Special Update

Investment Update

A note to our clients and friends:

We wanted to reach out to you to provide an update on our outlook given the recent turmoil in the financial markets, in Washington and in Europe.

Since our July Commentary, we have seen economic fundamentals deteriorate further in the U.S. and in Europe. Most of the measures economic health we look at are still in positive territory, and corporate earnings have been generally strong, but the trend is negative.

There are still reasons to believe that the economic weakness is temporary, the result of short-term disruptions and uncertainty. But we have also seen a highly destructive display of political dysfunction in Washington centered around the debt ceiling debate, and ongoing confusion and dithering in Europe in dealing with the spreading debt problems there. Credit default risk indicators are increasing at an alarming rate.

All of these factors have served to undermine both investor and business confidence. Declining stock markets don’t help.

Confidence and clarity are vital ingredients for robust economic growth, and robust economic growth is a vital ingredient for developed economies to sustain their high levels of debt. As confidence recedes, individuals and businesses retrench. They stop spending, investing and hiring. They make do with less. And so, a recession in confidence can easily make an economic recession a self-fulfilling prophecy.

As we wrote in our last client letter, during the second quarter we eliminated holdings with significant exposure to financial services as well as European equities. Earlier this week, we removed a bit more equity risk-exposure and raised cash levels in portfolios as our outlook became more guarded. We prefer to err on the side of caution and these moves, along with the balance and diversification that we have already built into your portfolios have helped to cushion portfolios from the full impact of the market sell-off. While most U.S. stock indices have fallen 8-9% since the end of the second quarter, most client portfolios have declined only 3-4%.

Where we go from here remains to be seen. There is a lot of fear and uncertainty, and the sell-off is likely disproportionate to the current economic reality. But economic reality is dynamic. Companies are in good shape, with very little excess capital or labor and healthy balance sheets. With credible leadership and policy responses from the Federal Reserve and the European Central Bank it is possible to quell the markets and restore stability and growth. But time is running short and the debt problems in Europe are spreading into the banking system and have the potential to debilitate it as well as the healthier economies like France and Germany.

We are watching the situation closely. Our base-case view is that the odds of a recession have increased, but it is still probable that we will see new and more effective policy responses here and in Europe, and that we are going to muddle through with slow economic growth and gradually rising interest and inflation rates.

If we believe that things are deteriorating further, we will likely decrease and/or reposition equity exposure in portfolios to reduce risk and take advantage of bargains in areas that we like for the long-term such as technology, commodities and emerging market stocks and bonds. Although the broad markets are down 10% from their highs, a number of good companies and sectors have declined significantly more and are starting to represent interesting if not compelling values.

It is also important to reiterate what we wrote in our last client letter that we build portfolios to weather periods of turmoil, incorporating a balance of offensive and defensive assets, diversification among asset classes, focus within asset classes on areas of opportunity, and with flexibility to make adjustments as circumstances and our outlook changes.

Most importantly, we are always here to help and encourage you to call us if you have questions or concerns about the markets, your portfolio, or anything else.

Karl Mills, Mikel Keifer, and Bill Jurika

Important Disclosures

Opinions expressed are those of Jurika, Mills & Keifer, LLC, and are subject to change.

Investments in securities involve the risk of loss. There can be no assurance that investment strategies referenced will be successful, or that investment objectives will be achieved. The net performance represents performance figures net of all fees including management, performance fees, transaction costs and commissions. Past performance is no guarantee of future returns, which may vary. Please note that one cannot invest directly in an index.

This communication is neither an offer to sell nor the solicitation of an offer to buy a security or advisory services, which can only be made by the appropriate offering document.