UNDERLYING WEAKNESS IN 3Q ???

At first blush, the S&P 500 index's +3.6% gain appears to be welcome relief after the sorry returns posted earlier in the year.  Masking overall weakness in that return, however, was a whopping +17.8% return for the energy sector.  Tech was up +5.8%, but most other sectors were up only a tad.  Telecommunications was down -2.0%.  The consumer discretionary sector, reflecting a gas price and hurricane induced retrenchment, fell -1.1%.  The market, a proxy for the economy, is at a crossroads.  Will high oil prices and petroleum feedstock shortages fuel further inflation, and will corporate earnings suffer as companies digest these higher energy costs?  (All returns are after dividends.)

Gold Leaf is an independent Registered Investment Advisor that buys stocks in cash positive companies with sustainable competitive advantages.  Gold Leaf's goal is to provide objective investment management and to protect client assets on the downside while participating in most of the market's upside.  On September 30th, portfolio attributes were:

Our big winner for the 3Q (+28%) was an industrial company that manufactures steel reinforcement materials for the housing industry.  We had purchased the stock some time ago when the company announced an earnings shortfall due to the high cost of steel.  Initially developed to serve the West coast's earthquake market, the ties have been shown to be effective in hurricane zones.  Four of our healthcare stocks posted double-digit gains as earnings grew as expected.  (All returns are after dividends.)

Our retailers suffered along with the consumer discretionary sector.  As gasoline prices continued to pinch budgets, retail consumer spending slowed.  PetSmart, in particular, was hit hard - falling 28%.  Clearly the company will need to guide earnings down.  Yet we believe the fundamentals to be intact as the number of pets continues to grow, more money per pet is spent each year while additionally the company is rolling out a higher profit product line.  (All returns are after dividends.)

Gold Leaf does not provide legal, accounting, or tax advice.