Marketing Commentary- Q3 2007

What’s Been Happening?

The third quarter will be remembered for its volatility. The broad US stock indexes peaked in mid July, sagged in mid August and recovered nearly all of the losses by the end of September. The charts look similar to the tracks on an amusement park roller coaster but the ride wasn’t nearly as fun.

Emerging Market stocks were the only asset class that continued to rise by double digits largely avoiding the problems spurred on by the subprime mortgage meltdown. In every other area, risk has recently been “repriced” with investors back to demanding significantly higher returns/yields from riskier assets. A flight to quality drove up the prices of safe US Treasury bonds while jumbo mortgages, for all but the most creditworthy homeowners, became difficult to obtain.

Trends to be Aware of

Housing plays a big part in investor psychology, and the housing bubble is unwinding in America . According to Reuters, foreclosures are up 99% from a year ago September, with the worst carnage in California, Florida and Ohio. August marked a 32 month peak in foreclosures. ForeclosureRadar founder and CEO Sean O’Toole said. “Now that nearly half of foreclosures represent non-owner occupied properties, it is clear that speculators are walking away too.”

September saw decreases in foreclosures across 39 states, suggesting a broad retreat may be under way, according to RealtyTrac. But housing forecasts are grim, and causes behind foreclosures such as rising payments on adjustable-rate mortgages are still being played out. Payments on some $650 billion in ARMs are slated to reset from the current quarter to the end of 2008, according to Lehman Brothers Holdings Inc.

What To Expect From Here

Despite the recent market volatility, we believe the world’s stock markets remain reasonably valued. If we are now in a period of falling interest rates, in part engineered by our Federal Reserve, we would expect the dollar to continue to fall relative to other currencies. This provides a tailwind to our International stocks and should help out US manufacturing exports.

So far, Fed chief Bernanke seems to be steering the large US economy with a steady hand. While the slowdown in the housing sector continues to be a cause for some concern, we note that less credit sensitive sectors such as technology are doing well with the Nasdaq Composite Index up 12% this year so far.

Some Numbers for Comparison:

The following table compares the main indices against which fund performance is measured. All figures are for the periods ending 09/30/2007.

Source:  Thomson Financial