9.30.20062006 Third Quarter Client Newsletter Economic Update: Where is the recession? The economic slump the bears have been predicting for months is not materializing. Based on income tax withholdings data from the Daily Treasury Statement, the wages and salaries of all those on payrolls jumped 6.8% year-over-year during the past four weeks. This growth rate exceeds the 6.3% year-over-year growth rate during all of 2005. This is further confirmed by the Congressional Budget Office (CBO) reporting federal receipts in fiscal 2006 were $253 billion, 11.8% higher than receipts in fiscal 2005. For the most part, the economy appears to be doing well, and is firing on most of its cylinders. One mis-firing cylinder, however, is a reduction in trucking volumes. Late summer usually signals the start of the trucking industry's peak season, a time when retailers load up their shelves in anticipation of the holiday shopping season. In August of 2006, shipping volumes dropped 2.1 percent; last year at this time volume was up 0.8%, even with high oil prices and fuel costs. Market Update: Rally without investor buy-in The US market is rallying without individual investors and mutual fund managers buying. This is a very bullish sign. Mutual fund cash balances have risen to 4.2% of assets. Typically, mutual funds want to be fully invested, because they don’t want to under perform the stock market. Cash balances represent potential buying power that could move the stock market higher. The last time cash levels were this high was in November 2004. In November and December 2004, the S&P 500 popped 7.2%. We are entering what has historically been the best investment period: the 3rd year of a US Presidential term. Third year out-performance begins now, in the fourth quarter of the second year. The third year historically exceeds the average by almost 8%. Unfortunately, the third year is typically better when a new party occupies the office versus a re-elected party. The following chart illustrates the average returns by Presidential Cycle year. Portfolio Update: Time to stop avoiding US Large Companies The Nasdaq 100 and the S&P500 have not been the places to invest for over 6 years. Investors have been compensated for avoiding stocks in these two indexes. For example, the Dow Jones Industrial Average just set a record high on October 10 at 11,930. The previous high was January 2000. It took 6 years and 9 months to achieve a new high. The Nasdaq 100 reached its high in April 2000. Currently, it trades at 1,690, 62% lower than its high 6 years ago. Alternatively, US small companies have attained new highs in 2003, 2004, 2005, and 2006. For the first time in six years, virtually nothing beat US large stocks this last quarter. We don’t like swimming against the tide. As a result, after under weighting large companies for six years, we are increasing your US Large Company holdings. Individual investors haven’t bought into this rally. If the economy stays the course, eventually they will add capital to equities. When they do, we could see a powerful rally. The magnitude of the rally will depend on whether individual investors buy-in. The party has started; the question is when will they arrive? Thank you for your continued trust and support. Trevor K. Holsinger, CFP