Full year % change                 15.71%            12.12%            14.95%
First qtr. % change                 -9.98%           -11.87%          -12.04%
 
The second quarter of 2010 was a turbulent one, particularly after the first quarter's pleasant rally.  Even in light of the first quarter rally the S&P 500 is down 7.5% year to end of second quarter.  There were several significant events that undermined investor confidence and pushed the markets lower during the second quarter.  The European debt crisis continued to lead the charge in bad news, followed by China's market decline and the Dow's May 6th "Flash Crash" of nearly 1,000 points in under half an hour.  An unexpectedly low consumer confidence index report of 59.2 at the end of June helped spur the selloff at months end.  The second quarter was a bit rockier than analysts predicted but not completely unexpected. 
 
Our outlook for the summer continues to account for the market volatility as well as the tax law uncertainties that will begin to garner more headlines.  New tax laws will affect all taxpayers considerably so proactive planning is imperative.  We will continue to monitor client assets for tax efficiency within their portfolios, as well as identify potential planning opportunities.  We see these areas as good places to increase wealth during uncertain markets. 
 
Greece's revisions and subsequent doubling of their estimated federal deficit (6.7% to 12.7% of GDP for 2009) and the doubt as to their ability to service an estimated $72.1 billion of debt in 2010 set off the credit crisis that dominated the headlines for the better part of the second quarter.   Greece's credit crisis continued to pull down the markets for most of the second quarter while the European Union met to discuss austerity measures.  Although the measures were met with riots and public protests, Greece is aiming to reduce its annual deficit below 3% of GDP by 2012.  Coupled with financial assistance from the Eurozone, Greece hopes to avoid defaulting on its debt.  If it cannot gain control of its policy then further market instability will ensue.  We will continue to monitor European markets for exposure as well as opportunities in client portfolios.
 
Due to the sovereign debt problems of Greece and other European countries, borrowing costs jumped not only for those nations but for United States companies as well.  This spike in borrowing costs caused the bond market rally to stall out as we entered the second quarter.  Investors left riskier high-yield bonds for the safe haven of Treasuries.  Yields on the 10-year Treasury Notes fell from 3.84% to 2.96% by quarter end.  Investor demand for Treasuries remained high, pushing prices up and the yields that move inversely to price, down. The upside here is that mortgage rates, generally believed to be positively correlated with 10-year note rates, are at historic lows.  For anyone who has considered refinancing in the past several years or who has loans several years old, now is the time to look at refinancing your existing home loans.  We are reviewing clients' loans currently and encourage you to call us if you want to discuss your current loan.
 
The unemployment rate dropped slightly throughout the second quarter from a high of 9.9% to the year low of 9.5%.  Year to date the unemployment rate is down 0.2% from the start of the year's figure of 9.7%.  Analysts are predicting a slow decline in unemployment for the foreseeable future so for the time being the silver lining is that the trend is going in the right direction, albeit slowly.  As investors see unemployment rates decline some positive sentiment and consumer confidence will return.  This, by most estimates, will take some time and it is likely to not be a straight decline.
 
Inflation or the Consumer Price Index (CPI) as it is more formally known, fell, 0.2% to 2% in May after a 0.1% decline in April to 2.2%.  June CPI is estimated to have a small decline again.  This is a two sided story.  While the cost of living has gone down a little, the flipside is that the lack of inflation indicates that recovery is not yet afoot.  The hope is that the lowered cost of living will encourage consumer spending and fuel economic growth.  In light of the dim consumer sentiments lowered costs will certainly be favorable for growth as well as sustained recovery by virtue of prices not flaring up as the economy tries to get its legs. 
 
China shared headlines this quarter with the European credit market as the Shanghai Composite Index lost 23% from April through June.  The breadth of the Chinese market has created waves in the global, as well as domestic markets.  The steep decline was caused mostly by Chinese investor concerns of the overheated housing market, the appreciation of the Yuan and the ability to sustain the recent economic growth they have enjoyed.  There is unrest among Chinese workers which threatens to soften China's exports and a property bubble that experts fear is looming.  The world has been looking to China to fuel the global recovery but at the moment there are doubts as to how well the Chinese economy will perform in the second half of the year.  The Yuan was allowed to appreciate a small amount during June.  For the most part this was viewed as a positive sign but with change comes investor worries on the flipside that a rising Yuan will stress the Chinese economy unnecessarily during an already difficult market cycle.  We will continue to watch Chinese policy to see how this unfolds.

Our outlook remains cautious for the third quarter.  While our long term view remains positive we feel that the lack of investor confidence will continue to fuel market confusion.   We are bracing for some volatility and we are looking to the aforementioned tax and financial planning strategies to create value in an economy where investment returns are scarce.  Reviewing your loans on primary residences, investment properties, vacation properties and consolidating debt as well as planning for the increased tax rates may be ways to increase wealth in this uncertain market. 
 
Please call if you have any questions regarding what has been discussed herein or if you wish to discuss your investment strategy.  We look forward to hearing from you soon.  
 
Sincerely,
Joseph M. Dowling, CPA                                                     Sean M. Dowling, CFP
President                                                                                  Vice President