Deo Gratias

Finally.  After three years of a demoralizing retrenchment, the S&P 500 index posted a gain of +11.7% for the 1st half of the year boosted by its +15.4% return for the 2Q.  Sectors that had been hammered, e.g., telecommunications and utilities were up over +21.0% for the 2Q.  Tech continued its rally and was up +18.3%.  The laggards were healthcare and energy, up +9.9% and 7.1%, respectively.  All returns are after dividends.

Two dynamics are clearly in play.  Though still needing further resolution, the quick war in Iraq served to reduce uncertainty in the market.  Secondly, investors are betting that the economy will steadily improve.  It's true that rate cuts, tax breaks, and home refinancings have pumped liquidity into the system.  Whether that will later translate into higher earnings for corporate America is the key question.  We're not so sure.  That's why our clients are diversified between both steady growth companies and those with exposure to the economic cycle.

Gold Leaf is a lower risk firm that buys large cap stocks when they are out of favor.  Its goal is to materially protect client assets on the downside while participating in most of the market's upside.  On June 30th, portfolio attributes:

Benefiting from that expected economic upturn, our biggest gainer in the 2Q was Carpenter Technology, a specialty steel processor, up +55%.  Home Depot was up +36%; many of our banks were up over +20%.  Our healthcare stocks did little as the market looked elsewhere.  Our three largest holdings are now Pfizer, cash, and Smurfit-Stone convertible preferred.  All returns are after dividends.

During the 2Q we purchased a dental distribution company that dominates this still fragmented industry.  We also bought an attractively valued financial institution.  We sold our Louisiana-Pacific since wood prices had turned upward with a concomitant rise in the stock price.  A 7.50% Household Finance preferred stock was called away from us.  We made all purchases of this security below par so that clients received their annual 7.50% plus some pleasant price appreciation.  Gold Leaf continues to search for undervalued companies with sustainable competitive advantages and free cash flows that generate long term value for our clients.