STRATEGIES, TRENDS AND NEWS FOR TODAY’S INVESTORS FEBRUARY, 2010

Nasdaq Composite 2,317 * Dow Jones Industrials 10,618 * 30 year U.S. Treasury Bond 4.67%

FLEEING FROM THE SAFETY OF CASH

What every investor wants to ever have the courage to pull The drug companies will survive know, these days, is how to the plug . . . . . health care reform, and the get a better return on cash. stocks are cheap. Johnson and Everybody on this planet is Stocks are another matter. Here Johnson (JNJ - $64, yield 3%) looking for a perfectly-safe we’re willing to take the long- and Sanofi -Aventis (SNY - $39, short-term investment that pays term view, as long as we’re 3.5%) have new drugs that offer 5%, so you can just forget about talking about solid companies an improvement over existing fi nding one. But is it too late that pay large and growing therapies. Patients are free to to buy into bonds? How about dividends. Take, for example, buy those drugs at high prices, stocks, commodities, or the Kimberly-Clark, (KMB - $62) or stick with the dazzling array Miracle of Free Markets in a blue-chip company with a of extraordinarily-cheap, ten- Asia? growing 3.9% yield and solid year-old drugs that go off patent earnings growth that should every year. Bonds have been extraordinarily allow you to sell your shares, good to us in the past year, and three years from now, at your Golar LNG (GLNG - $13) has run it’s still easy to fi nd safe 6% purchase price or better. What up a lot since we wrote about it, yields if you’re willing to buy do panty bombers wear? but the company should resume something that matures in 2025. Depends . . . . paying a $1 dividend in about The problem is that you’d be 12 months. Gas will displace taking a big gamble on interest Century Telephone (CTL - oil and coal worldwide, even as rates, because when rates rise, $34) pays an 8% dividend, Iraq triples its oil production and bond prices fall. We expect a and we think they’ll be able the members of OPEC begin to surprisingly-cool economy and to keep paying it despite the cheat on their quotas. We’ve relatively-low interest rates in steady shrinkage of “plain used exchange-traded funds 2010, but we wouldn’t want old telephone service”. The (ETFs) to make small bets that to place a heavy bet on that company has big earnings and the price of oil will go down, forecast. Most of the bonds an even bigger cash fl ow, and and that copper and other metals we’re retaining have adjustable they’ll use the extra cash to will also decline later this year interest rates, and low prices buy back shares at a rate that when world economic growth that reflect uncertainty about keeps earnings per share rising. slows down. some issue—such as whether AT&T (T - $27) offers a 6% the government will continue to yield and some genuine growth Lastly, we’ve invested in an ETF be willing to bail out Citigroup. prospects that center around that tracks the appreciation of The gummint owns 34% of cellular telephones—which is the Chinese Renminbi (or yuan) the shares, so we doubt that one of those businesses where which should soon resume its anybody in Washington would the big keep getting bigger. continued on page 2 (800) LUMBARD (800) LUMBARD (800) LUMBARD (800) LUMBARD (800) LUMBARD

FLEEING... ASK SINGAPORE continued from page 1 slow rise against the dollar. It’s The 5 million people of Singapore been falling against the euro, and live in an area of just 274 square that’s just ridiculous. miles. Water has long been patient care, in a system that is imported from Malaysia (to whom all about doctors and health care How about using that cash to pay Singapore was briefl y married after professionals (as distinct from off the mortgage? No—borrow all independence), but the nation has insurance, bureaucrats, and paper you can at today’s 5% rate, even if implemented water conservation and pushers). Everybody has skin in you have to reinvest, temporarily, recycling efforts that are the envy of the game, and the result is that at 0%. parched cities around the world. All Singapore’s health care costs just 5% runoff from streets and sidewalks is of GDP (versus 18% in the U.S. and The answer to the cash question is captured for purifi cation to drinking about 11% in Europe). Her citizens to diversify the old-fashioned way. water, so littering and other forms of live longer than Americans, and they Seek out dividends and interest, street-level pollution are rare. live longer than Europeans. wait for good prices, and avoid the herd. Singapore has a highly-developed The city-state is a fi nancial center market-based economy that is that is home to businesses that regularly ranked as one of the most reach far across Asia. Our clients A NEW TOY FOR business-friendly in the world. own shares of Singapore Telecom CONGRESS Enormous reserves of foreign (SGAPY.PK - $21), which gives currency (and a large sovereign them a 4% yield and significant The entire Montana congressional wealth fund) back the Singapore stakes in cell phone businesses in delegation has joined hands in dollar and the thriving banking some of the fastest growing nations bipartisan harmony to force General system. The nation’s citizens have of the world—running in an arc Motors to buy palladium from amassed substantial savings as well, from India to Indonesia and the Montana’s Stillwater mine. GM partly through a social security Phillipines. took taxpayer dollars, so now system—with unusually-large Congress gets to call the shots! mandatory contributions—which The nation’s external government creates accounts that are fully owned debt is zero. That’s quite a contrast Rep. Dale Kildee of Michigan by the workers paying into them. to what’s going on here in the ‘States, insisted that GM and Chrysler use where we reward borrowing, foolish unionized trucking firms, at an Each citizen also has a health savings spending, red tape, and complexity, additional cost of $10 million a year account (there are government while penalizing hard work, savings, for Chrysler alone. Then there are subsidies for the poor), and the result thriftiness, and simplicity. It’s time the Senators and Representatives is universal health care that runs we turned to Singapore for guidance. from all across this great land on a free-market model. Patients Former Prime Minister Lee Kuan who have forced GM to reopen 70 shop for services while hospitals Yew stands ready to help. dealerships . . . . . and doctors compete on price and

ILL-GOTTEN Under intense pressure from the public, Washington is fi nally going to close one tax loophole. You’ll remember that hedge funds charge 2%—much more than double our GAINS rate on larger accounts—and also take 20% of the gains in each client’s assets. That’s shocking, really, but the topper is that until now the richest hedge fund managers were taxed at just a 15% rate on that 20% slice. Of course, they had to buy protection every year with campaign donations, and it wasn’t cheap . . .

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The economy has strengthened, A recession is a cleansing process. A trillion but don’t expect to see 3% growth The problem for 2010 is that this one-dollar throughout 2010. Right now the one didn’t do much cleansing. bills, stacked Stimulus Package is stimulating Most Americans still have all one on top of the economy—don’t even try to the debt they had in 2007, and another, would pretend it isn’t—but when the the federal government has a lot reach 67,866 stimulus stops the economy will more. miles. defl ate again. 10/10/10 Let’s face it; our There are 110 million And here’s the part economy was pumped households in the United States. that many economists don’t up to greater size and faster growth If the federal government decides understand. Consumers aren’t by borrowing. It will take years to give away a trillion dollars, the going to go back to spending like it’s of slow growth to get us back to handout will be less than $10,000 2005. Brainless over-consumption “normal”. And investors can’t per household. Pretty disappointing, was a herd phenomenon, just like be encouraged by the fact that in the wake of e-mails suggesting the stock-market bubble, the real- the outlook for the auto, housing, that the Congress should send each estate bubble, and the various banking, defense, and health care taxpayer a million dollars to get the commodity bubbles. Retirement industries—and just about every economy moving. now looms for millions, and most other industry—is largely dependent Americans are fully aware that on government policy. Our forecast Still, the situation looks very they can no longer run up credit- for 10/10/10 puts the Dow at different when you suggest that each card bills and roll the debt into 10,010, the S&P at 1010, gold at household will have to pay $10,000 the mortgage. 1010, and the unemployment rate to the federal government to help it at a nice round 10%. pay back the money it borrowed in the last 8 or 9 months. If Congress borrows a trillion dollars a year in When someone asserts to you that The countries that have struggled the next ten years, each household the free market has failed and the most in the past year have is going to have to pay $100,000 that we need a new model, point been the Big Government nations. in taxes—on top of the taxes we out that free markets didn’t fail Portugal, Italy, Greece, and Spain already pay. Not to mention the cost in Singapore. Or in Indonesia, (known to international bond traders of the interest on the debt, which Brazil, Australia, or China—which as the PIGS); the United States; will double and redouble as the debt lacks democratic freedom, but has and Japan. Study Japan, because grows and interest rates rise. capitalist markets that operate so it’s the very model of the modern freely that most of us would like to major muddle. We’re heading down How ’bout pushing all the taxes see a bit more regulation . . . . that path right now. onto the rich? Forbes says that the richest 400 Americans—Bill Gates, Warren Buffett, Larry The tax code is 16,845 pages Ellison, the Wal-Mart Waltons, long. We’d like to tell you Michael Bloomberg, Michael how many pages of laws and Dell, the guys from Google, and regulations there are in total (it 389 of their peers—are only worth could easily—seriously—be $1.27 trillion. a million), but you can’t fi nd that information via Google, DEBT IS SLAVERY. Bing, or any other search SAVINGS ARE FREEDOM. engine. No one knows. SAVE ’TIL IT HURTS.

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SMALL IS BEAUTIFUL

Power Corrupts. And it breeds at risk. They won’t make as much inefficiency, slothfulness, and money, but they’ll be less likely to waste. fail; and it won’t be long before bankers—even the dim-witted Big banks are no better than big ones—decide that they’d be better government, and lately the two have off if they weren’t so very large. been working hand in hand. Two Decades of bank mergers would be decades of bank mergers, followed undone, the 2Big2Fail banks would by big-bank bailouts and little- disappear (no more bailouts!), and bank bankruptcies, have left the consumers would be able to choose consumer with few places to turn. among a wide array of community- The 2Big2Fail banks are taking focused banks that are eager to advantage, with a wink and a nod serve them. John Lumbard, CFA from Uncle Sam.

“While I believe that the government They’re charging fees on long- “The fi nancial reform on the table is can play an important role in creating closed accounts, hitting tardy credit- analogous to our response to airline the conditions for economic growth card customers with interest rates as terrorism (by frisking grandma and and employment, true growth and high as 32% (we’ve seen it, on bills taking away everyone’s shampoo), real jobs can only come from the to the elderly), and billing debit- in that it gives the appearance of private sector.” card customers $35 a whack for offi cially “doing something” and overdrafts—on a debit card!!—that adds to our bureaucracy without President Barack Obama, never should have been possible in really making anything safer.” December 3, 2009 the fi rst place. – David Einhorn, in Outside the Box Never fear; Congress is on the case. Financial reform has been put in the hands of Christopher Dodd (who received sweetheart mortgage deals Nearly 10 million of the nation’s from sub-prime kingpin Angelo 25 million subprime mortgage Mozilo) and Barney Frank (whose loans were guaranteed by (or on the love triangle with Fannie Mae and books of) Fannie Mae and Freddie — Senate Majority Leader Harry Freddie Mac will cost $400 billion, Mac. Another 4.5 million were Reid, describing town-hall protestors or $3,600 per American household). guaranteed by the Federal Housing of the health care bill. Melissa Bean of Illinois (who Authority . . . . received $1.4 million in campaign contributions from Wall Street) is “I do think I do not want the “Government is the great fi ction, also in the mix, but Frank and Bean same kind of focus on safety and through which everybody endeavors haven’t gone together as well as soundness that we have in OCC to live at the expense of everybody you’d think . . . . [Offi ce of the Comptroller of the else.” Currency] and OTS [Offi ce of Thrift – Nineteenth century economist The right way to reduce the risk in Supervision]. I want to roll the dice Frédéric Bastiat the fi nancial system is to force the a little bit more in this situation biggest banks to hold a lot of cash towards subsidized housing.” that is never lent out and never put — Rep. Barney Frank, Sept. 25, 2003 - 4 - (800) LUMBARD (800) LUMBARD (800) LUMBARD (800) LUMBARD (800) LUMBARD

USA Today says that there are now 382,758 federal workers who earn more than $100,000, and that the average federal worker makes 77% more than the average worker in the private sector.

We can’t possibly cover the cost of growing federal bureaucracies by taxing federal employees, and we can’t pay for Medicare and Social Security benefi ts by taxing the elderly. We certainly can’t pay for programs that fi ght poverty by taxing the poor. Taxes have to come from the private sector, and the private sector is shrinking while Washington grows.

QUINTUPLED (AND A HALF) The decade that just ended—the of $100,000, not long after we Naughts—was the worst ten-year opened our doors with absolutely period for U.S stocks in history. nothing under management), but Stocks actually declined a half it’s invested without favoritism Drew D. Kellner a percent each year, and that’s alongside our largest portfolios. including dividends; over that It has the same holdings and the our custodian U.S. Bank, which is period the S&P 500 dropped from same low brokerage commissions, arguably one of the two strongest 1,469 to 1,115. and it pays a fixed 1% fee that banks in the nation. Terry Schwartz, accounts for the only withdrawals our relationship manager at the In that time (Dec 31, 1999 to or additions the portfolio has seen bank, can be reached at (513) Dec. 31, 2009) our “Benchmark” in 19 years. 632-4992. And please call us account grew from $216,635 to for additional information—don’t $548,748. Up 153%, greatly You can find the performance forget to ask for a Form ADV Part II aided by the fact that it declined of our larger accounts on our (!!)—at (800) Lumbard. The digits just 3.3% in 2008. Sure, it’s a website (www.Lumbard.com). work out to (800) 586-2273. small account (it opened at a value The numbers are compiled by

FREE AT THE SCOOTER STORE! TOO BIG TO FAIL Uncle Sam is giving away free income voters, on the eve of the IS TOO BIG motorized scooters to seniors, 2010 elections) of free Motorola at The Scooter Store! If you’re cell phones with all the bells and too young for that free handout, whistles: “Any Minutes you do you’re still eligible for a $5,300 tax not use will roll-over. Features credit towards an $8,000 golf cart. such as caller ID, call waiting and Normally you have to keep the cart voicemail are all also included with for 27 months before you’re allowed your service.” You only get 68 free to sell it at a big profi t, but “The Golf minutes a month—an additional 60 Cart Man” of Lady Lake, Florida minutes costs $20—but you get will be happy to sign a deal today “text, international calling to over that will allow you to “make $2,000 60 destinations . . .” TracFone doing absolutely nothing.” spokesman Jose Fuentes says that “Over one million households in Then there’s an offer (to low- Illinois qualify . . .”

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“To deliver on all the government’s amendment to the Constitution, Washington is full of lifetime obligations and promises we’d and succeeded in putting a line- politicians who maintain their grip need $175,000 per person right item veto into law. That law wasn’t on power by showering money on now.” –The Concord Coalition worded carefully enough to pass their constituents. They’re buying muster at the Supreme Court, but votes with your money. That’s $53 trillion. It includes both today our own Senator Judd Gregg the existing debt and the future is pushing hard for a better version. We want a tax system that’s fair unfunded cost of entitlements such It’s a wonderful leap towards and simple—so simple that nobody as Medicare and Social Security. sanity, but to reach sanity—actually can manipulate it to their advantage. balance the budget—we’re also And we should limit government Bashing BushObama might be going to need that amendment to spending to the levels we had when our national pastime, but it’s the the Constitution. we last had a balanced budget, Congress that runs the country— back in the Clinton years. Federal most particularly the nation’s The constitutions of most states spending in the year 2000 was just budget. With a 2/3 majority the demand balanced budgets, and in 18.4% of GDP. We’ll round it up Congress can overrule the President fact 49 of the 50 states are guided to 20%, splitting the difference on just about anything. And many by language to that effect. We’ll between 2009 taxes (15% of GDP) congressmen now state openly need to make allowances for wars and 2009 spending (nearly 25% of that their job is to get as much and recessions, but all the proposals GDP). taxpayer loot as possible for their we’ve ever seen have done so. constituents, even if it means that Some day we’ll look back on What we need now is a simple we all run headlong, like lemmings, the current practice—allowing platform that can be used by over a cliff and into bankruptcy. Congress unlimited use of our congressional candidates from credit cards—and think that it was a both parties in the coming elections. “Kicking The Bums Out” isn’t risky and lunatic way to operate. Send us your ideas. If 25 sober and going to work, at least not for coherent citizens respond, we’ll set long. But way back in 1994 the As long as We The People are taking up a web site to discuss proposals U.S. Congress came within a single back control of our Congress, we and provide a rallying point. We’ve vote of passing a balanced-budget should also insist on term limits. already reserved a web address: WeElectedYou.org. Barbara Boxer is in bed with the re-bidding of the air tanker Boeing. The same can be said contract won by Northrop. We It’s a lot to hope for, but let’s of most of the California and sold our shares. never forget that we’re borrowing Washington delegations (and Chris huge amounts of money from our Dodd), but we like the alliteration “It may please you or it may children. How can anybody ignore . . . . . In recent weeks they all not please you. I’m the Number that simple fact, and continue to joined forces again to force the One earmarks guy in the U.S. steal money from his sons and $2.5 billion funding of ten gigantic Congress.” daughters? C-17 aircraft, over the strenuous –Senator Daniel Inouye. objections of the Pentagon. And Many of Inouye’s earmarks John Lumbard, CFA if you like that story, check out are for defense appropriations [email protected] the Darleen Druyan scandal, or that the Pentagon opposes. (800) LUMBARD www.Lumbard.com (800) LUMBARD www.Lumbard.com (800) LUMBARD

Performance Results: The performance results presented below are for our “Benchmark Account”, using January 1, 1998 as the date of inception. The performance results for the Benchmark Account are calculated by Lumbard & Kellner, LLC’s current custodian, U.S. Bank (prior to 2004 State Street was the custodian). The account pays fees based on our firm’s fee schedule from the 1990s (top rate of 1%), and the percentages shown are net of fees and expenses—that is, the returns shown would have been higher if fees had not been deducted. The performance results for the Benchmark Account include the reinvestment of dividends and other earnings, but there have not been any other additions or withdrawals since inception. The comparative indexes shown are the S&P 500 Composite Index, Dow Jones Industrial Average, NASDAQ Composite, Barclays U.S. Aggregate Bond Index, and the Citigroup 3 Mo T-Bill Index.

Actual returns for individual client portfolios managed by Lumbard & Kellner, LLC may vary and will not necessarily coincide exactly with the returns for the “Benchmark Account.” Past performance of the “Benchmark Account” does not guarantee future results. No assurances or guarantees can be given or implied concerning future investment results for Lumbard & Kellner, LLC or any investment index. Future returns may differ significantly from the past due to materially different economic and market conditions and other factors. Investments within portfolios, and therefore, portfolios, involve risk and the possibility of loss, including a permanent loss of principal.

General Disclosures: Statements in this communication are the opinions of Lumbard & Kellner, LLC and are not to be construed as guarantees, warranties or predictions of future events, portfolio allocations, portfolio results, investment returns, or other outcomes. None of this material is intended as a solicitation or offer to purchase or sell a specific investment. Readers should not assume that all recommendations will be profitable or that future investment and/or portfolio performance will be profitable or favorable.