Stocks experienced an 11% correction in the 2nd quarter. Headline news items were mostly negative, ranging from the BP oil spill in the Gulf of Mexico to continued financial troubles in Europe and stubbornly high unemployment in the U.S.

Our view is more positive. Markets correct (or deserve to correct) after a 70% move from the bottom last year. We believe that there is little likelihood of a “double-dip” recession. One can debate the speed of the economic recovery, but there should be little doubt that manufacturing has turned up, the consumer is spending more than one year ago and corporate balance sheets are in the best shape in 20 years.

We realize that tax rates are likely to rise. Two expensive and unpopular wars are draining our manpower and resources and the President’s popularity is less than 40% in the polls. November is not that far away. The electorate has shown displeasure with most incumbents. All of these factors have combined to negatively impact market psychology.

We feel that the negative mood impacting the stock market and money flowing into Treasury securities at almost zero return is representative of a circumstance ripe for a reversal. (It’s tempting to draw a sports analogy….like the suffering of Cleveland fans! But we are better at predicting the markets).

Our relative performance through the middle of the year was about 4% better than the market and, as of the writing of this letter, we are up for the year. So far in July, stocks have reversed about half of their 2nd quarter decline. The most significant positive developments are the strong earnings being reported by our companies and their low current valuations.