TREES INVESTMENT COUNSEL VIEWPOINT (Q2 2008) 

Since our last letter, the market is down another solid leg.  The Standard & Poor's has dropped 15% YTD and 20% (the magic number) from the October 2007 high.  The 20% decline meets the much talked about definition of a bear market, not that we needed Webster's Dictionary to tell us so.  On a 10 year basis real annualized stock market returns are negative.  Depressing.  Investors have had a rough ride.  Fortunately, average annual real returns for our clients over that same period are well in positive territory.

We admit the observable picture is bleak, and sentiment is as negative as it has been in a long time.  The fallout from the bust of the credit bubble and the housing crisis seems to get more expansive by the day, oil prices have jumped precipitously, unemployment is on the rise, and to top it all off, with rising inflation our dollars are not going as far.

As Batman said in the aptly named movie The Dark Knight, "The night is darkest just before the dawn."  While we do not doubt we will continue to see ramifications in financial services and housing, we are working through the cycle, and there is a light at the end of the tunnel.  When the faintest light is seen, stocks will rally.  Other concerns are not as alarming as we might think.  The tipping point has been reached on gas prices, and as a result, people are changing habits, driving less and buying more fuel efficient cars.  Any reduction in demand puts downward pressure on oil prices, which could fall just as rapidly as they popped.  While unemployment has increased, it is still a very manageable number at 5.5%, and we are in much better shape from a jobs perspective than almost any country around the globe.  Inflation is up, particularly in frequent purchase items such as food and gas, pushing the year-over-year increase in the Consumer Price Index to 5%, and that number is expected to go higher this summer.  Fortunately, over the next 10 years economist expect average inflation to moderate back to the 2.5% range.

We do not know exactly when the market will turn or what the catalyst will be, but we do know that we are seeing opportunity and attractive valuations for fundamentally sound companies.  We like that.  The number one rule of investing is buy low, sell high.  Stock markets are down, and we are adding to equities.  By definition, when the stock market declines we need to add to equities to balance our target debt/equity levels, and that is exactly what we are doing.  It is hard to go against sentiment, but it is important to remain disciplined.

The current angst will pass, and we hope and anticipate that your portfolios will be rewarded handsomely at that time.  We hope this is the dark before the dawn.  

July 24, 2008