Quarterly Summary to Clients

The markets have recently been quite volatile due in large part to several factors previously mentioned, the weak economy, threatened sovereign bond defaults in Europe, and severe political partisanship in US Federal financial affairs. Consequently, our accounts are down significantly this year but, in spite of our sizeable cash balances, have performed largely in line with the broad indices which closed out the quarter down. The first few days of October have shown a significant rebound.

While there remain significant risks to the economy, such as premature withdrawal of Federal stimulus or a sizeable default of a European sovereign credit, the fundamental economic indicators point to slow growth. This will pick up significantly as unemployment eventually falls. There remains considerable pent-up demand for the goods and services consumers have been passing up in the recent years while they saved and paid off debts.

Our view is that even the Conservatives in Congress recognize the risks of cutting off Federal spending too soon and have quietly agreed that the sizeable budget cuts will come in future “out” years. The Europeans have demonstrated (loudly complaining along the way) that they remain committed to the Euro and the Euro experiment. There may be some restructuring of Greek debts, but unlike the Lehman failure, Greece’s problems have been telegraphed with ample time for banks and bondholders to prepare for the worst. The German and French governments appear to be currently preparing their backstop of the banks that hold the Greek bonds. They may play brinksmanship to try to discipline the Greeks, but they will not allow a Lehman-like financial event.

Following some dramatic price gains, we also recently sold our long-term US Treasury holdings and moved them to short-term holdings. We viewed further gains or further reductions in long-term rates unlikely for now. If long-term Treasury prices retreat again, we may re-establish those positions.

Several months ago we purchased a few growth stocks, specifically in broadband fiber optics. These have been severely hurt by the recent downtrends in the market but have also been swept up in the more recent market up-trend. These stocks require time and patience and we’re confident they will eventually perform well. In spite of some relatively low prices, we do not anticipate further reductions in our cash balances until the risks described above have diminished or stabilized. In spite of the emerging positive economic factors, the economy remains in a very dangerous financial world. Housing may not fully recover for several years yet.

Because these quarterly thumbnail summaries are very brief, please do not hesitate to call me if you wish to discuss your account or our outlook in greater detail.

Very Best Regards,

Joseph L. Toronto, CFA

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