Market Commentary for the week of October 22, 2007

Economists and investors, alike, watched the market carefully last week as a confluence of factors inundated the senses with data, some important, some redundant, and some relatively meaningless. Most importantly, the market recoiled in the face of mostly negative expectations.

Consider:

· Energy edged up more than 5 percent to $89 per barrel.

· Home building slowed to its lowest levels in decades.

· Home prices fell to their lowest level in seven years.

· Inflation marched towards its highest one year gain in 15 years.

· The number of U.S. bankruptcies multiplied by double from last year.

· Wages fell as a percentage of GDP.

· Earnings season had already started off disappointingly, particularly in Financials.

· The market swept downward on the 20^th anniversary of the ’87 “crash”.

So, should we worry? And will the markets continue to fall?

Firstly, the markets concluded a disastrous summer during which stock prices either treaded water or went down. While the quarter, itself, was positive for the averages, only Technology, Energy, and Basic Materials accelerated, while the balance of other sectors lagged considerably.

Perhaps, too, things are not as they appear. Discretionary purchases are slowing which affects automobile sales (and profits), as each purchase represents a larger percentage depletion of savings. Whereas home ownership used to be thought of as one’s long-term residence, speculative/leveraged buying during the last decade more represented the use of real estate as an investment gambit than the purchase of a long-term commodity. Therefore, one might surmise that the glut in new home inventory is analogous to the run-up in stocks during the previous bull market.

As a result of their troubles, consumers and the mortgage industry find themselves sitting with inflated valuations that might fall precipitously.

There is no arguing, however, that commodities other than real estate continue to inflate. In some cases, nearly one third of all business expenditures are energy related. While advances in agronomy, horticulture, and agriculture have advanced their respective science, the average food bill is accelerating, with no end in sight. Likewise with life sciences, biotech, and pharmaceuticals.

Concern about negative geopolitical influences also weighed down the markets last week. Iraq, Russia, China, Burma, and Saudi Arabia were never far from the lead headline of the day. Our politicians look clueless or impotent in bringing these hotspots under control, or allaying any fear of further conflict.

Finally, the liquidity/credit crisis is far from over. Each time the U.S. Federal Reserve eases restrictions on “tight money”, speculators swoop in to create hybrid investments which exacerbate the problem and confuse the investing public. While I might concede that the economy is not receding quickly, it is a far stretch to correlate the economy with the psychological tightrope that the markets cross daily.

Right now, fundamentals do not lead the equity markets, perceptions do. It matters less if a company pays dividends or reaps an annual profit, as much as the sector in which that company operates, or the absence of bad news related to its products.

There is no silver bullet to save the markets. Cycles evolve over time and we must factor in the new paradigm of pricing power and inflation into our projections and calculations, or risk greater disappointment that we can’t figure out the justification for the market’s intractability.