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2007 Third Quarter All-Cap Value Commentary
October 16, 2007

Last quarter, the S&P 500 rose 2.0% while the Russell 3000 Value index fell 0.8%, and our accounts declined 1.8% (before fees) 1. Year-to-date our accounts increased an average of 7.6% (before fees) versus 9.1% for the S&P 500 and 5.2% for the Russell 3000 Value index. Given the market’s volatility, it is useful to look at recent individual months to separate the up periods from the down.

During June and July, equity markets fell due to concerns about subprime lending, home defaults and foreclosures, and the resulting decrease in values in asset-backed securities. This resulted in an overall tightening in credit availability. The primary impact for us was that a number of our investments had been targets of acquisition activity or “value realization” activism (Home Depot, Cadbury Schweppes, Tribune Company, and SLM Corporation). These stocks retreated as completion of these deals became less certain. Despite this, our low exposure to the credit-affected segments of the market allowed our investments to hold up relatively well during the decline versus the indices, as shown below.

We often say that 95% of our decisions are never seen, because they are decisions not to buy something that looks cheap. Among these was our decision not to buy companies whose earnings were benefiting from excessive consumer borrowing, or whose balance sheets were contingently exposed to credit risks through either their investing or lending activities. We viewed the borrowing boom as unsustainable and potentially dangerous, and sought to minimize our exposure. That is why we decided not to buy subprime lenders such as Countrywide, Citigroup, and H&R Block, asset-backed guarantors such as Ambac and MBIA, and investment banks such as Bear Stearns and Goldman Sachs. These unseen decisions reflect our risk-averse nature and tend to reduce the volatility of our investments. (By leaving the party early, we miss some of the excitement but most of the hangover.)

As world monetary authorities took actions to alleviate the crisis by injecting liquidity and reducing lending rates, the stocks that had previously declined the most rebounded strongly in August and September. During this period, our accounts rose less than the indices, gaining 2.4% versus 5.3% and 4.4% for the S&P 500 and Russell 3000 Value Indices, respectively. As a result, our performance for the quarter ended slightly behind the market’s.

Despite the governmental actions, we do not believe the credit issues are over. The “teaser” rates of recent years continue to re-set upward, causing financial difficulties for consumers who can neither sell their house in today’s market, nor refinance due to insufficient credit-worthiness. Meanwhile, the Federal Reserve will have more limited tools at its disposal for taking counter-measures due to the fall in the dollar and inflationary pressures in food, energy, and imports. Therefore, despite lower stock prices, we have not begun buying in credit-exposed areas.

The Value of Risk-Averse, Lower Volatility Investing
While few firms have achieved a 21+-year track record above that of the S&P 500 Index as we have done, the main benefit of our approach has been its steadier, more predictable returns, as experienced in micro since June. This is because for most investors, it is more appropriate to maximize the probability of earning a needed return (to support spending needs or future capital requirements) than to “maximize return” regardless of the probability of outcomes. Low volatility means a higher probability of a narrow range of returns, while high volatility means just the opposite – a wide range of potential outcomes (good and bad).

This can be seen from our rolling five-year returns since 1986, as shown in the table below. Sixty-nine percent of our rolling five-year returns fell in the range of 10% to 15%, versus only 28% for the S&P 500. Meanwhile, 25% of the S&P 500’s annualized 5-year returns fell in an unacceptable range (less than 5%) versus none for us. During these five-year periods, many investors would have been unable to sustain their spending needs or capital commitments without encroaching upon capital.

Annualized returns, including reinvestment of dividends, were calculated for EIC’s non-wrap All-Cap Value composite (gross and net of fees, see below 1) and the indices (excluding fees) over rolling 60-month periods since EIC’s inception in 1986 (202 5-year periods beginning January 1, 1986 through September 30, 2007). The table illustrates EIC's low standard deviation of returns relative to two market indices. Standard deviations for the rolling 5-year periods were: EIC non-wrap (Gross and Net): 2.4%, Russell 3000 Value Index: 5.9%, and S&P 500 Index: 8.6%.

Increasing the probability of an acceptable return, and reducing the number of less-than-acceptable returns, has been a key benefit to our investment approach over the years.

Portfolio Review
During the quarter, we sold our position in Allstate due to concerns regarding the quality of their investment portfolio and replaced it with Chubb, which we believe is a higher quality firm with a more conservative portfolio. In addition, we tendered our Home Depot shares in a Dutch auction, which resulted in almost all of our shares being purchased from us. Also, due to the rise in energy prices, we sold our positions in Royal Dutch and Petro-Canada, both of which had increased substantially. We replaced them with a somewhat smaller net position in BP, which had lagged the energy market due to its larger exposure to natural gas and refining, which we believe can be a positive going forward. As a result, we are now slightly under-weight in energy relative to the indices.

We added a new position in Hershey Foods, which declined due to management changes and tighter profit margins from higher milk prices. We also began a new position in Office Depot, which declined due to concerns regarding small-business spending and the resulting impact on margins. Both are well-managed firms with strong histories of growth, and we believe the price declines are over-reactions to temporary interruptions in this growth. Finally, we added a position in Annaly Capital Management, which purchases primarily short-term Agency securities and captures a small spread from a positive yield curve while taking minimal credit risk. Annaly’s margins are expected to rise relative to recent years as the yield curve returns to more-normal positive slope, which should enhance earnings potential.

Tax Management
We try to reduce the tax impact on our returns by maximizing the proportion of gains that are long-term, since they are taxed at lower capital-gains rates. One way of doing that is to harvest losses by adding to a position that has declined, waiting 30 days, and then selling off the high-basis stock. In taxable accounts, we used the market decline to initiate such trades in Wal-Mart, Gannett, and Lee Enterprises.

This effort has been effective for us over the years. For example, for the five-years ending December 31, 2006, over 100% of our realized gains for tax purposes were long-term 2, and our after-tax returns were more than 90% of our before-tax returns. So far this year we have had fewer opportunities to harvest losses; nonetheless, about 93% of our 2007 gains have been long-term.

Conference Call
Our quarterly conference call is scheduled for Tuesday, October 23, 2007, at 4:30 p.m. (Eastern Time). If you would like to participate, the call-in number is 800-977-8002, and the password is 200414#. As always, we appreciate the confidence placed in our investment approach and investment team.

James F. Barksdale (jbarksdale@eicatlanta.com)
W. Andrew Bruner, CFA, CPA (wabruner@eicatlanta.com)
R. Terrence Irrgang, CFA (tirrgang@eicatlanta.com)
Ian Zabor, CFA (izabor@eicatlanta.com)

¹ For Broker Use Only. Not approved for presentation to wrap program clients. Such presentations should reflect EIC's wrap composite information, which is available upon request. EIC’s returns represent a composite of non-wrap All-Cap Value equity accounts and are presented as supplemental information to a full GIPSã disclosure presentation, which is available upon request. All returns include reinvestment of dividends and interest. Index returns exclude fees and commission costs. After-fee returns for EIC were –2.0% for Qtr.3, 2007, and 7.0% year-to-date. Return figures are as of September 30, 2007.

²EIC’s long-term gains were determined using data from a single account, selected based on its taxable status and the absence of cash flows during the period covered (five years ending December 2006). It is intended to be representative of taxable all-cap value accounts managed by EIC in general, but similar results cannot be assured. Individual experiences may vary. “Short-term” is defined as gains or losses incurred from positions sold after being held less than one year, while “long-term” positions were held more than one year.