Welcome to the August issue of Condor Monthly!

In "From the Portfolio Manager" this month, we discuss the recent market volatility due to subprime mortgage concerns. In this month's "Financial Planning Corner," we review the limitations of benchmarks and provided an updated statistical bank.

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From the Portfolio Manager

Since peaking July 19th, global stock markets have experienced a broad-based sell-off, as sub-prime mortgage default concerns spread fear among investors that the housing market downturn may worsen and possibly spill over into other areas of the U.S. economy by inflating borrowing costs. Those sectors seen as most vulnerable to sub-prime mortgage losses underperformed, with shares of banks, brokerages, and homebuilders experiencing the most severe declines.

In light of the recent downturn in the markets, we highlight several reasons why investors should remain optimistic:

• Unlike the savings and loan crisis in the late 80's, losses from the current sub-prime mortgage predicament will largely fall on the shoulders of sophisticated investors, such as hedge funds and large, diversified investment banks, as opposed to U.S. taxpayers.
• Currently, credit defaults continue to surprise on the low side (1.4 - 1.6% vs. 30 yr. average of 4.3%).
• Corporate balance sheets and corporate liquidity remain robust.
• Second quarter corporate earnings have come in well above initial expectations, with earnings growing 11% year-over-year, versus the 5% estimated at the start of the quarter. This marks the 20th straight quarter of double-digit growth.
• Interest rates are still low by historical standards, which bodes well for consumers and corporations. In fact, the Fed cut the discount rate (the rate the Fed charges banks for overnight loans) a couple weeks ago and injected billions of dollars of liquidity into the financial system in order to reassure investors that officials will not idly stand by and allow a liquidity crisis to take hold. As a result, the probability of a Federal funds rate cut at their September 18th meeting has increased.
• Global inflation remains under control.
• Domestic and global economic fundamentals remain intact. Global growth continues at a 4% plus rate.

The bottom line is we believe the sub-prime mortgage meltdown will be well-contained and not spread to other areas of the economy outside of the housing sector. In fact, the stock market could benefit as investors pull money out of speculative hedge funds and real estate in a "flight to quality" move.

Financial Planning Corner

Benchmarks have become essential standards in gauging the performance of long-term investment vehicles. They help determine investment outlooks and place current returns in perspective. However, benchmarks have their limitations. An index such as the S&P 500 is not managed to meet investor goals and doesn't reflect the underlying tradeoff between risk and reward. While a benchmark may capture more of the upside in a bull market, an actively-managed portfolio may help shelter investors from the full impact of a downturn. For example, portfolio managers can opt to select only the undervalued or high-quality companies, while avoiding the less-desirable stocks within an index.

When investing, it's very important to keep time horizons in perspective. Recent empirical evidence has shown that actively-managed funds that have outperformed their benchmark over a 10-year period may often trail the index over a three-year stretch. Because market cycles are generally becoming longer, a short outlook may not capture a fund's true potential in all market environments. Investment choices based on short-term performance could hinder the manager's ability to add value over the long run, and may expose a portfolio to additional risk.

Over time, an investor's objectives may change, and the process of measuring investment performance should as well. For investors with income needs, their evaluation of a manager's performance should be based on how well their financial needs are met. While individuals in the income distribution phase should keep an eye on overall returns, they should also place a high emphasis on a strategy with low volatility in order minimize downside risk.