Welcome to the May 2010 issue of Condor Monthly!

Please continue below to view the "From the Portfolio Manager" and "Financial Planning Corner" segments in this month's issue.

From the Portfolio Manager

From Condor's perspective, the recent market correction appears overdone in response to Europe sovereign debt and North Korea concerns, as the fundamentals here in the U.S. still look solid:

• The U.S. economy added more jobs than expected in the first 4 months of the year.
• The housing market is showing signs of stabilization.
• Corporate earnings continue to beat expectations, while equity valuations look reasonable.
• Inflation is at multi-decade lows, which means the Federal Reserve will most likely continue to keep rates on hold at least through the end of the year, especially in light of the continued uncertainty in select European countries.

Condor believes the latest sell-off is most likely a healthy pause after the enormous global market rally off the March 2009 lows. Meanwhile, we have kept our direct exposure to Europe to a minimum over the last couple years, as we anticipated a slower economic recovery in Europe versus the U.S. The following study from Fidelity demonstrates that corrections are common, even during bull markets.

Economic uncertainty in Europe has weighed on global equities of late

Investors are nervous that Greece and Europe's need to restrain fiscal policy could spill over and cause a double dip recession in the United States. That isn't totally impossible, but it is highly unlikely. The U.S. economy is building momentum and derailing the expansion is quickly becoming difficult. Fundamentals also strongly support an improving economy. Thus, rather than weakness in Europe undermining domestic growth, it is far more likely that a healthier economy here and in Asia will spill over to help the Europeans.

Greece accounts for about 2% of total European Union GDP, so it would not even be able to derail a solid expansion in Europe, if they had one underway. Greece is just too small. A larger negative impulse will come from Spain and Portugal as they also raise taxes and cut government spending. However, some of this negative impulse will be offset by the weaker euro and lower interest rates. Europe may flirt with a decline in GDP in 2010, but expansion in the key countries of Europe, France and Germany, should provide enough impetus for growth to avoid recession.

Domestically, our economy has been building momentum for several quarters and the solid expansion that is now underway is increasingly unlikely to falter. First, monetary policy is still highly accommodative, as interest rates remain at very low levels. And the turmoil in Europe adds another reason for the Fed to wait a bit longer to be certain the expansion will not falter before it considers raising interest rates to more normal levels. Second, there is tremendous pent up demand to rebuild inventories or replenish depleted stocks of capital and durable goods. Total inventories are still declining, despite the rise in production that has already occurred. But more is needed. For example, auto sales have risen sharply off the lows of 2009, but the rate at which cars are junked is still above the current sales rate, suggesting that auto sales are still unsustainably low. A similar condition applies to housing, where population growth still exceeds by a considerable margin the rate of new housing starts. So unsold housing inventory continues to fall and construction must soon rise more significantly.

Most critically, job growth has resumed, which makes the expansion self-reinforcing. As workers are hired, they earn more income, which enables households to increase consumer spending, which boosts corporate sales and revenues, while forcing firms to hire more people. With employment growth in four out of the last six months, this virtuous circle is now clearly underway and it will take a significant shock, far more than the turmoil in Greece, to turn around our huge economy. But the economy's expansion doesn't rest only on the shoulders of consumers.

In the corporate sector, a depressed rate of investment has allowed the capital stock to age. This is particularly unsustainable in an era in which rapid technological change renders equipment obsolete at a rapid pace. Moreover, corporate balance sheets have never been in better shape. Firms built cash when the credit crisis hit and now hold more cash relative to market value than ever before. That cash will be put to use and capital investment is now rising. Moreover, were clearly back to M&A activity, where at least one new deal happens every week. In addition, companies have the cash to finance investment or to increase dividends, which brings us to the observation that stocks are rather attractively priced.

The market has rallied sharply since its low in March 2009, but corporate earnings have increased sharply as well, exceeding analyst estimates in every quarter. The S&P 500 now trades at around 14 times 2010 earnings, a rather low multiple relative to prevailing interest rates. Profit margins increased in each of the past four quarters and should rise further as the expansion gains strength. Indeed, companies report that order books are filling up and they see rising sales ahead. And while productivity has increased sharply, it is no longer adequate to enable firms to meet demand with their existing workforce, so hiring has resumed. All of these positives fit together and reinforce one another, which makes the expansion even more entrenched.

The turmoil in Greece has been disruptive to our markets, partly because investors remember the credit crisis that started in the housing sector and fear a similar contagion emanating from the credit problems in Europe. That psychology is perfectly understandable. This concern is reinforced by the focus on the domestic banking sector, as Congress and the Administration vilify the banks to justify the financial reform legislation and keep it on track. These newsworthy issues may capture our attention, but they are unlikely to derail the expansion.

As always, retail investors repeat their same mistakes. Just as they sold tech stocks after the market melted down and didn't buy stocks until the rally had lifted prices to full valuations, they are still buying bonds now, despite the historically low level of interest rates. And, they are avoiding stocks even though stock valuations are highly attractive.

Equities will surely remain quite volatile near-term. However, the Europeans are very anxious to reduce the turmoil in the capital markets in Europe and they have allocated almost $1 trillion to the task. As Europe calms down, we may be forced to find new issues to fear. Or, perhaps stocks will just resume their upward path.

From the Financial Planning Corner

Identity Protection and LifeLock

Recently at Condor, we have been receiving quite a few inquiries regarding identity protection and identity theft. Identity theft is one of the fastest growing crimes in America and continues to become more dangerous as more and more of us store personal information digitally on our computers and the internet, providing identity thieves additional avenues from which to steal our information. Increased awareness of this growing epidemic has led to a demand for identity protection services. One firm in particular, LifeLock, has been at the forefront of the industry, earning numerous awards and even a celebrity endorsement from actor and former talk show host Montel Williams, who appears prominently on the LifeLock.com homepage. However, LifeLock's headlines of late have not been so glamorous.

I'm sure many of you have seen or heard about the LifeLock advertisement with CEO Todd Davis' Social Security Number written in large numbers on the side of a truck, claiming that LifeLock is so effective that he can freely give out his Social Security Number and his identity will still be secure. What LifeLock does not want us to know, however, is that Todd Davis' identity has subsequently been stolen. Now, LifeLock has agreed to a $12 million dollar settlement over its trade practices. Supposedly misleading advertising and false claims made by the company led to eventual complaints by the Federal Trade Commission (FTC) and thirty-five state attorneys general. Said FTC Chairman Jon Leibowitz, "While LifeLock promised consumers complete protection against all types of identity theft, in truth, the protection it actually provided left enough holes that you could drive a truck through it." According to the FTC, LifeLock made claims guaranteeing that they could prevent identity theft from ever happening to one of their customers.

Once hired, for ten dollars per month LifeLock mainly attempted to protect its customers by placing fraud alerts for new accounts opened in the customer's name at the top three credit-reporting agencies, Equifax, Experian, and TransUnion, and renewing the alerts every ninety days. LifeLock also opts you out of receiving preapproved credit offers from the credit reporting industry and asks the Direct Marketing Association (DMA) to remove your name from their mailing list. Once the fraud alerts are in place, creditors are then responsible to take reasonable measures to ensure that the individual opening the account is who they claim to be. The problem is, seasoned identity thieves can and will circumvent these reasonable measures. More importantly, however, new account fraud only makes up about 17% of identity theft crimes. According to the FTC, LifeLock does nothing to combat the most common form of identity theft, the misuse of already existing accounts.

According to the complaint, Lifelock not only overstated its own capabilities, but mislead customers on its own internal data protection methods. LifeLock promised that the personal data provided to LifeLock by its customers (such as birth dates, addresses, Social Security, credit card, and driver's license numbers) would be protected by "highly secure physical, electronic, and managerial procedures" including electronic encryption and limited access by employees. The FTC's complaint charged that not only was electronic data not encrypted and customer information shared freely by employees, but LifeLock's own data system was vulnerable to outside attack by identity thieves.

Though the settlement requires LifeLock to make no admissions of guilt, it does bar LifeLock and co-founders Todd Davis and Robert J. Maynard, Jr. from continuing the allegedly misleading advertising practices. The FTC will use $11 million of the $12 million settlement to reimburse some of LifeLock's customers. Further information on the refund is available by calling 202-326-3757 and at www.ftc.gov/lifelock. The remaining money will be split by the states involved in the complaint. Despite the settlement, LifeLock will stay in business and has recently launched additional identity protection services, the LifeLock Command Center, that is supposed to provide more wide-ranging identity protection services. In its own press release regarding the settlement, LifeLock lauds the advertising guidelines set forth by the FTC as a positive step for the identity protection services industry and suggests that any potential wrongdoings are a thing of the past. Command Center does cost $15.00 per month, five dollars more per month than the original service.

LifeLock is not the only identity protection service available as competitors, such as TrustedID, Identity Guard, and Protect My ID, among others, try to fill the demand for identity protection services. Most companies, including those listed above, offer free 30 day trials of their services (but if you do not plan to continue the membership, be sure to call to cancel within the first 30 days or they will automatically begin charging you their monthly fee). On the surface, these companies appear to offer similar products as LifeLock's new Command Center.

Despite LifeLock's professed updates, the firm's egregious breach of trust brought to light in the FTC complaint means that we cannot recommend the services of LifeLock to any of our customers. Fortunately, you can do for free for yourself most of what LifeLock's services actually offered. You can place and renew your own fraud alerts with the credit reporting agencies Equifax, Experian, and Transunion, request a free credit report from each agency once per year, opt out of receiving preapproved credit offers, and ask to be removed from the DMA's mailing list. Look for more comprehensive information about protecting your identity in next month's edition of Condor Monthly.