July 2010

Shortly after we mailed our last quarterly reports, the equity markets began to deteriorate. As promised, we trimmed some of our positions with the greatest exposure to domestic and foreign stocks, and we are pleased with how well our portfolios weathered the 11.43% decline in the S&P 500 and 13.7% decline in the foreign index (EAFE) for the quarter.

Going forward, we remain concerned about high unemployment, the weak real estate market, and sovereign debt issues. The national unemployment rate has improved slightly, but this figure does not take into account those who have fallen off the unemployment benefits roster, or those who have given up looking for work. As long as employers are fearful about the future, they will not create jobs. Problems in the housing market are now spreading to the higher end consumer. Currently, 1 in 7 mortgages over $1 million are seriously delinquent or are in foreclosure. We now have 18 months of unsold homes in inventory, not including shadow inventory held by banks, and the average number of days a family in foreclosure is “squatting” in their own home is 449 days. The Fed just announced on July 14 that due to U.S. exposure to sovereign debt, the majority of Fed Governors agree that it may take another 5 to 6 years to pull out of the recession.

The good news is downsizing and cost-cutting measures have caused corporate earnings for the 2nd quarter to come in slightly above expectations, causing an upturn in stocks, however, most of this news has already been priced into the market. We will maintain our positions in sectors that are likely to perform well in this environment, and we have recently taken a position in a fund that invests in countries that have not experienced the level of economic difficulties that we have here in the U.S. We will continue to take advantage of opportunities in recession-resistant sectors, and keep a close eye on the data that may indicate an economic rebound is near. In the meantime, we will work to preserve capital and maintain the value of our portfolios so that when risk levels improve, we can increase our exposure to the markets.

John L. Brotherton, CFP®

Donna K. Brotherton, CFA