Quarterly Market Overview
As of July 25, 2011

Déjà vu is defined as the feeling that one has seen or heard something before or, something overly and unpleasantly familiar.  The second quarter market action gave us a sense of déjà vu.  Greek debt concerns and economic slowdown were pointed to as the reasons for the major correction in the spring of 2010.  This spring both lackluster economic growth and Greece were again the headlines as the market pulled back April through June.  In fact, it was eerily similar.  The correction of 2010 started on April 26th and ended July 2nd.  This year the short term high was set on April 29th and we started back up in late June.  We believe the balance of the year will again create a sense of déjà vu.  As last year, we expect the market to gain traction in the second half of 2011.

Other factors causing a pause in the economy were supply chain disruptions due the earthquake in Japan and the Midwest weather patterns here in the States.  Growth slowed and the phrase “double dip” was again prevalent in the financial news.  We believe, as these are one time events, we will see a faster rate of economic expansion going forward.  As the rate of growth improves in the second half of the year, the market will renew focus on earnings which continue to improve. 

Over 80% of companies have beaten earnings estimates in recent quarters.  The historical average is just 62%.  The positive earnings outlook should lend itself to price/earnings expansion and better market valuations once confidence improves. Stocks are trading at a reasonable forward looking price to earnings ratio of about 13 times. 

As of this writing, congress is debating the debt ceiling and the world is on the edge of the seat.  Emotions will create market volatility in the near term.  Even politicians are predicting a market selloff if an agreement cannot be reached. However, market pundits were also warning of a major selloff as QE2 wound down at the end of June.  What happened?  The market had one of the best weeks in years.  After all the political positioning, as always, we expect an agreement in the 11th hour.  Our focus remains longer term and as some of the uncertainty is mitigated, we expect the market to trend higher.

We sold the CGM Real Estate fund this quarter which was up over 180% since the market bottomed in 2009.  It was replaced with Homestead Small Company Stock fund which we believe provides better opportunity going forward and increases portfolio diversification.

We believe the future looks brighter than is indicated by the news media.  Stay cool this summer and remain focused on the big picture.

Royal Fund Management

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