“The Other S&P”

Winter 2006-2007

A line from one of Frank Sinatra’s songs can be used best to describe the world equity markets in 2006: “It was a very good year.” As we review the prognosticators’ predictions that were made in December 2005, it becomes abundantly clear that for all of their education and experience, their best guesses were just that, guesses. Most of the experts expected a mediocre to flat year in the markets and as of July of this year they were correct. The Dow Jones Industrial Average was actually in negative territory in July. Large cap stocks were expected to outperform small caps and foreign stocks were thought to be the best place to be in 2006. For the record, the Dow Jones Industrial Average was up 16.3% for the year. The NASDAQ Composite Index was up 9.5%. The S&P 500 Index was up 13.6%, its best year since 2003. Finally, to prove just how inaccurate the predictions were, the Russell 2000 Index which measures small cap stocks was up 17% for 2006. Foreign stocks were up 23%. Yes Frank, it was a very good year!

There were more than enough monsters under the bed in 2006 to negate these stellar returns. Iraq continued to disintegrate on a daily basis. Oil soared to over $78 a barrel. Predictions were dire for another horrible hurricane season in the Gulf. GM and Ford, while not exactly teetering on the verge of bankruptcy as the press liked to report, certainly could not be described as low risk investments. The Democrats swept the Republican Party out of control of the House and Senate after 12 years. Terrorism remained in the news as threats of blowing planes out of the sky over the Atlantic by mixing toothpaste and hair shampoo together became fodder for Letterman and Leno.

Finally, the housing boom burst and the fallout from that bubble may continue for several more years.

What occurred to turn a relatively mediocre year in July into a great year by January? A very warm winter in 2006 relieved the burden of high energy costs to heat homes and businesses. Oil prices dropped as the hurricane season turned into a mild kitten instead of the ferocious tiger that had been the hurricane season of 2005. Along with this drop in oil came a drop in gasoline prices from $3 a gallon to the low $2s. This led to lower energy costs for consumers giving them more cash in their pockets to continue to purchase consumer goods and services. With the lower energy costs, inflation became less of a threat and the Federal Reserve ceased raising interest rates after 17 consecutive increases. Due to continued consumer buying, lower energy costs and the stabilization of interest rates leading to lower costs for their borrowed money, corporate profits continued to reach record levels. All of these factors led investors to view the economic outlook as more favorable for future profits. They chose to invest more money in stocks of these companies to share in the future profits.

What will 2007 hold for investors? We do not know. We do not pretend to know. Anyone who would tell you that they know what lies ahead in the markets, is being less than truthful. The key to successful investing is to ignore the daily noise and to focus on long term issues. If long term issues would radically change, for example, if the price of oil were to rise to over $100 a barrel and there were reasonable expectations that the price would remain there for some time or forever, then we will need to make adjustments. If your financial circumstances or your time frame change, we will need to make adjustments. If nothing has changed significantly, we need to remain long term investors and let the markets reward us for our patience. We like to remind our clients that successful investing is a marathon, not a 100 yard dash.

If your financial circumstances have changed for any reason, please notify us immediately. If you would like a copy of our updated Form ADV, Part II, please contact us. We had a very good year in the markets in 2006. We will work very hard in 2007 to try to continue to provide the very best return with a minimum of risk.

Many of you graciously have been recommending our services to your family and friends. We greatly appreciate this show of faith. We enjoy working with you and it would only make sense that we would enjoy working with your family and friends who share the same goals, desires and values as you do. For all of these recommendations that we have received this year, we thank you.

In closing, we are very pleased with 2006 and are already hard at work to make 2007 another successful year. We have been providing financial services to our clients for over seven years. Throughout this time, we have grown to almost $40 million in assets under management with over 250 clients in nine states. We not only survived the three worst years in the markets since the Great Depression, we did well on a relative basis during that time period. We have increased our technology capabilities and our staff to provide the very best in service and results to you. To celebrate our achievements and thank our loyal clients and friends, we are going to host a Client Appreciation Night for our clients on September 12 th 2007 in Bucyrus. This will be an opportunity for us to not only show our gratitude for your continued support and recommendations, but it will provide an opportunity for everyone to meet our entire staff and visit with old friends and new in a relaxing evening of food and fun. We are alerting you to the date far in advance so you can plan your fall schedule around our event! We hope that you can attend and welcome any guests that you might wish to bring along to introduce to our services and staff.

Happy New Year to each and everyone from our entire staff.