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  1. Locke Financial Quarterly July 2008 Status of the Economy and Stock Markets After having a cold and rainy spring, the weather conditions are now great. However, if it isn’t one thing, it’s another. Now the economic weather is quite poor. We can only hope that the economy will improve soon, just like the weather did. Just as we were starting to recover from the credit crisis, soaring energy and food prices further slowed down the economy. Alan Locke, BS, MBA, CGA, CFP President Unfortunately, significant issues like these seem to hit us every five years or so, and investors need to be patient and wait until the economic realignment takes place. As you know, we receive our primary economic information from BCA (Bank Credit Analysis), an independent economic research firm. They recently sent us a primer on economic cycles and I thought that you might find a summary of this information to be interesting. BCA reminds us, that in a free market society, capitalistic forces are working to push for efficiency and profits. When the Federal Reserve decreases interest rates, and increases the money it loans to banks, it accelerates these capitalistic processes. When the Federal Reserve increases interest rates and lessens the supply of money to banks, it decelerates economic growth. As well, other government intervention may cause changes to the capitalistic process. The credit crisis began to emerge after the Federal Reserve increased the money supply during the last few years. This made it easier for lenders to give loans and made it easier to buy a home. Unfortunately, poor management by lenders and poor judgment by loaners caused the credit crisis. The energy crisis had its genesis when the governments of China, India and other communist countries removed the free market society from their citizens (many years ago). It caused them to achieve lower economic growth than the rest of the world. Now that capitalism has been somewhat restored, they are catching up. Consequently, they are consuming natural resources and energy at accelerated rates. Since there was a low demand for these resources during the last 10 years, there was little investment in petroleum and commodity production. Not surprisingly, this production process became strained, when the demand from these new consumers emerged. Thus, we have today’s soaring energy prices. As BCA mentioned, we are fortunate that the capitalistic process promotes efficiency. The credit crisis dramatically effects housing. When housing prices stabilize or begin to increase, we will know that the credit crisis is over. (There will be a period of debt retrenchment before this happens). Similarly, when the supply of energy surpasses the demand, energy costs will decrease. Locke Financial Services, Inc. 662 N. First Bank Drive • Palatine, IL 60067 • Phone (847)991-2705 • Fax ( 847)991-9496 • Email:

  2. (This has started to happen). The pricing mechanism of energy is controlled by the futures or derivative markets. If supply starts to show significant growth over demand, there could be a swift downturn in prices. It is BCA’s conclusion that we are not headed for a deep recession and that the capitalistic system will again find growth through improved efficiencies. They state that a good investor should remain very cautious, as the current economic conditions are very volatile. They recommend that investors should remain in equities but they feel that investors should be prudent in their securities selection. We, at Locke Financial, agree with this thought process and are according modifying our clients’ portfolios to be more conservative. We believe that we have found some excellent mutual fund managers that have a cautious investment process. We are in the process of adjusting your portfolios to decrease the mutual funds that invest in stock holdings in Europe. Since the European governments have been decreasing money supply, it has caused the Euro to soar in recent months. We think that the Euro has peaked and will now begin to decline. We are also reducing our investments in Emerging markets, as China is lifting it’s energy subsidy and money supply is likely to slow somewhat in this region. We also believe that stock prices in this region are quite rich, and we would like to take a breather from these investments for a while. You will see changes being made in your accounts, as the trade confirmations will begin to arrive shortly. We hope that you can enjoy your summer more, knowing that we are managing your portfolios to the best of our abilities. As always, if you have any questions or have an individual reason to change your investment risk tolerance, please give us a call or send us an email. Wedding Bells On May 10th, Viktoria Bendikova, our very competent administrator, joined Adrian Camacho in matrimonial bless. Their marriage and reception was at the banquet room of Texas de Brazil. Viktoria and Adrian both looked terrific, and it was a very happy occasion. Viktoria’s mother, who lives in Poprad, Slovakia, also attended this joyful event. We wish them much happiness and a great life together. • Some Interesting Facts • WHAT IS YOUR NUMBER? – The average amount of money that more than 2,000 adults anticipated they will need in order to retire comfortably was $1.13 million (source: USA Today, Kelton Research). • JUST BEING CAREFUL – 57% of American retirees are living on their defined benefit pension distributions and their monthly social security benefit checks and are not currently spending any income that is generated from their pre-tax retirement assets, e. g., income produced from assets in an IRA (source: Nationwide Retirement Income Confidence Survey). Locke Financial Services, Inc. is a Registered Investment Adviser. This publication is only intended for interested investors residing in states in which the Adviser is qualified to provide investment advisory services. Please contact Locke Financial Services, Inc. to find out if the investment adviser is qualified to provide investment advisory services in the state where you reside. The Adviser does not attempt to furnish personalized investment advice or services through this publication.