The oil bubble is the one phenomenon that has yet to pop because demand is still high and supplies tight. The consumer complains, and rightfully so. Over the past 30 years, homeowners have paid about 3% of household income for gas (see chart on page 4). That percentage spiked three times in the last 30 years: once during the Iran hostage crisis in the 80’s, once when Saddam attacked Kuwait and Bush Sr. came the rescue, and lately when we invaded Iraq in 2003.

remains that we need to remove the bottleneck and find new energy sources. As long as crude prices remain sky-high, economic challenges will remain. We are most likely facing $100+ oil and $4+ gas for years to come.

Taking a broad brush view of the second half of 2008 and beyond, we see many opportunities in both stocks and bonds. We will continue to focus on real growth stories, with companies that are generating strong cash flow and not dependent on debt to expand. Apple is a good example. We remain believers in the Global Economy, with the BRIC nations (Brazil, Russia, India & China) leading the way

We reported in January that we didn’t expect a recession, but would manage portfolios as though one was imminent. We loaded up on oil, gas and tech stocks to the aggrandizement of portfolio growth. This was the correct call, and is more appropriate now than ever. We will continue to take gains and generate cash at optimal levels so that it can be redeployed at lower levels. We have re-initiated a covered call strategy to protect portfolios from downside risk on shares that we view as long-term core-holdings, but we recognize threatening, near-term market pressures. We will continue to look for opportunities to protect your positions and maximize returns with additional passive income from call premiums. These premiums replicate cash dividends in portfolios.

A weakening job market and higher costs for food and energy are forcing budgets to be reined in. Technology is a key beneficiary of such an environment, as innovation brings greater efficiency and reduces costs. We are constantly seeking new investments to build our Tech allocation in portfolios. The evolution of wireless devices like 3G smart-phones will continue to lead advancements and capture wallet share across the continents.

Health care remains a dominant theme in our strategies going forward, as the need for affordable medicine and treatment is paramount. Advances in technology continue to enhance quality of life and we see this only getting better. We prefer to invest in generic drugs, biotech and orthopedics. Electronic medical record keeping is a major need in the health care field. Thus far there is no standardization, but we see this as a compelling opportuopportunity and are investigating the best way to participate in the growth.

As the U.S. economy inches along trying to avoid recession, we are still shying away from financials and consumer discretionary stocks. Existing pressures on the consumer will likely keep these sectors at bay for the time-being, although the time will come for a recovery
and we will be ready to take action.

In bond land, we see tremendous opportunity. The credit crisis has forced many banks to issue new preferred stocks, many yielding above 8%. Demand for such securities has proved very strong, by investors, both individual and institutional. This is a great sign. When things normalize, these securities should rally; and the dividends are qualified, which means they’re taxed at the 15% bracket. Municipal bonds will continue to be an oasis of safety amidst the disruptive market vagaries. Investors will continue to cling to their muni bond portfolios where there is a known outcome; a reliable tax-free return on their money; and ample supply to promote diversification. At one point this quarter, California Munis were yielding 125% of U.S. Treasuries, and are free of both federal tax and state income tax making them a cash magnet.

These are very emotional times, and panic has returned to the market. Maintaining a disciplined approach is vital in this environment. Interestingly, Wall Street is the only place where bargain basement prices drive shoppers away. Investors are paralyzed to buy at current bargain prices. For contrarians this is a very bullish sign. It will take time to heal and the waiting is the hardest part. We live in a 24/7 world now, where instant gratification has become norm. An extended waiting period for the recovery will test investor patience like never before.