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Capital Markets Commentary
August 15, 2007

The past six weeks have been a rough ride for investors. Broad stock market indexes have suffered losses ranging from nearly 5% for the S&P 500 to over 8% for small cap stocks as evidenced by the Russell 2000. International markets fared no better with losses ranging from 5% to 8% depending upon the geography. Other than cash, the only safe place was US Treasury obligations which were up slightly.

Many analysts continue to point to a list of real estate related troubles as the primary cause of the market pullback. Certainly, these are significant contributors. Negative news, however, has not been limited to real estate. Oil prices remain high and US consumers have become a bit stingier contributing to a very small increase in consumer spending.

In our opinion, these difficult markets are not simply the result of new data, but a revaluation of risk. The market recovery over the past five years has been characterized by uncharacteristically low market volatility. There have been very few “down” periods. Those that have occurred have been minor. Many investors have forgotten the pre-2000 markets which could increase rapidly 15 or 20 percent only to give back half of the gains just as quickly.

Where do we go from here? In our opinion, we probably still have not seen the end of the real estate bear market. There is, however, a reasonable amount of positive economic news that may help us weather the storm. Economic growth and employment remain solid and consumer confidence is still reasonably good. Interest rates remain relatively low. While growth of corporate earnings is slowing, they remain positive and balance sheets are generally strong. Growth outside of the US is solid and the rapidly growing markets of China and India provide a ready market for US exports.

While the past six weeks have been uncomfortable, it is important to remember that we have been through this type of market before. Though difficult, it’s important to maintain a steady hand and a long-term focus. Our outlook on fundamental long-term drivers of return: earnings, growth, valuation, interest rates and inflation is still reasonably positive. It is still our view that a commitment to well-diversified portfolios and keeping a focus on long-term objectives are keys to achieving financial goals.

* Index data from FT Interactive Data. Some source material provided by Lockwood Capital Management, Inc.