2nd Quarter 2007

Market Health Outlook

My mid-April letter indicated that I believed the overall stock market was fine but I was noticing some deterioration in key variables. I reasoned that it was possible that we would see a market pull back sometime this summer. It is typical for the market to pull back in the summer or early fall and if you look at the overall returns from July 2006 through June 2007 the market is up around 20%. So far we have not seen a market correction and it now appears as if there is a 50-50 chance we won't. After the crash of 2000 to 2002 I promised myself I would let people know my inside thoughts on the market and not be brashly optimistic at all times. I believed last quarter and still believe now that we will end the year with an overall positive return, but volatility could give us a ride in the short run.

The stock market has performed exceedingly well for the first six months of 2007. Looking at a couple of key drivers of the market, corporate earnings growth and growth of the economy, both did not increase as much. This is a concern but the market can be in an over-valued position and still go up in the short run.

The market is on pace to increase in value by 12% in 2007 and it increased in value over 13% in 2006. Corporate earnings increased around 8% on an annual basis through the first quarter. Economic growth also remains sluggish. Over the long run you would expect stock market returns to be closely linked to corporate profit increases.

Other key drivers of the stock market are interest rates and inflation. Both have been steady but the market has experienced increasing volatility in June as many people became nervous about the direction of inflation and how the Federal Reserve might react.

Stock market multiples are slightly higher than typical but not unreasonable. Currently the price/earning ratio is at 16.8 vs. a historical average of around 15. If the price investors are willing to pay for each unit of profits falls, the market could go sideways or down even if corporate profits rise.

The bottom line - The market has been on a great run since 2003 but the day is coming where it will stumble. Long term investors understand that short term trading in-and-out of the market is a foolish game and we are better off staying in the market through thick and thin. One in four years will typically be off, and if you happen to guess wrong and not be invested while the market is rising you lose more gains than you can ever hope to protect yourself from losing.

Overall I am not bearish but I am cautious. The market has become increasing volatile the past month and could go sideways into this fall. I am market neutral, which means I would hold onto current investments but new money coming into the market should be staged in over several months.

A review of key market factors:

Factor	Influences	Current Outlook
Inflation	Interest Rates & Profits	Neutral
Fiscal Policy	Interest Rates	Neutral & Frustrating.
Monetary Policy	Interest Rates	Neutral
Economic Growth	Profits	Sluggish - Neutral.
Earnings Growth	Profits	Neutral
Stock Valuations	(based on prices/earnings)	Solid - not overvalued
Exogenous (oil, Iran, etc)	Interest Rates	Bearish - High Bond Yields

I will continue to review the quality of your investments and the balance of your account vs. your risk tolerance and goals.

One of my core investment values is to buy and hold but don't buy and forget.

I spend time to review every account each quarter. If I think something should be adjusted I send out a personal note to explain the action we should take. With a buy and hold strategy there will be times when no action is required.

I hope you are enjoying the summer months and the recent 4^th of July. Regardless of your political views please remember our service men and women who are devoting their lives to protect the freedoms you and I enjoy on a daily basis.

Sincerely

Ron Dickinson, CPA, CFP, MPA-tax

"Never trade who you are for what you want"