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Prepared by Donald L. Sazdanoff
Sovereign Asset Management


-- Interest rates have been and will continue to dominate the conversation over the coming year as stock investors weigh when and by how much the Fed will raise rates. The bond market more than likely will preempt whatever move the Fed makes and will set the investment tone going forward.

--Bond investors need to rethink their investment strategy as in all probability we are at the end of the Secular Bull Market in bonds. Investors must understand that a Secular Bear can devastate a bond portfolio just as badly as the ones we have seen in stocks.

--Investors also need to reevaluate their relationship with their bond advisor as virtually none of them have managed a portfolio through any type of Major Bond Market Decline.

Interest Rate Debate Continues To Preoccupy Market

(May 22, 2015) As if the stock market did not have enough to contend with, now we have a bond market, which has been faltering since the high set on January 30th (low in yields). This rapid rise in interest rates is coming at a time when the economy has once again begun to slow, and stocks continue to meander near all-time highs. Under this type of environment, if stocks continue on their sideways trend near the top of the trading range over the coming weeks, investors should consider this as a major victory and a sign that the market may be able to muster another move higher before Summer. If not, then we will experience another move lower to the bottom of the range which would be a decline of roughly (-7.00%). As to which will occur is a day to day proposition. The bond market throughout the Summer will have the greatest influence on stocks especially if yields continue to rise unabated.

Going forward, bond investors need to recalibrate their thinking and long-term investment strategy as all indications at this time point to the end of the 34 year old Secular Bull Market in bonds (decline in yields). This Secular Bull started on September 30, 1981 for the 30-year bond, which is twice as long historically as most Secular Bull or Bear Markets for any asset class. Because of the strength and longevity of the multi-decade move it more likely than not will take several more years for the Bear Market to fully unfold, but it will nonetheless. This is in keeping with the beginning of the Secular Bear Move, in short and intermediate-term bonds, which began in 2012, and has been slowly developing since. Remember, a Secular Bear Market can also last for years, eventually resulting in devastating losses very much like what was experienced by the stock market during the Financial Crises and Crash of 2007-2009.

Most bond investors as well as bond portfolio managers have never experienced these types of losses in their portfolios, since it has been so long since the last Major Bear Market, therefore they have no idea as to just how bad it can get. With that in mind, investors also need to re-evaluate their relationship with their current bond advisor, again as the overwhelmingly vast majority of them have never managed a bond portfolio through that type of market environment. Experience will be key in navigating the changing investment climate.

Portfolio Strategy

Investors should over time move out of bond mutual funds as they will be most negatively impacted by an increase in interest rates (decline in bond prices) as fund managers will be forced to sell part of their portfolios to meet client redemption's, as investors flee that market.

Model Portfolio Allocation: Balanced Portfolio--60% Stocks; 10% Bonds; 30% Cash. Our Equity Portfolio--73% Stocks and 27% Cash.

May 22, 2015
Donald L. Sazdanoff
Sovereign Asset Management
1237 Hunters Ridge, Mansfield, Ohio

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