Market Commentary for the week of May 12, 2008

Despite “breaking out” above recent resistance levels, stocks showed little breadth of participation during last week’s rally. Most importantly, sentiment remains unconvinced that either the economy or the stock market is all that strong. What we saw during the rally was a reflexive bounce off the severely depressed levels that we achieved in March/April.

I remain unconvinced that we are in anything more than defensive rallies within the existing secular downtrend.

The factors which drive the rallies are an abundance of cash by some speculators who need to put money to work, and extremely attractive prices on some companies whose name recognition and perceived “good will” in the public identity make them must-have investments in spite of their poor track records recently.

Which way now?

The Fed seems to have little wiggle room left, and becomes, therefore, more irrelevant. Despite the creation of liquidity from rate cuts, they seem to have very little significance to the performance of stocks. By their own doing, they created inertia and doubt about their role in monetary governance by losing their “arms-length” neutrality during the Bear Stearns bailout. Historically, rallies generated by Fed-buzz have had very little staying power. Any justification for equity rallies that are credited to the Fed are suspicious, at best.

My profit models continue to show diminishing acceleration patterns. I am not convinced that these numbers might turn around in the next quarter or two.

The lone positive trends continue to be in heavy demand commodities areas, such as Energy, Materials, and Agriculture. Risks of these secular trends evaporating are relatively low, and would require months (or years) during which any asset allocation remodeling might take place. These patterns hold true globally as well as within the U.S. market.

It is what you think it is.

There are precious few signs that psychological support will flow into equities. Until the stress factor of personal finance and corporate earnings subsides, there is little appetite for conjecture, speculation, risk, or hypotheses.

Let’s be clear about what factors are driving the economy:

· Inflation is the greatest threat to economic security, and the biggest impediment to corporate profits.

· The dollar’s historically low conversion rate has changed the political, economic, and psychological landscape for global and domestic commerce.

· Price-creep, as referenced earlier by inflation, is the largest stealth-tax invasion upon investors and is, by itself, a form of domestic terrorism. If fear and jingoism win, money flow stops.

· Monetary policy has lost significance by creating the conditions for commodities inflation and asset devaluation.

I am carefully marking time by positioning my client’s asset allocation to reflect secular earnings patterns, and by mitigating risk through administration of cyclic entry and exit opportunities when appropriate. Until or unless these persistent patterns give indication of reversing, my bias is to be conservatively opportunistic and cautious. In my world earnings are the key, and right now the opportunities are extremely narrow.