Market pressures showed no sign of abating during the second quarter. Volatility has continued and the market closed the quarter only 2% above the low reached in mid-March. As of 6/30/08, the Russell 3000 Index is off 11.05% for the year, losing just under 2% this past quarter.

The market correction has been broad-based and impacted all markets. From a market cap perspective, midcaps and surprisingly small cap stocks outperformed large caps. The Russell Midcap Index gained 2.67% this quarter while the Russell Top 200 Index lost 3.70%. Fueled by an unending stream of bad news from the financial sector, Value significantly underperformed Growth. The Russell 3000 Growth Index managed to gain 1.51% over the past 3 months compared to the Russell 3000 Value Index's loss of 5.17%. International stocks have provided little immunity. The MSCI EAFE is down nearly 11% for the year, on par with the broad US market. Despite investors flight to safety, yields rose during the quarter and bond prices slipped. The yield on the 10-year Treasury rose nearly 15% to 3.98%.

The pressure points are the same: rising unemployment, a weakened US dollar, declining home prices, deteriorating consumer confidence, slow/no growth economy, tight credit conditions, rising food and energy prices. The lens of negativity has slightly shifted focus. Last quarter was all about banks and the credit crisis. While billions of dollars in write-offs continue, fear of inflation is mounting. Commodity-driven inflation. The price of oil has risen almost 46% this year. The price of corn nearly 60%. Some of this is due to speculation. Prices have risen too high too fast, a sign of a return chasing bubble. Some of this is due to the fact that commodities are not operating in a traditional free market where the dynamics of supply and demand regulate prices. Until recently, the Chinese and Indian governments have had huge subsidies in place to maintain low prices for consumers. Demand has run unchecked since price inflation has not been passed down. We expect to see some relief in oil prices as demand destruction begins to work its way through the developing world as it has already done in the US and Europe. Tagged to inflation, interest rates are expected to remain unchanged. The Fed lowered rates to 2% and we should expect no more rate cuts. It was clear from the minutes of their last meeting that inflation is of greater concern than a weak economy.

Kerry Luria, Portfolio Manager