June 2008 - Quiver Quarterly

Boy oh boy, things keep getting more interesting. If you are wondering what I mean you won’t have to look much further than the current financial headlines to get an understanding. Similar to most of my weekends I invested this past Sunday lying in my hammock reading over the recent business headlines. As I read headline after headline I couldn’t help but to feel as if Armageddon was around the corner. Headlines such as “The worst June since the Great Depression” or “June 08 on track to be the 10th worst month in market history” and “Oil prices touch $140 a barrel” caused me to feel more and more uncomfortable.

The only solace was the fact that we began taking much of our profits from April and May’s rally early in the month creating the largest allocation in money market within our accounts in the midst of these headlines. In response and respect to the market headlines I will cut to what counts and talk specifically about your account performance in this environment and where we go from here.

Account Performance vs. Market Performance
Let’s begin by looking at the market’s performance for the past month as well as year to date. Below is a breakdown of the market returns followed by the returns of our managed accounts.*

As you can see by our performance we are benefiting by allocating over 30% of our accounts into energy and commodity names which helps make a scary headline like “Oil Touches $140 a Barrel” a profitable headline for our accounts. Throughout the month we have increased our cash positions by liquidating our investment in financials which we purchased in April when it looked somewhat probable that a market turnaround was possible. Following our belief from May’s Market Review that the top range of the Dow Jones was near 13,000 we played the short side of the market as the Dow dropped from 13,000 to 12,200 providing us a hedge early in the month helping our accounts to outperform the market for the month as well as the year.

However, in this business it is less important where we have been as opposed to where we are going. It is obvious that there is a drastic repricing of all assets worldwide. Everything from corn and oil to real estate to stocks and bonds are being repriced to reflect the environment Wall Street feels is around the corner. This means the trading ranges I spoke of in the May Market Review go to the wind as we wait for the market to tell us where the new bottom will be. With the Dow Jones breaching the lows it created in March it is likely we will see the S&P 500 do the same in coming weeks causing another leg down in this market with possible declines of 7 to 10% in the near future. In response to this we are selling any strength we find and using the bear market funds where available as well as maintaining our holdings in commodities as the trend has been a lower market and higher commodity prices.

As with any thesis there is always a threat and the most likely threat to my thesis of a weaker market and stronger commodities is second quarter earnings. In the event second quarter earnings and the guidance provided is healthier than expected we could see the market rally which may cause us to reevaluate this theory. However, it is my opinion that even an earnings inspired rally would only move the markets slightly higher lacking the ability to change the downward trend the broader markets have developed.

Things to Watch
With the news cycle being as negative as it has been it is easy to forget that there is a bull market somewhere. Currently the bull market resides in the areas of Natural Resources, Energy, Energy Services, Basic Materials and Agriculture and as a result these sectors will continue to earn our cautious attention as eventually these sectors could fall victim to the bear as well. In tandem we will continue to monitor the dollar as June proved to be a rollercoaster month with a significant rally early in the month succumbing to selling pressure towards the end of the month. This Thursday will provide us with more insight on the direction of the dollar as we will hear whether the European Union will raise rates. In addition to the dollar, our eyes will be on the forthcoming earnings season and the guidance provided as this will contribute to the markets moves in coming months. Specifically we will be most concerned with the effects oil prices may be having on company’s earnings.

Stoking The Bears Fire
Over the past month the market’s performance has provided logs to the bear’s fire. Investing in this environment is unique and can be profitable once the trend starts to pronounce itself which is apparently developing. While the headlines I read in my hammock provide a bleak horizon I am reminded it is when the headlines are the worst investors with cash and a keen eye find the most profitable longer term investments.

As always we have attached or enclosed your most recent account values. Please review them at your convenience and feel free to contact me with any questions or comments you may have.

Warmest Regards

Colby McFadden

*Performance listed is for accounts which have followed the group allocation changes since 1/2/08 your actual performance may vary.

**The opinions expressed are those of Colby McFadden as of 6/30/08 and are subject to change based on market and other conditions.

***The S&P 500 Index is an unmanaged index of widely held common stocks that reinvests all distributions. It is not possible to invest directly in an index.