Dear Paul,

I keep reading that the U.S. economy is slowing, partially because of the decline in real estate. How will this effect the stock market over the next few months?

As I am writing this commentary, it is Thursday July 26, 2007, and the DOW dropped 311 points today or about 2.26%, because of housing market fears. Just so you know, a 2.26% drop in the market is not near enough of a decline for FOXHALL to implement our “DEFENSIVE” strategy and move out of the stock market and into bonds.

The stock markets have reached record highs this month in the DOW and S&P 500 INDEXES. This is simply a short-term correction with a lot of institutional investors taking profits. Given that the summer months and September and October are always the worst months for the stock market, I see continued volatility over the next few months and then I expect the market to reach new highs later on in the year. Let me explain why.

THE U.S. ECONOMY IS SLOWING.

Our economy will grow this year at a very low rate of only about 2%.

Compare that to the almost 12% growth in China and 7% or more growth in most developing markets.

The only reason the stock market has hit new highs recently is because U.S. companies are doing well globally. According to NBC News (July 21, 2007), the non-U.S. global economy is growing faster than at any time over the past 30 years.

According to Standard & Poor’s, S&P 500 companies posted 44.2 percent of their sales outside the United States in 2006, up almost 37 percent form 2001.

U.S. economic growth has lagged and is forecast to continue lagging growth in the rest of the world.

Only those U.S. companies with higher international exposure are likely to show better earnings growth, which will result in better performance for their stocks.

GENERAL ELECTRIC

Take GE as an example: According to their 2006 ANNUAL REPORT, 50% of all corporate revenue came from outside the U.S., but almost 75% of their profits came from global earnings, and almost half of that from emerging markets. GE earned 13% last year, but they would have earned less that 3.5% if it were not for foreign profits.

The vast majority of GE’s corporate investments are now directed toward foreign markets. If GE is investing a majority of its capital in global markets, doesn’t that suggest that many U.S. investors should have reasonable global market exposure as well? Global

markets are where the growth IS and where evidence suggests it will remain for the foreseeable future.

THE DROP IN THE U.S. DOLLAR HELPS U.S. COMPANIES

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The U.S. dollar is grinding steadily lower and most U.S. corporations couldn’t be happier.

The currency’s slide is delivering a generous boost to sales and earnings for many U.S. companies, a trend most analysts see continuing.

Those deriving the greatest benefit generate a significant portion of business beyond U.S. borders where the dollar is weak. Their goods are cheaper to foreign buyers and profits generated in those markets are amplified when translated back into dollars.

The weaker dollar is certainly helping the earnings of companies with international exposure. At the end of the second quarter on June 30, the dollar was down 4 percent against a basket of major trading partner currencies compared with the prior year.

BUT IT CAN HURT U.S. INVESTORS

One of the ways FOXHALL CAPITAL helps U.S. investors is by investing a portion of the Global Market Rotation Portfolios in currency funds other than U.S. dollars. When the U.S. dollar drops, these currency funds tend to increase in value. These FOXHALL investments will help our clients keep up with the price of gasoline!

Until next week……

-Paul Dietrich

dietrich@foxhallcapital.com