The second quarter of 2008 continued to be difficult for the financial markets as the economy muddled through the credit crisis, the housing slump and the sharp increase in energy prices. The U.S. Stock Market is down 10.8% year to date as represented by the Morningstar U.S. Market Index. Foreign markets, particularly emerging markets fared even worse.

Although there has been significant improvements in the credit markets, home prices continue to deteriorate with foreclosures and delinquencies on the rise. Increasing energy prices continue to put pressure on inflation while holding back economic growth. Consumer confidence worsened, falling to the worst levels in over a decade and the labor markets have softened. Despite all of this, thus far the economy has remained somewhat resilient. This is in part due to lower interest rates, the tax rebate checks and the strength of global growth.

GDP for the first quarter was revised higher, rising at a 1% annualized rate for the first quarter of 2008. This was primarily due to strong exports helped by a weaker dollar and better than expected retail sales. There is a similar expectation for the second quarter of 2008, which means that the U.S. economy would have thus far avoided a contraction for the first half of the year.

The headline inflation trend is not favorable, however core inflation which excludes food and energy was muted. Given the soft labor markets, weaker demand and declining housing prices which are a significant component may help keep inflation subdued. Persistent increases in energy prices however will continue to increase the inflation risk. Inflation concerns would cause the Fed to tighten back on interest rates sooner, which would dampen economic growth further. It boils down to a balancing act between growth and inflation.

The current environment is certainly challenging at all levels and to sum up here are the main concerns: recession fears, inflation concerns, the credit markets, declining home prices, sub-prime loans, the declining dollar and political issues both domestic and international. Overall a fair amount of pessimism within this backdrop of uncertainty is holding the equity markets back. This is despite continued attractive valuations in several areas. Sometimes, excessive pessimism can create its own self fulfilling prophecy and bring about some concerns as it affects people's action. Conversely, any improvements in the concern areas could cause a quick and powerful rebound in the stock market.

Earning season is approaching and we should get even more diverse results. Certain companies in certain sectors will have more trouble passing increasing input costs to customers while a few others will benefit from the current environment. Overall non-financial corporate balance sheets are in good shape and to the extent that earnings do not stray too far off from expectations on the downside, valuations are going to remain attractive.

It is important to remember that times of excessive pessimism are also times of significant opportunities if one can look past the short term concerns. Cycles by definition come and go and we've been there many times before. From a longer historical perspective the big picture presents us with some unprecedented global trends and opportunities. Staying the course is the only way to make this short term volatility work in our favor as we continue to scout for the right opportunities and manage the various risks,

We are thankful for the trust you have placed in us and the opportunity to serve you. We hope that you have a pleasant summer. Feel free to contact us if you have any questions or concerns.