Economic and Investment Forecast
June, 2007

The May Conference Board’s index of leading economic indicators, a gauge of future economic activity, shows that the U.S. economy will most likely slow in the coming months. The first quarter GDP growth was an anemic 0.6% and, according to Fed Chairman Bernanke, economic growth will remain modest for the near term. He also indicated that, although there may be spillover from the sub-prime mortgage foreclosures into the traditional financing market, the impact should not be a significant drag on the economy. (The problem in the housing sector is a correction of excesses, rather than long-term problems resulting from high mortgage rates or high unemployment.) A strong job market, increasing personal income, government spending, and a gradual increase in business spending have so far kept the U.S. economy out of recession. Whether the U.S. economy will continue to grow or slide into a recession will depend primarily on the direction of energy prices, foreign interest rates and the underlying strength of the global economy, the value of the dollar against other currencies, and the Federal Reserve’s policies. From his recent remarks, it appears that Chairman Bernanke is currently more concerned with inflation than recession and, therefore, the Federal Reserve is unlikely to cut interest rates anytime soon. Recent data indicates some rebound in U.S. economic growth in the 2^nd quarter. If the economy should experience sustained growth with the current tight labor market, the stage could be set for a wage price spiral to which the Federal Reserve would most likely respond with higher interest rates. Investors quickly drove the 10-year Treasury yield above 5%, as the result of inflationary concerns expressed by Chairman Bernanke and rate increases by several foreign central banks.

The U.S. stock market performed well last month after a flat 1^st quarter; the result of stronger than expected earnings by U.S. companies, especially multi-nationals benefiting from the lower dollar overseas. The S&P 500 Index was up 7.9% for the year as of 6/1/07 . Also, the decline in residential real estate in most areas of the country has made it less attractive as an investment option. Additionally, interest rates on long-term bonds are still historically low and mergers, corporate stock buy-backs, and private equity deals have helped drive up stock prices by reducing the number of shares available (supply and demand). We expect increased volatility in the U.S. and foreign stock markets due to rising interest rates abroad and the uncertainty about the direction of the U.S. economy.

Although the consumer has shown amazing financial resilience over the past few years and corporate balance sheets are generally in very good shape, we believe that the U.S. economy will weaken later in the year, unemployment will begin to increase, and corporate profits will gradually decline as the consumer struggles with high gas prices, higher interest rates, and the effects of the housing slowdown on construction-related jobs. Additionally, slower economic growth abroad as a result of increasing interest rates will ultimately have a negative effect on U.S. exports. The stock market, which is now in the 56^th month of expansion, the 2^nd longest in U.S. history, is finally showing its age as investors are turning to more defensive large cap stocks. This historically has been a precursor to a bear market. We recommend that investment portfolios be reviewed and rebalanced for both overall long-term objectives and potential short-term volatility.

Diversified Financial Management, Inc.

A Registered Investment Advisor with the Securities and Exchange Commission.