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The credit crisis and sub-prime meltdown continue to plague financial institutions and consumers are affected each day by high gas and commodity prices and falling real estate values. The economic outlook is cloudy but best described as "slow growth ahead".
Some key highlights:
Economic Forecast: We expect a renewed slowdown by late 2008/early 2009, with a rise in unemployment to 6.5% by the end of 2009.
Interest Rates: We think the next move in interest rates will be up, but before rates start to increase, we think Fed officials would like to see: 1) stability in the US labor market, 2) a bottoming of housing, and 3) normalcy in the financial markets.
Consumer: The consumer is still at risk. Unemployment is rising, credit card debt is increasing, bankruptcy filings are increasing and there is a five year backlog of unsold homes. Many economists are calling for an additional -10% to -15% decline in home prices from current levels during 2009.
Credit: Diminishing access to capital is starting to amplify disruptions throughout the financial system. Curtailed lending in response to the depletion of equity capital and reduced leverage are really starting to bite.
Inflation: Yes, both headline and core inflation are solidly above the Fed comfort zone. However, given the state of the consumer, housing, and the capital markets, we simply cannot envision tighter monetary policy in response to commodity-driven inflation.
One big positive, Global Growth: The strongest tailwind we have is the massive expansion of a middle class in many of the emerging economies of the world. This entirely new engine of growth, productivity and consumption is helping pick up the slack from an otherwise slow global economy. The depth and sustainability of this new segment will be tested in the years ahead.
What has happened?
Global stock markets had been going up for five years as profit margins grew to historically high levels. They were not alone: bonds had moved up too, as well as real estate, gold, commodities such as energy, base metals, agricultural products, fine art, you name it.
In fact, most asset classes had been helped - if not propelled - to new highs by a major credit boom. Money had been cheap and widely available. Excesses such as subprime lending in the U.S. had cropped up. Leverage in the financial system - some of it hidden - had increased. However, the business cycle has not been abolished, and the global economy is now adjusting to more normal levels.
We are patient, long-term investors and we hope that our clients will be too. While we remain conservatively invested in our discretionary asset management accounts, we are starting to see some attractive opportunities with investments that are focusing on markets outside the United States.
We appreciate your confidence and thank you for your continued support.
Sincerely,
Craig P. Kelley Sean P. O'Hara
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* Performance information stated above is for the one year time period, January 1, 2008 through December 31, 2008, from December 31, 2008 through January 31, 2009, and from inception, March 31, 2006 through January 31, 2009, as is indicated. Performance information is for Kelley Investments Managed Accounts Program where client accounts are managed on a discretionary basis. Not all accounts managed by Kelley Investments are part of the discretionary Managed Accounts Program. Performance information stated above does not pertain to any accounts that are not part of the Managed Accounts Program. Performance results for accounts that are not part of the Managed Accounts Program may differ significantly. Performance information quoted above represents past performance and is not a guarantee of future results. Performance information is quoted on a Gross basis and does not include deductions for management fees or trading expenses. If these fees and expenses were taken into account, performance would be lower. The investment return and principal value of investments in the Managed Income & Growth or Managed Growth Portfolios will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost.
**For illustrative purposes only. It is not possible to invest directly in an index. Comparisons with the S&P 500® Index are not meant to be indicative of any of Kelley Investments Managed Portfolio strategies, asset composition or volatility. Given the wide scope of securities held by S&P 500, it should be inherently less volatile. Our results may differ markedly from those of the S&P 500 in either up or down market trends. The performance of the S&P 500 is shown with all dividends reinvested into the index and does not reflect any reduction in performance for the effects of transaction cost or management fees.
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Conference Call
To listen to a replay
of our
January 12, 2008 Conference Call, dial (877)471-6587
and enter Program ID 1038358075004#
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Craig P. Kelley offers Investment Advisory Services through Kelley Investments, A Registered Investment Advisor. Client assets are held in custody at Fidelity Investments clearing firm, National Financial Services LLC (NFS).
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