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BUDGET & FINANCE AGENDA 09-02-08
l Central Contra Costa Sanitary District 5019 Imhoff Place, Martinez, CA 94553-4392 (925) 228-9500 www.centralsan.org BUDGET AND FINANCE COMMITTEE Chair McGill Member Nejedly Tuesday, September 2, 2008 3:00 p.m. Executive Conference Room 5019 Imhoff Place Martinez, California INFORMATION FOR THE PUBLIC ADDRESSING THE COMMITTEE ON AN ITEM ON THE AGENDA Anyone wishing to address the Committee on an item listed on the agenda will be heard when the Committee Chair calls for comments from the audience. The Chair may specify the number of minutes each person will be permitted to speak based on the number of persons wishing to speak and the time available. After the public has commented, the item is closed to further public comment and brought to the Committee for discussion. There is no further comment permitted from the audience unless invited by the Committee. ADDRESSING THE COMMITTEE ON AN ITEM NOT ON THE AGENDA In accordance with state law, the Committee is prohibited from discussing items not calendared on the agenda. You may address the Committee on any items not listed on the agenda, and which are within their jurisdiction, under PUBLIC COMMENTS. Matters brought up which are not on the agenda may be referred to staff for action or calendared on a future agenda. AGENDA REPORTS Supporting materials on Committee agenda items are available for public review at the Reception, 5019 Imhoff Place, Martinez. Reports or information relating to agenda items distributed within 72 hours of the meeting to a majority of the Committee are also available for public inspection at the Reception. During the meeting, information and supporting materials are available in the Conference Room. AMERICANS WITH DISABILITIES ACT In accordance with the Americans With Disabilities Act and California Law, it is the policy of the Central Contra Costa Sanitary District to offer its public meetings in a manner that is readily accessible to everyone, including those with disabilities. If you are disabled and require special accommodations to participate, please contact the Secretary of the District at least d8 hours in advance of the meeting at (925) 229-7303. w i~ Recycled Paper • Budget and Finance Committee September 2, 2008 Page 2 1. CALL MEETING TO ORDER 2. PUBLIC COMMENTS *3. CLAIMS MANAGEMENT 4. REPORTS/ANNOUNCEMENTS a. Review Position Paper approving District Investment Policy (Item 9.a. in Board Binder). b. Review Position Paper adopting Appropriations Limit (Item 4.d. in Board Binder). *c. Review Position Paper regarding GASB 45 Trust and discuss investment strategies. 5. REVIEW PERIOD 13, 2008 FINANCIAL STATEMENTS (Item 9.b. in Board Binder) 6. REVIEW EXPENDITURES (Item 4.a. in Board Binder) 7. ADJOURNMENT * Attachment Printed: Aug-28-2008 Expenditure Summary SFI F INSIIRON('.F FUND heck # Check Ventlor ame ccount'# Account L # ase - ase Title 1 102894 $9,471.87 Amit Munshi 003-0000-991.14-20 $9,471.87 GL1 Munshi (Orinda) Reimbursement for Lateral Replacement 2 102895 $739.88 Restoration Management Co. 003-0000-991.14-22 $739.88 2 Reinker (Orinda) Overflow -Restoration Services 3 102896 $7,494.75 William Wilson 003-0000-991.14-20 $7,494.75 1 Wilson (Orinda) Overflow -Sewer Repair 4 102897 $1,959.30 Robert Weng 003-0000-991.14-20 $1,959.30 GL2 Weng (Orinda) Reimbursement for Property Damage RIINNIN(; EXPENSE Fl1ND Check # Check $ Vendor Name Account # Account $ L # Case # -Case Title 5 171969 $10,813.25 Hanson Bridgett 001-0120-400.08-03 $299.50 ADM - H.R. -Labor -General $1,300.00 ADM - H.R. -Local 1 -Grievance $9,213.75 ADM - H.R. -Sexual Harassment Training CL# -Claim Log Number GL -General Liability Claims P -Property Claims AC -Auto Claims 2008-09 OVERFLOWS AND PLUMBING REIMBURSEMENT CLAIMS # Tvpe DOL Address C~ Claimant ~ Reserve Paid to Date Paid to 1 PL 06/28/08 42 Southwood Drive Orinda Bill Wilson PL $7,494.75 Bill Wilson 2 SSO _ _ 07/17/08 -- 100 Moraga Way - -._ Orinda Patricia Reinker PD $739.88 Restoration Management Co 3 Total -Overflows $0.00 $8,234.63 GENERAL LIABILITY CLAIMS -OTHER # Tvpe DOL Address C~ Claimant Tvpe Reserve Paid to Date Paid to 1 CD 05/11/08 245 Glorietta Blvd. Orinda Amit Munshi $9,471.87 2 GL 08/15/08 1 Virginia Drive Orinda Robert S Weng $1 959.30 Robert S. Weng 3 Total - GL Other $0.00 $11,431.17 PROPERTY # Tvpe DOL Address C yt Claimant Tvpe Reserve Paid to Date Paid to _ 1 2 3 Total -Property $0.00 $0.00 AUTO CLAIMS # Tvpe DOL Location Veh Desc. Name Reserve Paid Paid to 1 AUTO 07/03/08 Walnut Creek Dist Veh. CCCSD $250.00 Scott Sechler -for rental car AUTO 07/03/08 Walnut Creek Dist Veh. CCCSD $1,358.50 Jim's Auto Body 2 AUTO 08/14/08 Lafayette Dist Veh. Christina Brush $250.00 3 Total -Auto Claims $500.00 $1,358.50 8/29/2008 f" f.. rl R " i~ictirri arnpc::nsc:'ior; 8 ....~rnmeiir C~ainis Brc :a GOVERNMENT CLAIMS PROGRAM 400 R Street, 5~" Floor ~ Sacramento, California 95811 Mailing Address: P.O. Box 3035 ~ Sacramento, California 95812 Toll Free Telephone Number 1-800-955-0045 ~ Fax Number: (916) 491-6443 Internet: www.vc_~__cb.ca.eov James M Kelly Central Contra Costa Sanitary District 5019 Imhoff PI Martinez, CA 94553 August 25, 2008 RE: Claim G567585 for Central Contra Costa Sanitary District Dear James Kelly, ROSARIO MARIN Secretary State and Consumer Services Agency Chairperson JOHN CHIANG State Controller Board Member MICHAEL A. RAMOS San Bernardino County District Attorney Board Member JULIE NAUMAN Executive Officer The Victim Compensation and Government Claims Board (VCGCB), at its hearing on August 21, 2008, allowed your claim for the amount of $ 122,713.76. The claim amount, including a refund of the application fee, if applicable, are payable by Caltrans. This agency is required to pay the claim under Government Code Section 965 and will receive a copy of this notice. Before the Caltrans can pay your claim, it needs a written release signed by you. This agency will send the release form to you to fill out and return. If you do not receive the release form or if you have any questions, please contact the Caltrans. This award is a full and final settlement of your entire claim, as provided by Government Code Section 946(c). Any court action initiated on any part of this claim is considered an express rejection of the VCGCB's award. Sincerely, Jacqueline B. Tinetti, Program Manager Government Claims Program Victim Compensation and Government Claims Board cc: B-15 Caltrans, Attn: Diana Tham, Legal Division Warning Subject to certain exceptions, you have only six (6) months from the date this notice was personally delivered or deposited in the mail to file a court action on this claim. See Government Code section 945.6. You may seek the advice of an attorney of your choice in connection with this matter. If you desire to consult an attorney, you should do so immediately. It is not necessary or proper to include the Victims Compensation and Government Claims Board (Board) in your court action unless the Board was identified as a defendant in your original claim. Please consult Government Code section 955.4 regarding proper service of the summons. D STATE OF CALIFORNIA ARNOLD SCHWARZENEGGER, Governor Ltr 31 Board-Department Payment Approval Litigation Costs Scanlan V CCCSD V Kaufman Kramer 2006 January 0.00 0.00 February 0.00 0.00 March 0.00 0.00 April 0.00 0.00 May 0.00 0.00 June 0.00 0.00 July 0.00 0.00 August 0.00 0.00 September 0.00 0.00 October 0.00 0.00 November 0.00 0.00 December 642.72 0.00 642.72 0.00 2007 January 261.62 0.00 February 1,277.20 0.00 March 3,360.30 0.00 April 2,975.67 0.00 May 4,003.34 0.00 June 4,239.45 0.00 July 2,264.51 0.00 August 118.36 0.00 September 1,199.44 0.00 October 2,659.02 8,160.69 November 5,844.20 2,253.98 December 2,673.28 1,559.73 30,876.39 11,974.40 2008 January 815.76 3,152.37 February 856.96 1,824.48 March 3,532.31 2,900.63 April 5,172.07 1,538.95 May 5,673.69 665.90 June 5,505.68 878.57 July 13,277.10 824.00 August September October November December 34, 833.57 11, 784.90 Totals $66,352.68 $23,759.30 8/29/2008 Central Contra Costa Sanitary District August 29, 2008 TO: Board Budget and Finance Committee VIA: James M. Kelly, General Manager FROM: Randall M. Musgraves, Director of Administration ~~ Debbie Ratcliff, Controller ,~~ SUBJECT: GASB 45 Trust and Investments The Budget and Finance Committee and staff have discussed the various investment strategies available for the GASB 45 Trust. Andrew Brown from Highmark Capital presented market strategies and sample Investment Policies to consider. The options were narrowed down to a moderate or moderately aggressive investment approach. Examples of both investment approaches were previously reviewed by the Committee and are attached. Staff and the Committee also discussed the volatility in the current stock and bond market and agreed that the District's investments should be made over a time period of weeks or months to take advantage of dollar cost averaging. A time frame of investing over eight weeks was recommended by Andrew Brown. There are two other options that staff would ask the Committee to consider. The $11.2 million could be deposited in one lump sum or the dollars could be invested over an eight to twelve month time frame. For example, this would mean that staff would move $1.4 million a month for eight months. In addition to the investment timeframe issue, the Board must also consider which asset allocation strategy they are comfortable with. There are six basic allocation strategies: - Cash Account (Paying 2.29% as of 8-26-08) - Conservative - Moderately Conservative - Moderate - Moderately Aggressive - Conservative, and then depending on the market, move to moderately aggressive HighMark's Monthly Investment Highlights is attached which leans toward the moderately aggressive approach. Please see the last paragraph under Investment Conclusions of the HighMark's Monthly Investment Highlights, last page. H:\GASB 45 memo to Finance Comm-Draft 4.doc With each of these strategies, it is important to remember that the Trust is a long term investment to pay for future retiree healthcare costs, and it is important to stay focused on long-term trends in the market. Historically, the stock market has increased over the years. Attached is a graph of the Dow Jones Industrial Average over the last forty years which depicts the upward trend. We have also included recent articles about the stock market, the impact oil prices is having on the stock market and the impact of the financial sector as banks are forced to revalue their assets based on falling housing prices. As the stock market remains volatile with large swings, Business Week has an article, attached, pointing out that the S&P 500 "is virtually where it was in late June". After considering all of the different options, staff is proposing a more conservative approach and is recommending that the monies be invested over an eight month period using a moderate investment strategy. The Committee would monitor the investments monthly. When the stock market stabilizes, the Committee could direct staff to move to the moderately aggressive strategy. H:\GASB 45 memo to Finance Comm-Draft 4.doc Draft2 Central Contra Costa Sanitary District ~~~ ~~ ' BOARD OF DIRECTORS POSITION PAPER Board Meeting Date: September 18 2008 No.: Type of,4ction: APPROVE RESOLUTION subject: APPROVE RESOLUTION TO ADOPT THE PUBLIC AGENCIES POST- RETIREMENT HEALTH CARE PLAN TRUST AGREEMENT AND MASTER PLAN DOCUMENT AND AUTHORIZE STAFF TO INVEST $11.2 MILLION IN THE TRUST Submitted By: Debbie Ratcliff, Controller Initiating Dept./Div.: Administrative /Finance & Accounting REVIEWED AND RECOMMENDED FOR BOARD ACTION: ,C/ G .~ D. Ratcli graves James M. Kelly, General Manager ISSUE: Board authorization is needed to adopt the Public Agencies Post-Retirement Health Care Plan Trust Agreement and Master Plan Document, related documents and to invest District monies in the Trust. RECOMMENDATION: Approve a Board Resolution adopting the Public Agencies Post-Retirement Health Care Plan Trust Agreement and Master Plan Document, related documents and authorize staff to invest $11.2 million in the Trust. FINANCIAL IMPACTS: The adoption and subsequent establishment of a GASB 45 Post-Retirement Health Care Trust with PARS would include fees for administrative services, trustee, and investment management services, and additional fees associated with mutual fund investments. All-inclusive fees would be approximately $100,000 for a $10 million dollar investment balance and approximately $350,000 when the trust balance reached $50 million. ALTERNATIVES/CONSIDERATIONS: The Board could consider contracting with CALPERS or an individual bank, however, as discussed in prior meetings, this is not recommended. BACKGROUND: The Governmental Accounting Standards Board changed the accounting and financial reporting requirements for other post employment benefits, known as OPEB, with the implementation of its Statement Number 45 -Accounting and Financial Reporting by Employers for Post Employment Benefits Other than Pensions. The District provides medical insurance benefits to its retirees who meet certain eligibility requirements. Under Statement 45, governments are required to actuarially calculate their total OPEB obligation and the annual amount necessary to fund the obligation called the Actuarially Required Contribution (the ARC). Statement 45 requires footnote disclosure of the funding status of the total obligation, and requires recording a liability for unpaid portions of the ARC. N:\ADMINSUPWDMIN\POSPAPER\Approve Resolution to Adopt Public Agencies Post-Retirement HCP 9-18-OS draft 2.doc Page 1 of 2 POSITION PAPER Board Meeting Date: September 18, 2008 subJecr. APPROVE RESOLUTION TO ADOPT THE PUBLIC AGENCIES POST- RETIREMENT HEALTH CARE PLAN TRUST AGREEMENT AND MASTER PLAN DOCUMENT AND AUTHORIZE STAFF TO INVEST $11.2 MILLION IN THE TRUST Statement 45 does not require funding to a trust, but unpaid liabilities on the books affect financial statement ratios and may adversely impact credit worthiness over time. The Board approved the inclusion of $5 million dollars (less the actual retiree health care premiums) each year for the FY 2006-2007 and FY 2007-2008 budgets to be set aside toward the OPEB obligation. An additional $5.2 million was approved in the FY 2008-2009 budget. On May 1, 2008 the Board approved the establishment of a GASB 45 Trust with PARS to fund annual contributions each year as directed by the Board. The purpose of the trust is to accumulate, hold, and distribute medical benefit plan assets for the exclusive benefit of retirees within the meaning of IRS Code Section 115. The Board Budget and Finance Committee has discussed various funding options and investment strategies. With the current volatility in the market, staff is recommending a moderate investment strategy which could be changed to moderate aggressive in the future when the market stabilizes. Further, to reduce the volatility and take advantage of dollar cost averaging, staff recommends investing the $11.2 million over eight (8) months, investing $1.4 million per month. Attached are the documents required to set up the GASB 45 Trust with PARS which includes a Board Resolution, Adoption Agreement, Trust Agreement, and Master Plan Document. RECOMMENDED BOARD ACTION: Approve a Board Resolution adopting the Public Agencies Post-Retirement Health Care Plan Trust Agreement and Master Plan Document, related documents and authorize staff to invest $11.2 million in the Trust. N:WDMINSUPWDMIN\POSPAPERWpprove Resolution to Adopt Public Agencies Post-Retirement HCP 9-18-08 draft 2.doc Page 2 of 2 RESOLUTION N0.2008- A RESOLUTION TO ADOPT THE PARS PUBLIC AGENCIES POST-RETIREMENT HEALTH CARE PLAN TRUST AGREEMENT AND PLAN DOCUMENT BE IT RESOLVED, by the Board of Directors of the Central Contra Costa Sanitary District as follows: WHEREAS, it is determined to be in the best interest of the Central Contra Costa Sanitary District to participate in the PARS Public Agencies Post-Retirement Health Care Plan Trust (the Program) to fund post-employment benefits for its employees as specified in the District's policies and/or applicable collective bargaining agreements; and WHEREAS, the District is eligible to participate in the Program, atax-exempt trust and plan performing an essential governmental function within the meaning of Section 115 of the Internal Revenue Code, as amended, and the Regulations issued thereunder, and is atax-exempt trust under the provisions of the relevant statutory provisions of the State of California. IT IS, THEREFORE, RESOLVED, to adopt the Public Agencies Post-Retirement Health Care Plan Trust Agreement, including the Public Agencies Post-Retirement Health Care Plan, as part of the District's Retirement Program, effective September 18, 2008; and IT IS FURTHER RESOLVED, the Board of Directors hereby appoints the Director of Administration and the Controller as designee as the District's Plan Administrator for the Program; and IT IS FURTHER RESOLVED, the District's Plan Administrator is hereby authorized to execute the PARS legal documents on behalf of the District and to take whatever additional actions are necessary to maintain the District's participation in the Program and to maintain compliance of any relevant regulation issued or as may be issued; therefore, authorizing him/her to take whatever additional actions are required to administer the District's PARS plan(s). PASSED AND ADOPTED this 18th day of September, 2008, by the Board of Directors of the Central Contra Costa Sanitary District by the following vote: AYES: Members: NOES: Members: ABSENT: Members: N:\ADMINSUP\ADMIN\RATCLIFF\Resolution to Adopt the PARS Public Agencies Post-Retirement HCP 9-18-08.doc Gerald R. Lucey President of the Board of Directors Central Contra Costa Sanitary District County of Contra Costa, State of California COUNTERSIGNED: Elaine R. Boehme Secretary of the Central Contra Costa Sanitary District County of Contra Costa, State of California Approved as to form: Kenton L. Alm Counsel for the District N:WDMINSUP\ADMIN\RATCLIFF\Resolution to Adopt the PARS Public Agencies Post-Retirement HCP 9-18-08.doc 3. CONSTRUCT YOUR PORTFOLIO: SAMPLE PORTFOLIO Moderate Objective Moderately Aggressive Objective Equity 40-60% Fixed Income 40-60% Cash 0-20% Equity Fixed Income Cash Emerging Markets 1% Intemational 12% Small Cap Growth 4% Small Cap Value 3% . Large Cap Growth 13% Large Cap Value 12% 56.4% 40.8% 2.8% Cash 3% Interm-Term 31% Short-Term 9% High Yield 0% Equity 50-70% Fixed Income 30-50% Cash 0-20% Equity Fixed Income Cash Emerging Markets 1% Intemational 14% Small Cap Growth 4% Small Cap Value 4% Large Cap Growth 15% 65.6% 31.8% 2.8% Cash 3% Intemt-Term 25% Large Cap Core 14% Short-Term 7% High Yield 0% J HIGHMARK® 2 CAPITAL MANAGEMENT Large Cap Value 13% Large Cap Core 12% 3. CONSTRUCT YOUR PORTFOLIO: SAMPLE PORTFOLIO Moderate Eauit Large Cap Blend 6.0% DNVYX Davis NY Venture Fund 6.0% EXEYX Manning & Napier Large Cap Growth 6.6% HACAX Harbor Capital Apprec Instl 6.6% PRGFX T. Rowe Price Growth Stock Large Cap Value 5.8% JCVIX Hancock Classic Value 5.8% HMIEX HighMark Large Cap Value Small Cap Growth 3.5% PRNHX T. Rowe Price New Horizons Small Cap Value 3.0% NSVAX Columbia Small Cap Value Real Estate 0.0% MSUSX Morgan Stanley Real Estate Foreign Large Blend 6.1% FDVIX Fidelity Adv Diversified Intl I Foreign Large Growth 3.1% MQGIX MFS International Growth I Foreign Large Value 3.1 % DODFX Dodge & Cox International Emerging 0.9% LZEMX Lazard Emerging Markets Fixed Income Interm Term Bond 15.8% PTTRX PIMCO Total Return Instl 15.8% HMBDX HighMark Bond Short Term Bond 9.2% VFSUX Vanguard Sht-Term Corp Adm High Yield 0.0% PHIYX PIMCO High-Yield Instl Cash 2.8% HMDXX HighMark Diversified MM TOTAL 100.0% Securities shown here may change from time to time, at the discretion of HighMark. J HIGHMARK® 3 CAPITAL MANAGEMENT 3. CONSTRUCT YOUR PORTFOLIO: SAMPLE PORTFOLIO Moderately Aggressive Equity - 65.6% Large Cap Blend 7.9% DNVYX Davis NY Venture Fund 6.1 % EXEYX Manning & Napier Large Cap Growth 7.7% HACAX Harbor Capital Apprec Instl 7.6% PRGFX T. Rowe Price Growth Stock Large Cap Value 5.7% JCVIX Hancock Classic Value 7.7% HMIEX HighMark Large Cap Value Small Cap Growth 4.1 % PRNHX T. Rowe Price New Horizons Small Cap Value 3.5% HMSCX HighMark Small Cap Value Real Estate 0.0% MSUSX Morgan Stanley Real Estate Foreign Large Blend 6.1 % FDVIX Fidelity Adv Diversified Intl I Foreign Large Growth 4.1 % MQGIX MFS International Growth I Foreign Large Value 4.0% DODFX Dodge & Cox International Emerging 1.1 % LZEMX Lazard Emerging Markets Fixed Income - 31.8% Interm Term Bond 12.4% PTTRX PIMCO Total Return Instl 12.2% HMBDX HighMark Bond Short Term Bond 7.2% VFSUX Vanguard Sht-Term Corp Adm High Yield 0.0% PHIYX PIMCO High-Yield Instl Cash 2.8% HMDXX HighMark Diversified MM TOTAL 100.0% Securities shown here may change from time to time, at the discretion of HighMark. HIGH~iIIARK® 4 CAPITAL MANAGEMENT 662.17 577.60 539,19 d2 a4 ~ Q~ ~0 7'1 74 7O 78 ~ 82 84 ~ 68 4p 42 Q4 6~ ~i6 CK1 tY1 I~1 t~ http://stockcharts.com/charts/historicaUPrint/djia1960print.html 8/19/2008 ..~ ~~~~x~~~~~~ CAPITAL MANAGEMENT Vital Signs Improving--Not Dead Yet! Introduction So is the U.S. economy "pining for the Fjords" or could it finally be accelerating? Economic growth troughed in the fourth quarter of 2007 (-0.2%), but GDP has since accelerated through the second quarter to 1.9%. It shouldn't be surprising if the economy has already turned the corner, given the injection of extensive fiscal and monetary stimulus. A key question is whether the fiscal stimulus was a bridge to better times or just a plateau. Some point to recent job losses as a sign of difficult times, but corroborating evidence is erratic at best. The point of maximum financial stress, measured by credit risk premiums, was observed in December. The subsequent announcement of the Term Auction Facility (TAE) was a critical policy shift during this crisis, and seems to mark an important inflection point. It is hard to know for sure whether the acceleration observed over the last two quarters is sustainable, but we believe economic Vital Signs Are Improving. So why is consumer sentiment so dreadful? Good news doesn't help sell newspapers, but vilification of the U.S. economy does. The twin threats of housing and oil prices will eventually recede, but they aren't sufficient alone to cause a recession. This atypical mid-cycle slowdown started with low inventories, expanding capital investment, strong balance sheets, plentiful savings, healthy employment, contained inflation, low interest rates, accelerating exports, high productivity, robust profit margins, and record earnings. These are not the right conditions for a recession, but deteriorating sentiment has been fed by confusion, uncertainty and fear that has helped propagate the liquidity squeeze. The unfortunate timing of regulatory changes, including suspending the Uptick Rule and fair value accounting changes (SEAS #157), took their toll. Lapses in underwriting and struggling credit rating agencies have exacerbated concerns. We were hopeful that liquidity and credit issuance could recover ahead of housing, but the complexity and depth of write-offs have been too much to overcome without better visibility of an upturn in housing prices. Fear itself has been the greatest risk to economic expansion. Beyond housing weakness and high oil prices, many households do express concern that this mid-cycle slowdown at least "feels" like a recession, even if there is little evidence to support classifying it as such. So will this be the first "mental recession"? Most of us living in this time would certainly prefer not to be remembered in this way. So the Federal Reserve and Congress have poured the equivalent of rocket fuel into the tank of the U.S. economy and now all we need is a spark to ignite this combustible mixture. We are growing more confident about our 2.0% growth forecast for 2008. More importantly, one-year forward earnings estimates finally ticked higher in May and June after sequential declines for the prior six months. Accounting write-offs due to new fair value measurement rules have had a deleterious effect, but recurring earnings, excluding banks, are still clocking over 10% growth. A wild card for 2008 is whether any accounting write-offs will be reversed as credit conditions improve, given the wide gap that has opened up between intrinsic values and mark-to-market valuations of Tier III illiquid securities. When asset-backed security prices begin to close this gap, of course, depends most on home prices. The urbanization and industrialization of emerging economies has continued to underpin global growth. China may have slowed before the Olympic Games, as the government's desire to ease pollution at all costs is well known, but their economy will surely reaccelerate. We suspect emerging markets are decoupling from developed economies as demand for consumption and investment is accelerating now, from Latin America to Eastern Europe, as well as China, India and Russia. Although not evident in most economic indicators, fear about a potential recession has adversely impacted the national mood. Markets reflect various uncertainties, in large part rooted in higher oil prices and weakness in housing, but the economic reality was more robust than expected. Concerns come and go, but their very existence helps explain high equity volatility and equity indices skidding just barely into bear market territory, before rebounding. A U.S. recession is not inevitable, so with economic Vital Signs Improving, the global expansion is certainly...Not Dead, Yet. Investment Performance Review The S&P 500 (-0.8%) languished in July, as did most other equity indices, but bonds didn't do much better with the Lehman Aggregate slipping -0.1 %. International stocks underperformed, with EAFE falling -3.2%, compounded by weaker currencies. Emerging Markets were down -3.7%. The U.S. dollar continued to climb, up +1.3% on a trade weighted basis. March lows in the U.S dollar have held, including versus the Yen, which weakened from 96Y/$ in March to 108Y/$ on slowing Japanese growth. Small-cap stocks bucked the trend, rising +3.7%. A preference for small-cap stocks since April has now put the Russell 2000 Index +6.6% ahead of the S&P 500 for 2008. Value stocks outperformed Growth by 1.5%, although Growth still leads this year. SdPS00SectorHlatum j~Q ,jm,Q yIQ 11~ 3-vesr Svaar Materials -4.1% -5.0% -2.9X 4.3 % 14.9% 15.2 Consumer Staples 3.4% -1.9% -4.3% 6.8% 7.9% 9.0% Energy -13.9% -8.9% -8.3% 6.8% 17.4% 26.4% Heallh Care ¢.1 % 22% -8.2% -3.1 % 2.1% 3.7% Utllltles -8.1°h -3.7% -8.7% 4.0% 9.3% 17.1% Industrials 1.8% -9.7% •12.1% -12.1% 5.1% 9.5% S8P500 -0.8% -8A% •12.7% •11.1X 2.9% 7.9X ConsumerDlscretlonary 0.5% -11.1% -12.8% -21.9% -5.2% 1.7% Technology -1.2% -5.3% •14.2% -8.3% 3.1% 5.9% Tele°ommuncation -5.9% -13.9% •22.2% -22.8% 4.2% 8.0% Flnandals 7.1% -17.9% -24.7% -33.0% -7.8% -°.8% Trensportatlon 2.5% -1.9% 11.0% 0.6% 10.1% 14.1% Source: HighMark Capital Management The circulation of fabricated rumors has caught the attention of the regulators, as suspected manipulation of security prices through short-selling has become a concern. In June 2007, the SEC voted to end price restrictions on short-selling, also known as the "Uptick Rule", which was instituted in 1938. This action was taken just weeks before the liquidity squeeze emerged. It now appears the Uptick Rule was providing a circuit breaker to allow adequate time for dissemination and validation of information as the speed of news flow has accelerated. Last month, the SEC moved to impede so- called naked short selling' against primary dealers and key banks, as well as Freddie Mac and Fannie Mae. It may also pursue racketeering charges against those who may have conspired or colluded for personal gain. News of traders exploiting weaknesses in oversight is disquieting, but we are sure regulators will work to restore confidence in markets. Commodity prices have tumbled in recent weeks, led by energy. Natural gas prices peaked at over $13.50, but have since retreated over 33%. Oil prices traded above $147, but closed -16% lower at $124 for July. Falling oil and natural gas prices have dragged broader commodity indices lower, including the Commodities Research Bureau Index, which fell -8% during July. Energy stocks suffered even more, with the sector falling -13.9% during July. Demand destruction is now visible in the developed economies of the Organisation for Economic Co- operation and Development (OECD). With consumers reeling under the high cost of fuel, we expect the triple threat to high oil prices of Conservation, Substitution and Innovation (CSI) to begin extending into emerging markets as well. Recent volatility could change investors' mindset about commodities as an asset class. Exchange Traded Funds (ETFs) have facilitated the shift into this brave new world of commodity investing. Passive ETFs are available for many different indices 1 Short selling, without first borrowing shares, may violate U.S. securities laws under certain circumstances. with a common goal of providing intraday trading opportunities. We've highlighted that trading volume in some narrowly focused ETFs can even exceed the number of issued shares, which should concern long- term holders. Many ETFs that are small and highly specialized tend to be burdened by relatively high expense ratios, as well as accentuating guaranteed underperformance. For taxable long-term investors, as long as ETF assets increase, the tax burden remains low. However, large redemptions reduce the outstanding share count and may result in unanticipated capital gains. Specialized ETFs are more likely to experience swings in popularity. As commodities rose, few recognized the risks to ETFs that unwinding might cause. Nearly half of the 800 ETFs listed have assets of less than $50 million and many will likely be too small to survive. So far, 25 ETFs have shut down in 2008. A downturn in commodity prices could shutter many more. Although commodities have performed well over the last year, raw input prices can't exceed output prices, so commodity returns can't exceed the inflation rate over longer time horizons. Any collapse in commodity prices is good news for inflation, and of course for stocks, if it keeps the Federal Reserve from hiking interest rates more aggressively. Commodity indices still have farther to fall, we believe. As much as energy sector earnings have benefited from high oil prices, there is a risk that energy stocks might suffer further declines. Economic and Capital Market Outlook Second quarter Gross Domestic Product (GDP) grew 1.9%. It was stronger than expected in certain respects. Final sales were a blistering 3.9%, compared with 0.9% in the first quarter. An inventory decline lopped off -1.9%. Some may perceive this inventory decline as evidence that business sentiment is worsening, but we see it providing potential demand for our "coiled spring" thesis. Eventually, inventory levels will need to be replenished from their currently lean levels. GDP estimates are tracking higher now for 2008 and most economists expect even stronger growth in the third quarter. Residential construction decreased by an annualized rate of -15.6% last quarter, but was better than the first quarter's annualized decline of -25.2%. Exports (+9.2%) and non-residential construction (+14.4%) remain strong. Without an overhang of commercial property, construction employment has held up better than expected since residential construction rolled over. The purchasing managers' survey (ISM), now over 50 for the second month, suggests near potential trend growth, assumed by economists to be 2.7%. A recession is no longer thought to be inevitable. Economic data reported since June has been better than expected, particularly for industrial and non-consumer related activities. While the U.S. economy appears to be accelerating, Japan and Europe are slowing. Emerging Markets seem to have decoupled, as they become more reliant on urbanization and industrialization, a secular theme, which we continue to believe keeps global real growth above 4%. Employment growth in developing economies is driving consumers' seemingly insatiable consumption and an emerging culture of credit. We believe the extraordinary secular growth rates of emerging markets will be sustainable for several more years, as long as inflation can be contained and fiscal policies don't undermine currencies. Developing economies should begin to see their trade surplus decline over the next decade as imports increase, benefiting countries exporting desired goods and services. This effect is visible already in the United States and Germany, whose exports and foreign earnings have been boosted. Housing prices have declined, but the downturn in the 1990s was broader, longer, and much deeper than observed in this cycle. A rebound in credit hinges more on housing because the extent of any permanent losses depends on how long and how far prices drop. We are watching housing starts and sales for signs of recovery. Natural demand for residential construction exceeds 1.6 million units, an amount needed to satisfy demand from household formation (1.2 million), plus second homes and rebuilding (300,000). Housing starts have hovered near 1 million units for months now and actually increased 5% last month. Still, this rate is well below natural demand, so the coiled spring of potential housing demand is getting wound ever tighter. A reversal in sentiment could release sequestered buyers from their long hibernation, boost construction, and improve conditions in mortgage securitization. Mortgage rates might actually ease, if perceived lending risks moderate. Earnings estimates have stabilized for now, with 1-year forward earnings estimates tracking higher over the last two months. Many companies have pushed through price increases to offset higher commodity costs, so any decline in cost-of-goods-sold, as oil prices fall, will likely drop to the bottom line, boosting profit margins. It is likely that price increases will be sticky for several quarters until oil prices stabilize at what we believe will be much lower levels. 120 ~a9 E ~ _ a9 0 :e 40 N 0 S&P 500 IBES Earnings F°recast (12 Mo) Yw Wple.lrk Gomenw W______ __ ________2010 2005 676.M 575.Oe 2008 26oe 6e7.a Se7.w zoo? 961.91 sx.et _ _ _ _ _ _ _ _ _ _ pOq 2006 992.OOe 992.O9e - - - - - 2009 611 t.oa f/o9.17e 2ar7 2070 572/.OOe 512/.3A 2002 2006 2aob 200, 2005 200. --~~ - -- - ~3--- 1996 _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ 1995 _ _ 9w S6P 500 ennud esOmets _ _ _ 1990 1991 1992 - 1993 _ _ _ _ _ Ilece6 by ~e1Ms yse. ,965 ,967 ,969 1981 ,893 1995 ,987 ,998 200, 2003 2005 2007 Source: HighMark Capital Management and Thomson Datastream The economy remains resilient and so far, we have dodged recession. Back-end economic indicators seem to suggest we are pulling out of this mid-cycle slump. Improving confidence of businesses and consumers, as we head into the fall, might set up a much better fourth quarter than expected. The mounting stash of cash on the sidelines includes a record $7.5 trillion in household bank deposits. Equity markets tend to anticipate recoveries, so this level of lazy money will be put to work eventually. As noted last month, it is rare that the S&P 500 dividend yield, currently 2.3%, exceeds Treasury-Bill yields. In the past, such observations coincided with great equity market entry points. The recent equity market correction has caused investors to drift well below equity allocation targets. For those who haven't rebalanced back to targets, this is a rare opportunity. Accounting write-offs of illiquid Tier III mortgage assets are still accumulating, but to a much lesser extent during the second quarter. The impact of accounting write-offs may be reversed, at least partially, if actual economic losses on home mortgages are less than the $430 billion in write-offs recognized. Fair value measurement seemed like a good idea in order to improve the transparency of financial statements. But basing fair value measurement on volatile, sentiment-driven indices seems inconsistent with primary accounting principals of being useful, objective, consistent, transparent, timely, and representative. This accounting change was badly timed, poorly implemented, and confusing to even sophisticated investors. The adverse effects on the liquidity squeeze are visible, but the effect of this one- time adjustment won't continue at the same rate through 2008, so earnings growth should accelerate this year. Consumer price inflation has spiked to 4.7%. Oil prices jumped 50% in 2007, then almost 50% again through mid-July 2008. If oil prices fall back toward $100 per barrel, CPI inflation by year-end could ease dramatically and our 3% forecast will be too high. Higher oil prices have had a negative impact on all importing countries, even those with subsidized gas prices. Oil producing countries felt the pinch of foregone revenue, despite their windfall from exporting oil. The pinch of higher food prices due to rising transportation, production and fertilizer costs has been felt globally. Central banks are monitoring inflation expectations and remain on watch for rising wage costs, driven by cost-of-living increases. However, they have little control over commodity prices without also stalling global growth at the same time. Economic Forecasts 2005 2006 2007 2008 2009 U.S. GDP (Real) 3.0 2.7 2.5 2.0 2.5 Earnings Growth 13.7 15.3 -3.6 9.7 20.7 CPllnflation 3.4 2.6 4.1 3.0 3.0 Unemployment 4.8 4.4 5.0 5.2 5.0 Fed Funds Target 4.25 5.25 4.25 2.0 3.5 Treasury Notes-10y 4.4 4.7 4.0 4.2 5.5 --Gov't Bond Retn-10y 2.2% 1.5% 9.6% 2.5% -4.8% S&P 500 Index 1248. 1418. 1468. 1500. 1700 --Stock Return 4.9% 15.8% 5.5% 4.4% 15.3% Source: HighMark Capital Management and Thomson data Many concerns are a consequence of housing weakness, including residential construction, consumer sentiment, discretionary spending, and employment growth. Despite concerns about mortgage resets, only about 2 million households this year and 1 million next year have mortgages that will reset, while most interest rate benchmarks have fallen precipitously. Even if mortgage rates reset, many borrowers could wind up paying less given a 3'/.% cut in interest rates. On average, home price declines are less significant than write-downs otherwise suggest. Leveraged speculators have taken big losses, of course, and there are certain areas of significant weakness hidden in the averages below. Write-offs of $30 billion exceed the real economic losses to date, so how do we rationalize the more than $2 trillion of wealth that has evaporated in U.S. equities since subprime concerns emerged? Bank write-offs blew a $10 hole in expected $93 S&P 500 earnings during 2007, but this is unlikely to be repeated. Earnings fell - 3.5% in 2007, but "recurring" earnings were actually up over 12%. Given our earnings estimate of $92 this year and $111 next year, the S&P 500 is trading at a very compelling one-year forward P/E ratio of 12.4X. Sales Prlce of Exlsting Homes Average Mean) Year Northeast Midwest ouch West 2004 244,400 $ 273,600 $ 189,400 $ 215,600 $ 324,300 2005 $ 266,600 $297,000 $ 203,800 $ 231,700 $363,800 2006 $ 268,200 $299,700 $205,300 $ 230,000 $ 371,300 2007 $ 266,000 $307,100 $200,500 $ 225,600 $365,900 2008 Jun $ 257,500 $292,600 $204,200 $ 229,900 $ 330,500 2007 -5.2X -5.8% -3.9% -3.8% -7.5% 1-year -6.8% -8.5'/• -3.3% •3.4% •12.2% versus 2005 A.R. -1.4% -0.6% 0.1% -0.3% -3.8% versus 2004 A.R. 1.5% 7.9% 2.2•/. 1.9Y. 0.5•/. Source: National Association of REALTORS® ®2008 While the global economy continues to expand, many regions in the U.S. are feeling the slowdown, particularly domestic industries, residential construction, and autos. Higher food and fuel prices have displaced discretionary spending. Where job growth has been weakest, housing prices seem to have fallen most. Housing starts peaked at over 2.2 million in 2005, but have since plunged by half. While this correction has taken a toll, it is likely, in our opinion, that we are nearing a trough. Had oil prices not jumped to $145, a bottom might have been more visible by now. We expected oil prices to ease this year, but they took off in the other direction. We have discussed many of the reasons for that, but we still believe oil prices meaningfully above $70 are not sustainable. It is difficult to identify asset bubbles before a correction, but recent oil prices seem suspicious. Investment Conclusions America's economy hasn't folded, but instead has proved surprisingly resilient. To embrace a hard landing scenario, one must believe America is fragile, inflexible, and lacks the ability to adapt. Fear seems to be the greatest threat to global economic expansion. We believe U.S economic Vital Signs Are Improving, and expect the acceleration to become more visible in the coming months. This will bolster the investment case for equities outperforming bonds. Since 2000, the S&P 500 P/E ratio has compressed from 25X to just over 11X on 2009 earnings. Earnings have doubled off the lows in 2002, although the stock market is just 45% higher. The stock market has gotten cheaper every year since 2003. If the critical Vital Signs Are Improving, as we believe, then an overweight to stocks and an underweight to bonds is compelling. We still recommend overweighting small-cap and growth stocks, as well as an overweight to U.S vs. international equity markets. We are extending our overweight to high-yield bonds in August from 2% to 3%. We expect the U.S. dollar to firm and oil prices to fall, while Treasury bonds remain particularly expensive. Favoring more cyclical sectors like Industrials and Technology is consistent with our economic view, but if oil prices moderate toward $100, then consumer discretionary could outperform. Under this scenario, rather dramatic flows are likely out of commodity ETFs, gold, energy stocks and Treasuries and into cyclical stocks, including Consumer Discretionary and Technology, as well as credit exposure. David Goerz, SVP -Chief Investment Officer htto://www.hiQhmarkfunds.com/ <commentary> Monthly Investment Highlights is a publication of HighMark Capital Management, Inc. This publication is for general information only and is not intended to provide specific advice to any individual. Some information provided herein was obtained from third party sources deemed to be reliable. HighMark Capital Management and its affiliates make no representations or warranties with respect to the timeliness, accuracy, or completeness of this publication and bear no liability for any loss arising from its use. All forward looking information and forecasts contained in this publication, unless otherwise noted, are the opinion of HighMark Capital Management, and future market movements may differ significantly from our expectations. HighMark Capital Management, Inc., a registered investment adviser and subsidiary of Union Bank of California, N.A., serves as the investment adviser for HighMark Funds. HighMark Funds are distributed by PFPC Distributors, Inc. Union Bank of California, N.A. provides certain services for the funds for which it is compensated. Shares in the HighMark Funds and investments in HighMark Capital Management strategies are not deposits, obligations of or guaranteed by the adviser, its parent, or any affiliates. Any performance data shown herein represents returns, which is no guarantee of future results. Investment return and principal value will fluctuate, so that investors' shares, when sold, may be worth more or less than their original cost. Current performance may be higher or lower than the performance quoted. Investments involve risk, including possible LOSS of PRINCIPAL, offer NO BANK GUARANTEE, and are NOT INSURED by the FDIC or any other agency. Read the prospectus and carefully consider the Funds' investment objectives, risk factors and charges and expenses before investing. This and other information, including fees and expenses as well as the most recent performance data, can be found in the Funds' prospectus, which may be obtained by calling 800.433.6884 or by visiting www.highmarkfunds.com. Entire publication ©HighMark Capital Management, Inc. 2008. All rights reserved. CNNMoney.com Market Report -Aug. 11, 2008 .coy a 1"`a ~~~~ Symbol... ' Keyword Home Business News Markets Personal Finance Real Estate Technology Sma11 Business Luxury Fortune TRApYNG ~ € ~ ~~ 1~ ~~~ CENTER S~~~ ~ ~ r~IERiT~Aal` ~c~,49 - #9~~. Stocks gain as of I fal Is Page 1 of 4 Wall Street trims gains, but remains upbeat as crude prices retreat. 1. For banks, to By Alexandra Twin, CNNManey.com senior writer EMAIL I PRINT I SHARE I RSS 2, Stocks gain Last Updated: August 11, 2008: 5:45 PM EDT NEW YORK (CNNMoney.com) -- Stocks cut their gains Monday afternoon, but the broader market remained in positive territory as lower oil prices reassured investors for the second session in a row. ~~~ hlond;~y August il, 20U8 -, Ltlaw ~.fl3 ~0.41~ II,T82.35 3. Dollar makes The Dow Jones industrial average (INDU) gained 0.4%. The broader Standard & Poor's 500 (SPX) index gained 0.7% and the Nasdaq composite (COMP) added 1%. Small caps gained too, with the Russell 2000 index up 2.3%. Wall Street seemed to follow the path of the oil market throughout the session. Stocks slipped early as oil prices rallied on worries about supply disruptions in energy-rich Central Asia, amid the military conflict between Russia and Georgia. But crude resumed last week's slide after Iran called for renewed nuclear talks and China reported a decline in crude imports, countering threats to supplies in Eastern Europe. That turnaround helped stocks rebound. Oil prices then erased half of their losses late in the session, and the stock market followed suit. +2's.~ ~t,t17=f, 2,x.95 Ste' • X0.68%0 1,~.~ Quick Vote It's worth it for me to buy a hybrid if I save: _., $100 - , $500 -, $1,000 - •, I'm not interested in buying a hybrid or View results Gas down for 25th day Any advance Monday was "oil-related," said Dave Rovelli, managing director of U.S. equity trading at Canaccord Adams. He said that despite the events in Russia and Georgia, investors believe that prices are generally heading lower, and therefore stocks are recovering. 4. Oil falls to thr 5. Delta, North~n Markets Dow Jones Nasdaq S&P 500 10-year Bond http://money.cnn.com/2008/08/11/markets/markets newyork/?postversion=2008081116 8/11/2008 CNNMoney.com Market Report -Aug. 11, 2008 Due to a sense that demand is decreasing, "all these supply disruptions are being ignored in the great outflow of money out of commodities," said David Levy, portfolio manager at Kenjol Capital Management. He said the market is experiencing some sector rotation, with money coming out of oil and other commodities and going into healthcare and technology. Investors have even been dipping their toes into financials a bit lately, although he says that the sector remains unstable. "Basically, what the market loved going into the quarter it now hates and vice versa," he said. However, Rovelli noted that because it's a summer Monday, big stock moves can be deceptive. He said any advance will be tested later this week, when the retail sales and consumer inflation reports are released. The stock advance also seemed to lose momentum after the Fed released a study that showed 75% of banks have tightened lending standards on home mortgages and other loans. (Full story). Buy a Ilnk here $1 trillion in bank losses Stocks jumped Friday, with the Dow industrials gaining over 300 points, as oil prices lost almost $5 a barrel to trade at ~~~ ~iis three-month lows and the dollar rallied against other major ~~~~+- currencies. Stocks were also up sharply for the week, with the Dow gaining over 3.5%, the S&P 500 gaining almost 3% and the Nasdaq gaining 4.5%. Tuesday brings readings on the June trade balance in the morning and the July Treasury budget in the afternoon. Bank UBS (UBS) also reports results Tuesday. Fuel prices: U.S. light crude oil for September delivery lost 75 cents to settle at $114.45 a barrel on the New York Mercantile Exchange. Retail gas prices dropped overnight, extending a downward trend fora 25th day, according to a survey of gas station credit-card activity. (Full story.) Stock movers: Tech led the way, with Amazon.com (AMZN, Fortune 500), Apple (AAPL, Fortune 500) and N.Y. expands auction-rate securities probe Fannie sinks on downgrade Banks line up to make investors whole Airline stocks soar as oil falls Seat 37C -Brought to you by... Issue #1 on CNN -This week, 12pm ET http://money.cnn.com/2008/08/11 /markets/markets_newyork/?postversion=2008081116 Page 2 of 4 U.S.Dollar symbol SYMBOL LOOKUP More Gallelri Ch ~~ .~ As the mar region that used tc production. Here's small companies it~t Ob i.l.R ..«..:'"'",~,~ See •.•irsa. star. (More ) Th• oh The doll Games in Beijing, revenues. (More ) RETIRE RICI' _. ~ 8/11/2008 More Videos More Videos CNNMoney.com Market Report -Aug. 11, 2008 Google (GOOG, Fortune 500) among the big gainers. Amazon.com (AMZN, Fortune 500) gained 9.4% after Citi Investment Research said it will probably sell twice as many Kindle electronic book readers this year as Citi initially thought it would. Citi upgraded Qwest Communications (Q, Fortune 500) to "buy" from "hold," saying that the company is due for a restructuring that should improve returns to shareholders. Qwest shares gained 6% and topped the New York Stock Exchange's most actives list. Retail stocks jumped on bets that lower fuel costs will boost consumer spending. The S&P Retail (RLX) index jumped 4.8%. American Express (AXP, Fortune 500), AT&T (T, Fortune 500), Citigroup (C, Fortune 500), Home Depot (HD, Fortune 500) and General Motors (GM, Fortune 500) were the Dow's biggest gainers. Verizon Communications (VZ, Fortune 500) said it reached an agreement Sunday with two unions that represent 65,000 workers, averting a potential strike. The three-year contract gives workers pay increases and changes in retirement benefits. Shares gained 2% (Full story). Waste Management (RSG) boosted its unsolicited bid for rival Republic Services (RSG) to $37 per share, or $6.73 billion, from the original offer of $34 per share. Republic rejected that offer last month. Market breadth was positive. On the New York Stock Exchange, winners beat losers three to two on volume of 1.26 billion shares. On the Nasdaq, advancers topped decliners by more than two to one on volume of 2.32 billion shares. Other markets: In currency trading, the greenback rose versus the euro and slipped versus the yen, recovering from bigger morning losses. COMEX gold for October delivery fell $36.40 to settle at $824.30 an ounce. In the bond market, Treasury prices slumped, raising the yield on the benchmark 10-year note to 4% from 3.93% late Friday. In global trading, European markets ended higher, while Asian markets finished mixed. China's benchmark Shanghai Composite slumped to a 19-month low on economic worries. ^ First Published: August 11, 2008: 9:57 AM EDT The new math of lending Obama vs. McCain: Energy, taxes, more 2008 Fortune 500 World's 25 biggest companies Page 3 of 4 http://money.cnn.com/2008/08/11 /markets/markets_newyork/?postversion=2008081116 8/11 /2008 Investors hopeful for stocks as bear takes oil down - USATODAY.com Cars -Auto Financing Event Tickets Jobs Real Estate Online Degrees Business Opportunities Shopping Search How do i find it? Page 1 of 5 Becon Hame News Travel Money Sports Life Tech Weather T Log in Money » Markets Most Active Stocks Commodities Currencies Key Interest Rates Stock Screener More Market GET A ^ Enter symbol(s) or Keywords ~~~~;i ~ OJIA 11,782.35 +~ +48.0,, ~ NASD - 2,439.95 ~ +25.8 ~~. zf ~:n~ ~t~t ET c_:F gi;Ti:i,~, QUOTE: ~ ., Investors hopeful for stocks as bear takes oil down Updated 18h 3dm ago (Comments 8 I Recommend SLIPPERY SLOPE CRUDE Daily t3~11fD8 15D 14D 131D 1zD liD Aug Crude oil futures, dollars per barrel, 1 month. INVESTING TOOLS MANAGING YOUR MONEY: Sign up for our free a-mail newsle#ter. Every Friday, you'll ~' get a week's worth of USA TODAY's personal finance news and columns. READERS' CHOICE: See the 50 stocks that appear most in USATODAY.com reader portfolios. YOUR PORTFOLIO: Create free portfolios at USATODAY.com to track your stocks or mutual funds. Click here to get started. STOCK AND FUND SCREENERS: Market screener (mast active stocks), mutual fund finder, intraday stock screener. ASK MATT ABOUT STOCKS: 4 E-mail I Save I Print I Reprints & Permissions l By Matt Krantz, USA TODAY ( Mfxx it Finally, investors have a bear to get excited c3ther ways tau share: about. Yahoo! Buzz Digg Oil now is in unofficial bear market territory, with the price of a barrel of crude falling to Newsvine $115.20, down 21 % from its July 3 peak. Reddit While oil prices are still up 20% this year, Facebook the decline has been swift and vicious enough to give investors a bit of good news what s this? amid an anemic stock market and slowing worldwide economy The benefits of lower oil prices were clear Friday, as the Dow Jones industrials rose 303 points to 11,734, largely due to the $4.82-a-barrel drop in oil. "Lower energy prices (are) a net gain," says Jack Ablin of Harris Private Bank. "It's like a tax cut." Investors hope that low oil prices will give stocks the boost they need because of: •The swiftness and severity of oil's meltdown. It's taken just 25 trading days for oil to stumble into a bear market, catching many off guard, Ablin says. To put that into perspective, it took 190 trading days for the Standard & Poor's 500 to fall 20% from its Oct. 9, 2007, high. FIND MORE STORIES IN: Dow Jones ~ Jack Ablin of Harris Private Bank Investors may anticipate more declines in oil, says James Stack of InvesTech Research. Once oil prices start falling, the trend historically lasts for at least a year, he says. Although cheaper oil may not immediately reverse an economic downturn, "It will certainly lessen the depth or duration," he says. •The historical boost of cheaper oil. Lower oil prices tend to http://www.usatoday.com/money/markets/2008-08-10-oil-stocks N.htm Related Advertisi Invest with 15%+ Re+ Medical Imaging Centel Income-$25K Min Inv College Degree Onlii Get Your AA, BA, or BS Tech. 100% Online v Advertisement 8/11/2008 Investors hopeful for stocks as bear takes oil down - USATODAY.com Page 2 of 5 USA TODAY's Matt Krantz accompany rising stock prices. For instance, the last time oil i answers your questions daily at prices fell more than 20% was from July 14, 2006, to Jan. 18, E maney.usatoday.cam. 2007, when crude fell 34%. The S&P 500 rose 15% during that ~ period. .~ ~ ,•. Longer term, oil and stocks tend to move in opposite directions, • ~ says Russ Koesterich of Barclays Global Investors. Soaring oil has weighed more heavily on stocks in the last four months, he says, making the decline even more important now. "A pullback in crude certainly brightens the ,. picture." ,,,; •The ending of the energy trade. Much of the money that poured into oil and energy stocks may rush out and flow into different types of stocks, Ablin says. The flight was on Friday, as oil and gas equipment and services stocks fell 4%. But investors shouldn't assume that lower oil prices will automatically siphon away the market's pain. Stocks ~` on Yiour3tiiili, declined during two of the five recent periods that oil fell more than 20%. For instance, the S&P 500 fell 21 % from Sept. 20, 2000, through Nov. 15, 2001, despite oil prices falling 53%. The danger is that oil prices can fall because global economies are slowing, says Bryan Sadoff of Sadoff Investment Management. 'That would not be good for the stock market," he says. ,.; r ; ~s, s~~w',cnnt~s w ,., ~L ' ~ Share this story: l '{ ~tixx it Yahool Buzz Digg Newsvine Reddit Facebook What's this? ~ ~ ~ ~ _ ~ Posted 21h 17rn ago ~~ ) I~ 9 ~ ~ , Updated 18h 30m ago E-mail I Save I Print I Reprints & Permissions I To report corrections and clarifrcations, contact Reader Editor Brent Jones. For publication consideration in the ~ ~ ~ ~ r~etvspaper, send comments to letters@usatoday.com. Include name, phone nurnber, city and state for verification. ~+ ~ Guidelines: You share in the USA TgDAY community, so please keep your comments smart and civil. Don't attack other "~'t7Gk fpf G?R~?ilcf 1 Tef~.n readers personally, and keep your language decent. Use the "Report Abuse" button to make a difference. Read more. ~~~~ ' You must be logged into leave a comment. Log in ~ Register ~ • Real solutions for y~ __ __ ~. r, -~a Choose from the sele • Customized financi: • Search properties n Comments: (8) Showing: Newest first - • Full service relocati assistance _ • Apartments for rent I Oldefarte wrote: 1 h 29m ago • Home improvement WRONG, you've been listening to those idiot Democrats again [cne wrote: 5h 23m ago so lets see... we paid $ 147 a barrel less than a month ago and will probably be paying $ 85 next month. and ~,_ people wonder why there is such outrage at the way oil speculation works. There is no more and no less oil, we have never had a shortage, and we paid because a group of people bought the contracts and held them until they got the ransom they demanded]. The real reason for oil's decline is that Bush initiated the move to eliminate the ban on offshore oil drilling which scared the hades out of Russia and the middle eastern sheiks/OPEC. Now if the democrat-terrorists would do their part by lifting the ban, the economy/markets would benefit accordingly !!!!!1 Financing Options: Recommend ~ Report Abuse Need help financinc http://www.usatoday.com/money/markets/2008-08-10-oil-stocks_N.htm 8/11 /2008 All bets on oil price are suspect Browse the Canada.com Network Page 1 of 3 Shop ~ Find a Career ~ Find a Car ~ Find a Home New ~. ., _ ___~ SBPITSX 13,203.19 TSX Venture 2,015.35 Dow Jones 11,782.35 ', NASDAQ 2,439.95 ', S&P 500 1,305.32 Dollar 0.93E Home ' Analysis & Commentary ' Trading Desk Markets Money Small Business Careers Reports FP Magazine National Post Home /Analysis & Commentary / Columnists Search Fir~ancia! Past... Search All bets on oil price are suspect Claudia Cattaneo, Financial Post Published: Monday, August 11, 2008 Crude oil's steep decline in the past month has reinvigorated the debate over where prices are headed. The breadth is broad. In one camp, extreme bears are re- emerging, dusting off predictions the run-up is over. James Cordier, portfolio manager at OptionSellers.comin Tampa, Fla., for example, told Bloomberg News: "The bubble has burst. As the [U. S.] dollar continues to stabilize, the excuse for buying commodities is ended. The dollar has been strengthening, and that is one big catalyst that is gone." In the opposite camp, bulls see oil's fall as a hiccup in a rising trend. Witness Peter Buchanan of CIBC World Markets, who said in report to clients last week: "This month's pullback should prove no more lasting a detour from oil's five-year bull run than ?earlier corrections." Story Tools Change font size Print this story E-Mail this story Share This Story Facebook Digg Stumble Upon More Story tools presented by NPN~rork Blpgs How is it possible for supposedly informed market watchers to have such divergent views? Why is the price of oil so hard to predict? Who's right? http://www.financialpost.com/analysis/columnists/story.html?id=1125b382-1dc4-4ace-8221-ae252bab6e7e 8/11/2008 Columnists NP Network Blogs Diane Francis ' Wealthy Boomer Blog Legal Post Blog FP Comment All bets on oil price are suspect Here's one statement you can take to the bank: Bold predictions about oil prices are suspect at best. Often, they are dead wrong. Just ask The Economist, which made the most laughable oil prediction ever in its March,1999~ issue that oil would slump to US$5 a barrel since "the world is awash with the stuff, and it is likely to remain so." At the other end of the spectrum, the bright lights who see oil at US$35o a barrel are just as hilarious. Oil is so volatile that both bulls and bears will be right some of the time, and wrong some of the time. All you have to do is wait. For a measure of the volatility, consider that barely a month ago, oil hit a record of US$147.2~ and was seen as trending even higher. On Friday, oil slumped to US$ii5.2o a barrel and was seen trending lower. Meanwhile, nothing major, fundamentally, has changed. Oil's tendency to swing wildly is one reason oil industry leaders won't be caught dead saying where they see it going, even though they have more information than most about the oil market. They know oil is hard to call because there are too many moving parts --from world politics to demand, from production to spare capacity, from temporary interruptions to technological advancements that suddenly make deposits economic. They also know change tends to come out of nowhere. There's some degree of wishful thinking in oil price predictions, too. Oil bulls tend to be located in areas that produce, such as Alberta, that have a vested interest in oil prices rising, and oil bears tend to be in areas that consume, such as Ontario, that want prices to decline. Also, beware of market watchers supporting their own book -- that is, talking prices up or down, depending on the investments they made or recommended to their clients. Despite all of this, bears' bet that oil is suddenly in reverse seems weak. It's based on a rising U. S. dollar and indications of slower global economic growth, which could depress oil demand. On the other hand, consider this: Demand rose in the first half of the year, reaching 8~ million barrels a day. While OECD countries used 520,000 fewer barrels a day in the first half of the year, the rest of the world burned i.3 million more. Most public oil and gas companies are struggling with production declines because they don't have enough projects to replace the oil they are producing. While new projects are being planned, it takes years to receive permits and get them built. Access to resources is declining Page 2 of 3 http://www.financialpost.com/analysis/columnists/story.html?id=1125b382-1dc4-4ace-8221-ae252bab6e7e 8/11/2008 All bets on oil price are suspect around the world, either because governments want to keep them to themselves, or because people don't want oil development because it's bad for the environment. < 1 2 > Get the Natianal Past newspaper delivered to your home Crude Oil Prices See who's pumping oil for $13.21 & selling for over $120. Free Rpt www. I Hues tm e n tU . n etlO i I_Re p o rt Hot Dividend Stocks Discover Sizzling Hot Stock Picks Earning Annual Yields Up To 45% MoneyAndMarkets.com Page 3 of 3 The Bakken Oil Formation The New Black Gold Rush Is On. Early Profits Revealed: New Report. 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Unauthorized distribution, transmission or republication strictly prohibited. http://www.financialpost.com/analysis/columnists/story.html?id=1125b382-1dc4-4ace-8221-ae252bab6e7e 8/11/2008 Ads by Google Stocks: A Wild Ride to Nowhere Page 1 of 2 INVESTING August 11, 200$, 12:01AM EST Stocks: A Wild Ride to Nowhere Despite the big swings of the past several weeks, the S&P 500 is virtually where it was in late June. What's behind the market's crazy summer? by Ben Steverman The stock market has had more swings lately than a gymnast on the pommel horse. Stocks rallied Aug. 8, with the Dow Jones industrial average up more than 300 points-a jump of 2.65%-and the Standard & Poor's 500-stock index gaining 2.4%. A rally like that might look like a decisive move higher, but this summer it seems almost routine. In the past 10 days alone, the Dow has seen triple-digit swings up or down on seven days, including Aug. 5, when the blue chip benchmark dropped 332 points. Laid out on a chart, the summer's stock movements look like the teeth of a saw: repeated, sharp moves up, then down, then up again. INVESTORS ARE STUMPED Despite the wild ride, stocks have gone nowhere in the past six weeks. More than a week into August, the S&P 500 trades almost exactly at the same level as late June. "It's crazy," says Dave Rovelli, managing director for equity trading at Canaccord Adams. What's driving this wild ride? "I don't think anybody knows what to do," he says. Many long-term investors seem to be leaving their money on the sidelines, while they waver between optimism and pessimism. Meanwhile, short-term traders jump at every piece of news, pushing the market hard in one direction for a day or less, says Jerry Webman, chief economist at OppenheimerFunds. Lifting investors' spirits every few days have been frequent drops in the price of oil. A month ago, crude oil was trading above $147 per barrel. On Aug. 8, it settled just above $115 per barrel. Yet the persistent financial crisis continues to weigh on the market. After reporting huge losses, three giant financial firms saw shares plunge on three successive days: Mortgage financier Freddie Mac (FRE) dropped 19.3% on Aug. 6; insurer AIG (AIG) fell 18% on Aug. 7; and Fannie Mae (FNM) fell 9% on Aug. 8. Now that's volatility. The stock market tends to look ahead to the future-but that future's hazy now. AN ECONOMIC TURNING POINT The U.S. and world economies seem to be at "turning points," Webman says. It's hard to grasp the complexities of the financial system's distress or the stress on the world economy. "We are seeing things that we don't know how to find past models for," Webman says. In the U.S., the economy is weak-but how weak and for how long? "If we're going to come out of the recession in six months, you want to be buying stocks now," Rovelli says. Brian Gendreau, investment strategist at CNG Investment Management, is one of the many on Wall Street who have taken await- and-see approach to the market this summer. Since oil prices are very hard to predict, he sees it as "very dangerous" that "the http://www.businessweek.com/investor/content/aug2008/pi20080810_976807.htm?chan=investing invest... 8/11 /2008 Stocks: A Wild Ride to Nowhere Page 2 of 2 market [was] driven by oil prices and nothing else." On other fundamental measures, there are also big question marks this summer. The current economy seems weak, but the outlook for corporate earnings is "surprisingly good," Gendreau says, and the economy may improve in 2009. The daily headlines from the stock market are no doubt confusing to the public and retail investors. For traders, volatility offers opportunity for gains if they can quickly enter and exit stocks at the right times. "But it's horrible for people who have their life savings in the market," Rovelli says. "It makes them very nervous." By contrast, market pros don't appear particularly nervous. CALM AMID CHAOS Despite stocks' wild swings from day to day, there has been no spike in the VIX, a market volatility index based on the options traded on the S&P 500 that often reflects the level of fear and panic in the market. The VIX hit a recent high of 32.24 on Mar. 17, after the collapse of investment bank Bear Stearns. And it rose above 28 in early July amid worries about Freddie Mac and Fannie Mae. But the VIX, which trades on the Chicago Board Options Exchange, was barely above 20 on Aug. 8, three points below the past year's average. The lack of fear may reflect confidence among professionals that, eventually, the stock market will settle down and find a direction. Looking at the VIX, "one would have to conclude that this period of high volatility is temporary," ING's Gendreau says. He expects to change his "neutral stance" in a few weeks when the outlook clears a bit. In the meantime, "people should not be trying to watch the market with a magnifying lens," Webman says. Investors should be focusing on the long-term trends that they believe are going to create wealth in future years-not the daily headlines, he says. There's a chance the market still has some wild oats to sow. Gendreau warns that the fall Presidential election campaign could add to the uncertainty. Before Labor Day weekend, there are still a few more weeks of hot weather, long days, and relaxing vacations. But on Wall Street, the waning days of summer should be anything but lazy and quiet. Steverman is a reporter far SusinessWeek's investing channel. Copyright 2000-2007 by The McGraw-Hill Companies Inc. All rights reserved. ~'~ r ,, :fit. http://www.businessweek.com/investor/content/aug2008/pi20080810_976807.htm?chan=investing invest... 8/11 /2008 The Bad-News Banks - Forbes.com Page 1 of 4 ~ Search: Forbes.com Quotes Video Web Blags Advanced ill E •~€ '.. _.. __ '. U.S. EUROPE AStA HOME PAGE FOR THE WORLD'S BUSINESS LEADERS Free Trial Issue HOME BUSINESS TECH MARKETS ENTREPRENEURS LEADERSHIP PERSONAL FINANCE FORBESLIFE LISTS OPINIOI Autos Billionaires Energy Logistics Media & Hollywood Pharma & Health Care Retail SportsMoney Wall Street Washington E-Mail I Print I Request Reprints I E-Mail Newsletters l~ RSS The Bad-News Banks Liz Moyer, 07.15.0$, 6:03 PM ET Look for another wave of write-downs on Dugg an Forbes.cam mortgage asset values as banks deal L. Ron Hubbard, hip new with rising loan defaults. Reason: Many banks have been overly optimistic about young adult author the housing market. What Apple And Michael Phelps Share in Common Gee, what a surprise. Forbes making a hilarious mistake about Apple Inc. The futures market is factoring apeak- Bob Woodward Exposes to-trough decline in housing prices at Bush-Again: What Went 33%, while the biggest U: S:.banks have ~~ ~~~~~~~~ on in Secret far rosier outlooks, according 4o O h i l M ppen e mer ana yst eredith Whitney. Visit The Bank of America (Wyse: BAC -news - Forbes.com Digg ~ ~ people) sees a decline in housing Channel prices of 30%, Citigroup (Wyse: C - news -people) 20%, Fannie Mae (Wyse: FNM -news - people) and Freddie Mac (Wyse: FRE -news -people) 20% to 25%,JPMorgan Chase (Wyse: JPM -news - people) up to 16% and Wachovia (Wyse: WB -news - people) just 12. 9%. Housing price declines are a big factor in how banks value assets on their balance sheets. The continued slide in housing prices means banks constantly have to lower their mortgage-related asset values, creating a perception of instability. Whitney, who has been among the most bearish analysts on the bank stocks since the credit crisis erupted last year, says the optimism ~will~~~~~ ..... result in "a material and protracted write-down and capital pressure scenario" well into next year. She notes that housing prices have already fallen 15% since last year, which was what was once considered the worst-case scenario. Housing price declines "will at least be at the high end of expectations," Whitney says. ADVERTISEMENT Bid I~Qne~ Bearish But Insiders Bultish Make Farbes.cam My Home Bookmark This Page Page News by E-mail Get stories by E-Mail on this topic FREE .................................................................................. Companies US Bancorp [] Freddie Mac JPMorgan Chase ^ National City ................... Topics [~ Banks [J Write-Downs Foreclosures ^ Mortgage Meltdown Become a member FREE ..................................... Enter Username Select Your Title Already a Member? Log In Enter E-Mail Address Receive Special Offers? [~ FAQ ~ Terms, Conditions and Notices ~ Privacy Policy Isn't that nice? Analysts already have grim outlooks for banks for the ' """""""""""""""""""""""""""""""""""""""" foreseeable future. "Current conditions in the banking industry seem to Also available: E-Mail Newsletters http://www.forbes.com/2008/07/15/citigroup-fannie-freddie-biz-wall-cx lm 0715banks.html 8/19/2008 The Bad-News Banks - Forbes.com be even bleaker than they have been in the last few quarters," says David Hendler from CreditSights. Banks have raised more than $77 billion in new capital this year only to see most of it wiped out from continued write-downs. Shares of National City (Wyse: NCC -news - people) have been down as much as 17% this week alone, Fifth Third 18%, US Bancorp (Wyse: USB -news -people) 12% and Wachovia 21 %. Shares of Bank of America, Citigroup and JPMorgan Chase have each been down as much as 8% this week. Whitney sees Wachovia as having the "greatest reckoning" in the coming quarters. It recently replaced its chief executive officer, naming Treasury official Robert Steel to take the post after the ouster of G. Kennedy Thompson in June. Steel has to work quickly to assess the company's portfolio for assets to sell and decide whether to defend the dividend, a $3.5 billion annual payout that could be used instead to plug the drain in its capital from continued write-downs. Wachovia already warned it would lose up to $2.8 billion in the second quarter and set aside extra reserves for loan losses of $4.2 billion. "We are hard pressed to find examples of financial companies that have successfully shrunk their businesses," Whitney said Tuesday. Write-downs Galore In Europe ~1 UBS's $37 Billion Pain i ill Your Rating Reader Comments Page 2 of 4 Mortgage Rates Click product name to view rates in your area PRODUCT TODAY LAST WEEK 30 Year Fixed 6.25% 6.27°l0 15 Year Fixed 5.77% 5.84% 1 Year ARM 6.14% 6.13% 30 Year Fixed Jumbo 7.30°l0 7.38% 511 ARM 5.5$% 5.70% 311 ARM 6.28% 6.39°I° View mare rates » RaOe data Banl~csit~e.corsll~, provided by Home Equity Loan Rates Click product name to view rates in your area ADVERTISEMENTS Top Solar Stock Pick - SSLR Solar Company Heating up Texas. Investment Stocks Trading News www. SunriseSola rCorp. com overall Fast, Streamlined Trading Rating ~ Options & Stocks, Flat $9.95/option $4.95 Stock, $0 per contract/share www. optionshouse. com Posted by Mayl5thProphecy ~ 07116/08 05:19 PM EDT This is more proof of the 100% accuracy of the MAY 15th PROPHECY Do a Google search of the MAY 15th PROPHECY and you will see what will happen next [~~„ Post A ~c~rnrrrer~t~ E Have a question? Ask our community of experts here. More On This Topic Companies: BAC I C I FNM I FRE I JPM E-Mail Newsletters: Sign Up Now To Stay Informed On A Range Of Topics Attach: Customize Forbes.com Now To Track This Author And Industry Article Controls E-Mail I Print I Request Reprints I E-Mail Newsletters The Most $100K+ Jobs Search 72,384 Jobs that pay over $100,000 at TheLadders.com. www.TheLadders.com Solar Stock Pick - EVSO Emerging Green Energy Co. Growth Stock Investment www. EvolutionSolar.com Alternative to Open Back Surgery Minimally invasive, corrects most spinal disorders, 21st century laser techniques, outpatient surgery. www.laserspineinstitute.com Buy a link here ADVERTISEMENT Related Business Topics ................................................................................... Business Ethics Office Desks ^ ^ Content Management Software ^ Accountin~Software ~' del.icio.us ~ ~ Digg It! I Ya- My Yahoo! ~ Share I €~ RSS http://www.forbes.com/2008/07/15/citigroup-fannie-freddie-biz-wall-cx_lm 0715banks.html 8/19/2008