Spero-Smith Investment Advisers, Inc. Independent Investment Advice, Asset Management and Financial Planning Consultations.

Financial markets in the second quarter reflected increased concerns about the state of the economic recovery and elevated debt levels among advanced economies. Equity markets around the world suffered declines in the quarter, with the S&P 500 down 11.9%, the EAFE index of developed foreign markets down 16.9%, and the EEM index of emerging markets down 11.4%. Fixed-income markets were relatively stable although yields rose in several European countries with high debt ratios.

As we discussed in our client seminar on June 16, we believe the global recovery remains intact although it is not as robust in the U.S. and other advanced economies as hoped. While U.S. manufacturing activity and corporate profitability have rebounded, excess capacity exists in many sectors of the economy. It remains to be seen how quickly the private sector can fill the gap from the winding down of government stimulus programs.

Although the quarter was filled with negative developments ranging from the Gulf oil spill to concerns about sovereign debt default in Greece, we were encouraged by increased international efforts to address fiscal and monetary issues. In particular, the establishment of a nearly $1 trillion stabilization fund by the European Community and the International Monetary Fund (IMF) sent a strong message of unity and financial backing for member countries. The European Central Bank continues to provide short-term liquidity to banks, is purchasing weaker sovereign debt to support pricing, and is conducting stress tests of major banks to assess their stability. Several countries have announced plans to significantly reduce spending and debt, including higher retirement ages for pensions. While the austerity measures are painful and have spurred strikes and protests, the steps being taken will help to secure longer-term growth potential. We are also encouraged by the G-20’s reaffirmation of its November 2010 deadline for agreeing on new capital standards for banks.

In the U.S., the end of tax credits for homebuyers resulted in weak housing sales in May, both for existing and new homes. Home sales had surged in previous months as buyers hurried to sign contracts before the April 30 deadline for tax credits. While the supply of houses on the market remains high at 8 ½ months, it is down from the 11-month levels reached during 2008 (the number of months supply represents how long it would take to clear the inventory at prevailing sales levels).

Although constraining the economy currently, the very low levels of new home construction will help the market regain equilibrium. During the housing boom from 1998 through 2006, new homes were being built in the U.S. at an average annual rate of 1.8 million, significantly above the longer-term household formation rate of 1 to 1.5 million per year. Since the housing crash, however, housing starts cratered to 905,000 in 2008 and to only 554,000 in 2009. The latest data for May 2010 indicate a current annual rate of 593,000. Household formations typically slow during recessions as multiple generations of families move in together. The Pew Research Center has reported that seven million more people were living in multi-generational households in 2008 than in 2000. As the economy continues to recover, however, household creations are expected to pick up. In sum, housing inventories over time should return to a more normalized level of six months’ supply due to the sharply reduced construction levels and expected gains in household formations as the economy strengthens.

The high unemployment and general slack in the economy may contribute to further choppiness in the markets, but we remain upbeat about the longer-term prospects for global growth and equity returns. The major reason for this, as we’ve discussed previously, is the continuing strength in emerging economies. A recent report from the IMF projects that within five years Asia’s economy (including Australia and New Zealand) will account for more than a third of global output and be comparable in size to the economies of the United States and Europe. Countries such as China and India are focused on increasing domestic demand for goods and services and reducing their reliance on exports for growth.

Despite sluggishness in a number of advanced economies, recent projections from both the IMF and the Organization of Economic Co-Operation and Development (OECD) indicate healthy growth for the global economy. The May 2010 issue of OECD Economic Outlook provided the following data and projections for GDP growth.

	Average Annualized Rate 1997-2006	2007	2008	2009	2010E	2011E
Global	3.7	5.1	2.8	-0.9	4.6	4.5
U.S.	3.2	2.1	.4	-2.4	3.2	3.2
China	NA*	14.2	9.6	8.7	11.1	9.7
India	NA*	9.6	5.1	6.6	8.3	8.5
Brazil	NA*	6.1	5.1	-0.2	6.5	5.0
Euro Area	2.3	2.7	.5	-4.1	1.2	1.8
Japan	1.1	2.4	-1.2	-5.2	3.0	2.0

In sum, the emerging economies are driving a global recovery from the worst downturn in decades. Their growth fuels demand for goods produced by companies around the world. Given their younger populations, desire for higher living standards, and low debt levels, we expect emerging economies to support solid global economic and equity growth for years to come.

We enjoyed seeing many of you at our client seminar and were pleased with the positive survey results and constructive comments. We encourage you to contact us at any time with questions or concerns, or to inform us of any changes in your financial affairs. And, as always, we are deeply appreciative of the trust you have placed in us as your financial advisor.

2nd Quarter 2010 Market Commentary & Outlook

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