Last quarter, the markets largely stabilized in an upward trend again following a rambunctious first quarter. Amazon continues its upward surge and Oclaro stockholders last week overwhelmingly approved the merger with Lumentum which will be completed in a few months in a distribution of both cash and Lumentum stock. The capital gains and tax effects of the merger are still not clear.

We continue to focus on monetary policy. The Fed continues to raise short-term interest rates but long-term interest rates, largely controlled by market forces, remain quite stable resulting in a flattening of the yield curve. A flat, or worse yet, an inverted yield curve is a proven precursor to a slowing economy if not outright recession. The next two years will be telling. Although the Fed anticipates that it will increase short-term rates two or three more times this year, our best guess is that the Fed will curtail its tightening well before that happens as the economy begins to slow in response.

The Federal deficit continues to expand as a result of the recent tax cut which is reducing federal revenue. This can only be seen as economically stimulative, although the specific application of the tax cut is economically inefficient.

As mentioned above, the Treasury bond market remains unimpressed by the growing deficit as those longer-term interest rates remain stable and have decreased somewhat in recent months. While inflation itself is very close to the Fed’s targets, other inflation indicators such as precious metals continue to decline. Oil and energy costs, while high at present, have begun to decline as additional supplies enter the oil markets.

We remain cautious and vigilant. Prices are high and bargains are rare but we anticipate making account adjustments by raising cash positions periodically as a precaution in response to maturing economic conditions.

Please also remember that because these quarterly thumbnail sketches are very brief, do not hesitate to call me if you wish to discuss your account or our outlook in greater detail.

Very Best Regards,

Joseph L. Toronto, CFA

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