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Redhawk Squawk

News & Commentary 1st Quarter 2011

In This Issue

Process is Long Term. Management is Tactical. The Quarter's Best

- top articles and topics from Research Update, Redhawk's daily publication.

Process is Long Term. Management is Tactical.

If someone were to ask us what our "golden rule" is at Redhawk it would be something like what the title says. The plan and process for each client considers only the long term. The management of the assets at risk is tactical, dynamic and daily. The days of complacency, or what we call "buy and hope," are long over in our view. What has also been proven futile is the brochure-based track record sales pitch that used to drive clients to a particular mutual fund. What everyone learned over and over again during the last decade is track records are highly overrated and do very little to tell us what will happen to our net worth and purchasing power going forward. What Redhawk values is its advisers' understanding of the process we use to manage all of the assets every day while keeping a watchful eye on the longer term process ­ the process that challenges the balance of ALL the assets: the fixed, the tax deferred, the risk, the bank money, everything. This dynamic vision (you know, forward vision and tactical management, like a red-tailed hawk) that a brochure can never give you. The very reason our DIALTM was created was for this very purpose ­ to let people know we are not going to `set it and forget it'. We are not going to let the media move us. And we are not going to look back, always forward. Our process should be held for the long term while managed on a daily basis. To use a rather bland and complicated word, "homogeneous" is one I learned all about in Geology school, way back in the stone age when oil was $45 a barrel and then suddenly dropped to about $10 a barrel (early 80s if you recall). You want to know what it's like to lose everything? Be in the oil business at that time like my family was (and then wasn't). Anyway, natur everything in nature has been designed to be moving and adding and changing all the time, wouldn't you agree? How do earthquakes and volcanoes and tsunamis and oil deposits all happen? Yep, all due to a non-homogeneous architecture. So why would someone try to convince us that what was, is and will be? Our clients and advisers are far too smart for that!

Money Management Commentary

- 1st Quarter 2011

The Wall of Worry

Budget Breakdown, Endless Recession, Housing Collapse, Dollar Collapse, Earthquakes, Oil Disasters, Tsunamis, Radiation, Peak Oil

d b t this Wall f You might have heard about thi W ll of Worry our chief investment guru, Bryce Kommerstad, goes on and on about. Naturally, all bull markets must first climb this miserable wall of downward pressure on stock prices. As we've mentioned many times over the years, technology and lightening quick information is in the hands of every earthling. Don't you recall seeing hundreds of tsunami videos on the internet within seconds of it happening? 100 years ago it could have taken days, weeks or even months to get a black and white photo of what happened. These days we worry in HD! Don't forget to keep the sharpest focus on the long term.

Redhawk's New Site The Biggest Risk - Personal Inflation

Coming Events

"Virtual Lunch" with a Professional Money Manager

Bryce Kommerstad will be hosting a web based presentation the 2nd Thursday of every month throughout the year. The time will be 12:00 PM to 12:30 PM Central. His purpose is to give all of our friends, clients, associates, anyone who wants to learn, a real perspective of what's really going on in the financial world.

"Press Play"

-a new webinar series from Redhawk

May 9

-Personal Inflation

May 23

-Red, Green & Yellow Lights: What's Behind the Curtain? Be on the look out for your invitation!!

News & Commentary Page 2

The Quarter's Best

­ top articles and topics from Research Update, Redhawk's daily publication.

Redhawk Growth Portfolios

2011 is shaping up to be a year of solid recovery for the U.S. economy, and a year in which Federal and State governments will be forced to take action to reduce profligate spending. Overspending and the constant buildup of debt have created a crisis that is now threatening our way of life. The problem can no longer be kicked down the road. Everyone knows that painful cuts have to be made and no one will be immune. Recent news on the economy, markets and the debt crisis: 1) Standard & Poors says the strength of revenue growth may surprise investors in 2011. 2) Weekly jobless claims posted the biggest decline in nearly a year after a holiday-related spike. 3) Conference Board's Index of Leading Economic Indicators increased in December more than forecast, a sign the recovery will gather steam in 2011. 4) Richard Bernstein, well known strategist, says investors are "way too bearish on the U.S." He says the strength of corporate profits is being neglected by the media and by investors. 5) Bloomberg reports that "even after global stocks rallied 10 percent last year, valuations around the world fell the most in a decade." Translation: Earnings increased more than prices, so stocks are actually cheaper than they were at the beginning of 2010. 6) Jim Paulsen, Wells Capital Management, says, "It is the legacy of the 2008 crisis. Investors just can't believe we're actually recovering." 1995. Since the 12-year low for the S&P in 2009, the benchmark index has now climbed 95 percent. Even despite this huge advance, many feel that stocks are still relatively cheap. Jeremy Siegel, long-time finance professor at the Wharton School at the University of Pennsylvania, came out bluntly and said "This market is not overvalued... it's not too late to get in."* What is he focusing on? Facts, not headlines. Not surprisingly, Mr. Siegel is a "stocks for the long-run" type investor. Why do you think we continually urge our clients that the pocket of money in the market should not be touched for an absolute minimum of 3 years (preferably 5+ years)? Otherwise, you can't help but fall victim to shorter-term market swings and emotions.

Redhawk Growth Portfolios

As 2010 ends, there is solid evidence that economic momentum is building going into 2011; 1) ISM-Chicago reported on December 30 that its business barometer rose to 68.6, exceeding the most optimistic forecasts and reaching its highest level since July, 1988; 2) Other regional measures of manufacturing showed strength in December, with New York rebounding more than expected and the Philadelphia area expanding at the fastest pace since April 2005; 3) Weekly jobless claims fell 34,000 to 388,000, the lowest level since July, 2008; 4) Retailers' 2010 holiday sales jumped 5.5% for the best performance since 2005; 5) Dupont, the third biggest US chemical maker, said its earnings will rise to its 2012 target a year earlier than it forecast in 2009, led by sales to farmers and electronics makers. We still have plenty of problems to deal with, but we can't ignore the fact that many areas of the economy are improving faster than most thought possible a few months ago. Just last summer the central debate was about whether the US would fall into a double-dip recession. Note: Debates can be interesting but they don't affect our decision-making. All investment decisions are a product of our quantitative discipline that focuses solely on price. We learned long ago that markets are far smarter than we are. Elsewhere, December flows into US stock funds turned positive after 33 straight weeks of outflows. Further, for the first time since the economy tanked over two years ago, there were large outflows from US bond funds ($14 Billion in December). If money continues to exit bond funds as we move through 2011, a large portion should end up in stocks.

Think Estate Thursday

We have just witnessed the effects of a catastrophic event in Japan. Are you and your family prepared for a similar event? Do you have copies of important papers that you have shared with family (Wills, Medical Powers of Attorney, and Healthcare Directives)? What insurances are available to care for medical expenses, loss of property, and death benefits? Take the time now to sit down with family and discuss these issues. Catastrophic events are unplanned and unannounced. Most of us walk around oblivious to the fact that there are specific steps the state and federal governments make everyone go through to process death. If possible or necessary, an autopsy may be performed. Estate settlement follows. If you leave directions, the probate process follows those instructions. If you don't have the will, the state will dictate the division of your estate. Don't forget to plan for the contingency of your heirs being lost to the same catastrophic event that befalls you.

Market Perspective

New day, more gains for stocks. With continued strong earnings data being released, many industry pros believe that earnings will grow at a rate of 15 percent in 2011. In 2010, earnings for S&P 500 companies rose 29 percent, which was the fastest growth since

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1st Quarter 2011 Page 3

Money Management Commentary

­ First Quarter 2011 by Two Rivers Capital Management

US U.S. stocks were the global performance leaders in Q1 2011 2011. On the Large-Cap side, the S&P 500 was up 5.92% and EAFE (Large-Cap Int'l) was up 3.45%. Emerging Markets ran into some inflation trouble and were up a more modest 2.10%. U.S. Mid-Cap Growth, our largest concentration, was up 9.84%. Q1 rundown (red bar indicates largest strength): Q1 2011 Growth S&P 500 Mid-Cap Growth Mid-Cap Value Small-Cap Growth Small-Cap Value EAFE Emerging Markets 5.92% 9.84% 8.91% 9.14% 6.34% 3.45% 2.10% would have said stocks would tank. But after only a modertank ate sell-off in early March, stocks recovered and posted a good first quarter. What's going on? Investor confidence may be improving due to a combination of strong corporate profits, better U.S. employment numbers, forecasts for decent long-term global growth, and the EU and Washington finally being forced to deal with their respective fiscal crises.

Redhawk Launches Their New Home on the Internet!

"We are very excited to announce the launch of our new web site at www.redhawkwa.com " says Dan Hunt, Chief Executive Officer of Redhawk Wealth Advisors, Inc. We have been working very hard for a very long time to bring all of the materials and systems Redhawk offers to both its investors and advisors to this state of the industry level. The new site is our online operating hub to deploy our technologies. When you enter the site you will find a wealth of information available to investors about many financial topics and we are continuously adding and updating the existing content of the site. Among the site features is our Wealth Advisor Questionnaire. The Wealth Advisor software provides a comprehensive risk tolerance profile to potential investors and a suggested portfolio model based on the profile results immediately on completion of the questionnaire. Investors can further refine and focus their needs by working with their Redhawk advisor. In addition to the investor side facilities, their is a secure area providing robust support and tools to Redhawk's investment advisor team. Take a few minutes and visit the new redhawkwa. com and watch for announcements of new capabilities in our daily research updates and newsletters.

On a more extended rolling 12-month basis, U.S. stocks were still the clear winners over EAFE and Emerging Markets. This is a major change from what we've seen the past 10 years when Emerging Markets led the world by a wide margin. The trend of U.S. outperformance may continue as U.S. stocks have become far more attractive on a valuation basis. Many U.S. companies have doubled or tripled their earnings over the past 10 years and their stock prices have gone nowhere, which means P/Es have plummeted and their stocks offer better value. Many commentators have been arguing that U.S. Large-Caps are the most undervalued category among all stock asset classes. Nonetheless, Small and Mid-Caps have sharply outperformed Large-Caps since the market turned up in March, 2009. Large-Caps will have their day, and when they do it could be a good, long run. But until they show actual relative strength, we'll stick with Mid and Small. Given all the headwinds stocks encountered in Q1, their performance was impressive. If you had been told on January 1st that there would be historic unrest throughout the Middle-East, long-standing regimes would fall, oil prices would spike above $110/barrel, and that Japan would suffer an epic earthquake, tsunami and nuclear crisis, you probably

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News & Commentary Page 4

The Biggest Risk: Personal Inflation

When you think of risk, what is the first image that comes to mind? Losing it all in the stock market, right? As we hit i h fear we most often hear about h to d with f h b retirement, the f has do i h outliving ones' money. In fact, the fear of death is lower on the scale, just behind the fear of public speaking. Well, fear not, we have dissected the concept of Purchasing Power risk, best defined by investorwords.com as the risk of loss of cash due to inflation. Of course we have taken the liberty of enhancing the concept further to say "Personal Inflation". Bryce Kommerstad looks at it this way: Loss of Purchasing Power: The erosion of what a fixed amount of money can buy over time. Prices of "things" go up but the amount of money one has at his or her disposal remains fixed (like a retired person on a fixed income). Unless there are investments keeping up with inflation in that person's portfolio, his or her lifestyle will decline. The reason why fixed income investments decline in value is inflation and interest rates rise. The fixed interest from the bond buys less over time, so the value of the bond producing that revenue stream has to decline, until it reaches a price where the current yield (coupon divided by current price) is equal to current rates. Just about everyone understands a good plan is diversified and risk tolerance adjusted with the specific purpose of making the nest eggs last longer. With the first boomers having already turned 60 in 2006, and maintaining a 1 in 3 chance of living to 95 years of age, this could mean 35 years of any or all of the following: 1. Social Security income becoming less, less effective, or worse 2. Less or no pension income 3. Higher costs for goods and services to include FOOD and FUEL 4. Desire to do more stuff, pick up an iPad, go fly fishing, travel to Curacao (off Venezuela coast) 5. Healthcare costs rose 73% from 2000 to 2006 according to a Kaiser Family Foundation survey while the S&P500 returned -3.5% over the same period. and-forget-it or "buy and hope" approach could very well have been futile. Based on that macro indicator, you could have l d What b h i i lost ground. Wh about the more important micro i di indicator: Personal Inflation? If you drive 50 miles to work, have two kids in college and are nursing a health condition, your version of CPI (Consumer Price Index) could be scary. Note: you can visit www.shadowstats.com to view an alternate picture of inflation. That said, many people do not know that CPI does cover FOOD and FUEL. Inflation does not since the costs are so volatile, but CPI does. The following was extracted from the U.S. Bureau of Labor Statistics (BLS):

The CPI represents all goods and services purchased for consumption by the reference population BLS has classified all expenditure items into more than 200 categories, arranged into eight major groups. Major groups and examples of categories in each are as follows: FOOD & BEVERAGES HOUSING APPAREL TRANSPORTATION MEDICAL CARE breakfast cereal, milk, coffee, chicken, wine, full service meals, snacks rent of primary residence, owners' equivalent rent, fuel oil, bedroom furniture men's shirts and sweaters, women's dresses, jewelry new vehicles, airline fares, gasoline, motor vehicle insurance prescription drugs and medical supplies, physicians' services, eyeglasses and eye care, hospital services televisions, toys, pets and pet products, sports equipment, admissions college tuition, postage, telephone services, computer software and accessories tobacco and smoking products, haircuts and other personal services, funeral expenses

RECREATION EDUCATION & COMMUNICATION OTHER GOODS & SERVICES

Easy homework that you can do at your leisure: 1. Get out the latest Research Update email, your account statement from TD Ameritrade, and other statements from wherever else your investable assets reside. Meet with your (Redhawk) advisor to see how all those dots connect and how to best manage them all. 2. Ask your Redhawk advisor to get together to talk about your Personal Inflation. The plan your advisor has in place will or should address this all important issue. We will continue to do our part to watch over the assets at risk. In the meantime rest easy (not) that CPI, Inflation, Breaking News, and perhaps even Congress will keep your boat afloat. It is the process going forward that addresses the Personal Inflation that matters. What your advisor and Redhawk are doing about it should make you feel very comfortable. Worst case, you will be an early adopter to a process that only your Redhawk advisor can deal with.

The S&P started the last decade at a value of 1,469.25 and closed March 2011 at 1,325.83 so you can do the math. If inflation was negative 3%, we'd just about be even. A set-it-

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