2nd Quarter 2007 Review

From the Desk of Ron Rowland

When we make buying decisions, one of the things we look for is reliability. When you go to the car dealership, you try to get the new vehicle that won't break down in the first year or two. Before picking up the latest gadget from Apple, you make sure reviewers aren't slamming the new gizmo. When shopping for dentists, you ask your friends to recommend one who is relatively pain-free.

Reliability is even more important regarding money. In fact, it's absolutely essential. You want whoever is handling your portfolio to know the market. You want them to have first-hand experience managing money in various market conditions. You look for a manager who can think calmly and consistently. Most of all, you want results that are above-average.

Strangely, many financial advisors will tell you that average is probably the best you can hope for. They will say it is impossible for any manager to outperform for long. I am the first to say that it is not easy to beat the market over time - but it is possible. I know this because at CCAM we've done it for more than twelve years.

Within our long-term success, we've gone through many difficult periods as well. We've survived them and learned from them. As one of our clients, you get the benefit of our experience. Have we always beaten the averages? No, and of course I can't make any promises about the future. What I can say is that our strategy has worked well so far, and we are optimistic it will continue to do so.

We also constantly re-evaluate our methods to see if we can improve. Six month ago in this space I mentioned that one of my goals for 2007 was to further enhance our risk management techniques. I am happy to report that I have made good progress in that area, and we are now starting to implement some of those changes. The markets evolve with time, and we recognize that we have to adapt as well. Our research never stops.

The Quarter in Review

Though June brought a decline for equity benchmarks, April and May helped deliver a solid 2nd quarter. The S&P 500 Index posted a 6.3% gain. The Nasdaq Composite Index also climbed 7.5% higher during the second quarter. Mixed financial news did not seem to dampen market momentum. Though hedge fund troubles and rising Treasury yields attempted to quell enthusiasm, corporate earnings and a strong economy spurred on an extended rally.

Energy led the charge for the quarter. With energy now accounting for approximately 11% of the S&P 500 capitalization, gains in the large-cap multinational producers were a big part of the broad-market rally. Technology continued its slow rebound as it broke out of a trading range in April. Volume in technology stocks has climbed considerably in the last two years, suggesting that bad memories of the 2000-2002 bear market may have faded for many investors.

Two underperforming sectors were utilities and financials. Utilities seem to have topped out in mid-May and from there began a correction that was still ongoing as of quarter-end. Financials were hurt by the fallout from the housing bust. Problems with mortgage-related derivative securities caused major losses for some hedge funds and Wall Street trading houses. We suspect there is more to this story, which is why financial stocks still remain weak.

On the international front, Asia is still the big story. China's trade surplus set another record in June. The depressed Yuan continues to attract more investments. IPO capital has served to bring the fast dollar to Chinese shores. Momentum is certainly in China's favor. Other regional markets, notably Singapore, Australia and South Korea, have also been strong. Japan is the Asian laggard but is starting to show signs of a turnaround.

Brazil continues to make waves in South America. Anyone invested in Brazil for the 2nd quarter was not disappointed with the results. Spurred on by lower interest rates and growing consumer spending, the "China of South America" should be a continued source of positive economic data. Planners do not seem eager to slow the growth.

Finally, Europe will not be forgotten. As of press time, the Euro broke into all-time high territory against the U.S. dollar. This is less a commentary on Europe and more a commentary on the weakness of the greenback. The U.K. and continental economies continue to show strong growth in most cases. European stocks are undervalued by most standards, leaving upside opportunity for equity investors.