Details of the individual years are as follows:
 

Year	Rate of Return	Inflation	Real Rate of Return
1981	15.0%	8.0%	7.0%
1982	15.4	3.0	12.4
1983	16.0	4.0	12.0
1984	9.8	4.0	5.8
1985	18.3	4.0	14.3
1986	13.8	1.5	12.3
1987	9.7	4.0	5.7
1988	18.0	4.0	14.0
1989	10.7	4.5	6.2
1990	0.7	6.0	-5.3
1991	14.9	3.1	11.8
1992	10.0	3.0	7.0
1993	13.7	2.6	11.1
1994	0.3	2.7	-2.4
1995	13.2	2.7	10.5
1996	15.5	3.0	12.5
1997	6.9	1.8	5.1
1998	-4.5	1.5	-6.0
1999	-2.3	2.5	-4.8
2000	15.3	3.3	12.0
2001	19.2	1.5	17.7
2002	-0.6	1.5	-2.1
2003	25.2	2.2	23.0
2004	9.9	3.3	6.6
2005	8.7	3.5	5.2
2006	11.7	2.0	9.7
2007	6.2	4.3	1.9
Average 27 years	10.7%	3.3%	7.4%

 
 

         I wrote this in the annual report for 2007.  “This past year, as was well documented, was the most challenging year that the investment markets have experienced in many years. It had many twists and turns, many traps and enough volatility to please the most enthusiastic casino patron.”
 

         The chaos has intensified this year and what I had hoped would be a cathartic event (the disappearance of Bear Stearns) now appears to be just an event in the ongoing trail of dislocation.
 

        The main indices, after all the drama, changed in the following fashion:

 “I expect to see additional turmoil and uncertainty throughout the year with the continuation of the crises that have roiled the bond, housing, currency and stock markets. The outcomes are unknown, but I will continue to use all my experience and caution as I attempt to navigate these tricky waters. We still have a very conservative posture, but it is not risk free. I believe it offers the best combination of potential gain coupled with the absence of financially life threatening risk. I think most professional portfolios, as currently constituted still have unacceptably high levels of risk IF some of the more dramatic scenarios unfold.

 My goal, as always, is to live to fight another day, I take the responsibility of managing your finances very seriously and I thank you for your ongoing trust.”

    Well here we are, six months later and, after a brief respite, the clouds are darkening again.  Everything I wrote about in the paragraphs above remains true.

    The really sad thing about the year to date and 12 monthly returns listed above is that the United States was one of the BEST performing markets in that period. Other markets were, all too frequently, savaged. Our markets ONLY fell 15%.
 

     There are many things to comment upon and the situation in the world is very fluid and, once again, troubling. In no particular order:
 
 

1. Fannie Mae in Trouble?
 
 Today, after a long string of disturbing falls, the publicly traded Federal National Mortgage association fell a further 15% to $16. Its high for the year is $71. This quasi Governmental agency is a key part of the national mortgage system and it has declined 77% in the past 12 months. The other publicly quoted agency, the Federal Home loan bank, has fallen by a similar amount. This, folks, is scary stuff.
 

2. Too Big to Fail No Longer True?
 
         The July 2nd remarks of Treasury Secretary Henry Paulson, on the World Economy and Markets before the Chatham House were quite remarkable. “Whether it was Long Term Capital Management in 1998 or Bear Stearns this year, it is clear that Americans have come to expect the Federal Reserve to step in to avert events that pose unacceptable systemic risk. But, as we noted in our Blueprint, the Fed has neither the clear statutory authority nor the mandate to attempt to anticipate and prevent risks across our entire financial system.

        To address the perception that some institutions are too big to fail, we must improve the tools at our disposal for facilitating the orderly failure of a large complex financial institution”.

        In other words, and in simple English, we aren’t necessarily going to save Citicorp, Fannie Mae, etc. AND we haven’t yet developed the tools to comfortably deal with their demise. More scary stuff.
 

3. Gloom and Doom

        The highly respected Barclays Capital has advised clients to batten down the hatches for a worldwide financial storm. The US yield curve is likely to "steepen" with a vengeance, causing a bloodbath for bond holders.
 
        They said (and I agree) that investors had taken their eye off the slow-motion disaster engulfing the US bond insurers or "monolines". Together these firms guarantee $170bn of structured credit and $1,000bn of US municipal bonds.

       The two leaders - MBIA and Ambac - have already been downgraded as the rating agencies belatedly turn stringent. The risk is further downgrades could set off a fresh wave of bank troubles. "The creditworthiness of many US financial institutions will decline in coming months," he said.
 

4.  More Gloom and Doom
 
         The Royal Bank of Scotland has advised clients to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks. "A very nasty period is soon to be upon us - be prepared," said Bob Janjuah, the bank's credit strategist.

        A report by the bank's research team warns that the S&P 500 index of Wall Street equities is likely to fall by more than 300 points to around 1050 by September as "all the chickens come home to roost" from the excesses of the global boom, with contagion spreading across Europe and emerging markets.
 
         Such a slide on world bourses would amount to one of the worst bear markets over the last century.
 

5. The Housing Disaster
 
         An even gloomier scenario may be in store for an already ailing U.S. housing market if the overall economy slips into a recession, according to UBS Securities analysts.

        Falling home prices, soaring foreclosures at a time of tighter lending and rising unemployment are all weighing heavily on an already troubled housing sector, the analysts said during a conference call late on Wednesday.

        "The housing market has been in a recession for the past year and once the overall economy slips into a recession, which it probably will, the housing market will probably be in a depression," said Tom Zimmerman, head of ABS, mortgage research at UBS Securities.

        "The housing market, in terms of housing finance, is really in a disaster situation right now and I see no change in that very quickly," said Zimmerman. "That's why our view of the housing market is very bleak and probably will remain that way for some time until there's some government intervention."

        Home prices, which had been falling at a reasonable pace over recent years, have accelerated since late last year.

        "We were declining at an annualized rate of about 5 to 6 percent but prices starting dropping very rapidly and we're now at a 20 percent annualized rate. That's the mode we're in right now," he said.
 

6.  Words of Wisdom from a Very Smart Grey Beard

      The country is going into a recession with its finances in the worst shape ever. In fact, if you believe Eli Broad, founder of Kaufman & Broad, the big building firm, this is the worst period in U.S. economic life since World War II. In his entire life, he says he's never seen anything like it. And he's 75 years old. (I agree.)
 

 7.  The Consumer is in Desperate Shape

     "Consumers are turning to credit cards after banks tightened standards for home-equity loans and other borrowing. The March figures brought U.S. consumer borrowing in the first quarter to $34 billion, the most since the first three months of 2001, when the economy entered its last official recession.

    Consumers are strapped as incomes are not keeping up with inflation and this is leading them to rely increasingly on credit to see them through the worst housing downturn since the Great Depression,' said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi in New York. 'The days of extracting cash from one's home to spend on goods and services are long gone.'"

       A truly astonishing statistic is that in real terms the average American wage earner is earning the same as they did in 1967. In that period wages have risen seven fold, which exactly equals the rise in the consumer price index.
 

8. Marketplace Trivia

• The month of June was the worst June in the markets since 1930.

• The first half of 2008 was the worst first half in the equity markets since 1970.

• As of July 8, 2008 (1.00 pm) our portfolio in 2008 is very close to breakeven. It has been a long and difficult struggle and I expect more of the same in the months ahead

Please call with questions. We are always available.