WHM Capital Advisors

3rd Quarter 2008 Client Report

Investment Commentary

By:       William H. McAfee, Jr.

President and Chief Investment Officer

Complete WHM Capital Advisors Composite Data is available by contacting the firm.

“Drilling for Bedrock”

Markets had overwhelming declines in the 3rd Quarter.  The largest historic daily declines and advances were both seen in the quarter, and it is unclear when the bottom will be found so that sustained growth can continue. 

Banks whose executives said only months ago that they would not have to cut dividends or raise capital, are now out of business because of capital shortfalls.  Banks found themselves in the financial equivalent of an “alpine butterfly knot,” in which climbers rope themselves so that if one falls, the others must catch him or risk falling too.  The catastrophic reaction to the banking crisis and its quick escalation belies the fact that most U.S. companies are in very good financial standing.  Historically speaking, U.S. non-financial companies have relatively high levels of cash and low levels of long-term debt.  Whether these companies are strong enough to weather the storm is yet to be seen and will depend on the length and depth of the continuing downturn.

At the outset of the 3rd Quarter, our expectations were that the Federal Reserve Bank would halt its easing of short-term rates and hold the line at 2% with increases in 2009.  Now, however, inflation is no longer primary concern for Fed.  Oil prices have declined significantly from their peak in the $130 range to $98 per barrel at the end of the quarter, and the U.S. dollar has strengthened versus other world currencies.  Both of these trends also signal that inflation is not as much a concern as is slow economic growth in the U.S. and world. 

Employment figures show unemployment up to 6.1% in the U.S. in September.  The number of monthly job cuts was at its highest level in 5 years with major cuts in service sector employment.  These job cuts demonstrate the probability of a lack of upward wage pressure in the near term.  Strong labor demand has been one of our largest concerns in watching inflationary impacts on corporate earnings over the last 2 years.  The decline in oil prices and wage pressure should help corporate earnings in the current risky environment since there previously had been little opportunity to pass these costs along to consumers.

Consumers are less likely to find available credit given the sudden stoppage in mortgage funds.  For years now, the U.S. consumer has kept things afloat by tapping excess equity in homes and now it has come to an end.  Auto makers are reporting the slowest sales in recent history.  Housing prices continued to drop in July, but the downward pressure appears to be slowing.  It is yet to be seen whether the financial rescue package will get money flowing again and whether this will in fact stabilize housing markets.  Corporate borrowers are seeing tightened credit terms on lending facilities such as commercial paper, but the impact is less on the economy than that of consumer credit.

As I am traveling in the Middle East while writing this commentary, it is clear how much the rest of the world looks to the U.S. for economic leadership.  Also evident is the concern in the world markets that the U.S. consumer will not be able to buy the same level of goods and services as in previous years.  Not only does 70% of the U.S. economy depend on the consumer, but the world apparently depends on U.S. consumers to spend as well.  Overseas markets have caught the cold that started in U.S. credit markets.  Global money flows are increasingly intertwined and foreign markets are dependant on capital inputs from one another for sustained growth.  The best evidence of this is in both the amount of revenue U.S. based companies are deriving from foreign sales and also increasing levels of correlation between returns in U.S. and foreign markets.

Broad diversification and exposure to non-U.S. markets and currencies has helped our portfolios over the preceding quarter. Stock performance for the quarter was mixed, with two-thirds of the Focus List outperforming the S&P 500 stock index.  Stocks in the consumer goods, consumer services, and healthcare sectors delivered positive returns for the quarter.  Amgen (AMGN) led the healthcare sector with a 25.68% return.  The consumer goods sector was led by a 14.60% return from Procter & Gamble (PG), while in the consumer services sector Sysco (SYY) returned 12.07%.  Although the financial services sector has led the recent market downturn, US Bancorp. (USB) delivered a 29.15% return for the third quarter, offsetting decreases in Bank of New York Mellon Corp. (BK) and Goldman Sachs (GS). 

For the reasons mentioned above related to tightened credit terms, it is essential to find opportunities with strong fundamentals.  Companies with stronger balance sheets will have an easier time meeting shareholder expectations in markets like this one, and these as well as opportunities to diversify to other global market sectors will continue to be a focus.

As we have noted in previous discussions with our clients, troubled markets historically lead to very large rebounds.  Whether this will reoccur is yet to be seen, but investors who stick to their long-term plans and systematically rebalance while others capitulate are more likely to come out ahead. 

WHM Capital Advisors, LLC is a financial advisory and wealth strategies firm headquartered in Columbia, South Carolina, which specializes in valuing companies, designing exit strategies and managing portfolios for business owners.  In addition, WHM Capital Advisors manages a select number of portfolios for high-net worth individuals, trusts, and foundations.  The firm uses a diversified equity and fixed income strategy designed to meet the individual objectives of each client. 

Contact:         William McAfee, Chief Investment Officer

                       1310 Lady St., The Keenan Bldg., Suite 800

                       P.O. Box 7426, Columbia, SC 29202

1-877-269-5342

(c) WHM Capital Advisors, LLC

www.whmca.com