Marketing Commentary- Q3 2005

What’s Been Happening?

It seems like risk is back in fashion, especially outside the U.S. International and Emerging Benchmarks made the loudest statements in the past three months, up 10% and 18%, respectively. Emerging markets have advanced almost 50% in the past year, despite higher oil prices that should hurt economies that rely heavily on energy demanding manufacturing. Despite above average three-year annual returns of over 16 % for large US Companies, the S&P 500 is still underwater over the past five years.

The record damages of Hurricane Katrina and her sibling storms are now being put into economic perspective. The rebuilding effort will grow Federal debt and deficits in the short term while creating jobs and, most likely, higher future tax revenues as the hardest hit areas are rebuilt.

Trends to be Aware of

Recent news stories of the Federal Government finally beginning to focus on conservation as an important part of our energy plan could become very significant. Given proper incentives, we have shown ourselves time and again to be able to make quick and dramatic shifts in consumption of gas, electricity and water. SUV sales are down 50% year over year. Lowering demand for oil would collapse prices, which would be the economic equivalent of a bigger tax cut than even Karl Rove could dream about.

What To Expect From Here

What we said three months ago has started to be true, so we will repeat it: Stocks are a better value than bonds today. After five years of negative returns for the S&P 500, earnings have recovered. At around 6.5%, the earnings yield of stocks (earnings per share divided by price per share) is now over 50% higher than the guaranteed 4% return on ten year government bonds. Rarely in recent times has this gap been as great.

Some Numbers for Comparison:

The following table compares the main indices against which fund performance is measured. All figures are for the periods ending 9/30/05.