INVESTMENT QUARTERLY - ATGF...175 basis points. 2008 estimated earnings make the picture look even...

INVESTMENT QUARTERLYPrepared by Feldman Securities Group, LLC

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Third Quarter - 2007

Contents:

The Rambling Rhino Page 2

Synopsis of Research Wires Dated May 1, 2007 through July 31, 2007

Page 4

Model Portfolio Page 4

Executive Summaries of Recommended Stocks Page 6

Visit fsgrhino.com, e-mail [email protected], or call (312) 444-1755 for current disclosures

ATG Trust Company INVESTMENT QUARTERLY – THIRD QUARTER 2007

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The Rambling Rhino

Economic Fundamentals Remain Strong Despite the recent stock-market correction, which was evidently triggered primarily by worries about a credit crunch in the sub-prime mortgage market, the global economic environment remains strong and promising. The old adage that stocks always go up and down should therefore provide a balm for investors worried about their portfolios in the current volatile stock market. A mid-year summary of prevailing economic fundamentals can help add a broader perspective to the current, and likely temporary, downdraft in the stock market: The United States Economy: Outlook Positive

Second-quarter real GDP growth was 3.4 percent, well above the inventory-correction-induced low reading of 0.6 percent in the first-quarter.

Real GDP growth of 2.5 percent is expected for the balance of 2007, rising gradually to a 3-percent rate in 2008. The greatest risks are oil prices and the extent of the sub-prime credit crunch.

Inflation is contained within the Federal Reserve's comfort zone. The Federal Reserve and Interest Rates: Outlook Neutral to Positive

The markets appear to have confidence in Chairman Ben Bernanke and the Fed's focus on containing inflation. The Fed Funds rate is expected to remain at 5.25 percent, and the benchmark 10-year U.S. Treasury note yield should remain in a tranquil range of 4.75- 5.25 percent, which is hardly threatening to business conditions or stock prices.

Corporate Profits: Outlook Positive to Neutral

Profits are expected to grow more than 10 percent in the second quarter, marking the 18th straight quarter of double-digit growth.

While corporate profit growth is slowing, and some margin pressure can be expected, Wall Street expectations remain high for the fourth quarter.

Global Economies: Outlook Positive

Europe and Japan are accelerating to 3-percent real GDP growth, Asia and Latin America remain strong at 6-8 percent growth. The price of oil is the biggest threat to global growth.

U.S. companies garner 34 percent of sales from overseas, which is a key driver of profit growth. The latest round of stock-market corrections, which has taken the benchmark S&P 500 down since it stretched to an all-time high in July, has been driven primarily by worries over the ongoing housing-market slump and the subsequent credit crunch in the sub-prime lending market, and secondarily by concern that rising oil prices will trigger inflation. Given the strong economic backdrop outlined above, we do not believe the credit crunch will cause serious or lasting damage to the economy or stock market. Oil prices remain a wildcard. Let's take a look at two issues feeding investors' anxiety: Market Worry #1: Credit Crunch in the Housing Market Worry about home-loan defaults reemerged July 31 when American Home Mortgage Investment Corp. (AHM) reported troubles with its credit lines and Bear Stearns (BSC) filed bankruptcy protection for two of its mortgage hedge funds. The news sent the venerable Dow Jones industrial average down nearly 150 points, and prompted investors to turn to government bonds as a safe investment. The recent flight to quality in U.S. government bonds drove the yield on the benchmark 10year U.S. Treasury note down from approximately 5.20 percent to the 4.75-percent area. AHM triggered the slide in stock prices when it reported that it doesn't have the necessary resources to fund mortgage loans. The Wall Street Journal added fuel to the fire when it reported (citing anonymous sources), that Bear Stearns - which tweaked investors' nerves several weeks ago when it shut down two hedge funds that bet on risky home loans - now faces big losses in a third fund with about $900 million in mortgage investments and has suspended investor redemptions. This report was followed the next day - Tuesday, July 31 - with news that the first two BSC mortgage hedge funds filed for bankruptcy protection. The hedge funds were squeezed after BSC made bets on the home-mortgage market that went the wrong way when loans to risky investors began to default. In July, the company said the assets in its Enhanced fund were essentially worthless, while the other was worth 9 percent of its value at the end of April. The stress that has grown over the months in the sub-prime mortgages market is not new. But now, loans to people judged by banks to have better credit are having problems, too.


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Earlier this month, JP Morgan Chase (JPM), the third-largest U.S. bank, said it tripled the level of reserves set aside for loan losses as even borrowers with good credit defaulted on home equity loans. Countrywide Financial (CFC) reported a similar situation. Investors are concerned that it's not just existing loans that are troubled: the volume of all mortgage applications slid recently to the weakest level in more than five months as demand for loans to buy homes eroded amid escalating credit concerns. Yet there are positive signs also. The National Association of Realtors said pending home sales rose an unexpected 5 percent, the biggest increase in three years, suggesting that the crunch is confined to the lower end of the mortgage market. With troubled loans and mortgage applications on one side and positive housing sales indicators on the other, it is sometimes difficult to get a feel for the broader market trends. Some analysts see the big picture. "The U.S. housing market has been and continues to be severely affected by the significant deterioration in sub-prime credit," Barclays Capital analysts wrote recently. "That said, the biggest economic hit from housing is behind us: residential construction has subtracted about a full percentage point from U.S. GDP growth over the past five quarters and it is likely to subtract less than half of a percentage point in the second half of this year," the firm said. "The rest of the U.S. economy - as well as the global economy overall - remains quite strong." But it really depends on what investors in aggregate think is important. Art Hogan, chief market analyst with Jefferies, said the market doesn't know whether to focus on problems in the credit markets or strong earnings and economic data. "There's a real dichotomy that's creating this tug-of-war, shifting the market between positive and negative ground," Hogan said. "On one end of the spectrum, we have a fear of the credit markets and how deep the sub-prime problem is. On the other end, the market rallies when it focuses on earnings and economic data. It depends on whether investors are fearful or greedy." Fear was on clearly on investors' mind when the stock market tumbled in July. As for mortgage lenders who pushed the risk envelope when the housing market was hot by lending to home buyers who were vulnerable to default in the first place, the chickens have come home to roost. As Warren Buffett once said during a previous episode of undisciplined lending and subsequent loan losses, "You never know who is swimming naked until the tide goes out." Market Worry #2: Rising Oil Prices Spur Inflation Fears Besides the housing slump and souring home-loan market, investors are grappling with concerns about the threat of inflation due to record-high crude-oil prices. Oil prices jumped to a new record Aug. 1 after the government reported a steep drop in crude inventories last week as refinery utilization surged. Light, sweet crude for September delivery rose 55 cents to $78.76 a barrel on the New York Mercantile Exchange. That surpasses the previous record of $78.40, set in July 2006. Rising oil prices are expected to continue as strong global demand pressures inventories and refining-capacity limitations. OPEC is not expected to add materially to supply, as it has indicated that it is reluctant to lift oil production, suggesting a sharp pre-winter decline in supplies. Higher oil prices over the long term are inflationary. Yet bond traders, ever-sensitive to inflation because it erodes the value of their fixed-coupon securities, have remained calm, with bond yields actually falling. Implications for Stock Investors To a certain degree, fear has returned to the stock market; investors are anxious to check the balance of their 401(k)s and other portfolios. It is therefore possible that stocks held in weaker and more emotional hands will continue to be sold in the coming weeks until the stock market finds its legs again. We do not believe the downside risk is great. The relative valuation of stocks improved markedly after stock prices and interest fell. The S&P 500 is expected to earn about $94 in 2007. This means the index is trading at 15.4x, which translates into an earnings yield of 6.5 percent. The rate of expected return compares favorably to the yield on the 10-year U.S. Treasury note of 4.75 percent, a comfortable spread of 175 basis points. 2008 estimated earnings make the picture look even better: Wall Street expects the index to earn about $100 next year, which translates to a forward P/E of 14.7x and an earnings yield of 6.8 percent, for a spread of 205 basis points - stock valuations remain attractive.


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Chronological Synopsis of Research Wires

May 1, 2007 through July 31, 2007

DATE COMPANY RESEARCH WIRE June 6 Noble Corp. Initiate coverage at BUY June 13 Emerson Electric Initiate coverage at BUY July 12 CDW Corp. Downgrade to HOLD July 13 Discovery Financial Services SELL (Morgan Stanley spin-off) July 17 Cisco Systems, Inc. Initiate coverage at BUY Oracle, Corp. Initiate coverage at BUY CDW Corp. Downgrading to SELL

FSG Model Stock Portfolio

July 31, 2007

Sector Rating FSG Weighting S&P 500 Weighting CONSUMER DISCRETIONARY 10.3% 9.8% Bed, Bath & Beyond Buy 2.1% Best Buy Buy 2.1% Lowe’s Cos. Buy 2.1% Starbucks Buy 2.1% Williams-Sonoma Buy 1.9% CONSUMER STAPLES 13.0% 9.4% Altria Hold 2.0% Anheuser-Busch Hold 0.2% CVS Corp. Buy 2.1% Estee Lauder Buy 1.9% Pepsi Buy 2.2% Proctor & Gamble Buy 2.1% Wrigley Buy 2.4% ENERGY 11.5% 11.1% Chevron Buy 2.9% ConocoPhillips Buy 2.8% Devon Energy Buy 2.7% Noble Energy Buy 3.0% FINANCIALS 16.5% 19.9% Amer Int Gp Buy 3.2% Capital One Buy 3.2% Morgan Stanley Buy 3.7% U.S. Bancorp Buy 2.9% Wells Fargo Buy 3.4% HEALTHCARE 11.3% 11.6% Abbott Labs Buy 1.9% Johnson & Johnson Buy 2.4% Medtronic Buy 1.7% Stryker Corp. Buy 2.6% Wellpoint Buy 2.6% INDUSTRIALS 11.4% 11.6% Danaher Corp Buy 3.8% Illinois Tool Works Buy 3.5% L-3 Commun. Buy 4.1%


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Sector Rating FSG Weighting S&P 500 Weighting INFORMATION TECHNOLGY 15.6% 16.1% Adobe Systems Hold 1.8% Autodesk Buy 2.1% CDW Corp. Buy 1.2% Citrix System Buy 2.0% eBay Inc. Buy 1.8% Fiserv Buy 1.7% Microsoft Buy 2.2% Oracle Corp Buy 1.2% Western Union Buy 1.6% MATERIALS 3.2% 3.1% Materials Select Sector SPDR Buy 3.2% TELECOMMUNICATIONS 3.7% 3.8% Vanguard Telecommunications Sector ETF Buy 3.7% UTILITIES 3.4% 3.6% Utilities Select Sector SPDR Buy 3.4%


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INVESTMENT QUARTERLY - ATGF...175 basis points. 2008 estimated earnings make the picture look even...

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