CREDIT WOES & MONTHY MADNESS

Years of low interest rates inspired mortgage lenders to increasing foolishness.  Loans, such as "no doc" loans e.g., requiring no W-2 form to prove applicant income, should never have been invented.  But invented they were.  And the losses incurred by these sloppy lending practices would have been confined to the original mortgage lenders had the loans not been repackaged and sold to Wall Street.  But repackaged and sold they were, widely.  As defaults began, hedge funds, pension funds, and other risk takers holding these loans had to sell indiscriminately to raise cash, eventually dumping even blue chip stocks.  The bond market suffered not because of a dramatic rise in rates (in fact, the 10-year Treasury yield fell in the 3Q) but because of this default meltdown in the repackaged loan market.

Fearing that the contagion would spread to the overall economy, the Fed lowered the Fed funds rate by 1/2 percent on September 18th.  The S&P 500 index's returns mirror this monthly madness: -3.1% for July, +1.5% for August, and +3.7% for September resulting in a +2.0% gain for the 3Q.  The S&P 500's energy sector continued its torrid pace with a +9.4% move.  Tech sales were strong, and the sector was up +6.1%.  Not surprisingly, the consumer retrenched; the consumer discretionary sector retreated -6.5%.  Financials suffered from the problems detailed above.  The sector declined -4.9%.

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:

Earlier, we had purchased a slice of the Indian market through an index.  Recognizing the growth potential of that country, investors bid up the shares +20.5% during the Q.  Our 3D company also had a good Q as shipments of their unique, labor saving product increased: the stock was up +17.3%.  Our banks and companies with housing exposure were hit with losses of just over -20% for the Q.

We tried to take advantage of the tumult in the financial sector and were buyers of two banks, a REIT, and some other income producing securities.  We added to an already established position in a cable making company.  Their 2Q earnings were light due to timing issues on several large orders.  The stock got cheap, and we added to accounts that didn't already own it.  Our Digene was acquired by Qiagen at $61.25 for a very healthy gain.