Sub Prime, the Fed & Weak Dollar
By: Clark A. Kendall

Financial markets got off to a weak start in the third quarter but finished strong in the final days of September. Large cap stocks faired better than small cap stocks—due in part to the weakening U.S. dollar which boosts profits of firms with overseas operations. Growth once again outperformed value stocks, a trend we have seen throughout 2007 which is markedly different than the previous five years. The S&P 500 Index rose 1.56% for the quarter, ahead of the S&P Mid Cap 400 Index (-1.17%) and the S&P Small Cap 600 Index (-2.05%).

The following are the three main factors that affected financial markets in the quarter:
• Sub-Prime Goes Sub-par
• The Fed to the Rescue
• The Dollar Weakens

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Funds of Mutual Funds Portfolio: Yesterday's Losers become Tomorrow's Winners
By: Paola Saenz

For the past several years, value-oriented securities were the winning formula for investing in the equity market. Value stocks, generally defined as those trading at low price-to-book ratios, have outperformed their growth counterparts (companies with rapidly and sustainable earnings growth) since the tech meltdown in 2000.

However, things have changed this year. Growth-oriented securities have been outperforming their value counterparts consistently at every market capitalization tier. For the 12 months ending September 30, 2007, large-, mid- and small-cap growth securities outperformed value stocks by approximately 5%, 7% and 13% respectively, as measured by the Russell 1000® (large-cap), Russell Midcap® (mid-cap) and Russell 2000® (small-cap) value and growth indexes. Managers appear to be recognizing that value cannot be separated from a company’s growth potential. They are finding undervalued opportunities in sectors that have been out of favor for a long time.

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GARP Portfolio:

Over the past quarter, the fundamental characteristics of our GARP portfolio have been stronger than expected. Consider revenues and earnings:

• Revenue: On average, revenues (or sales) of the companies in the GARP portfolio rose 19.0% over the same quarter a year ago. This compares favorably to the 7.8% revenue growth for the S&P 500 companies reported during the same period.

• Earnings: The underlying earnings have also been robust on an absolute and relative basis. Over the past quarter, earnings for companies in the GARP portfolio rose 25% versus the year-ago period. This compares favorably to the S&P 500 companies which experienced earnings growth of 9% during the same period.

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Income & Growth:

During the 3rd quarter of 2007, the two largest issues affecting income investors were (1) the collapse of the subprime lending market and (2) the 0.50% cut in the federal funds rate. For income investors that have sought out high yields by investing in below-investment grade securities, the summer months were very trying, to say the least, as defaults by speculative-grade companies increased and the spread (or difference) between yields on junk bonds and on safer, Treasury securities shrank. On the other hand, investors focused on owning quality financial holdings within their portfolios faired much better and welcomed the cut in interest rates by the Federal Reserve.

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Owning a home outright is a dream that many Americans share. Having a mortgage can be a huge burden, and paying it off may be the first item on your financial to-do list. However, there are several things competing with your desire to own your home free and clear:

• Your need to invest and save for retirement
• Your child's college education
• Your need to save for unexpected expenses (e.g.,
  medical)

But, putting extra cash toward one of these goals may mean sacrificing another. The obvious question arises: how do you choose?

Evaluating the opportunity cost
Deciding between prepaying your mortgage and investing your extra cash is not easy because each option has its own advantages and disadvantages. You can start by weighing what you will gain financially if you choose one option against what you'll give up. In economic terms, this is known as evaluating the opportunity cost.

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Recent Stock Selections

Ball Corporation (BLL - $55.71)

Business Overview:
Ball Corporation manufactures metal and plastic packages for beverages and foods. It also supplies aerospace and other techs and services to government and commercial customers. Metal beverage packaging: The American segment manufactures metal containers primarily for use in beverage packaging. The Europe/Asia segment manufactures and sells metal beverage container products in Europe and Asia as well as plastic containers in Asia. Metal food and household product packaging: The American segment manufactures metal containers primarily for use in food packaging. Plastic packaging segment manufactures polyethylene terephthalate plastic containers primarily for use in beverage packaging. Aerospace and Techs segment manufactures and sells aerospace and other related products and services. In 2006, it acquired U.S. Can Corp.

Smith Internations (SII - $70.78)

Business Overview:
Smith International, Inc. manufactures and distributes, products and services to the oil and gas exploration and production industry. It operates in two segments: The oilfield segment consists of three business units. M-I SWACO provides drilling and completion fluid systems and services, solids-control equipment and waste-management services. Smith Technologies manufactures and sells three-cone and diamond drill bits. Smith Services manufactures and markets products used for drilling, workover, well completion and well re-entry operations. The distribution segment includes the Wilson business unit, which markets pipes, safety and maintenance products to energy and industrial markets. It also provides technologically-advanced products and engineering services, including drilling tools and others.

Waters Corporation (WAT - $67.51)

Business Overview:
Waters Corporation principal activities are to design, manufacture and distribute high performance liquid chromatography and mass spectrometry instrument systems and associated service and support products, including chromatography columns and other consumable products. It also develops and supplies software based products, which interface with it’s instruments and typically purchased by customers as a part of the instrument system. The products are used by pharmaceutical, life science, biochemical industrial, academic and government customers working in research and development, quality assurance and other laboratory applications. The corporation operates in the US, Europe, Japan and Asia.

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