Despite some news‐driven volatility, the U.S. equity markets ended the year positive. While the zero interest rate policies from the Federal Reserve continued to pressure income‐oriented investors. Overall, 2012 was a good year for Riggs’ clients.

Looking ahead in 2013, we are starting to see signs that a growth phase may be re‐emerging in developing markets led by China. We believe the U.S. housing market will continue to recover and we believe there are opportunities for investors in the auto industry, industrials, materials, energy and commodities. We are increasingly concerned with the fixed‐income markets and feel that bond investors will need to rethink their income strategies.

Just as in 2012, fiscal issues continue to pose a risk. While Washington managed some compromise on the Fiscal Cliff, it punted on several issues which are likely to be negotiated during the debt ceiling negotiations in a few weeks.  Debt is not just a U.S. issue but will continue to hamper growth in Europe and Japan.  However, despite the fiscal risks, our outlook for 2013 is relatively positive.

Fiscal “Cliff” and Debt Ceiling

Recently Washington crafted an agreement to avert or at least delay the “fiscal cliff” by raising taxes and delaying spending cuts for two months. The net effect of tax increases that came out of the fiscal cliff negotiations will create a slight economic headwind as the increase in taxes will reduce consumption. For example, the increase in payroll tax which is a $1,000 tax increase on every $50,000 of earned income will reduce consumer spending by roughly $85 Billion or the equivalent of ½% of economic growth.

Now however comes the difficult part, dealing with spending cuts. There are two things that Congress must deal with between now and March—1)the request for an increase in the Debt Ceiling; and 2)sequestration.

A quick history lesson on the Debt Ceiling from Art Cashin of UBS:

It (the Debt Ceiling) came up during World War I. Prior to the ceiling, every bond issued by the U.S. had been individually authorized by Congress. With war debt piling up rapidly and fearing that some accidental Congressional inaction would inhibit war efforts; Congress handed over issuance to the Treasury. But, to keep some control, they set a limit, or ceiling, to the total amount of debt that could be issued. To exceed it, Treasury would have to go back and have Congress authorize further debt (bonds).

Each year Congress sets a limit on how much money the Federal Government can borrow. Over the past several years, the Federal Government has spent more than was authorized and has had to go back to Congress asking for additional increases in their borrowing limit. Think of this as going back to the bank and asking for an increase in their credit limit after they have maxed out their credit card.  The difference between Congress and a bank is that Congress will eventually say “yes.” As part of the 2011 debt ceiling negotiation, an automatic forced reduction in spending of $1.2 Trillion was negotiated. The spending reduction (or sequestration) would take place over 10 years beginning in 2013 and be divided equally between defense and non‐defense spending. For 2013, the portion of the across‐the‐board reductions total $109.33 Billion, again divided equally between defense ($54.67 Billion) and non defense ($54.67 Billion). So as the Federal Government goes back to Congress to negotiate an increase to its debt ceiling, Congress will be negotiating with the government on what favorite programs get cut and what do not in order to comply with sequestration.

At its core, the long term issues of government debts and deficits are driven by demographics and obligations. For example, when Social Security was enacted, only about 14% of the population lived into retirement age. In 1950, there were roughly 15 people working for 1 person collecting Social Security and Medicare did not exist at that time. Today, that ratio is roughly 3 to 1 and includes Medicare, the single largest budget outlay—larger than the defense budget. By the year 2025, it is estimated that the ratio will come close to 2 workers for every 1 retiree. So just as the Baby Boomer generation brought about the largest consumer class in history, it will over the next several years become the largest recipient of social programs in history.

As you can see these programs are already in deficit.

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As Social Security, Medicare and the newly enacted Patient Protection and Affordable Care Act become an in‐ creasing share of the federal budget spending on national defense, infrastructure, education, college tuition tax credits, food stamps, Head Start, the Arts, or even emergency support for natural disasters like Hurricane Sandy or Katrina
must be reduced. We believe that the fiscal negotiations in Washington are just the beginning of what will be an ongoing multi‐year process of realigning or rebalancing the priorities of the Federal Government.

These issues are not unique to the United States. Similar demographic and spending issues are affecting all the major developed economies around the globe. While the United States may face fiscal headwinds, it has some advantages that position it for prosperity better than any other country in the world. Demographically, the United States has a younger workforce than any other developed country. Economically it has the most productive, diverse economy in the World. Geographically it is one of a handful of nations with contiguous borders along both the Pacific and Atlantic shipping trade routes. All of these factors are strong tailwinds to U.S. economic growth and prosperity. So, while management of our fiscal issues in Washington will be difficult and the process messy (as we have seen), the long‐term outlook for the U.S. economy remains strong.

The Economy and the Fixed‐Income Markets

Outside of any exogenous event or significant misstep in Washington, our research indicates that the U.S. economy should continue to muddle along in 2013 much like it did in 2012. With growth fast enough to stave off a recession, but not fast enough to solve long term issues such as unemployment or government debt and deficits.  As a result, the Federal Reserve has stated that it will remain aggressive in its monetary policy and continue its unconventional approach to stimulate economic growth.
Effective January, 2013, the Federal Reserve embarked on an expanded Large Scale Asset Purchase Program (LSAPP) or Quantitative Easing (QE). It is now purchasing $85 Billion a month of mortgage backed securities and Treasuries. Over the next year, they will increase their balance sheet by $1.02 Trillion or 35%. This represents the most aggressive action by the Federal Reserve since 2008. Along with this increase in the Federal Re‐ serve’s balance sheet, the Federal Reserve announced they would target specific levels of unemployment before considering scaling back this most recent round of QE. Depending on economic conditions, they are targeting an unemployment rate of 6.5% (currently the unemployment rate is at 7.8%). At the current rate of jobs growth in the United States, it will take roughly two years to reach this target.

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When it comes to expanding its balance sheet, the Federal Reserve is not alone. Central Banks around the
world are doubling down on Large Scale Asset Purchase Programs or Quantita‐ tive Easing. For example, the Bank of Japan and the Bank of England recently indicated that they would be expanding their QE programs. All Central Banks of major developed economies from the U.S. to Europe and Asia are expanding their QE in some way shape or form.
The end result of these actions is to drive up the price of assets (stocks, commodities and real‐estate) and drive down the value of debts (bonds and currency) through inflation.

While having such a large purchaser of fixed income investments certainly creates a demand in the bond market, what happens when that purchaser begins to scale back? What happens when unemployment reaches more normalized levels and the Federal Reserve feels more comfortable in raising short‐term rates. What could happen if the Federal Reserve does either of the above less smoothly than the markets would like? The risk to fixed income investors is significant and growing. Therefore, we believe it is important that fixed income investors hedge against policy miscalculations. As you know, your bond portfolios have done well over the past several decades and in recent years. Unfortunately, going forward we believe fixed income investors will need to look outside the bond markets if they wish to maintain their standard of living.

For our fixed income investors, we will continue to proactively work to provide you the best risk‐managed returns the markets can provide and continue to augment returns when we deem it reasonable.  However, valuations throughout the fixed‐Income markets are stretched. To put this in perspective the 10‐year relative performance differential between stocks and bonds has reached its lowest level since the 1940 period and that period marked the beginning of a 24‐year secular bear market for bonds and a secular bull market for stocks.

Equity Markets

Our 2013 equity outlook is relatively positive. The aggressive actions of the Federal Reserve and other Central Banks around the globe support this outlook. The announced expansion of the Federal Reserve’s QE program is the most aggressive since 2008. The combined actions of the Federal Reserve and other Central Banks around the globe should put a floor under economic growth and help boost asset prices. The equity market should be the primary beneficiary of these programs.

For the United States, we see housing and autos as drivers that should help boost the economy. For the first time since the 2008 credit crash, housing inventories are at relatively normal levels. We would expect to see a steady improvement in the housing market over the next several years. In the auto sector, the age of the U.S. fleet is the oldest in three decades and, therefore, we should see a gradual acceleration in the replacement cycle for cars.  Improve‐ ment in both of these areas should help the U.S. economy.

On the international front, we do not see Europe as a driver of global growth. Much of Europe is in a recession and they will need to tackle slow growth, escalating debt and rising unemployment issues. We expect that 2013 will be more of the same in Europe with debt risk and news cycles driving short‐term volatility in that area of the world. Asia, on the other hand, is a driver of global growth. We have seen improvement in demand coming out of Asia recently and this bodes well for the global economy.

There are more than 7 Billion people in the world and the majority of the World’s population lives in Asia. As the standard of living continues to improve in Asia, so will the demand for goods and services. Companies that service these markets should continue to do well. Industries such as Industrials, Consumer Discretionary, Materials and Energy should benefit from this growth.

One area of special note, the Natural Gas industry has the potential to be a game changer for the United States economy. The key will be to build out the Natural Gas infrastructure and this process will take several years. However, as the infrastructure is completed, the United States will have a cheap abundant energy source from which it can ex‐ pand its industrial base. The combination of cheap energy, a well‐developed transportation system and direct access to both the Atlantic and Pacific trade routes uniquely positions the United States to take advantage of the changes in the global economy. So, while we will continue to have short‐term issues dealing with our government’s debt and deficits the long term prospects for the U.S. economy are bright.

Overall, we believe that the U.S. economy is improving fueled by the Federal Reserve pumping massive amounts of money into the system. There will be repercussions to this approach but we do not expect to feel them in
2013. For bond investors, this may signal “caution ahead.” For equity investors, this should provide the liquidity necessary to continue economic growth. The debt ceiling and spending cut discussions in Washington are likely to add some short‐term volatility in the markets but once the compromises are reached the markets should refocus on the overall economy. All in all, our expectations for the equity markets are fairly positive while we are increasingly concerned with the growing risk in the bond markets.

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As always, we continue to work hard to protect and grow your assets. If you have any questions with regard to our investment strategy, please contact your Riggs investment advisor representative.

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Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this newsletter, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio.  Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or infor‐ mation contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Riggs Asset Management Company, Inc. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. A copy of our current written disclosure statement discussing our advisory services and fees is available for review upon request.