Market Thoughts: 9/15/2008

Weekly Results:

S&P 500 1,251 .70 +.76%
NASDAQ 2,261.27 +.24%
Russell 2000 720.26 +.20%
MSCI Emerging Markets 36.10 -2.09%

A chaotic and confusing week with key shifts in Macro dynamics. There were growing anxiety and major headline announcements over the weekend. Lehman's bankruptcy, Bank of America's acquisition of Merrill Lynch and liquidity expansion by the Federal Reserve. Now, participants have to manage their expectations before placing bigger bets.

Key questions to reexamine:

· Do themes in Commodity and Emerging Markets recover from multi-month downtrends?

· As Credit risk continues to persist; are recent interventions enough to spark a short-term rally?

· Are US Treasury yields headed lower?

· Is the US dollar overbought and fundamentally poised to go lower?

Investors are forced to digest a new playing field and risk assessment. Clearly, these dynamics contribute to volatility, irrational behavior, political discussions, and interventions. Putting these various pieces together partially explains the uncertainty in the marketplace. Since August 22^nd, Volatility index has risen nearly 40%. The last few weeks have demonstrated the difficulty of navigating through a turbulent markets. Overall sentiment reflects fear with increasing speculations. For the week ahead, there is further suspense given upcoming FOMC meeting, key earning announcements and option expirations.

For chart pattern observers, recent market lows have coincided with policy-makers' actions. Since the start of the credit crisis in 2007 there are five key bottoms within the current downtrend. These dates include Aug 2007, Nov 2007, March 2008, Jan 2008, and Jul 2008. In all these cases, a stock market rebound was fueled by cuts in the discount and fed funds rate, changes to lending system or bailouts. As for last week's rescue of Fannie/Freddie the answer remains to be seen. That said, odds for a recovery appear feasible in the near-term as markets are deeply oversold. Again, confidence restoration does take time and policymakers are using various tools.

Commodities/Emerging Markets:

Trend followers would argue the cycle reached an extreme. Interestingly, with lower commodity prices overall inflation worries are less of a concern than previous months.

Crude [101.18]: Nearing a psychological support level of $100. Oversold in the near-term with 200 day average at $111.64.

Gold [750.25]: Retracing back to October 2007 levels. Attempting to stabilize after a 6 month decline from March 2008 highs. Long-term uptrend is intact despite this steep correction. Mean-reversion and a short-term bounce appears feasible.

EEM [36.54]: Nearly a 40 % decline since October 2007 highs of $55.88. Major support around $35 level, where bullish conviction will be retested.

Rates/ Currency:

Observers and industry pundits are noticing the Dollar dig itself out a multi-year decline. Key participants are taking notes of recent moves. Now, if this recovery persists, money managers should look to readjust themes in portfolio holdings. On the other hand, credit concerns and overbought technicals can lead to short-term decline in US dollar.

US 10 Year Yield: [3.71%] Currently yields remain above annual lows of 3.28%. Sharp declines since October 2007. Further evidence needed for stabilization.

DXY (US Dollar): [78.96] A sharp recovery since March, resulting in overbought levels above $80. A weak finish last Friday as worries of financial weakness take hold. One can expect near-term corrections given overall uncertainty.

Financials:

In this environment, safety appears to be a precious commodity. This can result in a continuing "wait and see" game . For those looking ahead, there are bargains in US equities. The headline concerns over Lehman and AIG escalate Fear to a new level following Fannie / Freddie takeover. For those seeking positive signals, the HGX (Housing Index) is up significantly since July 15^th lows. Same argument is made for BKX (Bank Index) where it remains above annual lows. Nonetheless, a fundamental turnaround in banking and real estate groups requires some patience.

Money Management:

Its apparent in the past year that risk-aversion is a dominate global theme. Investors have flocked back to developed markets and value players are awaiting favorable entry points. Now, shorts will look to hedge as volatility increases yet again. Risk in Equity markets is too unclear. Nonetheless, a recovery in pending months presents few stock specific opportunities.

Consumer related Long;

HSY (Hersheys), LUV (Southwest Airlines), WMT (Wal-Mart) and SBUX (Starbucks).

Media/Tech:

DTV (Direct TV), and PMTC (Parametric Tech).
Healthcare Long:

BLUD (Immucor), GENZ (Genzyme) and ILMN (Illumina Inc), JNJ (Johnson & Johnson) and TECH (Techne).

Commodity Related Short :

TS (Tenaris SA, SID (Companhia Siderurgica Nacional ADR) and GGB (Gerdau S.A)