July 14, 2008

Those of us who live near the shores of Lake Erie have heard the local adage that if you don’t like the weather around here, just wait a few minutes…it will probably change. So goes the economic and investment environment as perceptions, which in turn can influence reality, have covered a lot of ground since the beginning of the year.

As the year started, the foremost topics of concern on the economic front were focused on tepid growth in the United States as the economy struggled with declining residential real estate markets and credit market issues. The Federal Reserve responded by cutting the federal funds and discount rates.

In addition, the Fed implemented new creative measures to help the nation’s banks maintain liquidity in the financial system. These measures reached an apex when the Fed proved instrumental in orchestrating JP Morgan’s acquisition of a struggling Bear Stearns. It echoed the role the Fed played in helping resolve the crisis surrounding Long Term Capital 10 years ago.

By May, more than a few leading financial and banking figureheads were opining that the worst of the credit crisis was behind us. Many who made such proclamations have a vested interest in proffering such opinions since the financial banking system is ultimately a confidence game. Other equally prominent soothsayers have indicated they are not so sure we are out of the woods. Nonetheless, many segments of the financial markets stabilized quickly in May. Volatility, as measured by the VIX index, declined significantly in April and May. Riskier assets, such as equities and lower quality bonds, rose during that same period.

Now, the new villain on the scene appears to be inflation. Food and energy prices have risen significantly around the world. The U.S. economy, being a relatively affluent one, has consumers that spend a smaller percentage of their income on food and energy than consumers in lesser developed nations. Inflation in these developing economies may have very serious ramifications further down the road for the rest of the world. Both Ben Bernanke and Jean-Claude Trichet, President of the European Central Bank, have indicated interest rates are likely to rise in the future.

If inflationary pressures do continue unabated, fixed income maturities should be kept on the shorter end of the maturity curve to minimize interest rates, and bonds in general should be underweighted as an asset class in the portfolio. Equities remain attractive for those with a long-term perspective from a valuation standpoint, but from a near-term view, we are not confident that a catalyst exists to drive values significantly higher.

Over the past 24 months, we have been increasing portfolio allocations to what we have termed “special situation funds.” What we call special situations overlaps considerably with what have been called “alternative assets” in the industry parlance. In a nutshell, alternative assets is a general term that refers to asset classes that bear reduced performance correlation with the more traditional asset classes of equities and bonds. Their primary purpose is to provide diversification benefits to the portfolio. In some cases, alternative assets encompass the use of non-traditional classes such as real estate and commodities. In other cases, it entails the use of traditional asset classes in a non-traditional manner such as a long-short strategy in equities. In many cases, these strategies bear more of an absolute return focus rather than trying to ride the wave of what the market provides. As we are cautious on fixed income securities, and cautious on the short-term outlook for equities, we will continue to allocate more portfolios to special situation funds.

From a Sequoia perspective, our most significant event since we last talked was the divestiture of our interest in BGS Associates. We entered into a joint venture with Britton Gallagher in 2006 to build an employee benefits business together. While we respect the professionals at BGS and the work they do, we found that our corporate culture and strategic direction were not in sync. We decided that it was most beneficial to our clients and to our team to exit the relationship on good terms long before those differences ever materialized in a more tangible way. We continue to use BGS for our own corporate plan, respect their service offering and wish them continued success.

As I write this letter, summer has finally arrived­—the best time of the season in Ohio. We hope you all have an enjoyable summer filled with family activity and we look forward to updating you again in the fall.

Sincerely,

Sequoia Financial Advisors

Thomas A. Haught CFP^® ChFC

President