Enclosed please find your reports for the third quarter of 2007.  We are very pleased to report that your equity and bond portfolios continue to show strong performance year to date.  If you were away on vacation during the summer quarter, you won’t feel like you missed much: equity and bond markets are up modestly, and your portfolios show healthy margins over the benchmark index returns.  However, for those that closely monitor the markets, the volatility over the summer made for more of a wild ride than the tame quarter-end figures might otherwise indicate.  Singer Xenos have actively been positioning your portfolios throughout 2007 to weather these anticipated increases in volatility.

 

Economic and Market Overview

Risk was re-priced as risk appetites contracted sharply in July when subprime (i.e., low quality, high credit-risk) mortgages began resetting at higher interest rates and experiencing significant defaults.  This created a ripple effect throughout many asset classes: bonds with coupons based on the income streams from these mortgages obviously suffered; as companies specializing in issuing subprime mortgages faltered and began going bankrupt, financial industry stocks with any subprime exposure were hard hit; and finally, those hedge funds using complex financial products based on subprime mortgage income flows, often leveraged (sometimes as much as 200% or more), struggled and in some cases had to be rescued by their sponsor companies.

As is typical in situations where there is a wide-ranging impact from a single event, investors exhibit “flight-to-quality”, or bailing out of all ‘risky’ assets, whether they are related to the event or not.  Many hedge funds consequently experienced massive redemptions, whether they invested in subprime products or not, and many hedge fund managers were forced to sell whatever they had left (usually their highest-quality assets) to meet these obligations.  This caused equity markets to bottom on August 15^th.

Volatility continued into September as investors anxiously awaited indications of whether the Fed could, and would, move from inflation management mode to economic growth management mode (and subsequently help homeowners with resetting mortgages stay in their homes). On September 18^th, key inflation measures came in lower, and the Fed announced a 0.50% cut to the Federal Funds Rate, officially ushering in the last leg of the current market cycle and giving some much-needed relief to mortgage payers.

While certainly not enjoyable, this is exactly the kind of environment which enables our managers, who were neither leveraged nor exposed in any major way to subprime defaults, to be able to follow the golden rule of investing: buy low. Many of our equity managers who had been waiting for favorable pricing to put cash to work were able to find incredible deals on their best ideas. In the bond market, where everything except US Government Treasury Bills underperformed, our managers, particularly in the more thinly-traded areas of the market, found favorable pricing at levels unseen since the Asian currency crisis of 1998. As risk is reasonably and rationally priced back into the market in the fourth quarter and beyond, your portfolios will reap the benefits.

Events have served to confirm several Singer Xenos investment themes for the year. Our emphasis on companies with high foreign sales (and therefore higher likelihood of positive earnings surprises) continues to bear fruit. The Fed’s rate cut officially marks the turning point into the last leg of this economic cycle, in which larger-cap and growth-oriented companies outperform, also boosting your portfolios’ performance.  The Fed, as well as foreign central banks, have committed to providing market liquidity, and the current administration has political incentive to ensure that as many people as possible hold onto their homes. We are bullish on the fourth quarter and feel your portfolios are strongly positioned to benefit from the current market environment.

Singer Xenos Wealth Management