"Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble... to give way to hope, fear and greed."                                                                                                                 Benjamin Graham  

June was marked by continued economic uncertainty, which stemmed from high oil prices and weak performance in the financial sector. This caused stocks to drop sharply during the month.  The Dow Jones Industrial average fell to its lowest level since 2006. Concerns over inflation have also pushed bond yields higher over the past month, while the Fed has held short-term rates steady for now.

The financial sector, characterized by losses and layoffs, has been unable to rebound since the beginning of the credit crisis late last year. Banks have been hard pressed to raise capital in order to offset first and second quarter losses. Industry-leading financial institutions, such as Citigroup, Washington Mutual, Goldman Sachs and others have all made major adjustments to weather these turbulent times. Aggressive actions by the Fed to inject liquidity and drastic cost cutting measures, including large workforce reductions, are hoped to help reverse the companies’ downward course.

Oil prices remained a hot topic in June for consumers. Oil prices ranged between $126 and $142 a barrel, settling at the end of the month near the high end of the range. There were some hopes that an increased supply from Saudi Arabia would ease prices; unfortunately, the increase was less than anticipated and had little impact on oil prices. Attempts to ease restrictions on US exploration and drilling have so far failed to pass in congress.  The US saw a significant impact from China’s oil consumption this month. Prices are expected to remain high until the 2008 summer Olympics and throughout the summer vacation season. Agricultural commodities are also contributing to inflation concerns. Due to anticipated lower harvests after numerous floods in the Midwest and higher worldwide demand, corn prices are trading at double the year ago level.

Despite the “headline” economic concerns, much of the US economy remains resilient. Core retail sales are up 10.2% for the last three months and foreign demand for US products are up 19.2% from the prior year.  In addition, commercial construction is growing at a rate of 15.4% year over year. Real GDP growth for the first quarter was revised to 1.0%.  Real GDP was up 2.5% versus a year ago and excluding the housing market real GDP grew by 3.6% over the past year.

After cutting rates seven times since September, the Federal Reserve decided to hold rates steady in its June meeting. Although considerable risk to growth still exist, the Fed believes those risks have eased and is now shifting their focus to inflation risks.  With these opposing economic forces in play, aggressive moves are unlikely in the current environment. Although some analysts are predicting the Fed Funds rate could be gradually increased as early as August to fight off inflation and help strengthen the dollar.

Bonds are becoming more attractive as yields are moving higher.  Stock valuations look attractive but a catalyst is needed to move stocks higher.  The catalysts everyone is looking for are lower oil prices, and restored stability in financial companies.

Thank you again for your trust in us and I look forward to meeting with you for your quarterly reviews.

Justin S. Anderson, MBA, AAMS Portfolio Manager Cambridge Advisors Inc. 17330 Wright Street, Suite 205 Omaha, NE 68130 402-697-1166 janderson@cambridgeadvisors.net  

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