06/25/2007

Subprime Time -- Part II

Hello:

In early March, we wrote about the first ripple of the Sub-Prime Mortgage fallout. At that time, several sub-prime lenders announced bankruptcy.

Just as a pebble dropped into a still pond creates ever widening ripples, we believe the second ripple of the Sub-Prime Mortgage fallout arrived last week as a major Wall Street firm attempted to sell more than $1 billion of assets seized from two hedge funds that suffered heavy losses in sub-prime mortgage investments. Also last week, an investment firm in Irvine was told by the NASD to limit its activities allegedly due to losses on sub-prime mortgage-backed securities.

But hang on, if we are not experiencing as many defaults on sub-prime mortgages now as we were five years ago, then why are these ripples of turmoil affecting so many companies? One reason, according to Jeffrey Gundlach, CIO of TCW Funds, is that only approximately 1/5 as many sub-prime borrowers were required to take out mortgage insurance (PMI) in 2006 as were required in 2002. If there is no insurance for a default, then, theoretically, the mortgage company is left having to make good on the group of mortgages they sold to investors. That is why, we believe, the sub-prime fallout is spreading from the sub-prime mortgage industry to a portion of the investment industry.

Our investment philosophy is one of classic asset allocation combined with a long-term time horizon. We believe this philosophy helps our investors to side-step some of the riskier investment styles offered through other investment firms.

We will be traveling from 06/27/07 to 07/05/07. We will be monitoring our voicemail as much as possible during that time.

Happy Independence Day!

Terri G. Millson, CIMA, CIMC President

Ray Dicius, CSA, GEPC LPL Branch Manager