfolio?
First, I assume your goals are remain the same as they were when we first began to manage
money for you, i.e., to preserve and enhance your wealth. Second, if you are like other
clients we have recently spoken to, you would also like it to see an increase in the steady
growth of income that your portfolio generates, and we want to meet your needs.
While past performance is not always a good indication of what the future holds, you should
know that our Equity Income strategy now pays a dividend yield in the 5 percent range and
its price return over the past month was approximately 3.5 percent higher than that of the

S&P Index. Almost all of our clients now have a portion their total holdings in our Equity
Income strategy.
You may wish to discuss the portfolio allocation, or proportions, you now hold in Equity
Income, Growth and Bonds at your next portfolio review meeting. Please call to schedule
such a meeting at your convenience.
Sincerely,

Eugene Lerner
Managing Director, Partner