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Second Quarter 2008 Quarterly Newsletter

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Pachyderms & Asses

Elephants and donkeys. Republicans and Democrats. No matter what
you call them or what your affiliation, the conventions and big election are
coming soon. In less than four months, we will all know who our next
President will be.

This subject may make you somewhat nervous, just in case the current
market conditions haven't made you nervous enough. It appears to be a
close race, with the Democratic candidate having as much chance to win
as the Republican. Conventional wisdom says that a Democratic
President poses some dangers to the stock market and investing in
general. Whether correct or not, many see Democrats as "tax and
spenders", while viewing Republicans as champions of tax cuts.
Republicans are known as pro big business, whereas Democrats are seen as pro-regulatory and
potentially anti stock market. This line of reasoning says that, simply put, a Democrat in the White
House is a scary proposition for the average investor.

Fortunately, as we have discussed in earlier quarterly reports, conventional wisdom can often be
dead wrong. Numerous studies have been done on this subject, and the results should allow for a
sigh of relief if indeed a Democrat is elected. A UCLA study* in 2003 found that during the period
between 1927 and 1999, a broad-based market index averaged about 5% better average annual
returns when a Democratic occupied the White House compared to a Republican. A Democrat-
controlled Congress showed similar patterns. In 100 year (1900-2000) studies shown in the 2000
edition of the Stock Trader's Almanac, a Democratic Senate returned 10.5% vs. 9.4% for
Republicans, and Democratic House returned 10.9% vs. 8.1% for Republicans

Economic growth, as measured by GDP (Gross Domestic Product), followed the same pattern. The
Almanac showed that since 1930, (when the data became available), GDP was 5.4% for Democrats
and 1.6% for Republicans. Finally, as if to add insult to injury, the UCLA study also reported that
market volatility was actually less in Democratic administrations than Republican ones.

According to all this data, shouldn't we just do away with all Republicans and crown the Democratic
candidates "Kings for Life"? Well, not so fast. When you look behind the numbers, there may be
some data skewing. Firstly, many of the major bear markets occurring in the 20th century had
Republican Presidents in office (1929, early 1970's, 1987 and early 2000's). While you could still
point to the presidential leadership, or lack thereof, as a major reason for the market weakness, at
least some of the blame for the poor market returns may come from the previous administration's
actions. Also, along with higher Democratic market averages and economic growth came higher
interest rates and their corresponding higher inflation rates. Consequently, the inflation-adjusted
rates of return make the comparisons a little less glaring, although they were still meaningfully

The only thing you should probably take away from these studies is that having a Democratic
President elected this November would not, in and of itself, mean the next four years would have a
demonstrated negative effect on the stock market, investing and the economy. So regardless of
what type of political animal you are, go perform your civic duty on November 4th, and let's see what
new leadership can do to help guide this country toward better times.

*Journal of Finance 10/2003 "The Presidential Puzzle: Political Cycles and the Stock Market" Pedro Santa-Clara and Rossen Valkanov


In November 2007, Sarah Paris became our Director of Marketing. She has an
impressive background, having worked at Goldman Sachs in New York City and
most recently with a Charlotte-based hedge fund. Sarah graduated cum laude
with a degree in economics from Duke University, and is an ardent (too ardent?)
Blue Devil's fan. Sarah and her husband live on a farm in Lincolnton, NC, where
her enjoyment of the country is enhanced by her two cats, several pygmy goats
and a miniature donkey.

Earlier this year, Dollie Smith-Feldmeth became a financial advisor in
our Asheville office. She has been in the financial business nearly 10
years, most recently having investment advisor responsibility for eight
office locations of a regional bank. Dollie has a business degree from
Western Carolina University and she lives with her family in
Hendersonville, NC. She is active in community affairs and is a big
Florida Gators fan.

Financial advisor Clay Thornton joined the firm in June, and will be in charge of our
Summerville (Charleston) SC office. Clay has over 20 years experience with top 5
securities firms. He was born, raised and still lives in Summerville with his family.
Clay is a graduate of the University of South Carolina with a degree in finance, and is
an active tri-athlete. Clay's long-time senior administrator, Jessica Robinson, has
joined him in the move to this new office, and we could not be happier.

Second Quarter 2008 Asset Class Returns

The second quarter was a big tease for investors. After hitting lows in mid March, most equity asset
classes spent the first half of this past quarter repairing themselves, with most up 10% or more from
those March lows. But starting in early June, broad based selling once again ensued, and most
equity asset classes ended the second quarter lower then they started. Domestically, Small Caps
out performed Large. Normally, in the first stage of a new bull market, Small beats Large. Could
this be an early sign of a potential bottoming? Real Estate's -5% returns in the second quarter offset
its positive first quarter returns, and assured that all equity returns are underwater on a year-to-date

Internationally, it was worse. All equity classes underperformed their domestic counterparts, with
International Real Estate leading the way down. Even bonds experienced losses, as interest rates
rose due to fears of inflation. All in all, it was another tough, grinding quarter.

On the economic front, it is no more pleasant. Statistically, we are not in a recession. (First quarter
2008 GNP was revised to up 0.9%, whereas a recession is defined as two consecutive quarters of
negative GNP growth). This is somewhat surprising given the barrage of tough news on energy, the
US dollar and credit markets. The economy is really hanging tough, but one has to wonder if we are
destined for an official recession as the year continues. The biggest culprit appears to be energy.
You can basically tell the direction of the daily market fluctuation by watching the intra-day pricing of
crude oil. Regardless of the energy bubble that appears to be forming, some cessation of continued
"new highs" in energy will probably be needed to place a support under stocks.

Single family housing sales, while still weak, appear to be slowing their downward velocity. In some
regions of the country, sales of existing inventory seem to be stabilizing, at least over the short term.
It will take a few more months of comparisons, but we may be seeing the beginning of a bottoming
process. This will likely be a multi-quarter process, with more time needed to work off the excesses
of the last decade.

Past bear markets have shown that they often end well before the bad news gets better. Market
bottoms usually take place when the news is at its worst, with nothing positive appearing on the
horizon. That is the reason attempting to time market swings is so unprofitable. With markets
discounting news often 6 to 9 months in advance, if you wait until the news is "better", you're
guaranteed to miss a sizable portion of the next bull trend. For that reason, we don't make major
strategic changes in your portfolio during these tough times.

We know that when the end of the down cycle takes place, there are no bells ringing or whistles
blowing. If you want to ride the next market advance in its entirety, you have to be in position the
day it starts...and you will be. So be patient. Trust an investment methodology that is
scientifically/academically backed, that has won a Nobel Prize in Economics and has been used for
over 50 years by some of the largest institutional investors on the planet. If realizing excellent long
term rates of return on equities were easy, everyone could do it. It isn't, and they don't. But you will.

Due to our recent name change, amendments have been made to our SEC Registration Form ADV
Part II. If you would like a copy, please contact Kevin Broadwater at 828-236-5801 or kevin.broadwater@dhgwa.com.

The next few months promise to be exciting, for both short term economic and long term political
reasons. Stay cool...in more ways than one.


Frederick F. Kramer IV, JD
Chief Investment Officer