Economic Outlook……………………
- Credit Issues and the Housing Market
- The economy seems to be responding to the clearly troubled housing and credit markets.
- This is the worst downturn in the housing market since 1930.

A different approach this quarter for our newsletter……………………
- Shocks to the Economy
- The housing slump, the credit crunch and the spike in energy prices have caused volatility in the markets as inflation
worries intensify.
- Inventory of unsold homes is still up.

The third quarter was even more challenging than last quarter and volatility continues as we write this newsletter two weeks into October. Friday, October 10th, was historic. We had a 1,018.77 point swing from low (697 points down shortly after the opening bell) to high (322 points up less than half an hour before the close). Monday, October 13th, was the single largest up day with the Dow Jones soaring 936 points.

Happy New Year! As we begin 2009, we are delighted to share with you that Patti was once again selected by Washingtonian Magazine in their January issue as one of the area’s top Financial Experts. It is because of clients like you that we continue to get such wonderful recognition.

Shake, rattle and roll……………………
That may best describe the first quarter. Instability in both China and our own sub-prime market contributed to a volatile market environment. Geopolitical events in Iran and Iraq continued to unnerve investors.

A different approach this quarter for our newsletter……………………
Since so many of the issues remain the same as last quarter (high gas prices, recession in the housing market, interest rate uncertainty, and continued market volatility), we thought we would use this newsletter to discuss how we are incorporating this landscape in our investment management strategy.

Economic Outlook……………………
- Credit issues triggered volatility in markets.
- Credit issues spread to Europe.
- Housing market deteriorated further.

Economic Outlook……………………
- Credit and mortgage issues stole the spotlight in 2007.
- Banks are writing down bad loans in the range of billions of dollars.
- These write downs are causing a noticeable slowdown in the lending markets with banks forced to keep
cash to cover potential losses. This lack of liquidity in the credit market does not bode well for continued
economic growth.

Even in the winter, stocks show signs of spring……………………
Stocks had a good first quarter in 2006, with the S&P 500 gaining 4.2%, but the real standouts were smaller-cap, foreign stocks, REITs and energy. The Russell 2000 shot the lights out, gaining almost 14%. Foreign stocks rose 9.5%, with just over one percentage point coming from currency appreciation. REITs also had a huge quarter, gaining roughly 15%. In the face of steadily rising interest rates, the Lehman Aggregate Bond

Summer heats up as the markets swoon……………………
The markets bounced around quite a bit during the second quarter, with the S&P 500 reaching a year-to-date high in early May before sliding sharply, then recovering at the end of June to finish the quarter down 1.4%. The small-cap Russell 2000 Index dropped 5%, while foreign stocks managed a slight gain for the quarter. Value stocks continued their dominance over growth stocks in the second quarter while domestic investment-grade bonds were flat.

What you believe is often times guided by what you read and what you read can often times contradict……………………
Technical market measures will show that the market has gone too far without a correction as shown by thedata below. However, is this necessarily true?

Years come and years go……………………
But sometimes the issues remain the same. That is certainly true for 2006 and 2007. As we review our comments from a year ago (or for that matter - last quarter), we continue to focus on the same macro economic issues: 1) Housing 2) Federal Reserve Policy 3) Oil and energy and 4) Geopolitical unrest. There are some analysts who believe we are now experiencing a “Goldilocks” economy – not too cold and not too hot, just right…a soft landing, if you will – not a full blown recession. If Bernanke and the Federal Reserve governors believe that inflation is under control and that the economy is slowing at the correct pace, they will vote to leave interest rates alone. If consumer spending continues to slow (and the demand for goods reduces), prices should hold steady - slower growth means less worry about inflation. Reasonable corporate profits should be sufficient to help in this soft landing. Hopefully this should provide a solid foundation for the equity markets in 2007.

Now with 2004 behind us, what can we expect for the New Year……………………
Just as we thought, the 4th quarter proved to be better than any quarter last year. As the election results were determined, investors came back into the market. We ended the year up more than 10% on the S&P 500 with value leading the way. This certainly was good news for our equity allocations. So, what do we see going forward? Let’s start with the following assumptions:

The ups and downs of the market continue……………………
Stocks were down in January, up in February and down in March. Bonds were up in January, down in February and down in March. The only thing up in March was the dollar. All in all, these downward moves made for a painful quarter end. Why are we still experiencing such volatility? The answer lies basically in two areas – interest rates and oil prices. With higher interest rates and higher oil prices, consumers have finally lost confidence in the economy and are taking a break from spending. Families with less cash flow aren’t taking trips and aren’t buying big ticket items. That’s why retail numbers disappointed the street recently sending the market down over 100 points.

Up for the Quarter, almost even for the year……………………
So what should we expect for the rest of the year? Not much has changed in the direction of many of the important variables; oil is still on the rise, the Federal Reserve is still increasing rates and the deficit remains a concern. Despite this, we think the market is in for better days ahead. Corporate earnings continue to grow albeit at a slower pace than in the last couple of years. Inflation continues to be in check for both consumers and producers. Most predict that if the real estate market starts to moderate there would be only another rate hike or two warranted during this round of tightening by the Fed. This certainly would be good news for the market. However, there are still concerns that could derail us.

Weathering the storm(s)……………………
The 3rd quarter was anything but uneventful. Our country has gone through one of the largest natural disasters in its history and our resilience has once again been demonstrated to the world. It will take months to determine the extent of the overall damages of Hurricanes Katrina and Rita; but what is already clear is that the effects - physically, emotionally and economically will be felt for time to come. The personal loss for those either living in the gulf region or having family and loved ones in Katrina’s path is unimaginable. The outpouring of support from ordinary citizens and organizations has been heartwarming in the recovery. We have seen people who offered homes to victims who lost everything, others who offered money to those in need, and food and clothing to dislocated children and their parents. No one doubts that we will rebuild and that we will move on – that’s our way; that’s what makes our country so great.