Returns in the stock and bond markets have been relatively flat for 2015. The S&P 500 Stock Index was up .23% in the second quarter, leaving it up 1.23% for the first half of 2015. The U.S. Aggregate Bond Index was down 1.68% in the second quarter, leaving it off .10% for the first half of 2015. Our portfolio has fared better than the broad markets.

While much has been made about the stock market valuation in the press, we believe the current levels remain reasonable but not undervalued as they were in 2009 and 2010. At 17.3x 2015 earnings and 15.5x 2016 earnings, we believe the market has room to grow further.

Our equity portfolio has performed well this year based upon the broad strength of health care, and se- lected technology and retail names. These sectors are also some of the leading job creators and innova- tors in the current expansion. Professional and business services generated 670,000 jobs last year while health care created 408,000 and retail trade an additional 290,000.

Health care has been a consistent performer as new pharmaceuticals, medical devices and biologics are discovered, developed and launched after a period of testing. Only a few years ago patients with ad- vanced Hepatitis C would need to undergo a difficult and costly liver transplant. Now a patient can be cured in 8 to 12 weeks through a regimen developed by Gilead Sciences. Advancements in multiple scle- rosis treatments by Biogen are improving patient’s lives and Novo Nordisk continues to develop more efficient drugs for the ever growing diabetes market.

Innovation is one of the necessary ingredients for successful long term growth, and like the health care sector the technology sector has also delivered exciting new products. Advancements in the cell phone market over the last decade have been remarkable and the future remains bright. Two of the portfolio holdings have been instrumental in many improvements. Skyworks Solutions develops advanced semi- conductors to connect phones to the 3G and 4G networks, while Synaptics is a leader in fingerprint iden- tification and interface touchscreens. As companies find they are unable to find qualified candidates to fill open positions, they turn to outsourcers like Cognizant and Virtusa to manage technology alignment, enterprise architecture analysis and data management, all areas with tremendous growth potential.

Retail has been a beneficiary of lower gasoline prices, job expansion and improving consumer confi- dence. We expect job growth to continue at its current pace for the next year which will eventually lead to higher wages and higher spending. This will be a positive factor for retailers like Tractor Supply and Dollar Tree which still have the ability to double their store base while bringing competitively priced products to consumers.

We have observed and written about Greece’s financial condition for quite some time, so Greece’s default does not come as a shock. The time and money afforded to Greece through bailout programs from the Euro- pean Union, the European Central Bank, and the International Monetary Fund have been utterly wasted. Mar- ket reaction to the Greek turmoil has been mixed, given the long lead time and the fact that Greece is a small player in the global community.

The rapid decline in the price of oil related products apparently reached a floor late in the first quarter. The price per barrel of West Texas Intermediate Crude (WTIC) declined from $107.62 on July 23, 2014 to $43.46 on March 17, 2015. The closing price on June 30, 2015 was $59.47. We are hesitant oil prognosticators. There are many good arguments for lower energy prices and many good arguments for higher energy prices. In the end, we recognize that oil prices will continue to be volatile and will eventually move to a higher natural average.

The fixed income portion of our portfolio has outperformed the broad bond market indexes for the first half of 2015. Our focus on high quality, shorter maturity bonds has worked well thus far in 2015 and we expect that to continue for the remainder of 2015 and into 2016.

The ten-year U.S. Treasury Note rose from 1.92% to 2.40% during the second quarter. A move of .48% is sig- nificant. Bond market participants are slowly coming around to the realization that the Federal Reserve Open Market Committee (FOMC) is likely to begin raising rates in the coming months. The Federal Reserve contin- ues to support the narrative of patience. Their most recent economic forecasts emphasize slow economic growth, stubbornly low inflation, and moderate job growth. We expect that they will be surprised on the up- side on all three of these forecasts Will the FOMC begin the liftoff of rates in September? I don’t know. Will they wait until 2016? I hope not. Should they have started already? Yes.

Another concern is that the FOMC may be reluctant to raise rates for a more basic reason, they don’t have confidence in their new tools to move rates upward in the prescribed fashion. Before the Federal Reserve em- barked on quantitative easing and quadrupled its balance sheet, it used a tool called the Fed Funds rate to set the interbank lending rate and bend the overnight rate to its will. And it worked well. However, with Federal Reserve paying interest on excess bank reserves of $2.5 trillion, banks don’t need to borrow amongst them- selves, leaving the Fed Funds market ineffective in setting the overnight rate. Since 2008, the Federal Reserve has created and tested several programs to substitute for the Fed Funds rate until things can return to normal. Testing and protestations of the FOMC notwithstanding, there is no way to know how these tools will work when things get real. We think there may be material levels of apprehension inside the Federal Reserve that when the FOMC wants to act, they can’t, leading to an unstated reluctance to move.