Marketing Commentary- Q1 2008

What’s Been Happening?

The first quarter of 2008 was memorable. To many observers Bear Stearns’ swift collapse would have seemed unthinkable. Quick action over a weekend in mid-March by the Federal Reserve and JP Morgan may have averted a crisis of confidence in our capital markets that left unchecked could have had disastrous consequences. Much of the press coverage referred to the action as a bailout, but the firm’s shareholders and employees would beg to differ. The stock, which traded at $150 in May 2007, now hovers at around the $10 purchase price offered by JP Morgan.

The bond market continued to face its own problems. The latest sector to suffer was a type of bond called auction rate securities. During the quarter, municipal bonds, mortgage backed bonds and junk bonds were also under severe price pressure. Several ultra short term bond funds investing in a mixture of these types of bonds lost significant value since the end of February. The flight to quality continued with investors flocking to short term Treasury bonds. Those Treasury bond funds that were acting as a slight drag on your portfolio performance during the five years leading up to October 2007 have been moderating losses [as intended] in the last six months.

Trends to be Aware of

This quarter there is much less argument about whether we have entered a recession and more discussion as to how long will it last. We don’t think the answer to that question is knowable, but there will be plenty of pundits offering guesses. Our contention is that while unpleasant to endure, recessions are a necessary part of the economic cycle and should not distract us as investors from our long term goals of achieving market returns.

Housing prices continue to be subject to downward pressure in most regions and unemployment is creeping up to just over 5%. On the positive side, core inflation figures have actually receded a bit recently but, this is little consolation when filling our tanks at the gas station or for those of us facing rising health and college tuition bills.

While the memory is still fresh from paying federal and state income taxes, it is a good time to focus on capital gains and income tax rates which are at levels that might be the lowest we’ll see in our lifetimes. As you know, we track your investment gains and losses and would be happy to discuss strategies for realizing some of those gains while rates are relatively low. We will also continue to look to take losses to offset future gains where it makes sense.

Some Numbers for Comparison:

The following table compares some key indices against which fund performance is measured. All figures are for the periods ending 03/31/2008.

Chart Data Source:  Thomson Financial