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July 1, 2010    
    
                                                            Treading Water

After an encouraging start, the first six months of 2010 turned into a disappointment as the market went into a corrective
phase.  The S&P 500 Index started the year at 1115 and ended at 1031 for a net loss of 7.6%. Swings in investor
sentiment prompted numerous changes in direction with no one theme dominating market action.  The strong advance
registered from early February to late April failed to hold as the market gave back all of its yearly gains and then some,
in May and June. While disappointing, we are not all that surprised that the market has experienced what, to date, has
been the “modest setback” alluded to in our January newsletter.  The question now is, have recent developments such
as European financial instability, a potential slowdown in developing economies, and the gulf oil spill conspired to slow
corporate earnings.  We believe that the earning recovery will continue despite these added headwinds, although at a
somewhat slower pace than previously thought.














The chart above tells the price story, and readers should note the dramatic increase in volatility in the closing weeks of
the first half just after the “flash crash” of May 6.  Big daily swings in stock prices is nothing new, but the almost 9%
intraday decline from the prior day’s close set off a flurry of investigations to find out why.  While there is no definitive
answer yet, it has been speculated that large order entry errors closed listed exchanges for a brief time, causing sell
orders to be re-routed to thin electronic markets. Whatever the cause, headline-grabbing swings in stock prices are
hardly conducive to an inviting investment climate.

Foremost on investor’s minds these days is, “how long will this go on?” While we wish we could provide a definitive
answer, be sure that we share your frustration at the lack of forward progress.  To add some perspective to the current
malaise, let’s review some history. The technology bubble burst in 2000 and sent the stock market into a precipitous
decline that ended in October 2002 with a loss of 49% in the major averages.  Pessimism was at a peak, and many
investors stepped to the sidelines.  From there the market had almost 5 years of solid gains that produced new all-time
highs in October 2007 as the market more than doubled off the bottom.  Enter another collapsing bubble, this time in
housing that produced yet another steep decline ending in March 2009 and another bout of frustration that once again
sent investors to the sidelines.  From there, the market rose nearly 80% to its recent high in April of this year.

What’s the point you may ask?   Bubbles and investing fads may come and go, but well managed companies with a
global reach have demonstrated the ability to make their businesses grow over time despite recessions that interrupt their
growth track.  The market bottoms in 2002 and 2009 discouraged many investors who gave up on stocks and failed to
participate in subsequent recoveries.  The current decline, while nowhere near the severity of some in the past, has once
again unnerved investors and made them question the wisdom of stock ownership.  Corrections are an opportunity, and
given the outlook for modest growth here at home and somewhat stronger growth in developing economies, we believe
that the current air pocket in stock prices will once again prove to be a minor disruption to long-term investors.  Second
quarter earning reports will be out soon, and we will be closely monitoring progress of all companies in our investment
universe.

One other point, in April’s newsletter we talked at length about the “Power of Dividends”.  While nobody likes to see
the value of their portfolio decline month to month, it is nice to know that you are getting paid to wait for capital gains
when a company declares and pays a dividend.  As this piece is being written, the yield on the 10-year treasury bond is
slightly below 3%, not much return for a ten-year investment.

We hope that everyone has a very enjoyable summer and as always, if you have any questions or concerns, please call
anytime.
                                                               Mid-year Scoreboard

                                                               DJIA:                 - 6.3%
                                                                NASDAQ:         - 7.1%
                                                                S&P 500:           - 7.6%