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Pinnacle e-Letter Pinnacle Advisory Services Economic Outlook: The Pinnacle Advisory Services Investment Committee has a mixed outlook for the remainder of the year based on the past quarter’s market performance and the overall confusion on the direction of the economy. During the first quarter of this year, the U.S. economy slowed dramatically with GDP decreasing to a .7% annualized rate caused by a draw down in inventories, lower shipment of capital goods, and a weakening in consumer spending. The consensus view is for GDP to be 2.5% by the end of the second quarter. We remain skeptical of this reacceleration as energy prices remain high, the Federal Reserve continues to leave the benchmark at 5.25%, job growth is weakening, and the housing market continues to deteriorate driven by defaults principally in the sub-prime mortgage arena. The committee’s view is for the US economy to reaccelerate to a 1.5% annual GDP rate during the second quarter, continue to strengthen at a moderate pace during the third quarter and finish 2007 with GDP of approximately 2.2%. One of the major events during the second quarter was a fiasco in the sub-prime real-estate market which led to numerous hedge fund failures and shocks to the credit markets producing a flight to quality and shorter maturities among investors. This action modified the yield curve to a more normal shape; during this period the yield of the 3 month T Bill declined from 4.87% to 4.67% and the 10 year Treasury bond rose from 4.64% to 5.03%. In addition, the ability to close corporate acquisitions by private equity firms has greatly deteriorated as the appetite of institutional investors has waned. Portfolio Strategy: The stock markets moved higher in the second quarter with the S&P 500 up 7.58% and up 6.96% year to date. We continue to be overweight in technology and healthcare and underweight in consumer discretionary and financials. Most recent sells in the portfolio have been IGT, International Gaming Technology; BNI, Burlington Northern Santa Fe; ALL, Allstate; and AMGN, Amgen. During the quarter we purchased stocks which we thought would have higher growth than the economy and also those which we felt would be defensive through the third quarter, typically the most volatile quarter of the year. Second quarter buys included: DISH, Echostar Communications, MO, Altria Group; FPL, FPL Group; CELG, Constellation Energy; and CEG, Celgene. Our focus during the third quarter will be to follow the real estate market and consumer spending trends while looking to buy names in consumer discretionary and financials. July 6, 2007 Pinnacle Advisory Services, Inc. Registered Investment Advisor Return to the July 2007 e-Letter
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