Market Observation| June 23, 2008

Weekly Results:

S&P 500 -3.10%
DJIA -3.77%
NASDAQ -1.97%
MSCI Emerging Markets -1.33%

As we are set to close out the second quarter, there is a growing anticipation that markets are reaching an inflection point. Last Friday marked quadruple witching. A day when contracts for index futures, index options, stock options and stock futures expired. Generally, this quarterly occurrence results in abnormal and turbulent trading. Clearly, this contributed to rising volatility- a reflection of ongoing anxiety among participants.

It has been a difficult year for money managers, given sideways market behavior, risk-aversion, credit worries and heightened skepticism. "According to numbers released by Hedge Fund Research (HFR) on Thursday, 170 funds liquidated during the first three months of the year compared with 138 funds that closed down during the same period in 2007." (Reuters – 6/19/2008). Again, a challenging period to produce desired investment results.

The strength in commodities and weakness in Financials continue to resurface yet again. Basically, this relationship has captured the majority of investors' focus. This narrowing stock participation in global markets presents complacency and lack of conviction. Simply, there is a lot of money chasing few ideas. Momentum is a key factor, where holders of energy keep adding to winners. Similarly, those betting against financials profit from betting on downfall of Financials. That said, the tide can turn at a faster than expected pace but the dynamics are not clear. In the weeks ahead, these macro dynamics suggest pullbacks in emerging markets and further weakness in Europe. That said, US markets offer relative attractiveness in select areas.

In approaching month end, global inflation is playing a big role. These impacts are discussed in headlines and addressed by Central Bankers. European banks remain vulnerable with declines in investor sentiment and unraveling of credit crisis. For example, "the median CPI for the 71 countries is 5.83% (YoY) compared to the most recent CPI of 4.2% in the US." (Bespoke Investments 6-22-2008) Worries in Financials are increasing as seen by declines in stock prices. Interestingly, increasing investor demand for risk aversion has lead to a launch of new financial products. The recent launch of CDR Counterparty Risk index enables investor to hedge credit risks of banks/brokers via. This is an example where Innovative products are gaining popularity. On the other hand this showcases that skepticism continues to persist.

European Banks: Short ideas based on weakening fundamentals.

· STD (Banco Santander SA), AIB (Allied Irish Bank) and DB (Deutsche Bank).

Steel Producers: In a slowing global environment these names can present short opportunities.

· Brazil: SID (CIA Siderurgicia) and GGB (Gerdau SA)

· Argentina: TS (Tenaris SA)

Macro Levels:

S&P 500 [1317.93]: Near-term downtrend is established. Approaching key support level of 1300. Broke below annual range between 1350-1400.

Crude[135.36]: Momentum is overbought just enough to attract short-sellers. Forming a new two week range between $138-132.

US 10 Year Yield [4.20%]: A recovery back to December 2007 levels. Expect consolidation between 4-4.20% after a strong run.

Gold [907.50] : Glimpse of recovery after 3+ month decline.

DXY US Dollar [73.03]: Mostly in a sideways pattern in the past 4+ month.