Randy's Comment to a Client

This is a response to a client by Randy Alsman. Randy is our newest portfolio manager. Randy joined us from a major pharmaceutical company where he held numerous positions from finance to senior executive for managed care, where he dealt with the government and the insurance companies. You don't need to ask, why he's so happy to be back in his hometown. I consider Randy and expert in corporate strategy. He's a brilliant guy and has taken responsibility for our investment strategy in health care, insurance, and technology. His joining our firm will be good for all of us. Jim, here's my view of the current state of the market and economy: Oil traders continue to push oil prices higher because of fears that there are no new visible oil discoveries coming on board large enough to meet the increases in demand from the burgeoning economic expansions in China and India. In the face of these rising oil prices, US consumers are cutting back their use of gasoline for the first time in 20 years; however, both China and India still provide cheap oil to their citizens and thus, demand continues to grow at a high rate in these countries. Stock traders, seeing the runaway oil prices combined with their growing belief that more bad loan write-offs are coming in second quarter earnings releases beginning next week, have sent stock prices in the opposite direction of oil prices, with stocks falling to new 2008 lows. All of this flies in the face of the US economy which continues to confound the pessimists with a steady stream of better-than-expected reports, the most recent showing GDP growth in the first quarter of 1%. Indeed, many economists, who were formerly calling for a recession in 2008 have now come over to our view that the economy will just muddle along for the rest of the year. The media and many political candidates seem to be going in the opposite direction of the economists. From their perspectives, a "Hooverville" will be coming to a city near you soon. In fact, Arthur Lafley, chairman of Procter and Gamble, lashed out at the presidential candidates yesterday for crying, "woe is me" on the economy, which Mr. Lafley said was making people feel the economy is it much worse than it really is. The oil spike is lifting inflation fears and the credit crunch is increasing recession fears. We're a long way from stagflation (double digit inflation and unemployment at 6.5 - 7.0%), but it still feels like stagflation to a lot of people. The fixes for recession or inflation are pretty straightforward. However, facing both at the same time is much trickier. That uncertainty is causing traders to be more cautious, which translates into lower stock prices. Forced to put a stake in the ground, I'd guess near term trading will continue to be very volatile. If I am right and second quarter earnings come in much better than expected, the markets will be just as volatile on the upside as they have been on the down. Right now, we're pretty close to where we were at the January and March lows, which were just a few points shy of the mythical 20% down bear-market definition. Absent any big new news, we will most likely bounce up and down between here and 1,000 points higher for a while. Our investment strategy for 2008 is based on that scenario. Risking sounding like a broken record, we're buying and holding quality companies that have successfully weathered similar bad times, and worse, and that are increasing their dividends. So far, the average company in our portfolio has increased its dividend more than 11% over the last 12 months. We see that partly as a sign that they are expecting to come out the other side of this down market in decent shape. That’s all for now, I’ll have more to say when the earnings start rolling in. Randy Alsman, Vice President Portfolio Manager