1.15.20082007 4th Quarter Client Newsletter January 2008 Economic Update: How slow will we go? Yes, the economy is slowing down because the banks are denying credit to a wide range of consumer and corporate borrowers. They are making it difficult for businesses to carry inventory, which causes them to defer capital spending. A reduction in inventories and capital spending will domino through the system. This will cause an economic downturn. The downturn won’t be consumer lead, although in the end, the consumer will be affected. The story of 2008 may be the increased competitiveness of US companies. The recent decline in the value of the dollar has made US manufactured goods cheaper and foreign goods more expensive. As foreign currencies have appreciated in value, it takes less Euros, Pounds, or Yen to purchase US manufactured products. Alternatively, foreign goods are more expensive for Americans to purchase. As a result, US exports are soaring. This trend should continue and more attention will be placed on the competitiveness of American businesses. The lower dollar may be the only chance we have to avoid a recession. Market Update: Pessimism prevails Investors are pessimistic and they are beginning to show concern for the stock market. I expect investors to panic more in the coming weeks until all the bad news from the financial service companies has finally been divulged. This correction is creating a great buying opportunity to put our elevated cash position back into the market at lower prices. Here is a little ray of hope. In the past 60 years, there were 10 years when the economy has grown by 1% or less. In 8 of the 10 years, the S&P has moved higher. 6 of the 8 annual increases coincided with periods during which the Federal Reserve was dedicated to a rate-cutting campaign. Since the 1950s, the Fed has cut rates at least 3 times consecutively on 12 different occasions. In 11 of these instances, higher stock prices followed with an average annual gain by the S&P of 19.2%. There were 6 years when both the economy grew 1% or less and the Fed cut rates 3 times. During these 6 years, the average gain in the S&P was 23%. There is a good chance both of these will occur in 2008! Portfolio Update: Playing it safe, but not for long Early last year, we sold our small company stocks, because the risks were greater than the rewards. The Russell 2000, a small cap index, is down 21% from its 2007 highs. During the 4th quarter of 2007 we sold more equities and raised cash in anticipation of additional volatility and downward pressure. The fixed income, housing, and financial markets were all in disarray as the equity market was near an all time high. This didn’t make any sense to us. Therefore, we took a conservative stance. I expect additional short-term volatility and downside risk. It has been our experience that market extremes filled with stress, uncertainty, volatility, and fear tend to be times to invest. The market is in the process of creating stress, uncertainty, volatility, and fear. I believe there is more to come in the next couple months. In the intermediate term, 1 to 2 years, I think the market will set new highs, but it won’t be until late 2008 or 2009. It will pay to be conservative and wait for this period of uncertainty to subside, then expect the stock market to move higher one last time before the sun sets on the baby boomer driven 25-year bull market. Thank you for your continued trust and support. Trevor K. Holsinger, CFP