Absolute Return Portfolio Management LLC

Today, however, I am not so bullishly optimistic over the near term. The reasons are as follows: Investor sentiment has very rapidly cycled from extreme pessimism back to a high level of optimism. This illustrates almost a cavalier approach to risk in spite of the credit woes and rocketing energy costs.

Secondly, the market's technical condition is deteriorating. As the market rallied off the March 17th lows, we should have seen an ever-increasing number of daily New Highs and a corresponding contraction in the number of daily New Lows. This would have shown that large numbers of stocks were participating in the rally and would have been testimony to a healthy market advance which requires broad participation.

However, what has actually occurred is that the increase in the number of daily New Highs has been relatively anemic and the daily number of New Lows have remained high and spike to even higher levels on any down days in the market. While this is difficult to convey without graphics, the essence of these factors is that the underlying health of the market isn't particularly robust. Coupled with the aforementioned high level of sentiment and lack of general concern, I feel that more downside is possible and that the ultimate bottom either is still being formed or the market is still in the process of a longer-term decline.

I would like to mention that 1970's style discussions of "stagflation", "cost-push inflation" and "cost of living increases" in wage demands are likely to find their way into the vernacular of daily media and discussions. While the 1980's and 1990's brought relief from inflation and the common use of these terms, we have come full circle once again.

It is critical to understand the implications that higher energy costs have on the entire global economy. Oil is priced in US Dollars and since the US Dollar has dropped about 40% in the last six years, the burden of higher energy costs is even greater for the US economy and consumers. As I have mentioned before, the Fed's liquidity injection campaign and government funding of Social Security and Medicare/Medicaid health benefits for a vast population of Baby Boomer's augers poorly for the US Dollar because our government's response is likely to take the most politically acceptable approach which is simply to run the printing presses and create money (and inflation) out of thin air.

Almost every element of the production cycle of manufactured goods and large components of the service sector are influenced by higher energy costs. Many use oil as a raw input of production. Transportation of almost every kind is heavily burdened. Even professional services and service industry employees are still negatively impacted by the higher costs of purchased goods both personally and for the business itself. Employees will demand higher wages as an offset. Businesses will "push" these higher costs on in the form of higher prices leading to "cost push" inflation.

From an investment standpoint, intermediate and long-term domestic bonds have a poor outlook (we do not have any portfolio holdings in these areas). Overseas bonds, of high quality, are better if the US Dollar continues to decline and global inflation and interest rates don't increase too much or too rapidly (we own high quality international bonds). Historically, equities are a great hedge for inflation so long as businesses can pass higher costs along without a negative impact (at present we have no equity exposure due to our models being negative). It's a razor's edge because higher inflation and interest rates are ultimately a strong drag on economic growth. Slowing of economic growth equals lower earnings and lower stocks prices...So, modest inflation won't be a problem for equities and by focusing on overseas markets and higher growth areas we can certainly make the most of even a challenging economic environment.

International equities are continuing to out-perform the US equities, however. The US Dollar (USD) decline has continued due to the tremendous Fed liquidity measures which are viewed as inflationary and USD bearish. This favors overseas markets as local equity performance gets the added advantage of a positive currency gain for US-based investors.

LatAm, Asia and Emerging Markets remain the top equity regions globally in our models. When a recovery in global markets is confirmed by our models, it will be to these areas that we will look.

ASIA (ex-Japan) -

EMERGING MARKETS -

EURO -

JAPAN -

LATIN AMERICA (LatAm) -

USA -
(see Equity Style section for specifics)

As noted earlier, the acceleration of weakness in the US Dollar translates into strength in overseas investments.

GOLD Bullion - (GLD) BUY

Goldman Sachs Commodity Index (GSG) (largely energy ) and DB Commodity Index Tracking Fund (DBC) remain on a BUY.

Real Estate - REIT's have recovered nicely but in our Real Assets model, they still rank below Gold and Commodities and, therefore, haven't yet supplanted either existing position.

If you have any questions about our research or Absolute Return Portfolios do not hesitate to call. We can be reached toll-free at 877-632-7491.