News - February 2008

The news surrounding the economy and the financial markets has reached a crescendo, as evidenced by the late night talk shows’ focus on these issues. For example, the nightly satirical newscast, “The Daily Show with Jon Stewart,” has run several major segments humorously depicting the news media coverage of the slumping stock market, the mortgage crisis, and the slowing economy. Even with all of the inane political activity lately, they have set aside time to poke fun at the pundits and networks dedicated to reporting on the financial news.

A common phenomenon associated with the economic storylines is that, by the time these narratives reach the front page of the newspapers and the covers of the weekly news magazines, they have been accounted for. Thus, a casual observer of the financial markets or the economy may be encouraged to react based on events that have already been reflected in the markets.

As news of a soaring housing market or stock market makes the headlines, investors may feel obligated to get in the game. Conversely, if the news is negative, investors may feel compelled to avoid stocks or real estate. Reacting to the fear or exuberance generated by the headlines can often lead an investor to make poor investment decisions. We don’t necessarily blame the news media for reporting these events as much as the reactions that the news media may be inspiring, whether intentional or not.

One reason that it may not pay off to respond to the headlines is that analysts often try to use economic statistics to extrapolate predictions of stock market returns. In actuality, it’s probably the stock and other financial markets which are the leading indicators, rather than the inverse. We have seen the stock market sell off rather significantly recently only to be followed by some rather unenthusiastic economic reports on employment, consumer spending and economic growth.

All economic signs are indicating that we are in the midst of a dramatic change in economic growth compared to the level of prosperity enjoyed since 2003. However, it’s still not certain whether an official recession will develop or whether we are going to experience very slow growth and for how long. This lack of certainty is, in part, the source of the extreme volatility of the markets in early 2008.

The government reported that non-farm payrolls declined in January for the first time since 2003, as 17,000 jobs were lost for the month of January. The labor department also reported that the jobs created in 2007 were 376,000 less than originally reported, although the unemployment rate remains a respectable 4.9%. The preliminary Gross Domestic Product reported for the 4^th quarter was a mere 0.6%, although some had predicted a negative GDP recording by this point.

It appears that the employment and GDP data points are what encouraged the Federal Reserve to lower the Fed Funds Rate by 1.25% within the span of a week. The surprise 75 basis point cut was announced on January 22^nd following a sharp decline in foreign markets on January 21^st and 22^nd (the U.S. markets were closed on January 21^st for the Martin Luther King holiday).

The sell-off in the global markets may have also been a factor in the Fed’s decision to cut rates. The U.S. markets were poised to sell off as much as 5% on the morning of January 22^nd, but the Federal Reserve interest rate cut mitigated those losses. By the end of the day, the widely followed Dow Jones Industrial Average ended up losing just over one percent. The Dow 30 Industrials actually rallied in the neighborhood of 1,000 points from the inter-day low on January 22^nd through the end of the month, which included another 50 basis point reduction in interest rates by the Federal Reserve on January 28th.

Despite the rebound toward the end of the month, January 2008 was still rather uncomfortable and unsettling for equity investors. The S&P 500 was down 6% for the month while the Dow Industrials lost 4.5% and the NASDAQ fared worse at negative 9.8% for the month of January. The S&P 500, Dow Industrial Average and the Small Cap Index all bounced significantly after the January 22^nd trough, while technology stocks saw a somewhat muted rebound over the last several days of the month.

Contrary to last year’s trend, the value indexes (large, mid, and small cap) have all performed significantly better than their growth counterparts over the first month in 2008. The value indexes also produced negative returns for the month of January, but the losses were generally half of the loss for the growth stocks. This is a trend to watch as value stocks tend to do better while the economy is slowing and towards the beginning of the economic cycle. This is the first monthly period since December of 2006 that the value funds significantly outperformed the corresponding growth indices.

The U.S. markets outperformed the international markets for the month of January. The developed international market index was down 7.85% for the month of January while the emerging markets index was off 8.92%, as calculated by investing in the respective exchange traded funds. The U.S. dollar has stabilized somewhat, although it still remains, as of January 31^st 2008, near all-time lows compared to the Euro.

Financials have shown some signs of bottoming as a popular financial services exchange traded fund finished the month of January with positive performance of 0.73% for the month, erasing a 12% loss from January 18^th through January 31^st. It’s a highly contested position by pundits, economists and analysts as to whether or not the financials have indeed bottomed temporarily or permanently. Only time will validate which side of the argument is correct.

Retailer and homebuilder stocks also produced positive returns for investors for the first month of 2008 as the retailers ETF returned 1.92% while the homebuilders ETF returned a rather impressive 5.17% for the month of January. Commodity prices were mixed as the uncertainty in the markets continued to inspire investors to buy gold, pushing prices up to $935 per ounce from $837 as of December 31^st, while oil prices fell about $5 for the month as future fuel demand is questioned due to a potentially slowing economy.

There have been six recessions since 1970, and in five out of six cases, the stock market performance produced significantly positive returns during the six months immediately following the recession. During these five periods, stocks (as measured by the S&P 500) gained an average of 15.3% over the six month periods immediately after the recession. In these instances it was clear that stocks rebounded well before the actual economic statistics validated a recovery. In fact, in three cases there were actually stock market gains during the official recession.

The most recent recession of 2001, the lone outlier of the past six recessions, saw negative performance in stocks before, during and after the official recession. Obviously this period, being the most recent, is foremost in our minds. However, it is a good exercise to point out the historical numbers of recessions past. The high valuations for stocks compared to their earnings leading up to the 2000-2002 bear market forebode a much more dangerous position for the markets than we have today. In our view, current valuations are very reasonable today as the S&P 500 is priced only at 14 or 15 times 2008 earnings estimates.

Each period of stock market performance and the corresponding economic cycle is unique unto itself. Unfortunately, the exact timing of economic and stock market events is very unpredictable. Many experts will offer their predictions only to be vindicated at some point and declare their soothsayer-ship. We don’t believe that anyone can consistently predict these events, especially the timing of such things. The pessimists tend to warn of calamitous events regardless of what the market is indicating just the same as the optimists continually dismiss any warning in the market or the economy.

Whether you are an optimist or pessimist, we are assured that each point will be vindicated in the future again. This is not the last slowdown or recession we will see, and we are certain that the economy and the stock market will rebound in due time. Just last October, the S&P 500 and the Dow Jones Industrial Average hit all-time record highs; we are confident that those levels will be reached again. It’s the patient and diligent investors who will profit handsomely in between now and then.

Thank you again for visiting RollinsFinancial.com. We hope this update has been useful to you. Please email us and provide us with your thoughts and comments.

News - January 2008

The past year in business and investing will be remembered for the crises following the housing boom and bust, and subsequent bust within the financial services sector. By now even tangential observers of business headlines and economics are well aware of the problems facing homeowners, lenders and financial institutions who behaved irresponsibly. The year 2007 will also be remembered as a dichotomous year with respect to the large disparities in returns (both good and bad) generated by various sectors of the stock and bond market.

Commodity prices continued to break records during the month of December, underscoring the benefit of diversifying a portion of one’s investment portfolio in natural resources, whether directly or in those corporations that benefit from these trends. Investing specifically in oil and gold, which has become much easier due to Exchange Traded Funds tracking both prices, was very profitable for the year and for the month of December. The respective ETF’s were up 8.8% (oil) and 6.6% (gold) for the month of December, while the annual returns were 47.4% for the oil ETF and over 30% for the Gold ETF. In addition to buying these tracking securities, mutual funds and ETF’s focusing on energy and natural resources also returned over 30% on average for all of 2007.

It served investors well to avoid Financials, Homebuilders and Real Estate Investment Trusts (REIT’s) over the past year. The Financials were off 19%, the REIT’s were down 18% and the Homebuilders were down almost 50% for all of 2007. The Financials and REIT’s were both off about 5% for the month of December, while the Homebuilders actually ticked a bit higher over the course of the month.

A question that seems to be hampering the financials above and beyond the well publicized write-downs is to what degree their earnings are dependant on business lines related to mortgage securitization. A metric necessary to value companies would be their normalized earnings, which, in the case of the financials, may not be known for some time. Some banks and financials could, in fact, be selling for fire sales prices currently, but determining which just might be impossible until all the news is made public.

Stock market gains around the world may have been much more significant if not for the poor performance of the Financials. Emerging Markets, which provide many of those natural resources that are in such demand, have also had another banner year for investors. The Emerging Markets ended the year with gains of 33.1%, while the Developed International Markets finished with a 10% gain for 2007 after each pulled back 1.4% and 3.0%, respectively, during the month of December.

The broad U.S. indices were some of this year’s least spectacular performers. The S&P 500 ended the year with a modest gain of 5.5% and the Dow 30 Industrial Average fared a little better at a positive return of 8.9%, while the NASDAQ outdid each, moving ahead 10.6%. Financial institutions make up a significant portion of the broader indexes, which held their gains in check. The QQQQ ETF, which tracks the NASDAQ 100, rose 19.4% for the year, and amazingly, the majority of the gain can be attributed to the positive performance of just three stocks: Google, Apple and Research in Motion. The Small Cap stocks finished the year in negative territory at -1.75% and the Mid-Cap stocks were a little better up 5.1% for the year.

Looking forward to 2008 there are, as always, some questions and reasons to be optimistic. So far this year, however, the negatives have been on the forefront. The number of jobs being created on a monthly basis is now slowing significantly. For the month of December, the initial number of jobs created was a miniscule 18,000. The gains came from the government sector while the number of private sector jobs decreased for the first time since 2003. Economists are still divided as to whether a recession is in our midst or whether economic growth is temporarily slowing.

Employment remains the most significant factor in keeping the consumer strong. We have seen some weakness in the consumer as unemployment, while still very low historically, has ticked higher to 5%. We been pleasantly surprised that employment has remained as strong as it has during 2007 when you consider the housing woes and the related weakness with financial institutions. The relative strength in the overall employment figures indicates stronger job trends in other industries beyond housing and the financials.

This latest employment data point has greatly increased the chances that further rate cuts by Federal Reserve will be significant. There is now a good chance that the Fed Funds Rate and the Discount Rate will be lowered by 50 basis points in January, with additional cuts likely later in the year. Stocks typically perform well while the Fed lowers interest rates, although the timing, as always, can be nearly impossible to predict. We believe patient investors will be rewarded for staying invested in stocks over the next few years.

Investors have flocked to secure investments, selling stocks and higher risk bonds in favor of buying U.S. treasuries. As a result of the strong demand for U.S. treasuries, the yields on the shorter term U.S. government bonds have fallen to their lowest levels since 2004, dipping below 3% during the month of December. Spreads, the difference between high grade corporate debt and treasuries, have reached the highest levels seen since 2002. That widening of the yield spreads hindered some bond investments as higher yielding issues were less in demand.

Most analysts have opined that growth will be slower in the first half of 2008, as the lingering aforementioned issues that have impacted us during the last two quarters of 2007 provide an overhang into 2008. Many are predicting that we will work through these issues during the first half of the year and the growth will begin to improve in the second half of 2008. The government is expecting GDP to come in at a modest 2.3% for 2008, while this is slower growth these expectations are not currently recessionary predictions.

The persistent economic expansion in South America, China and India will continue to provide a positive influence for the U.S. economy and investors and multinational businesses. While admittedly there are many crosscurrents from the development in these emerging economies (e.g., higher worldwide commodity demand and a larger supply of labor), the benefits of additional consumers of American products and services are worth the costs on the whole. Clearly, some industries and labor groups are paying a large share of the cost associated with participating in the global economy, while the rest of society benefits.

These trends are evident in the political candidates’ rhetoric, especially the populist candidates making inroads in popularity. The market is going to react to the rhetoric surrounding the primaries and, eventually, the election itself in 2008. As the disparity between the “haves” and the “have nots” grows to levels not seen since the 1920’s, a more populist agenda has become popular in both major political parties. Most agree that if one of the more populist candidates were to win the election, it could be an additional headwind for the stock market. Others would argue that the populist rhetoric is just that: a political point of view intended to win votes.

Any major legislation significantly increasing the level of protectionism or significantly altering tax policy is probably unlikely, especially given the likeliest nominees. Furthermore, the checks and balances within the U.S. government provide some insulation against significant policy changes either way. We don’t believe that incremental changes in trade or tax policy typically have a profound impact on the economy or consumer behavior. However, significant changes in the current policies are a risk, but not something we believe is likely.

We look forward to the New Year as we are optimistic that the U.S. economy can weather the challenges in the year ahead. As always there will be peaks and troughs, but we expect the increasing diversity of our economy will provide some moderation to the current trough. Rest assured that Rollins Financial will be evaluating the investing environment constantly and will make every effort to position our investment accounts to benefit from the situations that are presented this year.

Thank you again for visiting RollinsFinancial.com. We hope this update has been useful to you. Please email us and provide us with your thoughts and comments.

News - November 2007

Another quarter, another correction for the stock market – or at least the first official correction by traditional definitions – although we have seen correction-like action in the stock market two other times this year. The monotonous, troubling news concerning falling home prices and falling valuations of securities backed by mortgages sometimes feels very unnerving. We are all undoubtedly growing more familiar with terms such as “CDO,” “CMO,” “sub-prime,” and “credit crunch.” In financial publications and our local business pages, there are several articles devoted to the subject each day. The one reaction that continues to strike us is how so many lenders, borrowers, mortgage brokers, and self-proclaimed Wall Street geniuses could be so completely foolish.

For years, specifically from 1992 through 2006, Americans had seen their home values steadily rising. In stark contrast, the S&P Case-Shiller U.S. National Home Price Index measured the national average of home prices falling 4.5% from the 3^rd quarter of 2006 to the 3^rd quarter of 2007. This marks the largest annual national decline reported in the survey’s 21-year history. Florida and California are the two notable regions where housing prices are suffering the worst, showing some locals with home prices over 10% lower than a year ago. This is not totally surprising since those locations also showed some of the largest gains before the real estate markets turned soft. It’s not unthinkable that poor real estate markets in these very populous states could have an affect on the economy as a whole.

There are some exceptions to the housing price declines, notably in parts of the Pacific Northwest and the Southeast, including Atlanta. Home prices in Atlanta, as reported by the S&P Case-Shiller report, continue to buck the national trend. Not only are prices not showing a year-over-year price decline, but they are actually still showing slight gains year-over-year. The survey shows prices gaining 0.4% over the past year compared to prices reported in the 3^rd quarter of 2006. The rate of increase in home prices in Atlanta is slowing, however.

Stock market volatility continues to flow more than ebb this year largely in response to the saga surrounding real estate prices and those securities associated with mortgage debt. The ebbs and flows of the market and volatility are becoming more regular and are in stark contrast to the tranquility experienced in the early part of the recent bull market from 2003 through 2006. The VIX, an index which measures market volatility, had been very tame in recent years following the tech bubble and burst culminating in 2002. We are seeing regularly occurring spikes in this measure this year as the bull market shows its age a bit.

During the late 1990’s and into the early 2000’s, the stock market was experiencing much greater volatility than we have experienced recently. The levels of volatility this year are still relatively low compared to what we had experienced in the late nineties and early in the 21^st century. Only recently, as the market has dipped three times this year while rebounding in the spring and earlier this fall, have we been getting the volatility levels that were commonplace from 1997-2002. The troughs in volatility during that period are coinciding with peaks in volatility of this year. How did we manage sanity during those volatile boom and bust periods? The numbers are larger now, because the indexes have grown to such high levels, which may make us feel as though volatility is even greater than it really is. The Dow Industrial Average needs to move about 130 points today to make a 1% gain or loss, while 10 years ago the 1% threshold was only 70 to 80 points.

For the month of November, the Dow Jones Industrial Average lost 3.8%, the S&P 500 lost 4.2%, and the NADAQ lost 6.9%. Again, financials and real estate related stocks have fared worse than the broader market. A popular Financial ETF lost roughly 8% of its value during the month of November and has lost 15% for the year. Large, and historically highly regarded, financial institutions like Citigroup, Merrill Lynch, Bear Stearns and Morgan Stanley have all lost between 30% and 40% of their market values since the first of the year.

The trend favoring international investments has remained intact, partly aided by the continued weakness in the U.S. dollar. The dollar has lost about 10% against the Euro this year, including a 1% drop in November. The dollar, like the stock market, did rebound some at the end of the month minimizing the losses for November. Emerging markets performed roughly in-line with the U.S. markets, while the developed international markets lost a relatively impressive 3.7% for the month of November.

The performance of the emerging markets is interesting in that during the previous market sell-offs, the emerging markets index had an exaggerated move down. Some analysts have questioned whether emerging economies can prosper even as the U.S. economy shows some signs of an impending slowdown. And if so, then investments in those markets may provide diversification benefits beyond additional risk and return potential.

The market would have been significantly deeper in the red had the market not rallied over a couple days near the end of the month. The Dow 30 Industrials tacked on gains of roughly 550 points, or roughly 4.3%, in two days of trading during the last week of the month. Despite the financials suffering losses, the broader indices are still safely in positive territory for 2007.

Technology, Materials and Energy stocks have exceeded the gains of the broader market, helping to boost the indices. Some have opined that these high-flying sectors could be vulnerable if the problems in the financials and real estate do, in fact, spill over to the economy and cause a recession or major slowdown. The fact that these sectors are holding impressive gains for the year could in itself be signaling that the economy will withstand the aforementioned headwinds.

The catalysts for the rebound over the last few trading days of the month were clear and numerous. It appears that the government is about to take a more active role in trying to mollify the financial markets. It has been reported that the Bush administration will try to broker a deal freezing some of the adjustable rate mortgages, allowing borrowers to keep their lower introductory rates on adjustable mortgages for up to seven more years. The Federal Reserve, including chairman Ben Bernanke, appear to be developing a more accommodative stance, signaling that further interest rate cuts are a good possibility. These developments late in the month of November helped diminish some of the losses in the stock market since the end of October.

Oil has dropped about 10% from the highs earlier this month and is hovering around $90/barrel as opposed to closer to $100/barrel. It seems difficult to comprehend the extreme volatility in oil lately without the explanation that speculation is taking control of that commodity price. Regardless of the explanation, it probably supplies the Federal Reserve with confidence that inflation will not explode if and when they reduce interest rates further.

GDP has continued to stay surprisingly strong as well as employment. The revised estimate for 3^rd Quarter GDP came in at 4.9%, which would be the highest quarterly growth rate in four years. One component cited in the government report is the impact of an improved environment for exporters, which is one of the benefits of a weaker dollar.

We would think that some effect of the housing and sub-prime issues would have shown up in the 3^rd quarter, although, according to the government statistics, that seems to not be the case. Such a good estimate for 3^rd quarter growth is encouraging in that it points to the possibility that recession can be avoided, while a slowdown in growth still seems to be the most likely scenario.

Thank you again for visiting RollinsFinancial.com. We hope this update has been useful to you. Please email us and provide us with your thoughts and comments.

News - October 2007

Commodity prices, especially those related to energy, are spiking yet again this year. Oil, which averaged trading at about $23/barrel as late as the year 2002, is now hovering around the $95/barrel mark. High oil and gas prices paired with a national downturn in housing prices (although figures vary significantly from one region to the next) and the fact that many of the largest financial institutions are struggling to value their financial assets might typically provide a backdrop for a sinking stock market, not a resilient environment for investors that we have seen this year through October 31^st 2007.

The conditions working in favor of a rising, healthy stock market have been the Federal Reserve aggressively lowering interest rates and the continuing growth in foreign economies. The Federal Reserve is trying to alleviate some of the pressure on financial institutions and individuals who are now sensitive to defaulting mortgage loans and a less liquid mortgage-backed securities market. The broader stock market has reacted positively to the lower interest rates. Interestingly, financial stocks, the focus of the rate cuts, continue to falter. As a result, many economic observers are expecting additional rate cuts necessary to stabilize the financial institutions.

Another situation that is increasingly covered by the financial media is the weakness of the US dollar compared to the other major currencies. The weak dollar is actually a beneficial component in the outperformance of our international investments. A weaker dollar is a predictable response any time the Federal Reserve reduces interest rates while other nations are raising or keeping rates constant. As we have discussed, a lower US dollar benefits those US companies exporting goods and doing business abroad. Positive currency effects, from a weak dollar and strong foreign currencies, generate additional value for US investors of foreign entities and corporations.

Another cursory effect of a weaker dollar is its affect on dollar denominated commodities. Some have voiced the opinion that commodities priced in dollars (like oil and gold) are rising simply as a natural offset to the weakening of the US dollar compared to other currencies (as the dollar goes down, commodities tend to go up). Higher commodity prices are benefiting many companies trafficking in such businesses and their alternatives. Some argue that commodity prices are artificially high and have risen in part from speculation.

In addition to the currency effects, old fashioned supply and demand theoretically should have the most significant affect on commodity prices. Some are astonished that energy and commodity prices can rise while many of the developing countries economies show some signs of slowing. That observation may actually point to higher future commodities prices, as we try to gauge the impact on prices when (and if) the US, developed Europe and Japan experience higher economic growth in the future.

One question that may be on investors’ minds is why inflation has not been more pronounced in the wake of higher materials, agricultural and energy costs, and how is it that the economy can sustain fairly healthy growth when food and energy prices are rising. Productivity and technological progress are two major influences that enable the economy to gracefully absorb these potential pitfalls. As society makes technological progress, we become more efficient users of natural resources. While many individuals choose to drive vehicles that are not much more fuel efficient than cars and trucks of the past, we certainly do have more options and can transition to fuel efficient vehicles if higher fuel costs become a burden.

October saw the Dow Jones Industrials achieve all-time highs before settling October 31st at just 70 points below the 14,000 milestone. The quick action in the markets signifies precisely the concept cited by market theorists who say that timing the market is nearly impossible and that staying consistently invested is typically the most prosperous strategy. Of course it’s essential to stay broadly diversified across many sectors and assets classes because the different groups within the market fall in an out of favor as economic conditions and sentiment evolve.

Since the Fed unexpectedly cut the discount rate in August, the Dow Jones Industrials and the S&P 500 have advanced 8% while the NASDAQ has advanced a stellar 16% in only 2½ months. For the month of October, the S&P 500 gained 1.6%, the Dow Jones Industrials advanced 0.4%, the NASDAQ added 5.9% and the Russell 2000 (small cap stocks) gained 2.9%. All of the major large cap indexes are in the black by at least 10% with the NASDAQ advancing a very strong 19.1% for the year. Growth significantly has outperformed value during the year and that trend held during the month of October.

Emerging Markets continue to significantly outperform the domestic stock indices. A popular Emerging Markets ETF returned 11.87% for the month of October and has advanced 46.17% for the year. A notable catalyst to the Emerging Markets gains is the well publicized performance of Chinese stocks this year. An ETF tracking 25 Chinese stocks has nearly doubled since the beginning of the year, increasing by an incredible 96% and an equally astonishing 21.39% just for the month of October. Many analysts and prognosticators have expressed the opinion that Chinese stocks are entering bubble territory. Valuations in China are much higher than is typically sustainable, however the Chinese economy continues to grow at staggering rates. The developed international markets have also done well making 17.59% for investors year-to-date, and 4.25% for the month of October.

As would be expected with commodity prices rising, the energy and commodity stocks are doing very well this year, outperforming the broader market. A popular ETF consisting of energy related stocks has gained 32% for the year, rising 2.5% in the month of October. An ETF tracking actual Oil prices has increased 42.59% this year while an ETF tracking a basket of commodities has moved ahead 13.69% for the year and advanced 3.46% for the month of October. Materials stocks, which tend to benefit from a strong global economy, and demand for raw materials have also bested the broader market, gaining 27.3% for the year and returning 4.16% for the month. Technology stocks are once again starting to garner some attention as the NASDAQ 100 tracking ETF has moved higher by 27.8% for the year and 7% for the month of October.

Financials and Real Estate, as we have previously mentioned, along with retail stocks have been laggards all year long. The retailers have both high energy prices and weakness in home prices working against them, but retail stocks do may perk up if energy and commodity costs trend lower. Real Estate is showing some signs of an improved environment as the Federal Reserve has shifted towards a lower interest rate policy. Even though REITs are still in negative territory for the year, they have done much better over the past three months gaining 13.05%.

Thank you again for visiting RollinsFinancial.com. We hope this update has been useful to you. Please email us and provide us with your thoughts and comments.

News - August 2007

When is the market merely correcting versus predicting upcoming economic difficulty or even a recession? Corrections can be great buying opportunities where additional equity investments are rewarded. To the contrary, it could be that the cause of the correction is a foreboding sign of systematic economic issues that validate the correction. Amid the uncertainties, one thing we know for certain is that when the market corrects 10% within a few weeks (as they did in July), it is signaling that risk levels have been elevated. Additional investments can be rewarded handsomely. Of course, accompanying those possible rewards is increased risk, which is either real or perceived.

Navigating these questions and making investment decisions based on the data and risk assessments is at the crux of what an investment advisor is about. Even the most accomplished investment analyst or commentator cannot with any certainty time these events, correctly predict the degree of a correction or with complete accuracy provide an analysis of how the events will unfold for the broader economy over a longer period of time. It’s more appropriate to provide probabilities on how these events will play out, realizing that any scenario is not absolutely certain.

The current correction is reminiscent of the corrections in the late 1990’s. In 1997 it was the “Asian Contagion” and in 1998 there was the Long Term Capital Management hedge fund that collapsed because of issues with Russian debt. The US stock market reacted sharply to both of these events, but the corrections did not last, as they did not have a great effect on the US economy. Looking back, those who invested in those uncertain times were rewarded handsomely (and relatively quickly). Remember how the markets sold off in February, 2007 due to the Chinese sell off, but recovered rather quickly to reach all-time highs?

There is a possibility that the current correction could be more significant due to its relation to home real estate prices. Homes and real estate are significant assets for most consumers and investors. But again, there are a number of opinions and variables to be considered when evaluating the current situation. What will be the effect of a prolonged period of falling home prices, if that materializes? Will falling or stagnating prices, if any, have an effect on the broader economy if they are felt regionally, not nationally?

Unlike the potential reduction in home prices, the “sub-prime” and credit issues hampering the banking and lending institutions are not expected to have a great impact on the broader economy. The financial firms who make loans, securitize mortgage loans, sell derivatives of these products, or make any investments in these products are likely to suffer some negative effects. The amount of “sub-prime” loans and lack of liquidity are relatively insignificant issues that should be resolved quickly without a major lasting effect. However, there are many other sectors of the economy that will feel a greater effect based on the level of housing prices.

The homebuilders are the most obvious group of companies that will be impacted by tougher lending standards and sluggish or falling home prices. They have already seen their profits evaporate and are now reporting losses on a quarterly basis. Other retailers may not see their profits disappear, but the expected growth in profits may not materialize.

Over the last month, market volatility was even higher, evidenced by 14 days of 100 point moves for the Dow Industrials. Despite all of the concerns over the past few months, the market was actually slightly positive for the month of August. The Dow gained 1.3% for the month while the S&P was up 1.5%; the NASDAQ achieved a gain of more than 2.1%; and the small cap stocks showed some strength gaining 2.3%. Thus far for 2007, the Dow remains a leading index at a positive 8.7%; the S&P 500 is at 5.2%; the NASDAQ is at 8%; and the small cap stocks are up only 1.4% for the year.

We have continued to see a shift from “value” investing towards “growth”. Within sub-sectors of large-, mid- and small-cap stocks, the growth subsets are well outperforming the value stocks for the month and for the year. This trend, which we have discussed before, is typical in the economic cycle. As the overall growth rate of the economy begins to slow, it becomes more difficult for slower growing companies (“value” companies) to achieve earnings expansion. Hence, investors tend to prefer those companies that are innovating and have the potential to organically grow their profits.

Mid-cap stocks, which have been in the “sweet spot” for much of the recent buyout activity, have underperformed for the month. As some of the recent takeovers have come into question due to the tightening credit environment, we have seen the mid-cap stocks struggle.

International stocks did not make it into positive territory during the month, as both the developed foreign market index and the emerging markets were down 1.6% and 0.6% respectively. Foreign investments may have been weak partly due to the fact that there was such a great “flight to quality” over the past month. Short-term US treasuries were in demand as yields fell to under 3.5% during the middle of the month, ending at just over 4.0% on August 31^st. This “flight to quality” may have helped the dollar gain some strength, which is a detriment to the foreign currencies and, therefore, investments in foreign equities.

These low treasury yields are implying some significant Federal Reserve actions to lower interest rates over the next few months. Potentially aided by the prospect of lower rates, Financials and Real Estate have reversed their downward trend for now, with gains of 1.5% and 6.4% respectively for the month of August.

While September is historically a difficult month for the stock market, there are some reasons to be optimistic. First, we expect Ben Bernanke and his FOMC mates to follow through and lower the Fed funds rate, which will hopefully slow the rising rate of home foreclosures. It only seems fair that if the Fed is willing to help the big banks who are struggling with credit issues by lowering the discount rate, then they have an imperative obligation to also assist those single family homeowners and consumers who are also struggling. We are not condoning irresponsible lending or borrowing, but we do support the Fed taking action to take some of the sting out of the current situation.

Insiders purchasing shares of stock is another reason for us to be optimistic this fall. The level of insider buying has some analysts citing that these are the most bullish insider purchases since the fall of 2002. Obviously, the executives and CEO’s would not be aggressively buying their company stock unless they believed their prospects were good. Some of the buying has been concentrated in the financial sector, which has suffered the most because of the sub-prime fallout.

We do see some increased risks to the economy and our investments as we navigate though this uncertain period, and as such, we are a bit more cautious in the near term. Over the long term, we expect the lower interest rates to stabilize the credit markets and housing prices. We may see some disruptions in certain sectors most closely related to these issues, but the long-term effects should be minimal. A slightly more conservative portfolio with an increased emphasis on fixed income investments and consumer staples investments may be appropriate for a relatively risk averse investor.

We are also excited to be approaching the best time of year for equity investments – November through May of each year. Fortunately, that seasonally strong time of year is just around the corner.

Thank you again for visiting RollinsFinancial.com. We hope this update has been useful to you. Please email us and provide us with your thoughts and comments.

News - July 2007

The credit markets have been spreading a wave of worry through the financial markets over the past month. Well documented issues with mortgage lenders and the housing market have been rippling through the financial services sector. There have been a few cases where a hedge fund or mortgage lender have been exposed to having taken on too much risk and have collapsed. But by and large the overall extent to which many of the most recognizable financial institutions are exposed to these issues remains unknown.

That uncertainty has spread through the debt and equity markets as investors require higher returns from bonds and have sold off many stocks in the near term. Two hedge funds run by the Wall Street firm, Bear Stearns, have been exposed as being nearly worthless. The funds were invested in mortgage products, but it appears that the funds were highly leveraged. The high degree of leverage more precisely lead to the downfall for their investors. That revelation along with general sentiment has put into question which other Wall Street firms and financial institutions could suffer losses related to mortgage loans, hedge funds and structured products that invest in these mortgage products.

The majority of the loss, however, is not necessarily attributable to Bear Stearns, but those who invested in these hedge funds. The financial institutions may face future litigation and will certainly lose some future management fees associated with these products. The fees are generally minimal in the context of the revenues and earnings these companies generate. The other negative consequence could be a lack of reputation which could linger on for some time.

As current investors have required higher returns for their corporate bond investments, current holders of corporate debt have seen their principle diminish. Many high yield bond funds lost over 3% for the month. As stocks slid during the month also these high yield investments didn’t provide as much protection or diversification as investments in risk free US treasuries.

Government bonds performed well for the month as investors chose to swap out of higher risk bonds and into safe secure US treasury bonds and notes. The yield on the 10-year treasury quickly retreated from the recent high of 5.3% to well under 5% again towards 4.8%. Rates coming back down seem to indicate that the Fed may need to lower rates in the near future instead of raising or standing pat.

The recent stock market events have definitely been taking their cues from the bond market. The government said that the annualized GDP growth in the second quarter was 3.4%, which was higher than expected, and marked the fastest economic growth since the first quarter of 2006. Consumer spending was lagging though as record setting oil prices and a reduction in home equity withdrawals seems to finally be taking its toll on the American consumer.

Many economists and analysts have remarked that the global economy is in the best shape as they have ever seen. The strength in the global economy continues to bring along the US economy from our perspective. While the declining dollar has some negative implications it also helps US exporters sell US manufactured goods at cheaper prices abroad. This should help reduce the trade deficit to the benefit of many manufacturers and workers here in the US.

For the month the large cap stocks held up much better than the smaller capitalization stocks, while commodities and international stocks held up even better. S&P 500 was down 3.1%, the DOW Jones Industrials was down 1.4% for the month of July. The Russell 2000 index of small-cap stocks retreated 6.8% and the mid-cap stocks were down 4.3%.

Financials and Real Estate related securities continue to be notable underperformers for the month and for the year as rising interest rates and the issues surrounding mortgage lending continue to hamper these two specific sectors. A popular financial services ETF was down about 9% for the month of July and is down about 8% for the year through the end of July. A popular Real Estate ETF was down over 7% for the month and is down a whopping 15% for the year through July 31^st.

Although the financials, the largest sector in the market, have struggled the overall market has done reasonably well. There have been many headwinds to the market this year, but the S&P has advanced 3.6% for the year and the DOW Jones Industrials have managed and even better 7.3% gain from January 1^st 2007 through July 31^st 2007.

Technology, Telecom, Utilities and Natural Resources have all outpaced the gains in the broader indices. Exposure to international markets also continues to be beneficial to investors as the developed markets have gained nearly 8% year to date and the emerging markets have returned 15% through July 31^st.

Thank you again for visiting RollinsFinancial.com. We hope this update has been useful to you. Please email us and provide us with your thoughts and comments.