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The Quantum View 1st Quarter 2007 In This Issue Slower Growth, But Still Growth Tax Loss Harvesting IRA Allocation Going Green Slower Growth, But Still Growth By Mat Johnson This past quarter, investors were reminded about the other component of investing — risk. In this case, risks of an economic slowdown, as suggested by former Fed Chairman Greenspan's comment regarding the potential for a recession this year, as well as financial market risk resulting from foreign market volatility. The natural impulse to such concerns is to pare back on stocks and buy more bonds. This year, however, this reaction could prove to be the wrong response. As we highlighted in our 2007 outlook, the principal concern of investors entering the year was a marked slowing in consumer spending resulting from housing market weakness, and ultimately, an economic recession. Our view was then, and continues to be, that consumer spending will moderate this year, though from abnormally high levels in prior years. Either way, slower consumer spending will have the effect of dragging down growth in the broader economy, but by no means push it into recession. Another factor that was thrown into the mix early this year is the impact of foreign stock market volatility on the U.S. financial markets. In late February, the Shanghai stock market lost -8.8% of its value in a single day, unnerving global financial markets. While the decline in the U.S. equity market was more moderate, it still totaled — 3.6%. The result was increased concern about the near-term prospect for U.S. equities, and growing disregard for the fundamental underpinnings of the long-term outlook. As has since become apparent, the global equity markets have shrugged off these concerns to reach new highs. Unfortunately, neither concern of a U.S. economic slowdown or foreign market volatility has completely dissipated, though placing these factors into context should provide investors with some sense of calm should they begin to tremble once again. The backdrop against which the widely anticipated U.S. economic slowdown is playing out is comprised of several structural forces currently underway: increased global trade and outsourcing, financial deregulation and the rise of Asia. All of these factors are long-term in nature, and should result in substantial long-term benefits. Moreover, in our view they have also played a significant role in the recent recovery of global financial markets following the late February market correction. Outsourcing, the on again, off again, dirty word associated with globalization, has resulted in more profitable, more leveraged, yet more stable business models. When companies outsource to less developed emerging economies, they are in fact outsourcing critical, but very volatile parts of their business — capital spending, inventories and manufacturing. What remains are the more profitable pieces of their business, such as development, design and marketing, and as a consequence are better focused on their most profitable activities. Even beyond being the most profitable parts of their business, these activities are also more stable. The result is that when faced with the prospect of a slowing economy, employees are much less exposed to the cyclical volatility of the past. This has effectively been "outsourced" to developing markets. Not only does this have key implications for more stable employment levels at home, but also on factors such as wages and salaries, the ability to service debt burdens and consumer confidence. In the context of stock markets then, it is businesses that are listed on exchanges, and therefore if an exchange is comprised of a large number of volatile manufacturing and mining companies, as would be more likely in emerging markets, one would expect greater volatility in emerging market exchanges vis-à-vis developed market exchanges which are comprised of a larger number of service oriented companies Another concern that has long plagued investors are consumer debt burdens, though this too has been favorably impacted by increased globalization. Freer trade has increased global competition, resulting in lower and more stable levels of inflation, and as a by product, lower levels of interest rates which directly impact consumers' (and companies') ability to borrow and service their debts. Combine this with greater financial deregulation, and individuals can better manage their liabilities, and assets, in ways that only corporations could more than a decade ago. While there is a lot of negative attention focused on household financial products such as home equity lines of credit, and the trouble some consumers are facing as a result, far more consumers are beneficiaries of these products by allowing them to tap into what was once a highly illiquid asset. This too produces greater economic stability despite the incidence of increased leverage on the part of consumers. Finally, the rapid growth of emerging Asian markets, and in particular China, has resulted in not only the opportunity for developed economy businesses to outsource their volatile and less profitable business activities abroad, but is creating a new source of global demand, increasing global savings as these economies better utilize their vast resources, and thereby providing further fuel to finance future investment opportunities. Each of these factors is a long-term contributor to future growth, and represents a fundamental underpinning for sustained growth in consumer spending, company profits and increased financial market stability, though they will certainly not be without their short-term hiccups. Growth Matters Despite our confidence in the long-term fundamentals outlined above, the remainder of 2007 will not be without its challenges. As this commentary began, there is a widespread recognition that the U.S. economy is slowing this year and the typical tendency is to reduce exposure to equities, and increase bond holdings. For many of the reasons that we cited above, we believe this typical reaction would be misguided. For one, if there is merely a slowdown, and not a recession, as is expected, then historically the market has not only done well, but very well, as was the case during the soft-landing years of 1995-1997. The most overlooked aspect to successfully investing in a slower economic backdrop is the focus of investment opportunities on growth companies. That is, to counter the effects of slower economic growth by identifying growth companies, rather than seek the perceived security of value companies and bonds. The key to successfully doing this is to identify and invest in companies that are responsible for determining their own growth prospects, as opposed to those that are reliant upon a strong economy to provide for their growth. To successfully navigate a period of slower economic growth is to also appreciate the dynamics between large and small companies, and the role they play in the business food chain. That is, large companies are typically closer to the end user, while small companies tend to be suppliers to large companies. Large companies therefore carry a great deal more leverage with their smaller counterparts and are better able to weather periods of slower economic growth, whether by having the means to affect customer demand through merchandising and discounting, gaining leverage versus their suppliers, or driving growth through expanding into new markets, for example. For these reasons, as well as for the fact that we are currently finding the best value in the market among large growth companies, we are optimistic about the remainder of 2007. However, since the past strength in the equity market has not been the result of large cap growth company performance, the rotation out of those areas of prior strength may result in some near-term volatility over the next several months ahead. Given that growth is our focus, and risk versus reward is our discipline, we feel well positioned to continue delivering solid returns for our clients. Back to Top Tax Loss Harvesting By Howard Aschwald Tax loss harvesting is a way to boost after tax portfolio returns for a taxable investment account. One of the benefits of an individual stock (or bond) portfolio is the ability to identify and utilize the tax characteristics of the underlying securities. Using these characteristics, a portfolio manager can sell securities that are down in value from their original purchase price. This technique can lower the net reported realized gains on other securities that were sold during the tax year or the gains from assets held outside of the portfolio. As long as the portfolio manager waits at least 31 days before buying back the sold security, the loss is fully deductible from gains and can also be used as a deduction against other income on the tax return. In addition to selling stocks with a loss to offset other gains, the timing of sales can make a difference between short term or long term gains tax treatment. Securities held for more than twelve months receive long term capital gains treatment. The tax on short term gains is usually more than double that on long term gains. A portfolio manager can decide that it may be better to wait a few more weeks before selling a security for a gain, if that would change the holding from short to long term. Tax savings should only be one factor in the decision of when to sell. It is much better to sell a security with even a short term gain, rather than wait until it becomes a long term holding, but goes to a loss. Conversely, 31 days can be a long time to wait before buying back a security that could appreciate rapidly, just because it has a tax loss that can be harvested. Back to Top IRA Allocation By Howard Aschwald An important financial planning decision is what type of assets should be in an IRA (or other type of tax deferred plan). The short answer — it depends. It depends on total investment assets available, expected future contributions, anticipated withdrawal amounts, tax bracket (before and after distributions begin), length of time before withdrawals begin and most importantly, what rules Congress might change in the future. The last is just a reminder that plans, be they financial or otherwise, need to be designed for flexibility. If current tax savings are important, it is generally better for high tax bracket individuals to put high tax investments like bonds and real estate investment trusts into an IRA. Investments more likely to be taxed at favorable capital gains rates should be in the taxable portion of an individual's overall investment allocation. This can make the IRA grow slower than a taxable account, but will allow for gains and losses to be fine tuned in the taxable account. Since IRA accounts are also designed as long term investment vehicles, it may be wiser to put more volatile, higher growth assets into the IRA and leave more stable investments, like bonds, in the taxable account when having ready access to funds is an important consideration. If this seems like contradictory advice, it just shows that financial planning solutions really are much more about customization to the individual rather than a one size fits all approach. Back to Top Going Green By Stephen Bradley Jr., Adam Breech and Katie Salvaterra In recognition of Earth Day and with so much public interest lately in global warming and alternative energy, companies are feeling the pressure to "go green" and develop environmental initiatives. The consequences of this trend are having a profound effect on the way companies are viewed today. An ever-increasing amount of consumers have begun to track companies with regards to their concern, or lack thereof, for the environment. This is by no means a new phenomenon, but it continues to gain ground in importance. There are also the more general reasons that aren't as reliant on public opinion: increased energy costs, shortage of natural resources, and environmentally concerned shareholders. Increasing profits and helping the environment are no longer mutually exclusive as was the case in the past; in fact they are becoming entwined. Companies are no longer just meeting environmental regulations, they are figuring out ways to surpass them in order to create competitive advantages against their rivals. Some companies have even begun incorporating their environmental strategies into part of their overall corporate strategy. "Green" companies are the rising trend of the future. Going "green" is a great way for companies to improve their operating efficiency, lower emissions, and usually increase profits. Companies that decide to acknowledge these pressures are leading the way in creating new methods to lower energy usage. Other companies are creating strategies to help decrease pollution and to lessen their risk of environmental liability, which can have an impact on stock prices. With these new demands, companies who fail to recognize them could fall behind the pack. A company's green initiatives are only a small piece of the larger puzzle that is the effect of environmentalism on our economy. Other issues that can carry as much if not more weight are alternative sources of energy, public trading of carbon emission credits, and legislative policies and regulations concerning the environment. Back to Top

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