2006 2nd Quarter Market Report

Hello!

I hope you had an enjoyable Fourth of July holiday and safely celebrated the heroism of our forefathers in delivering to us a free and independent nation. The AAA Motor Club predicted this holiday would be among the busiest of travel days, which indicates that people continue to comfortably spend their discretionary incomes. Because consumer spending fuels our business growth and contributes to about two-thirds of the nation's Gross Domestic Product, it is important for our economy that the national mood retains its optimism.

But even as public confidence persists, many economists, including those on Ben Bernanke's Federal Open Market Committee, are paying close attention to the effects of several economic interrelationships, such as energy and inflation, and interest rates and the housing market.

After the 17th consecutive fed funds rate (the interest that banks charge each other) increase in June to its highest level in more than five years, many financial analysts ask, "Has the Federal Reserve finally finished hiking rates for this cycle?" While a valid question, its answer may not be the panacea for the investment world that many imagine because the flip side of a cycle top is evidence that while inflation risk has been slowed, a measure of economic growth has also been curtailed.

Balancing interest rates with economic growth is seldom easy. For the one-year period ending 5/31/06, according to the Department of Labor, inflation is up 4.2%. No full calendar year since 1990 registered a reading that high. And higher rates often lead to moderating housing activity, an area that according to the Department of Labor Statistics contributed about 10% of the growth in non-farm payrolls in each of the last two years. Inflationary pressures can now be seen as borrowings for mortgages and personal and business loans become more expensive.

But while interest rates and gas prices continue to escalate and the housing market in many areas slows, consumers continue to spend, a big plus for the U.S. economy. The U.S. Conference Board reported that June's consumer confidence rose higher than May's already lofty 104.7 reading. While this may indicate concerns regarding the economy's direction are moderate at worst, spending on non-discretionary items such as interest payments, health-care expenses and energy costs appear set to rise further, which could leave consumers with less and less disposable income and cause economic growth to slow.

With numerous domestic and international political issues, mid-term elections, and even the threat of an avian flu pandemic as factors that could further weigh on the markets, it is important that we employ solid investment principles and frequently review your investment objectives to give us the best chance at reaching our long-term financial goals. Please call me at 949-788-7700 to schedule an appointment.

Regards,

Andrew C. Karlinski, CFPR

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

Securities offered through Mutual Service Corporation
Member NASD, SIPC

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.