October 30, 2006

Well folks, the holiday season is upon us! Halloween is right around the corner and before you know it we’ll be sharing turkey for Thanksgiving, celebrating the Christmas season, and hopefully - for those of us who are Gator fans - preparing for a big bowl game after our New Year’s Day celebration. 2007 will be here before we know it and it’s time for all of us to begin making our plans for the New Year.

Here at FFM, we’re starting the holiday season with our 8th Annual Client Appreciation Day Brunch on Saturday, November 4. This is an opportunity for all of us here at FFM to thank you for your continued friendship and support.

We will also once again be holding our annual Predict the Dow Contest. This is an opportunity for you to take a guess at what you think the Dow will finish for the year. FFM will make a $250 contribution to the charity of choice for whoever comes closest to the actual Dow closing on December 29. I make my prediction in January of each year, and last January, I predicted the Dow would close this year at 11,500. Today (October 24) the Dow stands at over 12,000.

The Scoreboard

(www.investmentadvisor.com)

	2003	2004	1stQ 2005	2ndQ 2005	3rdQ 2005	4thQ 2005	2005	1stQ 2006	2ndQ 2006	3rdQ 2006
DJIA	+28.3%	+3.15%	-2.59%	-2.17%	2.86%	1.40%	-0.61%	3.66%	0.37%	4.75%
S&P 500	+28.7%	+8.99%	-2.59%	0.92%	3.15%	1.59%	3.00%	3.73%	-1.90%	5.18%
NASDAQ	+50.4%	+8.59%	-8.10%	2.89%	4.61%	2.49%	1.37%	6.10%	-7.17%	3.98%
LBAB	+4.11%	+4.34%	-0.48%	3.00%	-0.67%	0.60%	2.43%	-0.65%	-0.08%	3.81%

(Investors cannot invest directly in indexes.)

This year’s Dow continues to be highlighted by volatility, both in current events and the markets. International events, particularly the nuclear threat from Iran and North Korea, have dominated the news cycle. On the domestic side, the pending elections and the possibility of a democratic takeover of the Senate and the House have largely been ignored in favor of strong earnings, low unemployment and an expanding economy. Productivity and the growth of the economy are still very healthy. Expectations of an increase of 9-12% in earnings for corporate America are still on target. Unemployment is less than 5% and the GDP is expected to remain a healthy 3.5%.

Inflation concerns have abated and oil prices have continued to come down. The recent decline in the cost of a barrel of oil from a peak of $78.40 has produced an 80 cent decline in the average cost of a gallon of regular gasoline in the last 70 days. This has put more money in everybody’s pocket. Fears of a massive real estate bubble have subsided as interest rates for mortgages have been coming down. I know many people remain concerned that real estate is overpriced, and in many areas of the country, particularly California and the coasts of Florida, it is. Real estate speculation has been affected the most and has slowed or halted in most of the country. Don’t misunderstand me; I love real estate, but I do not expect that we will see the appreciation in real estate that we have seen since the beginning of this century. All investments are cyclical. Therefore, I expect short-term interest rates, the rates set by the Federal Open Market Committee (FOMC), to remain at their current 5 1/4 percent for the remainder of the year.

As I said in last quarter’s newsletter, and in our discussions during our investment and planning reviews, we have established a discipline that we are using to evaluate the markets and make any asset allocation changes that are needed. We carefully watch the ISM (Institute for Supply Managers) index and interest rates. One of the ISM indexes, the PMI

(Purchasing Managers Index), tells us if the manufacturing sector is expanding. This month, the PMI was 52.9, down from last quarter, but still indicating an expanding economy. It is the 40th consecutive month that this index has indicated an expanding economy. If we ever see the ISM index beginning to indicate a contracting economy, and the yield curve continuing to be inverted, we will suggest making changes in your portfolio to reduce your exposure to stocks. We will be doing this in two ways: buying more bonds, or consider adding Real Estate Investment Trusts. Both investments are designed to provide a counter weight to stocks. Right now, however, we are not recommending any changes.

I want to bring to your attention some very important legislation that President Bush signed on August 17, 2006. The Pension Protection Act of 2006 is designed to promote retirement savings by increasing planning contributions, improving portability, and making it easier to save. In 2001, Congress created the Economic Growth and Tax Relief Reconciliation Act (EGTTRA). This Act was notable for the many changes it made in retirement plans. For example, it provided increasing contribution limits to all retirement plans, and also created the catch-up provision that allows people over 50 to make higher contributions to IRAs, 401(k)s, 403(b)s and Simple plans. All of these changes were scheduled to Sunset in 2010. The Pension Protection Act of 2006 makes all of the benefits of the 2001 Act permanent. And for those of you who are participating in a 529 college savings plan, the Pension Protection Act of 2006 also makes permanent tax-deferred growth and the tax-free distribution benefits of the 529 plan.

One of the most important provisions of The Pension Protection Act of 2006 is going to be the opportunity to make charitable contributions from your IRA. The act will allow IRA owners over age 70 1/2 to make tax-free distributions from their IRA’s directly to a charity from now through December 31, 2007. Each eligible taxpayer may gift a maximum of $100,000 per year. The advantage to the IRA owner is that you do not have to report the IRA distribution as taxable income. However, you will not be allowed to claim a charitable income tax deduction for the gift. There are several important details of this opportunity to remember. First, the provision applies only to IRA owners over age 70 1/2. You may use these charitable gifts from your IRA to satisfy your annual Required Minimum Distributions (RMD). Second, charitable gifts may only be made from Traditional and Roth IRAs. Third, the money must be paid from the IRA directly to a charity - a taxable distribution will occur if you receive a check and then endorse the check over to the charity. Fourth, tax-free distributions are only allowed if the funds are distributed to a section 170(b)(1)(A) organization (a 50% organization) such as churches, educational institutions and hospitals.

Many of you take your RMD at the end of the year, and quite often, I hear people say they don’t need the money at this time, and wish they didn’t have to take the distribution. So, if you would like to use this year’s RMD as a contribution to a charitable organization, please let us know as soon as possible and we will work with you and your accountant to be sure that it is done correctly.

As many of you know, I’m on the Board of Directors of St. Francis House here in Gainesville. If you’re looking for a worthy charitable organization to receive your IRA distribution, I would greatly appreciate your considering St. Francis House and all they do to help the homeless in our community.

If you have questions about your investments, or some of the observations I’ve made in this letter, please give me a call or send me an email and I’ll be glad to answer them. If I’m not available, please ask for my associate, Darla Greer. She’s a wealth of information and can answer most of the questions you may have about your portfolio, and can help you make any changes that may be necessary.

Again, I appreciate the confidence you have placed in me and all of our team here at Falcon Financial Management, Inc. As always, I wish you the best and look forward to seeing you soon.

Sincerely,

Jeff Davis, CFP^®

President

Falcon Financial Management, Inc.

All economic and performance information is historical and not indicative of future results. All views expressed in this letter are those of Jeff Davis,CFP^® and should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Additional risks are associated with international investing, such as currency fluctuations, political and economic stability, and differences in accounting standards.