PDF version of the Market Outlook

The string of seven consecutive monthly gains in stock prices ended in October over concerns that the economic recovery is losing momentum, despite a report that the economy grew 3.5% last quarter, signifying that the recession is likely over. The Standard & Poor’s 500 (-1.9%) and Nasdaq Composite (-3.6%) both edged lower, while the Dow Jones Industrials finished the month unchanged. Energy led sector performance with a gain of 3.2%, while the financial sector was the worst performer, posting a loss of 6% (source:Bloomberg.com).

Concerns that the recovery had stalled emerged following reports that weekly unemployment claims increased, consumer spending in September declined for the first time in five months, and consumer confidence slid in October. These reports cast doubt on the sustainability of the recovery, which many believe to be mostly driven by government stimulus. Fueling the negative sentiment were fears that the end of the home-buyer tax credit in November will bring a halt to the improvements in home prices and sales. Cynics argue that when the government’s stimulus efforts run their course, the economy will slip back into recession. Yet at the same time the index of U. S. leading economic indicators rose in September for a sixth straight month.

The market correction underway, similar to the ones we saw in July and September, is a correction in confidence and not economic fundamentals. While a weekly figure for first-time unemployment claims did rise, the four-week moving average declined for an eighth consecutive week to the lowest level in nine months. The decline in consumer spending for September was due to the end of the cash-for-clunkers program. Consumer spending actually rose on a monthly basis when auto sales are excluded from this artificially inflated figure. In fact, the current level of chain-store sales are on pace to far exceed the National Retail Federation’s projection for a year-over-year decline in November and December. We expect Congress to approve an extension and expansion of the home-buyer tax credit this month that will further support home values and sales through April of next year.

We can’t deny investors’ concerns and the public’s dismay, given the short-sighted policies coming out of Washington and the politicization of the economic stimulus funds to date. The vast majority of the billions of dollars approved for investment sit idle. What’s the excuse? The original plan was to spend the funds over a two-year period. Why two years? It is no coincidence that the mid-term elections will be held approximately two years after the economic stimulus plan was enacted. Meanwhile, programs designed to induce consumption, like cash-for-clunkers and the home-buyer tax, credit simply steal future demand so as to create the illusion that the status quo is better than reality dictates. These misplaced priorities are clearly demonstrated by the Obama administration’s announcement to send $250 checks to social security recipients for a total of $13 billion, compared to the $3.4 billion made available for projects aimed at modernizing the nation’s power grid. The $250 checks may buy lots of $10 toys at Walmart come year-end, and even fewer votes for incumbents in next year’s mid-term elections, but they do little to support job growth or the long-term investments we need to stay competitive in the global economy. Give a social security recipient a check for $250 and you feed him for a week. Create a job and you feed a middle-class family for a lifetime.

The sustainability of this recovery and continuation of the bull market underway depends predominately on one thing – employment. We still find more reasons to be optimistic than pessimistic, because our focus is on what the jobs data will look like six months from now rather than on what it was last month. Ironically, the rise in consumer spending (ex-autos) that contributed to a 3.5% advance in GDP last quarter is not the driver of growth or employment upon which our bullish outlook is dependent. That driver has yet to materialize. This is a profits-led recovery. The surge in corporate profits over the past nine months is unprecedented for a recessionary period. Therefore we should be focusing on the inevitable revival of corporate spending that will lead to job growth. Companies reduced labor costs and consumers cut spending earlier this year well in excess of what the severity of the recession in economic activity would normally dictate. This is because practically everyone assumed the recession was really a depression.

As home prices have stabilized and financial markets have recovered, consumer net worth has increased nearly $5 trillion over the past year. It has now returned to a level relative to disposable income consistent with the historical average that predates the stock market and housing bubbles of the past decade. We know that a rise in consumer net worth leads consumer spending by approximately six months, which bodes well for sustaining current spending levels as we move forward. Furthermore, we believe that earlier this year the 90% of consumers who are still employed cut back on spending more than necessary for fear their net worth would continue to decline. The dissipation of their fear explains the incremental rise in spending (ex-autos) from depressed levels over recent months and runs counter to the argument that the increase was stimulus induced.

Under the same misconception, corporations reduced expenses and cut employment well in excess of the peak-to-trough decline in economic growth (3.7%) in preparation for what they thought might be a depression. As a result, productivity and profits have soared and capital spending is down to its lowest level as a percentage of GDP in decades. Corporate revenues inevitably rise when the economy begins to expand, forcing companies to increase spending on capital equipment and to hire more workers.

Temporary employment continues to improve and the rate of decline in unemployment claims now exceeds the pace set in the previous two recoveries (1991 and 2001). Manufacturing employment surveys and the Institute for Supply Management’s payroll indicators are all moving higher. The current trajectory of the data leads us to believe we will see job growth by year-end, but the unemployment rate will still exceed 10% in the near term. An unemployment rate of 10% isn’t much different than the current 9.8%, but there will be a psychological impact on the public and undoubtedly visions of pink slips for politicians come next November. Herein lies the silver lining.

The unemployment rate exceeded 10% just two months prior to the mid-term elections in 1982, and the Republicans suffered significant losses in the House and Senate. We believe a 10% unemployment rate today will force the Obama administration to surrender political gamesmanship and accelerate an initiative Democrats intended to use prior to next year’s mid-term elections – a new jobs tax credit for businesses. We believe this would garner overwhelming support from both sides of the aisle and serve to speed up the improvement in employment that is already underway.

Another significant driver of economic and employment growth in coming quarters has yet to unfold. Businesses have continued to reduce inventories despite the improvement in sales activity. While industrial production is increasing, it is not increasing at the rate of end demand, so inventory-to-sales ratios are still declining. Businesses will be forced to bring inventories in line with sales over the next several months, which should boost economic growth more than most expect, further improving employment.

The trend in leading indicators that measure economic health six months from now collectively point to an improvement in the coincident and lagging indicators (unemployment rate) that the media emphasizes and the general public relies on to make emotionally based investment decisions. We believe these leading indicators will peak during the second quarter of 2010, at which point we are likely to temper our bullish outlook. In other words, when the unemployment rate is finally beginning to fall from its peak, and weekly unemployment claims (leading indicator) have bottomed, the majority of investors will finally feel comfortable taking on risk. From that point moving forward, stock market gains are likely to be muted relative to the gains we will have seen over the previous year. Investors scoffed at the idea of investing in stocks last April as leading indicators began to rise month-over-month, but they are likely to be euphoric several months from now just as these indicators peak. We believe we are beginning the seventh-inning stretch of the historic rise in stocks prices that began in March, and though we expect the breadth of participation to narrow in coming months, our upside target for the S&P 500 remains 1200. When the facts change, so will our outlook.

Our bottom line is that the economy is on the mend. The equation that supports our bullish outlook is unprecedented levels of liquidity plus historically low interest rates combined with elevated skepticism equals higher asset prices. Investors still hold more than $3.5 trillion in money market funds, which is nearly twice the historical average relative to the value of the stock market. The Federal Reserve is highly unlikely to raise short-term interest rates until the unemployment rate begins to decline, which we believe won’t occur until next spring. We can’t think of a bull market more loathed by the investor public than the one that began in March. Investor sentiment remains extremely subdued as evidenced by the flow of funds into stock and bond mutual funds. While investors directed more than $200 billion into bond funds during the first eight months of the year, there has been a net flow of just $15 billion into stock funds. This is all the evidence we need to know that most investors have not subscribed to the recovery thesis. The market should find its footing once again in November, following what may be a 10% correction from the October highs, but we would view this as yet another buying opportunity as the market averages achieve new highs before year-end.

Fuller Asset Management, LLC (FAM) is an SEC registered investment advisor. FAM and its representatives are in compliance with the current notice filing requirements imposed upon registered investment advisors by those states in which FAM maintains clients. FAM may only transact business in those states in which it is noticed filed, or qualifies for an exemption or exclusion from registration requirements.

This newsletter is limited to the dissemination of general information pertaining to its investment advisory/management services. All information presented in this newsletter is believed to be reliable, but no representation or warranty (express or implied) is made or given by any person as to the accuracy or completeness of the information contained herein and no responsibility or liability is accepted for any such information or opinions. Information or opinions expressed may change without notice, and should not be considered recommendations to buy or sell any particular security. Any subsequent, direct communication by FAM with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides.

For additional information about FAM, including fees and services, send for our disclosure statement as set forth on Form ADV from FAM using contact information herein. Please read the disclosure statement carefully before you invest or send money.

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Performance History

*Composite inception 10/17/2005

Trailing Total Returns

Fuller Asset Management, LLC (“Fuller Asset Management”) is an SEC registered investment adviser. The Fuller Large Cap Growth Composite Portfolio (the “Composite Portfolio”) represents actual client accounts invested according to Fuller Asset Management’s proprietary investment strategy. The Composite Portfolio invests in individual equity securities with a view toward capital appreciation.

The results of the Composite Portfolio are net the actual Fuller Asset Management investment advisory fees charged to the client accounts within the composite, brokerage commissions and other expenses. Fuller Asset Management’s investment advisory fees are described in the disclosure statement of Part II of the Form ADV which is available upon request.

Accounts within the Composite Portfolio are held with different custodians so they are subject to different commissions and other charges. In addition, withdrawals and deposits, and account size among other factors creates variations in performance among accounts within the Composite Portfolio and also in comparison to the Composite Portfolio.

The results of the Composite Portfolio include dividends and other earnings. Comparison of the Composite Portfolio to the Russell 1000 Growth Total Return and the S&P 500 Total Return is for illustrative purposes in relation to the potential performance of large capitalization stock only and the volatility of the Russell 1000 Growth Total Return and S&P 500 Total Return may be materially different from the volatility of the Composite Portfolio due to varying degrees of diversification and/or other factors.

Past performance of the Composite Portfolio may not be indicative of future results and the performance of a specific individual client account may vary substantially from the composite results above, in part because client accounts may be allocated among several portfolios. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable.

PDF version of the Market Outlook

The bulls have long been overdue for a rest given the torrid pace of the rally that began last March. September, which has historically been the worst performing month of the year for the stock market, provided a golden opportunity for a correction, yet the markets refused to cooperate. The Dow Jones Industrials (+2.3%), Standard & Poor’s 500 (+3.6%) and Nasdaq Composite (+5.6%) all finished the month of September with substantial gains. Industrials led sector performance with a gain of 6.6%, while healthcare was the worst performing sector, posting a gain of less than 1% (source:Bloomberg.com).

We could not summon a more supportive environment for financial markets. The negative numbers that the bears cling to are all lagging indicators, while the positive ones are all either leading or coincident. As the dollar continues to weaken, Treasury yields are falling, inflation is non-existent and credit spreads have collapsed. Stock, bond and commodity prices are rising in concert, and home values have registered their third consecutive month-over-month increase. Liquidity is still abundant and investor sentiment is cautious at best.

Critical to sustaining the market’s current uptrend through year-end will be a continuation of the improvement in housing and employment data. There are reasons to be optimistic on both fronts. With home prices still depressed and mortgage rates below 5%, home affordability is at record highs. The S&P/Case-Shiller home-price index recently reported its largest monthly gain in nearly four years (for July) as the trend in sales of existing and new homes continues to improve. Some have argued that the numbers are skewed because the majority of sales have been foreclosures. When the $8,000 tax credit for first-time home buyers ends in November, sales will slide and home prices will decline again. Yet further analysis of the monthly data reveals that the percentage of sales attributable to first-time home buyers has steadily declined from March through July. We believe that the incremental rise in home prices will continue, which will support a further improvement in sales.

We are anticipating further declines in weekly unemployment claims and in the number of jobs lost each month, with the expectation that there will be job gains by year-end. Corporate profits have risen dramatically over the past six months, despite the lack of economic growth, primarily due to the reduction of labor costs. As profits have risen, business confidence has gradually improved, which is a precursor to hiring new employees. Now that the economy is expanding again, revenues will start to rise and companies will be forced to hire new workers to meet demand for goods and services.

There is no better evidence of the improvement in business confidence than the flurry of acquisitions and strategic investments announced around the world last month. This is an indication that financial markets remain undervalued, despite their meteoric rise since March. Regardless, individual investor sentiment remains guarded, as shown by the net redemptions from equity mutual funds in recent weeks. The consensus of leading economists is equally as reserved in their expectations for corporate earnings and economic growth in the year ahead. This caution is significant because it is the dichotomy between perception and reality that determines the potential for market returns moving forward. We believe the vital signs for the economy indicate that the consensus of investors and economists are still too pessimistic.

As the gap between perception and reality closes in the months ahead, we will need to more closely monitor some major headwinds that have the potential to steer this bull market off course. One major concern is that once the inventory cycle has run its course and the benefits from the economic stimulus plan end, the artificial prosperity we enjoyed from debt-induced consumer spending over the past decade will not be there to support economic growth. At this stage, we are not concerned.

Household wealth rose in the second quarter for the first time in two years as the amount of consumer debt continued to decline, and retail sales are on track to increase in the third quarter, even when we subtract the boost in auto sales from government subsidies. Consumer spending will undoubtedly level off next year as the savings rate rises, but even if its contribution to economic growth is negligible, we see an offsetting factor that few are acknowledging. In previous recoveries our imports of goods rose dramatically as our exports to trading partners declined, leading to an increase in the trade deficit that detracted from growth. This was in large part due to the indebtedness of developing countries and their lack of domestic consumption. Today developing countries are leading the recovery because they avoided the leverage that encumbers growth and have realized the emergence of their own middle classes. As a result, our exports are rising faster than our imports, which is narrowing the trade deficit and contributing to growth. We believe this new development, should it sustain itself long-term, has the potential to offset the decline in domestic consumer spending as the savings rate rises.

Another concern is inflation. The government’s prudent response to the bursting of the credit bubble has been to inflate our way out of it by increasing the money supply, lowering short-term interest rates to zero, and borrowing and spending even more. Opponents of this policy point to the weakening of the dollar that has resulted and the inflationary pressures they believe will follow. The nominal rate of inflation, which includes energy, is set to soar over the next few months, but not for the reasons just mentioned. Energy prices plunged in the fourth quarter of last year, which means the year-over-year comparison used to determine the headline inflation rate will show a substantial increase as we enter the fourth quarter of 2009. We expect this to raise concerns, but they are misguided. The Federal Reserve focuses on the core rate of Personal Consumption Expenditures (PCE) when determining inflation risks and monetary policy. This inflation gauge measures the average increase in prices for all domestic personal consumption and accounts for changes in spending habits caused by price changes. This figure is forecasted to decline over the next year by leading economists, which will substantially ease the need for the Federal Reserve to withdraw liquidity and tighten monetary policy to the extent that it thwarts the rise in asset prices.

Fearful memories are persistent in people’s minds. Many of us know someone who lived through the Great Depression and was permanently changed as a result. This apprehension is pervasive today in light of the dramatic downturn in the economy and financial markets last year. Fed Chairman Bernanke offered his expert opinion just days ago that the recession is “likely over.” The market is up nearly 58% from the lows in March leading up to his conclusion. Our message has always been that the markets look forward 6-12 months. The financial media will continue to get lost in the day-to-day minutia, with its central focus on reporting what will attract the most viewers, as opposed to truly informing investors. We will continue to focus on incoming data that is forward looking (leading indicators) and allow this information to dictate our investment strategy. In our May Outlook we established a year-end target of 1200 for the S&P 500. Over the past five months our confidence in this forecast has only increased as the arguments for sustainable growth continue to outweigh the potential headwinds.

Fuller Asset Management, LLC (FAM) is an SEC registered investment advisor. FAM and its representatives are in compliance with the current notice filing requirements imposed upon registered investment advisors by those states in which FAM maintains clients. FAM may only transact business in those states in which it is noticed filed, or qualifies for an exemption or exclusion from registration requirements.

This newsletter is limited to the dissemination of general information pertaining to its investment advisory/management services. All information presented in this newsletter is believed to be reliable, but no representation or warranty (express or implied) is made or given by any person as to the accuracy or completeness of the information contained herein and no responsibility or liability is accepted for any such information or opinions. Information or opinions expressed may change without notice, and should not be considered recommendations to buy or sell any particular security. Any subsequent, direct communication by FAM with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides.

For additional information about FAM, including fees and services, send for our disclosure statement as set forth on Form ADV from FAM using contact information herein. Please read the disclosure statement carefully before you invest or send money.

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PDF version of the Market Outlook

A powerful and synchronized upturn in the global economy is underway. While the bears have been convinced for months that a significant decline lurks just around the corner, the bulls remain in complete control of this market. The Dow Jones Industrials (+3.5%), Standard & Poor’s 500 (+3.6%) and Nasdaq Composite (+1.5%) all finished the month of August with impressive gains. Financials led sector performance with a gain of 12.8%, while telecommunications was the worst performing sector, posting a loss of 2.4% (source: Bloomberg.com).

At the beginning of the year we built our case for an economic recovery unfolding during the summer months, led by a dramatic rise in stock and bonds prices (with the exception of Treasuries), on the expectation that financial markets would look beyond the recession and toward recovery. This outlook was considered highly improbable at the time by most on Wall Street. At the end of March we staked claim to the idea that a new bull market in stocks was underway–a notion considered equally implausible by most investors. Our assertion in May that the financial sector would lead the rally through the remainder of the year was easily the most unbelievable of our predictions based on the media reports about bank nationalization then prevalent. These views were not brave attempts to throw a Hail Mary pass deep into the end zone, but conclusions we believed were logical, based on the facts presented to us. Our main objective has always been to interpret the economic data and filter the news flow without bias in an effort to explain to our readers how things really are, as opposed to how we would like them to be. Using this same methodology today, we believe the economy will continue to improve and we are finding more reasons to be optimistic about the financial markets.

The bullish camp is no longer the ghost town that it was earlier in the year. Most investors will acknowledge that the recession many feared was a depression now appears to be ending, and the stock market has rallied more than 50% from the March lows, led by the financial sector. As corporate earnings reports and data measuring the health of the economy have beat expectations, leading economists and influential market strategists have been forced to raise their estimates. This is not to say that investor sentiment, a contrarian indicator, is overly optimistic by any measure. The state of panic most felt at the beginning of the year has abated, but the cash held in money market funds earning next to nothing still approximates 40% of the value of Standard & Poor’s 500.

The bears argue that the 50% surge in the stock market is “irrational exuberance.” They claim that the improvement in the economy is temporary and stimulus-induced. When the stimulus fades the economy will slip back into recession. They believe that the surge in corporate profits is a result of nothing more than cost cutting and that we are unlikely to see revenue growth in the year ahead. They see tepid consumer spending and a rise in the savings rate as significant drags on economic growth with no offset. Home prices will continue to decline, loan losses will continue to mount and the unemployment rate will continue to rise. The problem with this line of thinking is that there is nothing to support it given the economic data we have seen in recent months. Instead, we believe the negative sentiment on Wall Street is an expression of the overwhelming disdain the investor class has for the populist policies of the Obama administration. Yet it is a huge mistake to base an investment strategy on the hope that it will validate a particular political view. We must simply play the hand we are dealt.

The 50% rise in stock prices is truly historic, but so was last year’s decline. We view the market as being down more than 20% over the past 12 months and just returning to levels first reached more than a decade ago. We believe the economic recovery to date is more attributable to an improvement in business confidence and the inventory rebuilding that results from a normalization of the business cycle than to the economic stimulus. The bulk of the $274 billion in infrastructure spending included in the stimulus plan has yet to be distributed. It is perfectly normal to see the initial rise in corporate profits result from cost cutting as we embark on a recovery. What is not normal is to see a rise in profits during the first half of this year that set a record for a recessionary period. This bodes very well for employment gains in the months ahead. We acknowledge that the consumer will be a drag on growth, but this negative is balanced by the benefits we are realizing from the steady improvement in our trade deficit.

We do believe this new bull market is at an inflection point, but not one that will bring comfort to the bears. Stocks began to recover in March at the same time that economic indicators which historically lead a recovery in economic growth began to turn up. These indicators are collectively known as the Leading Economic Index (LEI). Some of the components of this index that we have discussed in recent months include weekly unemployment claims, the money supply, consumer confidence and new orders from purchasing managers (PMI). The sequential improvement in this index since March has led to its first year-over-year increase, which historically coincides with the end of recessions. This now sets the stage for an improvement in coincident indicators of economic growth–an improvement that we believe will lead to a significant turn in investor sentiment and a new leg up in this bull market.

Industrial production is likely to soar over the coming months in an effort to rebuild the unprecedented decline in inventories that followed the credit crisis. We believe the economy will grow north of 4% through the end of this year and well into 2010. As a result, the improvement in employment numbers is also likely to be more robust than the consensus expects. The trends in layoff announcements and unemployment claims continue to improve. The stabilization in home prices and increase in new home starts should lead to an increase in construction employment. The recovery in stocks and bonds should lead to an increase in employment in the financial sector. As for the $274 billion in infrastructure spending included in the stimulus plan, less than a third of the proposed projects are funded and only a fraction are underway. Regardless, a significant number of jobs will be created as a result.

We are not deaf to the long-term headwinds that face our economy and we are not attempting to spin the data available to achieve a desired outcome. We are simply focusing on what matters most to the financial markets. We believe that when investors see a resumption of economic growth that exceeds consensus estimates, accompanied by the continued improvement in employment data, sentiment will shift from skeptical to optimistic, and the trillions in cash now earning negligible returns in money market funds will move into the stock market. Our initial target in this next leg up in the bull market is 1200 for the S&P 500. A correction of 5-10% from current levels will not sway our outlook, since we believe it will be met with aggressive buying by those that missed this initial rally off the March lows.

Fuller Asset Management, LLC (FAM) is an SEC registered investment advisor. FAM and its representatives are in compliance with the current notice filing requirements imposed upon registered investment advisors by those states in which FAM maintains clients. FAM may only transact business in those states in which it is noticed filed, or qualifies for an exemption or exclusion from registration requirements.

This newsletter is limited to the dissemination of general information pertaining to its investment advisory/management services. All information presented in this newsletter is believed to be reliable, but no representation or warranty (express or implied) is made or given by any person as to the accuracy or completeness of the information contained herein and no responsibility or liability is accepted for any such information or opinions. Information or opinions expressed may change without notice, and should not be considered recommendations to buy or sell any particular security. Any subsequent, direct communication by FAM with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides.

For additional information about FAM, including fees and services, send for our disclosure statement as set forth on Form ADV from FAM using contact information herein. Please read the disclosure statement carefully before you invest or send money.

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The new address is literally across the street:

7135 E. Camelback Road, Suite 230
Scottsdale, AZ 85251
Phone: 480 – 553 6352
Fax : 480 – 553 6353

PDF version of the Market Outlook

In early February, we concluded that the record levels of cash socked away in money market funds, earning a negligible rate of return, would eventually lead to an unannounced surge in asset prices as violent and substantial as the decline that followed Lehman Brothers’ bankruptcy and the collapse of credit markets last September. The stock market (S&P 500) has now soared 48% from the low established in March, yet skeptics still abound as money market fund balances remain twice their historical average relative to the value of the market. We believe this bull stampede is far from over. The Dow Jones Industrial (+8.6%), Standard & Poor’s 500 (+7.4%) and Nasdaq Composite (+7.8%) continued their ascent in the month of July. Materials led sector performance with a gain of 13.3%, while utilities were the worst performing sector, posting a gain of less than 4% (source: Bloomberg.com).

We view the dramatic rise in stock and bond prices as nothing other than an unwinding of panic-driven liquidation of investments that began last fall. The market is climbing back to these levels on the realization that our banks were never insolvent, that the depression was actually a recession and that life isn’t coming to an end as we know it! These remarkable gains have been achieved on the basis that bad news is good news when it is less bad than expected. It should come as no surprise that the market bottomed coincident with the point of deepest contraction in economic activity, because markets bottom when the fundamentals can’t look any worse. We have continually focused on the rate of change in the data points that measure economic health, rather than the absolute numbers that are spun to project the worst possible outlook. It is the rate of change, and the direction of that change, that matter most to the financial markets. A loss of 200,000 jobs is good news when the economy was losing twice that figure in the previous month. What will fuel the demand for stocks in the months ahead is a continuation of the improvement in economic indicators and a resurgence in corporate earnings that defies an overly cautious consensus view.

In May we noted the sequential improvement in the global Purchasing Managers Index (PMI) for manufacturing and services companies, which precedes an upturn in industrial production. Orders must be placed for goods and services by purchasing managers before they can be filled by the companies that produce them. Since then we have seen a rise in business and consumer confidence, a steady decline in layoff announcements and unemployment claims, and the first signs that home prices have found a floor. The economy is now on the verge of a staggering rise in industrial production to rebuild the record plunge in inventories. This will lead to increased spending on capital equipment, advertising, travel and most importantly, job creation. The economy is finally expanding again after four consecutive quarters of contraction.

We anticipate corporate earnings will exceed expectations in the third quarter, despite what may be tepid revenue growth, because costs have been cut so dramatically. Companies are as slow to rehire workers and increase spending in a recovery as they are to cut costs during a recession. This leads to an acceleration in profits that outpaces the rise in revenues when business improves. We are on the cusp of a positive feedback loop that should continue to propel asset prices higher. As asset prices have risen, so has confidence. An improvement in consumer and business confidence leads to an increase in spending and economic growth. Economic growth ultimately leads to job creation, and asset prices forge higher. But what will sustain the recovery beyond an upturn in the inventory cycle, and how will we compensate for years of consumption-led growth when the government stimulus is gone and the savings rate continues to rise as Americans repair their balance sheets?

We believe a continuing improvement in our trade deficit over the next several years will offset the decline in economic growth likely to result from a reduction in household consumption. China is now the engine of global growth and its recovery has been robust. This growth is driving V-shaped recoveries in many other export-oriented developing countries. A middle class is emerging within the developing world. As this newborn middle class inevitably consumes more of the goods and services we take for granted, our exports should continue to improve relative to our imports. This gradual improvement in the trade deficit, which began in 2007, should offset a significant percentage of the anticipated decline in domestic consumption, and be an additional source of job growth. For this reason, we do not fear the so-called “death of the consumer” or a rise in the savings rate, but embrace it as an opportunity to repair America’s balance sheet and rebuild the engine for future economic growth in our country.

Critical to this endeavor will be breaking our dependence on consumption for economic growth and refocusing it on innovation. We can start by ending policies that are penny wise and pound foolish, and begin thinking beyond today and tomorrow in our search for solutions. A program like “Cash for Clunkers” is a step in the wrong direction. This program was funded with $1 billion to provide consumers with as much as a $4,500 rebate when they purchase or lease a fuel-efficient vehicle (+22 mpg), provided they trade one in that is less fuel-efficient (-18 mpg) so it can be destroyed. The amount of energy consumed and pollution created to build the new vehicle completely negates the fuel-efficiency benefits of driving it when it leads to the destruction of an older vehicle that was perfectly viable for continued use. The program was intended to last until November, but the authorized funds were exhausted within five days. Congress is moving quickly to approve an additional $2 billion by shifting funds away from a renewable energy loan program. This $3 billion would amount to more than the total appropriated for advanced car battery systems and electric vehicle technologies in the economic stimulus package. This is not the type of stimulus that will lead to sustainable growth, because it reinforces our dependence on consumption, and typifies the fiscal mismanagement of resources that ensures we continue to cede leadership in new energy technology.

Despite these setbacks, we remain optimistic about the remainder of this year. The reason China’s recovery has been far more robust than ours to date is because their stimulus is focused almost exclusively on the types of investments we have yet to make. The majority of what we have spent has been dedicated to transfer payments and tax cuts. As the rebuilding of inventories runs its course through the remainder of this year, we expect the investment portion of the stimulus plan dedicated to energy and infrastructure to pick up the slack. We believe the economy will expand 3-4% in 2010 as a result. This should lead to substantial revenue growth for well-positioned companies in the technology, industrial, material and energy sectors, but our favorite remains the financials.

The bank index has produced twice the return of the stock market since the March low, but the group still remains inexpensive. The benefit that banks have over other industries is that they do not need to grow revenues in order to grow earnings. All they need is the eventual and inevitable decline in loan losses and an earnings explosion will follow. As we continue to see gradual improvement in the employment and housing data, the rate of delinquencies and foreclosures will decline, and the realized losses on loans and provisions for future losses will dissipate. Loan losses consumed 75% of industry revenues in the first quarter of 2009. Should losses decline to 25% and revenues remain level, profits will triple. We believe the financials will lead sector performance through the remainder of the year and provide the rest of the market with a tailwind to help reach our 1200 target for the S&P 500.

Fuller Asset Management, LLC (FAM) is an SEC registered investment advisor. FAM and its representatives are in compliance with the current notice filing requirements imposed upon registered investment advisors by those states in which FAM maintains clients. FAM may only transact business in those states in which it is noticed filed, or qualifies for an exemption or exclusion from registration requirements.

This newsletter is limited to the dissemination of general information pertaining to its investment advisory/management services. All information presented in this newsletter is believed to be reliable, but no representation or warranty (express or implied) is made or given by any person as to the accuracy or completeness of the information contained herein and no responsibility or liability is accepted for any such information or opinions. Information or opinions expressed may change without notice, and should not be considered recommendations to buy or sell any particular security. Any subsequent, direct communication by FAM with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides.

For additional information about FAM, including fees and services, send for our disclosure statement as set forth on Form ADV from FAM using contact information herein. Please read the disclosure statement carefully before you invest or send money.

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Performance History

*Composite inception 10/17/2005

Trailing Total Returns

Fuller Asset Management, LLC (“Fuller Asset Management”) is an SEC registered investment adviser. The Fuller Large Cap Growth Composite Portfolio (the “Composite Portfolio”) represents actual client accounts invested according to Fuller Asset Management’s proprietary investment strategy. The Composite Portfolio invests in individual equity securities with a view toward capital appreciation.

The results of the Composite Portfolio are net the actual Fuller Asset Management investment advisory fees charged to the client accounts within the composite, brokerage commissions and other expenses. Fuller Asset Management’s investment advisory fees are described in the disclosure statement of Part II of the Form ADV which is available upon request.

Accounts within the Composite Portfolio are held with different custodians so they are subject to different commissions and other charges. In addition, withdrawals and deposits, and account size among other factors creates variations in performance among accounts within the Composite Portfolio and also in comparison to the Composite Portfolio.

The results of the Composite Portfolio include dividends and other earnings. Comparison of the Composite Portfolio to the Russell 1000 Growth Total Return and the S&P 500 Total Return is for illustrative purposes in relation to the potential performance of large capitalization stock only and the volatility of the Russell 1000 Growth Total Return and S&P 500 Total Return may be materially different from the volatility of the Composite Portfolio due to varying degrees of diversification and/or other factors.

Past performance of the Composite Portfolio may not be indicative of future results and the performance of a specific individual client account may vary substantially from the composite results above, in part because client accounts may be allocated among several portfolios. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable.

PDF version of the Market Outlook

The stock market spent most of June treading water as it worked to solidify three months of consecutive gains. The Dow Jones Industrials and Standard & Poor’s 500 were virtually unchanged, while the Nasdaq Composite managed to climb 3.4%. The market took a more defensive tone, with utilities leading sector performance, posting a gain of 5.1%. The materials sector was the worst performer, posting a loss of 4.9% (source: Bloomberg.com).

Despite the market having rallied 40% from the lows established in March, it remains 40% from its highs reached in October 2007. We have probably come to an inflection point where market prices have completely retreated from the fear of Armageddon and returned to a state of normalcy. The easy money has been made, or in most cases, recovered. Further gains will require a marked improvement in economic indicators as opposed to a stabilization of the rate of decline.

Investors have been skeptical of the market’s torrential advance since the day it began. Many leading economists and market strategists have been equally skeptical of an economic rebound on which future market gains will depend. We believe that much of this skepticism is rooted in a philosophical disagreement with the means by which the government is trying to achieve the end we all desire – an economic recovery. The Keynesian policies the Obama administration has implemented to revive the economy have been widely criticized, and understandably so, because of the deficits they produce along the way. Yet allowing a philosophical rift with these means to bias one’s interpretation of new developments, and maintaining a negative outlook for the economy and markets as a result is self-defeating. A bearish outlook at this stage in the economic cycle simply contradicts logic.

Skeptics point to the fact that we lost 345,000 jobs in May and that the unemployment rate jumped to 9.4%. We would focus on the fact that this is half the number of monthly job losses we had six months ago, and the smallest drop since the credit crisis began last September. Layoff announcements and initial unemployment claims have been steadily declining, and continuing claims saw their first weekly drop since January. While the absolute numbers are ominous, it is the rate of change in the number and the direction it is moving that matters to investors. Today’s numbers indicate to us that we could see job growth before year-end.

Skeptics are quick to remind us that existing home prices are down 18% year-over-year and nearly 27% from their peak, according to the Case-Shiller house price index. New home starts continue to decline and the number of existing homes for sale remains elevated. From our vantage point, existing home prices saw the smallest month-over-month decline (-.8%) in nearly a year, and the fall from the peak has brought home prices back in line with their historical relationship to incomes. The number of homes for sale is now falling, because existing home sales are on the rise at a rate above new listings (including foreclosures). We believe home prices will begin to rise again before year-end.

Skeptics focus on the record plunge in industrial production reminiscent of the 1970s, and on the fact that inventories are on track to decline more in the second quarter than they did in the first. On the flip side of the coin, these inventories must eventually be rebuilt, and while they continue to decline, the Purchasing Managers Index (PMI) for new orders has started to increase. This presages a reversal in the inventory cycle and a significant rebound in production. A case in point is the auto industry, which skeptic or not, most would call a disaster. Chrysler and General Motors have shut down numerous assembly plants, fired thousands of workers, and filed for bankruptcy. Both companies will remain on government life support for a long time. Yet the silver lining most skeptics fail to acknowledge is that auto inventories have fallen so far below an already depressed rate of sales in recent months that auto production is scheduled to surge more than 50% in the third quarter simply to meet current demand. This demand will increase in the fourth quarter as tax incentives kick in from the cash-for-clunkers bill that Congress recently passed.

The stock market historically bottoms coincident with a point in time during which the fundamentals couldn’t look any worse (think bank nationalization), and it now appears that early March was that climactic low. Recessions have historically ended approximately three to six months following the market bottom. Based on this timetable and the improvement in leading economic indicators, we are convinced the recession is now over. The economy probably contracted 1-2% in the quarter just ended, and will likely grow 1-2% in the quarter just begun. The recovery is underway. Only $53 billion in stimulus dollars have been paid out so far from the $787 billion fiscal stimulus package, and regardless of whether we think it is needed or not, the pace will run approximately $40 billion per quarter through the end of 2010. After all, it will be an election year. We believe real economic growth next year will be more than double the consensus expectation of 1.7%.

As incoming data measuring the health of the economy gradually improves, we expect to see the classic revisionist response from leading economists and influential market strategists, redirecting the herd back into the markets and remolding the investor psyche towards an optimistic outlook. A glass now viewed by most as half empty, will eventually be seen as half full. Skepticism is critical to the longevity of every bull market, as it serves as a source of fresh demand for stocks as prices rise higher. There is no better real time measurement of this skepticism than the amount of cash sitting on the sidelines in money market funds yielding less than 1%. Despite the 40% increase in the S&P 500 since March, money market funds still total more than 50% of the value of this benchmark index, which is more than twice the peak levels reached during the market lows of 2002 and 1990. Money market funds have averaged approximately 20% of the value of the S&P 500 over the past 20 years. When this cash hoard eventually declines to normal levels, and negative sentiment capitulates to the bullish side of the aisle, it will be time to temper our optimism.

We believe that the unprecedented amount of fiscal and monetary stimulus, combined with the record number of policy actions on a global basis, collectively support an S&P 500 valuation of 1200, which implies a 30% rise from current levels. Healthy corrections of 5-10% along the way should be welcomed, as they will provide the cement necessary to sustain the advance. The sectors that should drive this advance will be those most levered to economic growth. We expect the technology, consumer discretionary and financial sectors to maintain their leadership positions into the third quarter, followed by the industrials, energy and material sectors. We expect more defensive sectors such as healthcare, staples, utilities and telecommunications to lag the market through year-end.

Fuller Asset Management, LLC (FAM) is an SEC registered investment advisor. FAM and its representatives are in compliance with the current notice filing requirements imposed upon registered investment advisors by those states in which FAM maintains clients. FAM may only transact business in those states in which it is noticed filed, or qualifies for an exemption or exclusion from registration requirements.

This newsletter is limited to the dissemination of general information pertaining to its investment advisory/management services. All information presented in this newsletter is believed to be reliable, but no representation or warranty (express or implied) is made or given by any person as to the accuracy or completeness of the information contained herein and no responsibility or liability is accepted for any such information or opinions. Information or opinions expressed may change without notice, and should not be considered recommendations to buy or sell any particular security. Any subsequent, direct communication by FAM with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides.

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