2007 August Market Report

Hello!

I just wanted to send a quick note to share my opinions on the recent market situation. Panicky investors are continuing to make mountains out of molehills. Even though risky sub-prime mortgages are a small part of the total mortgage market, this "sub-prime mortgage market meltdown" is having a big impact, way too big an impact, on overall markets. As the Federal Reserve (the Fed) noted in their Monetary Policy Report to Congress on July 18, the riskiest mortgages, sub-prime variable rate mortgages, comprise about 9% of mortgages outstanding, and they have a delinquency rate that had risen to about 12%. Mind you, not a default rate of 12%, just 12% behind on payments. The delinquency rate on sub-prime fixed rate mortgages was steady at about 5%, while prime rate mortgage delinquency rate was steady at about 1%. As I see it, this all amounts to only a molehill. And, suppose the numbers double. The delinquency and default rates would still be below historical highs, so maybe then we get foothills.

I look at this senseless, indiscriminate selling as a smallish problem relative to the large, generally stable, credit market. True, mortgage lenders, hedge fund managers, hedge fund investors, and lenders to hedge funds are getting hit for their actions, but that is what our financial system is designed to do - discipline excessive risk taking. And some other parts of the credit market are less liquid, as traders mill around trying to figure out what the precisely right price for a bond should be. Meanwhile, the Fed is doing its job - injecting reserves into credit markets to hold the overnight bank lending rate at the target of 5.25%. They adjust reserves every day; they've just used bigger numbers the in last few days.

To reiterate…I think economic and company fundamentals are strong. We just completed an excellent quarter for economic growth and company earnings and I am confident that the third quarter will show similar results. Company balance sheets are robust and interest rates remain low. Consequently, I am equally confident that this downdraft in the equity markets will pass. It is precisely this kind of market turmoil that makes the case for a well-diversified portfolio that avoids excessive risks associated with big bets on exotic, highly risky securities.

If you have any questions or concerns, please don't hesitate to call me at 949-788-7700.

Regards,

Andrew C. Karlinski, CFPR
President
AK Financial Group

Web: www.akfinancialgroup.com
Email: akfinancial@mscmail.biz
Phone: 949-788-7700
Fax: 949-788-7710

Securities offered through Mutual Service Corporation
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AK Financial Group is not associated with Mutual Service Corporation. This is not an offer to sell securities, which may be done only after proper delivery of a prospectus and client suitability is reviewed and determined.

This letter represents the general economic outlook of this firm and does not constitute investment advice, nor should it be considered predictive of any future market performance. Past Performance is no guarantee of future results.