9.30.20052005-Third Quarter Client Economic Update: The Economy is Alive and Well The US economy continues to surprise the media and investors with its strength as real GDP increased 3.3% in 2nd Quarter of 2005. Although the economy was extremely strong prior to Katrina, don’t be surprised if we see economy weakness reported for September due to Katrina. With over $1 Billion donated to the American Red Cross and other organizations assisting in the Katrina disaster, consumers were left with less money to spend for themselves. For example, a local auto dealership had its slowest month since September 2001. If this is any indication, corporate profits and economic news could be weak in the coming weeks. Any weakness appears to be temporary as salaries for the 135 million US workers subject to withholdings are up 6% and non-payroll individual federal withholdings are up 25%. When combined, individual’s federal tax payments are up 10% year-over-year. Corporate income tax payments are up 34.9% from last year. This is precisely why the federal deficit is not as negative as once projected. Additional support for the US economy is the growing number of new jobs available to the public. Want ads and online job postings continue to grow. Market Update: Higher Interest Rates Since Katrina, individual investors have soured on the stock market. The American Association of Individual Investors reports that bullish opinion has dropped to 31.9%, while bearish sentiment has risen to 39.1%. The UBS Index of Investor Optimism plunged 27 points from 61 in August to 34 in September. This indicator is at its lowest level since March 2003, the beginning of the Iraqi War. As investors go one direction, the market tends to go in the opposite direction. We anticipate interest rates to continue moving higher. Here are nine reasons: (1) optimism has crept back into the US bond market; (2) inflation is at a 14-year high; (3) global commodity prices are rising (4) gold is at an 18-year high; (5) US dollar is instable due to deficit and trade imbalance; (6) global manufacturing capacity is diminishing; (7) the economy is growing; (8) US Federal Reserve wants to continue raising rates to combat inflation and the real estate bubble; and (9) corporate profits are at a record high. Portfolio Update: Avoid US Large Company Stocks Three months ago, we predicted the stock market would move out of its trading range over the past 18 months. It did, but only temporarily! The market traded above the range in July, but it has since sold off and it has moved back into the same trading range. In 2005, most of our investment success has come from areas other than US stocks. We have over-weighted portfolios with international equities, international bonds, emerging market bonds and equities, utilities and real assets: oil, timber, and other commodities. Each has contributed positively to your portfolio. International equities are consistently up over 10% year-to-date. Commodities are up over 20% year-to-date. The worst performing asset class continues to be US large companies, a favorite asset class of most other investment firms. As we have mentioned over the past year, investors continue to withdraw money from US large company stocks and put it into US small company stocks, international stocks, and commodities. After hurricane Katrina, oil prices are lower than before the hurricane. The primary law of economics, supply and demand, is beginning to take hold. Consumer demand is decreasing due to the high prices. As the price of oil rises, consumers search for ways to use less oil. Along the same theme, the price of used sport utility automobiles has decreased. Secondly regarding the supply of oil, the oil companies can reduce their drilling risk by locking in high oil prices and locking in profits for 10 years. Now oil companies can increase their drilling efforts, which will increase the supply of oil, which will push down energy prices. As a result, I believe oil investments won’t be as profitable as you might think as oil prices should begin easing. Thank you for your continued trust and support. Trevor K. Holsinger, CFP