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July 25, 2009

Dear Clients and Friends,

The second quarter's significantly positive investment returns were a welcomed relief. The period from the fall of 2007 through the first quarter of 2009 was brutal on virtually all investors and investment classes. However, we are encouraged that our clients seem to have weathered the storm better than most. We base our belief on the decrease in reported asset levels managed by other independent firms, as reported in a recent issue of Wealth Manager Magazine. In addition, it appears that we have all pulled through this period without letting the financial and economic crisis get the best of us emotionally; no small feat.

However, these are still very difficult and challenging times. The stock and bond markets may have bounced back too far and too soon. We remain cautious and would not be the least surprised to see lower investment valuations in the months ahead. Further, young and old have many justifiable reasons to be discouraged. High unemployment, high debt levels, tight credit, depressed home values, rising tuition costs, family and friends in financial difficulty, and investment values still below their peak, are just some of the reasons to limit our optimism.

Continuous negative thinking is seldom a good thing. It creates a spiral of inaction or negative behavior, making it more difficult to move forward in a positive way. The power of positive thinking is not a myth. It's actually necessary to making personal progress and getting the most out of our own talents.

We would like to encourage each of you to be an ambassador for hope where you see despair. Eleanor Roosevelt was quoted as saying, "It is better to light one small candle than to curse the darkness." Take the time to light a candle for others by giving them a little positive encouragement, and don't forget to light a candle for yourself.

Let young people know that regardless of the external obstacles they face, their happiness, however they define it, will largely be determined by their own thoughts and actions. The unemployed should use this period to invest in their most precious asset, their own human capital. They can do that by learning new skills, gathering new information, and making new contacts. Success only happens when preparation meets opportunity.

The Economy, the Deficit and Inflation

This economy is worthy of the moniker, the Great Recession. We expect unemployment to remain stubbornly high over the next couple of years and inflation to be somewhat subdued.

Reviewing the most recent recessions for evidence of when to expect a recovery from the current economic malaise does not seem useful. This recession is one of a kind. It's deep, broad in scope, and international. However, by one measure it is not as bad as it could be. Many of you will recall the Misery Index, calculated by combining the unemployment rate with the inflation rate. There has not been much talk of it in recent times because the index has been almost steadily dropping since reaching its peak of 21.9 in June of 1980. The index's high in 2008 of 11.5 was recorded in last August. In June of this year, the index, with nonexistent inflation, stood at 8.1 (www.miseryindex.us).

Our nation's deficit (spending in excess of revenues) has never seen levels as high as this in its history. The Congressional Budget Office's (CBO) estimate of the President's budget is a deficit of $1.825 trillion in 2009, and a deficit of $1.432 trillion in 2010.

Deficit spending in a time of national crisis is not unusual. In fact, we expect government spending to act as a stabilizing force in a destabilized economy. One concern has been that this level of deficit spending will result in higher interest rates and dampen future economic growth. We have attached a white paper from Dr. David Kelly, the chief market strategist for J. P. Morgan funds, titled "The Inflation Question." His paper addresses these issues and explains them in a way we could not. We think you will find it timely and extremely well done.

Economic recovery in the United States cannot happen without job recovery. In order to have growth in meaningful jobs, there needs to be a demand for workers from businesses. Every effort should be made to maintain America's edge in new business development and new technologies. Small businesses are the backbone of the country, yet they are seldom appreciated. They employ half of all private sector employees and have generated 60 to 80 percent of net new jobs annually over the last decade (www.smallbusinessnotes.com). At least some of the $800 billion in stimulus dollars should have been spent enabling new businesses to get off the ground, and to incentivize established businesses to grow. The private sector is where meaningful job growth will be created. Government's role should be to maintain an effective regulatory framework and let the American entrepreneurial spirit create jobs.

While we recognize that this has been a difficult year for U.S. and foreign equity market performance, we are pleased at how investments in other sectors incorporated in your portfolios have helped weather this financial storm. It is important to remember that the U.S. does not need to be the sole engine for global economic growth. There are increasing numbers of people rising to middle class status in a number of emerging market countries. Their ability and willingness to consume in the future will help mitigate the effect of slowing economies of the developed world. It has been and will continue to be a major focus of ours to keep this in mind in constructing client portfolios.

New Tax Law

It is safe to assume that income taxes for above average income earners will be going up. Work on health care reform is delaying the passage of tax bills, including estate tax changes and the extension of certain income tax provisions that expire by year-end. We will incorporate any enacted or highly anticipated legislation into our annual tax planning reviews in the fall.

Annual Offer to Deliver ADV

This is our annual offer to deliver to you our most recent filing with the Securities and Exchange Commission. Please contact us if you would like a copy.

We continue to work daily to earn your trust and confidence.

Best regards,

Vincent A. Schiavi, CFP®, CPA/ PFS             Ravi P. Dattani, CFP®, CPA
President                                                            Vice-President


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