TREES INVESTMENT COUNSEL VIEWPOINT (Q3 2006) 

The saying goes that "a picture tells a thousand words"; this clip from the October 5, 2006 Financial Times does just that.  As I am sure you are aware, despite a setback in May, our domestic markets have had very respectable performance this year; in fact, the past few weeks the news has been cluttered on a daily basis with analysts and newscasters clamoring about "the market" making "new highs".

Here's what the numbers say.  For the year, as of October 15, the Standard and Poor's is up 9.4%, the Nasdaq is up 6.9%, and the Dow is up 11.6%.  Not too shabby, especially in light of the tempered expectations that we have spoken about in past Viewpoints.  What is especially interesting to us is that in the context of the longer term market, the numbers are fairly somber.

As you can see in the illustration above, the Nasdaq and the S&P are at only a fraction of their 2000 highs (32% and 73% respectively), while the Dow Jones Industrials, a price weighted measure of a mere 30 stocks (not necessarily a representation of the basket of stocks most investors own), has just passed its high-water mark.  Clearly many investors have still not made up the ground lost between 2000 and 2002!

Nonetheless, investors are certainly seeing the glass half-full.  This is in spite of the weakening state of the housing market, an inverted yield curve, large current account deficit, historically low savings rates, Kim Jong-II's (North Korea) antics, and the mess in the Middle East, to name a few.  It is not all bad news.  Oil prices are hovering at $60/barrel- down 25%, corporate balance sheets are strong, and overall employment seems to be in pretty good shape.

We are thinking that the best news may already be in the indexes at this point, and would be happy if the market was at this place come year end.  During the quarter we put some cash to work in more defensive names with strong franchises, stocks that have traditionally performed well when the brakes are put on the economy, something we feel is a distinct possibility.

Fortunately, our clients have achieved much better results than the above market indexes over the last few years.  Should you know anyone who would benefit from our services, please let us know, and we would be delighted to have a discussion with them. 

October 19, 2006