10.29.20072007 3rd Quarter Client Newsletter Economic Update: Continued Growth The US economy has strong momentum heading into the fourth quarter. In the 3Q2007, income tax withholdings rose 6.3% and non-withholding income tax rose 10.3%. In the past year, personal income is up 6.8%. Since the consumer is 70% of the economy, it is no coincidence the economy, as measured by actual Gross Domestic Product, is up 7%. The consumer is fully employed and continues to spend money. As long as the consumer remains employed, the economy should continue to be strong. The consumer is more employed than even the Bureau of Labor Statistics estimates as they continue to revise their estimates upward. In the last nine months, BLS estimates job growth totaled 1,073,000 jobs. An even more bullish perspective comes from Trim Tabs who estimates job growth has been 1,507,000 jobs. Market Update: Cash (is) was King! Hyman Minsky, a famous economist from the 1920s, said “stability breeds instability or stability is destabilizing. Free-market economies, even though very innovative and productive, are intrinsically unstable. The longer things are stable, the more likely investors are to become complacent and risk premiums drop.” The drop in risk premiums can be translated to mean securities are expensive and vulnerable to losses. This is precisely what happened this summer. The equity markets went from reaching new highs to panic selling, and then back to new highs. The market returns were very deceiving, because the markets panicked in August, but you would have never known it based on equity returns. An example of the panic in August is one-month US Treasury yields went from 4.5% to 2.5% in just one week as investors sold risk (assets) and purchased the least risky asset --- one-month US Treasuries. This was a massive flight to quality and move in yield. With the market back to new highs, investors are piling back in at an alarming rate. Stability is regaining its grip on the world. Over the past 6 months, when the bullish percentage is low and the bearish percentage is high, the market (S&P100) rocketed higher. Now the opposite is true, the bullish percentage is almost off the chart and the bearish percentage is near the bottom. From a contrarian perspective, the risks have risen …. again! Portfolio Update: The Nasdaq is back in favor The Nasdaq peaked in March 2000 at 5,132 and fell to 1,108 in 2002. After seven years of lagging other indices, the Nasdaq is now leading the market. The Nasdaq remains over 40% below its highs as the Dow Jones Industrial Average, S&P500, and Russell 2000 are at all time highs. The new market leaders are large growth companies as we predicted exactly one year ago. I expect short-term volatility and potential risk; even though, I expect this multi-decade bull market to continue for a couple more years. Thank you for your continued trust and support. Trevor K. Holsinger, CFP