2007 Quarter 3 Update

October 19, 2007

If one had gone into a long slumber from the end of July through the middle of September he could be forgiven for thinking that nothing much occurred in the financial markets during that late summer period of 2007. Of course he would be incorrect as the markets took a wild ride beginning in late July as a result of some troubling news on the housing front which spilled over into the credit markets like a virus. You’ll recall that in late August we updated you on the current state of the financial markets and at that time it was very difficult to get a clear picture of how things might turn out once the dust had settled. We also updated you on our current mindset, what we had done, and what we planned to do going forward. As it turns out our decision to look for opportunities during such a difficult period for the market has proved to be a good one. Of course we had no way of knowing what might transpire in late August and September but it was our belief that the Federal Reserve had little choice but to come to the market’s aid. This is in fact what the Fed chose to do and it has been extremely effective to date in curing the market’s ills, a fact that we are all extremely grateful for.

So what were some of the more important issues we were grappling with when looking over client portfolios during this period? The first decision of course was to decide where we might raise cash in order to protect from any further slide in the equity markets. Decisions were made to cut our exposure to economically sensitive areas, namely those companies most affected by the potentially troubled domestic economy. It was then our task to make a decision as to whether or not we should put the cash to work and in what fashion. By the time we were able to effectively analyze the macroeconomic situation the market was facing we decided to take a different approach to the equity market and as a result our clients’ position in it. It was our view, and still is, that the best place to be going forward would be those companies that have exposure to the global economy and the continued strength it has exhibited as of late. There continues to be a great deal of growth overseas as a result of the desire by countries such as China, India, Brazil and Russia to catch up to the western world and it’s standard of living. The afore mentioned countries, and many others like them, are undergoing a sea change in the way their people live and in order to make that dream a reality these countries have a voracious appetite for infrastructure and everything that goes into it, not to mention the technologies that make the western world so productive and efficient. This hunger for transformation is likely to continue throughout the world for the foreseeable future in our opinion.

In order to take advantage of the global growth we speak of above one need look no further than right here in the U.S. It is not necessary to wade into the world of foreign equities and foreign markets to garner exposure to these fast growing economies. Some of the opportunities are obvious. Energy is being consumed faster than ever as the world continues to grow, making companies such as Schlumberger (SLB) and XTO Energy (XTO) extremely attractive for the long term. As we mentioned above, the infrastructure needed to fulfill the desires and needs of these growing economies is also of the utmost importance, thereby making companies such as Freeport-McMoRan (FCX), U.S. Steel (X), Cleveland Cliffs (CLF) and Alcoa (AA) extremely appealing to investors, us included. Perhaps less obvious are the companies that fulfill foreign desires to keep up technologically with the West, a few being Research In Motion (RIMM) and Hewlett-Packard (HPQ). Of course these are only some of the companies we have taken positions in with the belief that global growth will remain strong in the coming years.

So have we given up on the domestic economy and its prospects for the future? Most certainly not. While we believe that the U.S. economy has and will continue to soften somewhat in the near future it would be foolish to assume that the West’s best days are behind them. Economies are cyclical in nature and the fact that the domestic economy is currently suffering from the excesses created during the recent housing boom will only strengthen the environment once the problems have been worked out and eventually improved upon. Perhaps one of the best aspects of the position we have put our clients in is the fact that should the domestic economy improve quickly we will still be able to reap the benefits of the upswing. The companies we own today are not only the beneficiaries of global economic growth but are also positioned to benefit from domestic growth as well. It may sound too good to be true but we believe that we are positioned to have our cake and eat it too!

The financial markets are currently in a state of uncertainty that will take some time to work itself out. This uncertainty will likely create some volatility in the near term as more information is disseminated in relation to subprime exposure and the like. That being said, we are of the opinion that the worst for the financial markets is behind us. As we stated above, it is our belief that the U.S. economy will likely slow over the next twelve months while the global economy continues to remain strong. Consumer spending will likely slow domestically as a result of the changing real estate climate, however we do not believe that it will collapse as some may have you believe. We also believe that the Federal Reserve is “on watch” so to speak and that they will continue to provide liquidity to the financial markets as needed, thereby avoiding recession here at home. We are very encouraged by the market’s rebound this fall and because the market is a discounting mechanism by nature it would suggest that much of what we are currently fretting over has been “priced in.” Of course the market always reserves the right to re-evaluate upon receiving new information, hence our belief that things could remain fairly volatile in the near term.

To reiterate, we are very pleased with our current positioning in the market going into the fourth quarter of 2007 and we are very optimistic about the future. As we’ve said many times before, we are focused on the long term for our clients and believe the prospects for future asset growth remain strong.

In closing this quarterly letter, we would like to thank you for all of the referrals you have given us over the years. As you know, we spend very little time marketing our services and instead choose to focus our time on finding the best investments for your portfolios. While growing our client base is very important to us, we have relied on our clients to pass along our name to family, friends and colleagues as our source of new business. We appreciate your continued support and welcome the opportunity to assist anyone that you may feel is in need of our help. As always, we appreciate the confidence and trust you have shown in us by hiring our firm as your investment manager and we look forward to the remainder of 2007.

Cordially,

Paul R. Ray III Brian M. Phillips