The second quarter marked a pause in the 18 month rally in the equity markets. International markets performed substantially worse than domestic ones, particularly when translated into U.S. Dollar terms. Much of this correction stemmed from the uncertainties in Europe and lackluster domestic indicators of economic activity.

The last three months have brought market participants to a point where many feel we are evenly balanced between economic decline and growth. That viewpoint is reflected in asset prices in both the stock and bond markets. We hold to our belief that growth will occur, albeit slowly, due to a very stubborn labor market in which unemployment remains high. Economic data aside, in the last three months financial markets have had to contend with the “flash crash,” a massive oil spill in the Gulf of Mexico and numerous austerity packages passed in Europe.

Economy

Economic activity as measured by the GDP grew at an annualized 2.7% rate in the first quarter of 2010. Although positive, this is a lower reading from the fourth quarter 2009 level. This figure has discouraged many since GDP growth following a recession is typically significantly higher; particularly with the massive stimulus efforts we have implemented in an attempt to spur growth. We note that history has shown it is common to have a temporary slowdown in growth after the beginning of a strong recovery and this may be exactly what we are experiencing.

Looking over the last year we see three good quarters of real growth in the GDP. According to Robert Schiller, in past recessions when GDP has reversed course and posted three or four quarters of gains (as it just has), it has never immediately begun to fall again. That record goes all the way back to 1947. When GDP starts moving upward after a decline, it usually doesn’t stop in its tracks.

Following the Greece fiasco, the EU passed a trillion dollar liquidity package intended to serve as a backstop to member nations that are having problems with their level of sovereign debt. Although heralded as a vital response to calm fears in the European markets, the fanfare was short lived and both sides of the Atlantic still view sovereign debt levels as monumental risks. The issue is simple: member countries of the EU have spent more than their tax base can support. Since the individual member countries do not have their own central banks, they do not have the ability to “print money” which debases the value of their currency and in turn reduces the true cost of debt. Quantitative easing (what economists call printing money) is only possible at the EU level and with so many governments involved, that is obviously a complex decision.

Adding fuel to the fire is the fact that austerity measures are being passed across the EU creating fear that the fragile recovery in the world economy could suffer due to the pullback of government spending. Again, if executed correctly we fall on the good side of the tipping point, but the risk does remain that execution is poor and a contraction follows. We are hopeful a healthy balance can be achieved, one in which investor confidence is supported.

BP’s massive oil spill adds immeasurable risk to our economy. First and foremost the direct economic losses from thousands of fishing and hospitality jobs are at risk as oil is causing tourists to cancel trips and the Government to close fishing areas. Secondly, the “drilling moratorium” as ordered by the executive branch, now deemed illegal by a Federal judge, risks thousands of jobs along the Gulf. Potential for further economic losses in areas such as real estate values, energy security, environmental restoration etc. are unknowns right now but will assuredly be large. For the environment and for the economy, let’s all hope that the relief wells currently being drilled by BP will succeed.

Although improving, job growth continues to be slow as companies stretch their workforce as much as possible. Manufacturing has picked up and companies are restocking inventories. However, they are achieving this via increased productivity as opposed to hiring new workers. Uncertainty regarding the new health care bill and future tax policy is preventing managers from knowing the true cost of employment and is thus contributing to the lack of large scale hiring. A strong consumer is paramount for a strong economy and consumers are made strong by employment.

Congressional leaders are in the midst of creating a new bill that if it passes, will be the biggest overhaul of financial institution regulation since the 1930s. Derivatives, bank proprietary trading, securitization and hedge fund registration are all issues that will be addressed. At present nothing has been passed but we expect a push to make it law before the next election. Regardless of the form, this bill will most likely mean more oversight, more regulation, and more government involvement in our financial system.

Finally, we mentioned in the last letter the need for the Chinese Yuan to appreciate relative to the Dollar. It appears this idea has finally gained some support from Chinese leadership. In a recent meeting the communist nation approved relaxing the ratio at which they have held their currency pegged to the Dollar. If this plays out it will make products that the U.S. exports more affordable in China and assist in balancing the current trade deficit. Our expectation is that the revaluation of the Yuan will be a multi-year process which will depend on the strength of the global recovery.

Stocks

May 6, 2010 will go down in history as the day of the Flash Crash. The exact series of events which led to the short lived drop may never be known in full. We have long held the view that a share of stock represents a minority ownership position in a real operating business and should be bought and sold as such. We would cheer regulatory change that would “slow” trading down to benefit the long term investor. Debate on appropriate regulatory response is in full swing and no resolution has been reached at this point.

As one might expect, the energy sector was hard hit following the Gulf oil spill in late April. Almost every energy stock from service companies to oil producers have suffered as investors sold the energy index in one fell swoop, throwing the good out with the bad. We believe there is a real risk that the government moratorium which bans drilling for 6 months could convince all 33 deep water rigs currently in the Gulf to leave for other countries. This would do damage to a vast number of other companies that support the Gulf drillers. There are 3,600 structures in the Gulf that produce oil and gas which provide 31% of domestic oil and 11% of natural gas production. If the moratorium lasts too long we may force the industry into a steep decline and our dependence on foreign oil will grow even larger.

Economic and political uncertainty has certainly led markets lower this quarter. The psychology of many investors and certainly of the major media outlets is depressed and fearful. As we’ve shown in this letter, there are a number of legitimate factors, both political and economic, that support a gloomy outlook. Losing money is on everyone’s mind right now, but simply because the media is fearful and economic numbers have slowed it does not mean a double dip recession is a certainty as some have concluded.

What’s not in the headlines is that analysts are raising earnings estimates for U.S. companies at the fastest rate since 2004 and valuations after this correction are even more attractive than they were 6 months ago. According to Bloomberg, during the first quarter “the proportion of S&P 500 companies that raised their profit outlooks reached 8.6% … compared with 3.4% that lowered forecasts, according to data compiled by Bespoke Investment Group LLC. That’s the second-highest level of companies increasing their projections since 2001…” Not only that, but 28% of S&P 500 companies either increased or initiated a dividend in the first 6 months of this year and amazingly only 1 company has lowered its dividend in 2010! When dividends are rising like this it is a strong signal that companies are strong and confident about their future.

Bonds

U.S. Government and high quality bonds are again en vogue, as one would expect in turbulent times. The uncertainties mentioned above have driven investors to the safe haven of Dollar denominated government debt. The yield on the 30 year Treasury dropped to 3.89% at quarter end from 4.63% at the beginning of the year. While this may sound trivial from a yield perspective, this move equates to nearly a 13% increase in price and signals that bond investors believe there is a greater risk of deflation as opposed to inflation. Agency bonds (Freddie Mac, Fannie Mae, etc.), now backed by lines of credit at the Treasury, have held their ground and performed well. We have been participating in the new Agency issues coming to market with step-up coupon structures that are designed to protect investors from an increasing interest rate environment. While there is little room for these structures to appreciate in price due to their callable nature, at this point we are content to earn an above market yield and to have short effective durations.

The investment grade portion of the corporate bond market has performed well in this correction, which is a healthy sign. We can remember when the credit crisis was in full bloom in late 2008 that prices on investment grade bonds fell precipitously and created tremendous buying opportunities. In the current market, prices of corporate bonds have increased, but not as much as the Government market. The difference between Government and corporate yields (called the spread) has thus widened, which means the market is pricing in additional risk on corporate bonds. This is a welcome reaction since it leads us to believe the correction is temporary and based on emotion as opposed to a real liquidity event or default risk.

The municipal market has also held firm, but the unending media reports of default risk in this sector have kept a lid on prices. Tax free yields relative to taxable equivalents have crept back to well over 100%, which we view as attractive. It is important to understand the credits you buy since there is a wide disparity in the health of various state and local budgets. We are comfortable with the credits we buy and continue to believe there are structural issues that will support municipal prices going forward. Although we have outlined our rationale before, it is worth noting that the issuance of the “Build America Bond” program is gaining traction.  This is essentially a stimulus program where municipalities issue taxable bonds and the U.S. Government subsidizes their interest payments. In many cases the issuers are choosing to issue taxable bonds to the exclusion of tax free bonds. This has, and we believe will continue to, decrease the supply of tax free bonds. At the same time, we believe income tax rates will inevitably rise. The health care bill alone will levy a 3.8% tax on investment income over a certain threshold. However, municipal bond income is exempt from this tax. We believe the demand for tax free bonds will increase when tax rates rise, thus creating a supply/demand imbalance that will support municipal prices. We have been buying longer dated maturities in this space for several months now, and doing so by selling bonds with very high premiums, low yields, and short maturities. In some cases we have been able to reinvest the proceeds into bonds with longer maturities and double the yield.

Conclusion

This quarterly letter is not intended to be a farmer’s almanac whereby we predict the specific occurrence of distant future events. It is meant to summarize the current situation in which we now find ourselves and to funnel the ocean of financial and economic data into an easily consumed glass.

The stock market is always trying to predict the short-term economic future and right now it’s saying that future is bleak. We understand its pessimism, but find that valuations are quite attractive and if your time horizon is measured in years rather than months, there are opportunities available. We plan to invest accordingly.

Last week we experienced a selloff reminiscent of the days of Lehman Brothers’ failure in 2008. While some claim a trading error may have been responsible for a portion of the massive decline on Thursday, we know that fears of a European collapse and Greek contagion gave speculators and traders a reason to sell.

It’s clear the markets have risen substantially from the March 2009 lows, but we continue to live by the belief that it is valuations that drive markets in the long term and emotions and current news that drives markets in the short term. As much as we believe that there are real problems in Greece, and as much as we know that we have problems aplenty at home as well, still we don’t see the rationale behind the kind of market action we saw Thursday.

At the end of the day we don’t like this selloff any more than you do, but we are not doing our job as advisors if we simply try to beat the crowd by anticipating each maniacal move it makes. There is no question that stocks had risen pretty steadily for a long time and a pullback would be healthy for the market. Thursday’s action can’t simply be described as a “pullback” though, it was more like a “throwback” – to the ugly days. It is days like this when having a good advisor at the helm can protect your assets from permanent impairment.

The trading in the market late Thursday afternoon was like nothing we have ever seen. In a span of 15 minutes, the Dow Jones index went from being down about 300 points on the day, which was bad enough, to down 998 points at its worst moment – on essentially no news!

The market then quickly bounced back. There was no doubt in our mind that electronic trading by computers was behind the rout that caused some truly unbelievable prices. For instance, Accenture (NYSE:ACN) traded below a penny at the height of the craziness.

In response, the Nasdaq exchange said that certain trades that were made in excess of a 60% daily move would be canceled, but that still leaves a huge number of trades that will stand at incredible prices.

Yesterday, with all the troubles in Europe, and with the EU stepping up with a significant relief package for the Eurozone countries in need, world markets rallied. Once the situation in Europe is stabilized, US investors will begin to focus on our own economy again and we think, be met with some good news. For one, the economic recovery here in the United States continues to gain steam. The employment numbers from last week with those filing for initial unemployment benefits continuing to fall and companies starting to add jobs again, are a very good sign.

We don’t want to dismiss the real fears that are present in this market, but we think that Armageddon is not at hand.

To support this view we note that the current quarter will be the first time in years that no S&P 500 companies will cut or suspend their dividends.  If true, it would mark the first such quarter since the second quarter of 2004, and it is certainly a bullish statement by US corporations.  Earnings have steadily improved over the last year, and according to our data, trailing twelve month reported earnings on the S&P 500 have increased 89% over the past year.  Having heavily cut costs companies are flush with cash, and very few S&P 500 stocks are distressed or in need of a dividend cut to conserve capital.  As a comparison, S&P 500 companies decreased dividend payouts by a record $52 billion in 2009.

We don’t believe our economy is on the edge of collapse or setup for failure as it was two years ago. Many of the weaker financial institutions have already failed, and those that survived the first credit crisis have had nearly two years to raise capital and allow earnings to bolster their balance sheets. Bad loans have been cut back significantly. In other words, we have a very different situation today than we had in early 2008.

Morningstar’s Paul Larson used this apt analogy: “The first credit crisis came through and burned the underbrush and lower branches, sparing the tallest trees. And now if a second fire comes through, there is not nearly as much fuel to let it burn.”

We tend to agree.

Today, only a bit more than a year later, the S&P trades over 1,140, nearly a 70% increase from that infamous low. What a difference a year makes! Even with that gain it should be remembered that the S&P still stands 20%+ below its 2007 high, so it’s important to “zoom out” when looking at the recent rally to put it in context.

The last year and a half has been full of economic upheaval accompanied by stock and bond market volatility. We believe the worst has passed and that while these waters are navigable, significant risks remain. Acknowledging these risks, we see many reasons to be cautiously optimistic. Let us explain why.

Economy

Many economic variables have either improved or stabilized over the previous 12 months. As we wrote last quarter, prognosticators, even those who are experts, often get it wrong. Currently, the conventional wisdom is that consumers are retrenching and are unwilling to make discretionary purchases. The data we examine confers just the opposite message: the recent report for individual store sales showed overall sales were up 0.3% in February from the previous month. If you back out motor vehicle sales the number was even larger at 0.8%. This data does not seem to portray a weak consumer. Additionally, the average ticket price at Home Depot and Target (two retail bellwethers) has risen. We would venture to say that reports of the death of the American Consumer have been greatly exaggerated.

According to Morningstar, Industrial production fell almost 15% this recession, which is one of the largest reductions in history. With consumer spending picking up pace, we believe manufacturing and production will begin to ramp up. Production cannot lag forever and keep up with growing consumer demand. According to the Census Bureau, inventories are down almost 9% year over year. What this tells us is that instead of making new goods to satisfy consumer demand, manufacturers simply shipped goods they already had in inventory. So the question now becomes how long producers will wait before rebuilding inventories, at which point the virtuous cycle of hiring begins. Presently manufacturers are pushing workers (as measured by hours per worker and productivity figures) versus adding to payrolls. Soon we will reach the point where the band snaps and hiring begins.

Unemployment has persisted during this recovery longer than we had hoped, as many employers are uncertain about the sustainability of the stimulus spending and its effects on demand. Employers are also greatly concerned by policies coming from Washington that will affect variable costs, health care and taxes. The debate concerning the recently passed Health Care Bill is beyond the scope of this letter. However, one of the main takeaways for investors is that as these new bills and spending programs become law, the uncertainties surrounding the issues will diminish.

We do not see a robust employment picture developing any time soon.  Encouragingly, the mass layoffs that companies used to balance cash flow have all but ended. This sets the stage for hiring back full time workers and eventually lowering the unemployment rate. Full employment (most view this as 4% unemployment vs. the current ~10%) will not happen for the foreseeable future. We find it likely that 8% will be the range over the next two years.

Where does the “cautious” come in for our “cautiously optimistic” view? There are a number of risk factors we are monitoring closely. They include:

• European Sovereign debt crisis
• Chinese attempts to slow growth
• U.S. Tax Policy/Government Spending/The end to Quantitative Easing by the Fed
• Inflation

The fiscal problems in Portugal, Italy, Ireland, Greece and Spain (shortened to “PIIGS” by creative Wall Street traders) have been well publicized. These countries are all members of the European Union and have adopted the Euro as the common currency. EU members agree to keep debt levels below a certain percentage of GDP in order to ensure sound fiscal policy and prevent the need for a financial bailout caused by irresponsible borrowing by any one country. The PIIGS (Greece in particular) violated these agreements and used financial derivatives to hide high debt levels. The normal tactic taken by a country in this situation is to debase the currency and print money to offset the financial obligations, more commonly known as “monetizing debt” (this is what Ben Bernanke and the Federal Reserve have been doing for months in the U.S.). This strategy is not an option for countries that have a common currency and no central bank; thus insolvency issues arise. This is playing out now in Europe and investors are nervous. We believe the EU will work this out, led by the stronger countries (Germany and France) and potentially the IMF, but it further undermines confidence in the financial markets. This has led to a strengthening of the U.S. Dollar relative to the Euro.

China and the U.S. are in the midst of a love/hate relationship. Both parties would be economically challenged, to put it nicely, if they divorced. China is heavily dependent on U.S. imports and the U.S. is heavily dependent on China reinvesting its trade surplus into our Treasury market to fund deficits. As one of our portfolio managers likes to say “we send China paper and they send us plastic.” If any one side gets disgruntled with the other the global economy would be destabilized. One upcoming date of interest (other than it being the tax deadline) is April 15. This date is the when the U.S. Treasury department must decide who, on the sovereign level, should be classified as a currency manipulator. Most currency traders will acknowledge the Renminbi (the formal name for the Chinese Yuan) is perhaps 25-40% undervalued versus the dollar based on economic fundamentals. This perhaps should be considered manipulation but it is unclear if we have the political will to state this publicly and create a stand-off with China when they are funding our Government at the moment. Time will tell.

U.S. tax policy, government spending, quantitative easing on behalf of the Federal Reserve and inflation are all closely linked, and all present risks to our economy. We have just embarked on the largest Keynesian Economic spending experiment since the New Deal. Government spending is widely considered to be unsustainable and will be curtailed as our stimulus efforts wind down. The Federal Reserve is ending their program to purchase government and mortgage backed-bonds and we are unsure what the economic effect will be. Rising inflation (if gold prices are an indicator) is widely viewed by many as a foregone conclusion. We simply cannot see a scenario where we have high unemployment, low industrial capacity utilization, weakness in the housing market and high inflation. We see the likely scenario as low to no inflation in the short run and hopefully low to moderate inflation in the long run. This assumes a modest economic recovery that will include increased employment.

This is a longwinded way of saying that we acknowledge there are headwinds facing this recovery. We hope that the naysayers will acknowledge that there are fewer headwinds today than 12-18 months ago. When we view all of these data points collectively, we tend to lean towards optimism.

Stocks

What we’ve seen from the markets more recently is that the specter of 2008 remains very fresh in the minds of investors. As we observed during the September, December and March earnings seasons (when companies give quarterly reports) there has been a clear trend. Earnings have consistently beat the expectations of analysts, but stocks initially fell after earnings were announced, only to rise again in the succeeding months. In other words, investors don’t seem comfortable waiting; they are quick to move on to another investment for fear they will be hurt by staying with their current portfolio.

We continue to see attractive opportunities lying in plain sight. Large, diversified companies with high barriers to entry in their respective markets are selling for very attractive prices. When looking just at price/book ratios, various analysts believe stocks have been this cheap only three times in the last 120 years. Even more importantly, when these investments are weighed against the alternative of cash or short-term bonds, it is clearly the rational choice to invest in these types of equities with one caveat – one must have an adequate time horizon to benefit from this strategy.

It is a well known maxim that when it comes to investing in the equity of a business, the price paid and the time horizon are two of the most important factors to consider. Today we think many prices are right. As we mentioned earlier though, many investors are looking for instant gratification; their time horizons are not properly calibrated. So even with the right price, if a boring company announces earnings that aren’t spectacular, investors are prone to sell the stock. We believe that one quarter’s performance, positive or negative, should have very little impact on the price of a business that operates for the long term. We believe in the concept of “time arbitrage,” which means a 3 to 5 year investment horizon is much more successful than a 3 to 5 (day/week/month/quarter) one. This may appear to be an unpopular approach, but it has served our clients quite well over time.

The consensus estimate for the earnings of the S&P 500 in 2010 is $75, a figure that is based on a very weak recovery in GDP of around 2.5%. We think this figure is too conservative. Reviewing 2009, analyst profit estimates were consistently low right through the fourth quarter. In fact, over 53% of S&P 500 companies beat analyst expectations for the fourth quarter of 2009. For 2010, we expect GDP growth between 3.5% and 4.5%, which implies profits north of $80 for the S&P 500, possibly as high as $85. Profits in 2011 could approach $100. Using a price earnings multiple of 16 implies an index level of 1,360, almost 15% higher than current prices. Using a price earnings multiple of 15 on 2011 earnings implies another gain of more than 10% next year. Neither of these earnings multiples is aggressive, particularly if interest rates remain fairly low.

Bonds

The bond market was mostly positive during the first quarter, as investment inflows are still more heavily weighted toward fixed income securities. The overall taxable fixed income market was up 1.78% for the first three months of 2010. This performance, similar to recent quarters, can be attributed to a strong showing in corporate credits and asset-backed securities. Investors continue to unwind the “flight to quality” trade and turn to asset classes that were most affected by the recession. The laggard in the taxable space was the long U.S. Treasury bond, which turned in a negative .07% return. This may not sound that bad but for the month of March the long Treasury was down 2.57% and the weakness has continued into April.

Overall our strategy has not changed for taxable bond accounts. We have been buyers of “step up” Agency debt, where the coupon adjusts higher over time, as we feel that rates are headed higher for U.S. debt. We have been pleased with the way the market has absorbed the massive supply of US bonds. As we work through the economic issues we outlined above, we believe investors will demand higher yields to continue funding US deficits. Value remains difficult to find in corporate bonds. Spreads (or the premium you receive for owning riskier debt) are as tight as, or tighter, than before the credit crises began.

The securitization market, or the practice of pooling loans, credit card receivables, private mortgages, etc., is showing signs of life, which will be an engine of growth for our economy. We do not see a full securitization market recovery in the short term. The market is realizing though, that underwriting standards have improved greatly and the yield levels have begun attracting buyers. If this market ignites again it could be the fuel for our economy that has been lacking, putting pressure on inflation expectations and thus rates.

The municipal market has performed well, despite the headlines of budget shortfalls for virtually every state. In fact, the market has been so healthy that we are finding little value in the new deals that are coming to market. North Carolina just issued a $487 million General Obligation bond at rates that were very good for state finances. An investor would have to tie up their money until 2027 in order to achieve a 4% rate! Our strategy in the municipal market has also changed very little although it is different than our taxable strategy. We are taking gains in the short end of the curve and reinvesting at more attractive rates in later dated maturities. We are firm believers that the prospect of higher taxes coupled with constrained tax-free issuance (due to the Build America Bond stimulus plan) will create an attractive supply/demand dynamic and keep longer rates low relative to the taxable market.

Conclusion

At the risk of repeating our letters from the last 6 months, we continue to believe the “risk rally” of the last twelve months will lose steam as higher quality stocks pick up the baton in 2010 and 2011. In our portfolios, we have moved from defense to offense as the economy has continued to right itself. We recently had the opportunity to have a one-on-one visit with the management teams of two of our holdings. We came away impressed with the amount of cash on their balance sheets and the pending backlog of new orders. Both management teams stated that one big problem is the uncertainty over legislation coming from Washington concerning the cost of health care and environmental regulations (Cap and Trade), etc. We keep getting the message that the business world is primed for growth, but are cautious and awaiting clarity from Washington so they can plan for the future.

In 2009 the markets surprised us all by going up. It paid to be a long-term investor and to stay patient in the midst of the storm. In 2010 the market may very well upstage conventional wisdom again by staying up. We look forward to it.

To separate the various types of advisors, the easiest approach is to investigate two items: 1) how is the advisor compensated and 2) what legal standards are they required to uphold?

Brokers are subject to FINRA Conduct Rule 2310(a) (emphasis ours):

In recommending to a customer the purchase, sale or exchange of any security, a member shall have reasonable grounds for believing that the recommendation is suitable for such customer upon the basis of the facts, if any, disclosed by such customer as to his security holdings and as to his financial situation and needs.

Doesn’t that sound a bit subjective to you? Who determines what is “reasonable grounds” or what is “suitable?”

SS&A is a Registered Investment Advisor (RIA). RIAs are held to a fiduciary standard. A  recent speech given by the Chairman of the Security and Exchange Commission (SEC), explains the difference between the two standards. Note her comments on the discrepancies within the advisory industry and how the fiduciary standard is superior to the “suitability” standard (emphasis ours):

…imagine an investor walking down Main Street in the town where you grew up. He steps into the office of the local securities professional and is handed a business card.

But he doesn’t look to see whether it says broker-dealer or investment adviser. Chances are he doesn’t know the difference. Or even care. All he wants is helpful, investor-focused advice, a fair deal and a professional he can trust.

These seem to me to be reasonable expectations. But today that investor — whether he knows it or not — is treated differently depending on what that business card says. If it’s a broker-dealer, he’s sold a product that is, “suitable” for him. If it’s an investment adviser, he gets treated under a higher standard — the fiduciary duty standard — meaning that the investment adviser has to provide advice that puts the investor’s interest first.

Investors today should not be treated differently based on what door they walk into — or based on what is written on the business card they are handed.

At SS&A, we do not collect fees from transactions; there are no kickbacks or hidden commissions. We charge a flat fee on the average balance of the account irrespective of transaction volume or product. It’s clear this structure aligns the interests of the client (you) with the incentives of the manager (us). There is no benefit for us in excessive trading and no incentive to put a client in high fee products – especially when we have no products to sell!

At Smith, Salley & Associates, our only business is you.

Build their business                                   Travel
Join a nonprofit board                            Build a house
Start a new business                                Volunteer  to tutor
Run for office                                           Invent something new
Invest in an African orphanage              Take a sabbatical
Become a patron of the Arts                    Start a family foundation
Pilot their own plane                                Become a philanthropist
Find a new professional challenge          Watch their grandchildren grow up

Interested in experiencing these benefits? Begin by asking yourself these questions:

• What is all this for? What’s important about money to you? Does your current advisor know this?

• Are you comfortable with your current plans for retirement? Do you know exactly how much money you’re going to need in order to retire—and stay retired—comfortably? If not, why not?
• Is your current portfolio structured so that you do not run out of money – ever? Would you like it to be?
• Are you highly confident that your retirement income will be sufficient? (Remember, there’s an awful lot riding on your answer.)
• Is it possible that getting a second opinion, at no cost, might be helpful?
• Do you have a written plan forecasting income and expenses in retirement, to ensure you don’t run out of money?
• Do you know what risks you are taking with your investments? Said another way, does your plan pay attention to protection as much as potential?
• Are you confident in your current financial advisor?

If you find you don’t like the answers to these questions, give us a call at SS&A, we will be glad to help.

Mackay serves as Smith Salley’s Chairman, Growth Manager and Chief Investment Officer. To get to where he is today, Mackay earned a Bachelor of Science in Business Administration from The Citadel. Mackay received his MBA from The Moore School of Business at the University of South Carolina. A CFA Charterholder, Mackay is also a member of the North Carolina Society of Financial Analysts.

Prior to joining Smith, Salley & Associates, Mackay was a Director and Vice President of Franklin Street Partners in Chapel Hill, NC. During his time at Franklin Street he was portfolio manager for the Franklin Street Partners Small Cap Fund. Before joining Franklin Street, Mackay was Senior Vice President and manager of special investment products at Wachovia Trust Services where he worked for 19 years. Mackay has over 38 years experience in portfolio management and equity research while working with Franklin Street Partners, Wachovia, Delaware Trust and the DuPont Pension Fund.

Upon attaining his degree from The Citadel, Mackay completed two years of active duty in the US Army artillery and was awarded the Bronze Star Medal for service in Vietnam with the 1st infantry division. Mackay loves his wife, Eleanor, his children and grandchildren, beyond that he enjoys flying his plane. He has been an active pilot for over 55 years and loves to travel and see his 4 grandchildren.

Mackay and Eleanor reside in Clemmons, NC and attend Clemmons United Methodist Church. Mackay heartily enjoys serving in his community and singing in the choir.

To contact Mackay you can email him at mackay@smith-salley.com.

In 1997, Gregory received a Bachelor of Science in Business Administration, with a concentration in Finance from North Carolina State University. He also earned an MBA from the Kenan-Flagler Business School at the University of North Carolina at Chapel Hill. Continuing his affiliation with the Kenan-Flagler Business School, Gregory currently serves as an Advisory Board member for the Applied Investment Management Program.

Gregory was raised in Greensboro graduating from the Greensboro Day School.  He is an avid outdoorsman and is involved with the Coastal Conservation Association having served as president and chairman of the Triad chapter and as an executive Vice President on the State Board.

Gregory is also an active member of Ducks Unlimited and attends Westover Church.  He and his wife, Janet, are actively involved with Caldwell Academy, a K-12 classical Christian school where their two children attend.

To contact Gregory you can email him at gregory@smith-salley.com.

Jim comes to Smith, Salley & Associates with 50 years of experience in research and portfolio management. Jim retired from CCB/SunTrust after 35 years with the bank after working in various capacities, most recently as senior portfolio manager in the Wealth and Investment Management division.

Jim specializes in value equities as well as taxable and tax free fixed income securities. Jim received his bachelor’s degree from Georgia Tech. His post graduate work includes an LLB from Woodrow Wilson Law College and a Masters Degree in Industrial Management from Georgia Tech. Jim was instrumental in the development of the CCB Trust and Investments division, where he worked for over 35 years and managed over $250 million in assets. He has 50 years of investment experience in all areas of Trust and Investment Management. Jim is a member of the Durham Toastmasters, Westminster Presbyterian Church and Hope Valley Country Club in Durham, NC.

To contact Jim you can email him at jim@smith-salley.com.

Andrew’s responsibilities include investment idea generation and portfolio management. He joined Smith, Salley and Associates, LLC in March of 2006 with ten years of experience in both fixed income and equity research and portfolio management. Prior to joining SS&A, Andrew managed personal and institutional portfolios for SunTrust Banks in Charlotte, NC. During his nine years with the bank Andrew was a member of the fixed income strategy committee and the value equity stock selection committee. He co-managed a taxable fixed income mutual fund and an actively managed Value Equity Strategy. Andrew received his undergraduate degree in economics from the University of North Carolina at Chapel Hill, with a minor in marketing from the School of Journalism and Mass Communications. Andrew, a CFA Charter holder, is a member of the CFA North Carolina Society.

Andrew enjoys golf, running and hiking with family in his leisure time. He and his wife Dana are involved with the Red Dog Farm animal rescue and help support the Future Fund, which is an initiative of the Community Foundation of Greater Greensboro, and the Coastal Conservation Association.

To contact Andrew you can email him at andrew@smith-salley.com.

Scott got his start with Smith Salley as a summer intern while attending the Kenan-Flagler Business School at the University of North Carolina in 2005.  In May 2006, upon earning his Bachelor of Science in Business Administration from UNC, Scott came on as a full time member of the team.  Scott was hired to develop the Financial Planning side of the practice and in early 2009 he completed the Certified Financial Planner™ certification and now oversees the planning functions of the firm.

As a CFP® practitioner, Scott is responsible for walking clients through the many “softer” issues of wealth management.  Whether he is putting together retirement spending models or helping devise a funding strategy for a child or grandchild’s education, Scott stands at the intersection of how our clients invest and why they invest.

Scott grew up in Raleigh, where he met his best friend in 6th grade only to marry her 12 years later.  Scott, Mary Chandler, and their dog Hank now call Greensboro home. When they are not traveling to see family or camping in the mountains, Scott and his wife are regular attenders at Grace Community Church.  Scott is an Eagle Scout and currently sits on the board for the Guilford District of the Boy Scouts of America.

To contact Scott you can email him at scottb@smith-salley.com.