“The Other S&P”

Fall 2006

Cedar Point, supposedly the world’s best provider of roller coaster thrills currently with 16 purveyors of hills and valleys and upside down loops, announced the construction of a new $20 million roller coaster called the Maverick Run. This ride obviously takes full advantage of new technology by employing a 95 degree drop that takes you within five feet of the ground before hurtling you somewhere off into a hot dog and fries draining hill or blissful unconsciousness, whichever comes first. Yes, I said a 95 degree drop which is more than the proverbial straight down. The US equity markets continued their version of the Maverick Run with the quarter just completed. Our newsletter for the Spring quarter talked about how incredibly well the markets had performed during the first quarter. The Summer newsletter remarked about how we had given up all of the previous three months gains and were just about breakeven for the year. As you might expect from the start of this newsletter, the third quarter returns were quite respectable, placing us in a fairly good position as we head into the end of the year. For the record, the Dow Jones Industrial Average was up 4.7% for the quarter and is now up 8.97% for the year to date. The NASDAQ Composite Index was up 4.00% for the quarter and now stands at a positive 2.41% for the year. The Standard & Poors 500 Index was up 5.2% for the quarter and is now up 7.01% for 2006. With all due respect, if we could close the books on the Dow and the S&P 500 right now, it would have been a good year.

The usual question is, “What happened to turn the markets around and what will it mean going forward?” The turnaround was driven by two primary issues, interest rates and oil. The Federal Reserve Board met twice during the quarter and for the first time in several years, the Fed did not raise interest rates. Prior to the meeting in August, the Fed had raised interest rates a ¼% seventeen consecutive times. Investors responded cautiously but favorably to the inaction on the Fed’s part. The assumption is that inflation is under control and that the Fed will not have to raise interest rates anymore. It would be very good for the overall economy if the Fed could leave interest rates at the current level. Higher interest rates put pressure on home sales, car sales, credit card debt and any other big ticket purchases that consumers must use credit to purchase.

Oil prices now have dropped the most since March as investors absorbed a quiet hurricane season, a brokered cease fire in Lebanon and a foiled terrorist attack in England that targeted planes over the Atlantic Ocean. The drop in crude oil prices led to a 21% drop in the price of gasoline in the month of September. This savings at the pump flowed directly to consumers’ pockets and led to an overall increase in consumer confidence and purchases. The down side of the oil market was displayed in all of its resplendent glory at the United Nations by the leaders of Iran and Venezuela. Both men chose this forum to bash the United States and its policies which did little to calm the nerves of investors concerned about future oil prices and availability.

The US economy continues to dazzle with its persistent ability to deliver strong profit growth and low unemployment. Projections are for the US economy to deliver a record smashing 18th consecutive quarter of double digit percentage increases in corporate profits in the S&P 500 companies in the forthcoming fourth quarter of 2006. That is four and a half years of over 10% growth a year which is a phenomenal achievement. The US equity markets responded to stable interest rates, lower energy prices and record breaking profit growth with favorable results.

What lies ahead for the markets? The US housing market remains a great unknown. Higher interest rates have delivered their intended consequences by popping the real estate bubble on properties on the eastern, western and southern coasts of the US. How consumers react to this devaluing of their most significant asset remains to be seen. Global tensions and terrorist activities have always been with us in some method or manner and will continue to cause uncertainty. Mid-term congressional and state elections will probably un-nerve the markets as much as anything in the foreseeable future. The price of oil, along with all other forms of energy, will fluctuate based upon world demand for oil and the influence of terrorists and demagogue leaders. In short, we can expect continued volatility in the equity markets. Volatility, in and by itself, is not necessarily a bad thing. Volatility allows us the opportunity to buy shares in great companies and their management at discounts. The key is to recognize these opportunities and to move quickly to take advantage of these momentary chances to pay less for a great company. That is the goal of all of our mutual fund managers and of our staff.

We will continue to monitor your accounts closely to try to deliver the best possible results with the least amount of risk. If there have been any changes in your personal or financial circumstances, please contact us immediately so that we might discuss them and make any necessary changes. If you would like a copy of our most recent form ADV; Part II, please call the office. We appreciate the tremendous number of referrals that you have sent to us this year. The confidence that you have shown in us by recommending us to your family and friends is quite humbling. We appreciate the opportunity to work with each and every one of our clients. If you have any questions at any time, please contact us. We will continue to strive to do the very best for you, your family and your business to achieve your financial goals.