July 2008 - Gimme Shelter

Back in the late 1960s, in a song called "Gimme Shelter," the Rolling Stones sang, "a storm is threatening my very life today if I don't get some shelter ... oh yeah my life is fading away."

Mick Jagger's sentiments probably hit home for today's investors. After a June that was the worst month in almost six years for the Dow Jones Industrial Average, July is following in its footsteps. We have all read the reports about Fannie Mae and Freddie Mac, Wachovia, National City Bank and Lehman Brothers. In addition, there has been a major accounting change that is adding to the economic uncertainty. Last fall, the Financial Accounting Standard Boards (FASB) issued Statement 159, which allows companies to opt to carry financial assets or liabilities at fair value. This is a change for companies, and is likely to cause additional confusion until accountants and companies become more familiar with it.

Recent concerns also have centered around the financial conditions of U.S. banks. Just a few weeks ago, federal regulators took control of the California-based IndyMac bank. However, Ben Bernanke, chairman of the Federal Reserve, told the Senate Banking Committee recently that he is confident about the soundness of the nation's banks and their reserves; however he is not as confident that the banks' lending standards are adequate.

But there are some positive developments. First of all, we are seeing "strategic" mergers and acquisitions activities with companies such as Rohm and Haas, Hercules Chemicals and Barr Laboratories being purchased. We are seeing good earnings reports from companies such as General Electric Company in the industrial sector, JP Morgan in the financial sector and Nokia in the telecommunications industry.

Second-quarter operating earnings for the S&P 500 in aggregate are estimated to decline 12%, but this decline can be attributed mainly to poor conditions in the financial sector. Excluding the financials, earnings are expected to increase 9%. If you were to exclude the positive contribution from energy and the negative contribution from the financials, earnings are expected to increase around 3.6%...not bad in today's environment. Also, retailers are seeing the positive effects of the tax rebate checks helping to contribute to good same-store sales. And the price of oil appears to be moderating somewhat, in response to concerns that speculators were driving oil prices to unsustainable levels.

These and similar positive signs suggest that we may be starting to move in the right direction -- even if that movement is halting and includes some backsliding. Bernanke and Treasury Secretary Henry Paulson have been working hard to allay fears and restore confidence in the basic soundness of the U.S. markets. So unless you need your money in the very near future, it may make more sense to stay focused on the long term.

Perhaps we can all learn a lesson from John Templeton, who died recently at the age of 95. Templeton was a pioneer in global mutual funds, founding the Templeton funds. He also was a philanthropist and created a foundation to promote inquiry into life's "Big Questions." In both his investment philosophy and his life philosophy, Templeton focused on the big picture. That may account in part for his long life and his investing success. So as we ride out the current storm, and look for shelter, we should remember to keep our focus on the future.

Garry K. Schaefer
Atlanta, Georgia
July 22, 2008

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