In my May 22, comments, I forewarned that the “bear market rally” was fading and that I would wait for more confirmation before becoming more deliberate in rebuilding bearish investment strategies into managed portfolios.

Unfortunately, today’s sobering unemployment report further validated my view that investors who were putting a bid under the stock market this spring were too optimistic in their expectations for a quick recovery in the economy and financial markets. The unemployment rate rose sharply from 5% to 5.5%, registering the biggest incremental rise since 1986. Before today’s report, the bulls have argued that there is no hard data to suggest endemic job loss in the U.S. economy. To paraphrase, “As long as consumers are employed, they will spend and sustain the U.S. economy.” That was a marginally defensible argument until this morning.

Of course, unemployment is a lagging economic indicator because most businesses tend to delay layoffs until well after business activity slows down. However, many other leading and coincident indicators were issuing warnings that employment numbers would eventually deteriorate. For some reason, the markets were surprised when the data was released and stocks took a nose dive. With a deflating housing market, faltering credit markets, escalating food and energy costs, weakening consumer confidence, and now, rising unemployment, it appears equity investors have little left to hang their hats on.

I want to reiterate that equity markets have been disconnected from fundamentals for some time. Generally speaking, rational fundamental analysis still does not justify the stock valuations on the broader exchanges. This is not a pessimistic view - only a conclusive reflection of the facts to which the market should inevitably concede. Market sentiment has already turned convincingly negative and stocks appear poised to fall hard. I’m beginning to scale into positions that stand to benefit from unfavorable market conditions. I will tread carefully.

P.S. The S&P 500 is down (-13.5%) from it’s all time high set on October 11, 2007 and (-10.94%) from it’s previous all-time high set on April 23, 2000 - over 8 years ago.

Since the Federal Reserve rescued Bear Stearns and buoyed the banking system with some rather unusual tactics in late March, the stock market has been on a roll. Absent the Fed’s extraordinary measures, the equity markets would have collapsed. Instead the markets have staged what I would term a “bear market rally” or a “sucker’s rally.” It’s puzzling how investor psychology swung from extreme fear to blind optimism in matter of moments following the Fed’s announcement. Wall Street’s pundits are now issuing a message that the capital markets are pricing in an economic recovery in the near future, but hard economic evidence suggests the contrary. To me, it sounds like the siren’s song luring unwary investors to their peril. I urge you to resist getting whisked away by the Wall Street’s eternally positive spin. This economic “slowdown” may be deeper and more protracted than “experts” and “officials” want to publicly acknowledge.

The undercurrents of the credit and financial markets warrant caution. Strong rallies and crushing sell-offs are signature characteristics of a bear market. There are many indications that this run up is near an end. You can surmise what might follow. I will wait for more confirmation before becoming a little more opportunistic with portfolios – of course with a bent toward capital preservation and an absolute return.

By proceeding, I acknowledge that I have read and understood the Disclosure and Copywrite Statements.

Since my last writing, the US stock market indexes have plunged through the August lows and several key support levels further below. The S&P index finished one of its worst Januarys in history, posting a loss of -6.1%. This is a foreboding warning for stocks through the remainder of 2008, as January performance is historically an indicator of things to come. It’s not official for the S&P 500, but a couple of other indices, including the Russell 2000 Small Cap Index, registered readings in bear market territory last week (-20%). This week, the sellers grew exhausted and the markets bounced off of oversold levels. The market is staging a relief rally that I believe may be short lived.

Despite this week’s rebound, this looks and acts like a bear market. Many investors have not seen it coming or have failed to identify what was making the crackling noises in the woods. Of course it’s possible that it’s not a bear, but their Aunt Betsy growling behind the bushes. But, that doesn’t explain why they’re bleeding. Better to run and ask questions later. In other words, sell the rally and reassess your strategy. It’s not too late. Bear markets seldom go straight down and the generally give fleeting opportunities to escape being mauled into oblivion. The garden variety bear markets shed 30% or more. The more ferocious bears drop 45-50% and the grandfather of all bear markets fell -78% in 1929. The point is, if this is a bear market, it is far from over.

As I have said before, the economic climate is pretty scary from my perch – a view that is not obscured by the filtered information disseminated by the media and the doubletalk of WallStreet. The housing market is weak and some experts are predicting the worst bust since the Great Depression. The credit crisis is seeping into the broader economy, corporate earnings are slowing, employment is lagging, and consumer confidence is waning – not to mention the menacing risks of a sea of credit derivatives. All along, investors and speculators have been pricing stocks for absolute perfection. The capital markets appear setup for disappointment as are the real estate markets, and the broad economy. Time will tell whether the problems in the U.S. will materially impact the global economy, but my guess is that the global economy, as dependent as it is on the American consumer, will catch cold if the U.S. economy sneezes.

These circumstances are presenting opportunities for realistic and nimble investors. Exploiting those opportunities will require investors to shed the popular conventions of the past two decades and embrace a serious paradigm shift. It is unimaginable that many people want to take a round trip to the year 2002. However, the investment industry has not done ample job of educating investors about the alternatives or even that returning to 2002 stock market levels is even plausible.

Of course, I will be keeping my eyes open for evidence of improving conditions, when we can once again become confident longer-term investors. I suspect the time will come when we can buy companies that satisfy time-tested valuation metrics instead of buying stocks on the notion that a greater fool will give us a bid in the future. Until then, Catamount will be positioning portfolios to preserve capital and profit from alternative investment strategies that tend to perform well in down trending and/or range bound markets.

By proceeding, I acknowledge that I have read and understood the Disclosure and Copywrite Statements.

Dear Clients:

Following the August credit crunch, stocks rebounded and attempted to challenge all time highs (Dow 14000 & S&P 500 1575). If the indexes had broken above these levels with conviction, I would have expected the stocks to power higher. But they didn’t. Instead the broad markets have retreated over the last couple of weeks. Although this is not conclusive evidence that a more significant correction (or bear market) is imminent, this action is not indicative of a healthy stock market.

The equity markets finished decidedly lower again today. The major indexes closed well below critical technical levels that (13500 on the Dow and 1500 on the S&P 500). The indices are developing a pattern of setting lower lows and lower highs. Lately, down days have been accompanied by higher trading volume and ugly advance/decline statistics, where up days have lacked supportive trading volume and breadth. This action signals further weakness at least in the short term. Today’s breach of these key psychological levels could cause the markets to test the August lows.

Your portfolios had a net (short) equity exposure (10%), a high allocation to cash, and a significant position in 10 year U.S. Treasuries – very enviable shelters when investors are fleeing for safety. The portfolio values should move up slightly. Meanwhile, the Dow and S&P 500 finished lower by 2.6% and 3% respectively. Small cap indices and emerging market indices got hit even harder.

I’ve been waiting for a discernible trend to develop which would indicate a continuation of the bull market or the beginning of a bear market. Right now the preponderance of evidence suggests that the direction is down. This gives me enough confidence to tilt the portfolios a little more short, betting on further weakness in stocks. As such, I added to our short position in the Profunds Ultra Short Mid Cap 400 Index (MZZ). That brings MZZ to a 15% of the overall portfolio. Keep in mind, this fund goes up at 2 times the rate that the Mid Cap index goes down. That’s means you have the equivalent of 30% inverse exposure to the Mid cap index. A 10% long position in the Ishares Russell 1000 Large Cap Growth Index (IWF) offsets/hedges the short position in the MZZ. So, the net short exposure in the overall portfolio is about 20% now. I expect large cap growth stocks to continue to perform better than mid cap stocks, so I think it is a reasonable hedge for the moment.

As a side note, the fact that some instruments like MZZ use half the amount of cash to acquire the desired investment exposure should give you comfort about holding higher than normal cash positions. If you think about it, we can accomplish the same investment objectives and still earn money market rates (currently around 4.5%) on the excess cash. Consider this when you get the feeling that your high cash position is not serving a good purpose.

I think we are at the turning point in the capital markets but major trend changes take time to develop. The effects of the housing recession and the subprime credit crisis are beginning to metastasize in the broader economy. Perhaps investors, at least the sober ones, are beginning to worry about to the creaking noises in the bowels of the ship. I will get more opportunistic with the cash in the portfolios as acquire more clues about the general direction of the markets.

By proceeding, I acknowledge that I have read and understood the Disclosure and Copywrite Statements.

The conventional wisdom views investment grade bonds as conservative and safe investment in any climate. Historically, however, that has not been the case. Bonds tend to perform poorly in market environments that are characterized by increasing interest rates. The two primary forces that determine the direction of interest rates are the Federal Reserve’s monetary policy and the bond market. Of course the “fed rate” can be set at the deliberation of the Federal Reserve Board, which tends to have an impact on the bond market. However, at the end of the day, the bond market beats to the drum of market forces (i.e. the supply and demand for bonds). This has become quite evident in recent weeks as the Federal Reserve has held the Fed rate steady while the bond market has driven the 10 year treasury yield markedly upward. The bond market has been pushing yields higher because fickle bond investors are requiring higher yields. As a result, the market value of existing bonds have fallen significantly.

Rising rates and the sell off in the U.S. bond market can be attributed to a variety of factors but the main culprit is inflation. Inflation, by definition, is an increase in amount of currency in circulation (money supply). Uncontrolled increases in the money supply can lead to rampant inflation. Unfortunately, the FED has been pumping greenbacks into circulation like there’s no tomorrow.

Of course, each new dollar in circulation erodes the purchasing power of currency already in circulation. Therefore, more and more dollars are required to purchase the same amount of goods and services. Eventually, inflation manifests in the form of rising consumer prices. But if you are watching the consumer price index (CPI) and the producer price index (PPI) for signs of inflation, you will not find much evidence. These statistics are unreliable for reasons I will not discuss for fear of sounding like a conspiracy theorist. Suffice it to say that much of the deception imbedded in these statistics is in how numbers are reported. The financial press tends to dismiss the overall CPI numbers and emphasize “Core CPI” which strips out food and energy prices. The last time I checked, food and energy prices have a profound impact on the average consumer. Most assuredly inflation is present in our economy. If you want proof, just take a look around. You are paying higher prices for oil, unleaded gas, food, housing, and many other goods and services.

Unfortunately, inflationary forces are likely to pressure interest rates, depress bonds, and the debase the U.S. dollar for many years. You don’t have to take it from me. A few days ago on CNBC, Bill Gross of PIMCO Funds, manager of the world’s largest bond fund ($94 Billion) declared the end of the 20 year secular bull market in domestic bonds citing his long-term outlook for inflation and higher interest rates. Only time will only tell if he is right. However, warning signs should flash when a man, who makes his living managing a $94 billion bond portfolio, publicly announces that serious challenges lie ahead for bond investors.

Now that we know why bond prices are falling, the question is “who’s selling?” Well, it may be less a matter of increased selling pressure, and more a matter of decreased buying interest on the part of foreign investors. For several years, foreign investors have provided a substantial source of demand for U.S. treasuries and other domestic debt securities. Much of that demand has stemmed from Chinese and Japanese governments who were buying U.S. debt securities in order to support their export lead economies. You see, by buying our U.S. treasuries, Japan and China were artificially depressing the value of their currencies thus making their products inexpensive for U.S. consumers. In other words, they made products, priced them cheaply, and sold them to Americans on credit. American’s now owe the rest of the world $ trillions. This debt is affectionately referred to as the “trade deficit.”

There was method in their madness, but Japan and China may be second guessing the wisdom in owning such a large pile of U.S. debt. In fact, a few weeks ago, China publicly announced intentions of diversifying their massive position in U.S. Treasuries. Coincidentally, foreign purchases of U.S. treasuries slowed sharply over recent weeks.

Yes, I believe troublesome times lie ahead for domestic bonds. It’s time for investors to look elsewhere.

By proceeding, I acknowledge that I have read and understood the Disclosure and Copywrite Statements.

Dear Clients,

Ordinarily, I would not inundate you with so many musings in a matter of days. However, yesterday’s market action was notable. You may be wondering what happened to the stock market and what the implications might be for your portfolios. As I have mentioned in previous remarks, I have been preparing your portfolios for some stormy weather in the capital markets. The storm may be close at hand.

The volatile action in the markets yesterday should serve as a wake-up call for investors that have slipped into 2006’s market induced complacency. The S&P 500 fell approximately 3.5% in Tuesday’s trading session, erasing three months of impressive gains in a single day. All of the major indexes buckled under massive selling pressure amid extremely high volume trade. Few stocks survived the fall as declining stocks outnumbered advancing stocks by a ratio of 12:1 on the NYSE. The catalyst? China’s stock market fell 9% on Monday night, setting off the frenzy in the U.S. stock market and other global markets. These events beg the question, “why would a sell-off in China ignite such fear in U.S. markets if investors are confident that our “goldilocks” economy is so impervious, the stock market so attractively valued, and our real estate markets on such solid ground?”

I don’t know, but the explanation must run a little deeper than “investors just got a little spooked by the news from China.” I might point to a couple of concerns weighing on the market psychology; Former Fed Chief Alan Greenspan’s warning of a recession in 2007, a difficult U.S. housing market, down beat economic reports, decelerating corporate earnings, historically rich stock valuations, increasing inflation pressures, growing trade deficits, heightened Middle-East tensions, and resurgent energy prices. These things can make for a challenging investment climate.

You may find it counterintuitive when I say that our investment strategy has the potential to perform well in this environment. I can only make a general comment about how our portfolios faired yesterday. However, I’m pleased to report that, while the S&P shed a jaw-dropping 3+ percent, the Catamount managed portfolios held up quite nicely. Today, the portfolios advanced respectably. Rest assured that I will continue to monitor the situation closely.

Greg

By proceeding, I acknowledge that I have read and understood the Disclosure and Copywrite Statements.

Dear Friends & Clients,

We are off to an excellent start in 2007! Your portfolios are showing nice YTD returns due in large part to positions in silver, gold, oil, and Japan. Let me say, with personal humility and with professional respect for the vagaries of the markets, I’m confident that more auspicious rewards are forthcoming.

I have been preparing your portfolios for a change in season. Sometimes it take’s a while for investment strategies bear fruit, but now there are clear signs that we have a well cultivated crop. I’m expecting good harvests. Thank you for your patience.

I have made a change to your portfolios. I added 5% to your position in Street Tracks Gold Trust (GLD). This brings the GLD weighting close to 11% of your overall portfolio. Gold and Silver prices soared through some key resistance levels on more than double the normal trade volume on Wednesday. This is an indication of strong buying interest.

I believe that this renewed interest in precious metals could be the tip of the iceberg. There are many reasons why precious metals stand to perform well on a short, intermediate and long-term basis. Touching on all of them would be a little onerous for today’s comments. So, here are just three reasons why we are investing in precious metals.

First, there are clear signs that inflation is on the rise in the U.S. economy and precious metals offer protection against the ravages of inflation. The primary scourge of inflation is the erosion of your purchasing power. These commodities can preserve your purchasing power when consumer prices rising. Believe me, no matter what the CPI numbers tell you, prices are on the rise.

Secondly, this week Federal Reserve Chairman Bernanke expressed concern that the current distress in the housing and sub-prime mortgage markets could lead to a substantial decrease in personal consumption. This should come as no surprise to you, since I have been talking about the potential risks in the housing and residential credit markets for many months now. Anyway, personal consumption drives close to 70% of the U.S. economy and a sharp decrease in spending could usher in a deeper economic slowdown than anyone, including the Federal Reserve, expected. The U.S economy may miraculously avoid a slowdown but, remember, economic cycles are inevitable. We should be prepared to survive a down cycle. Precious metals typically act as a safe haven for your capital during periods of economic uncertainty.

As if that weren’t enough reason to invest in precious metals, the third and perhaps the most important fundamental reason to own gold and silver relates to the increasingly bloated U.S. trade deficit and it’s implications for our national currency. The U.S. trade deficit is, in essence, borrowing from foreign countries on a mass scale to finance the purchase of goods from those countries. In other words, we are buying a lot of imported stuff on credit. The absolute size of the debt is becoming a burden to the U.S. consumer and cannot be supported indefinitely. The easiest way to repay the foreign debt is to systematically devalue the dollar. It should be no mystery that the orderly devaluation of the Greenback is central to U.S. Treasury Secretary Paulson’s agenda with China. This portends a continued and, hopefully, measured slide in the value of the U.S. dollar against other foreign currencies and particularly against precious metals. With that said, foreign governments, central banks, institutions, and investors that are looking to reduce their positions in the Greenback will likely replace many dollars with investments in gold and silver among other alternatives.

With these three trends in place, there should be plenty of investment demand for gold and silver which should translate into higher prices and attractive investment gains for those who get in before the herd. We are already there.

Catamount Capital is located on McKinney Avenue in Dallas, Texas. I welcome you to drop by for further discussion on this topic. We enjoy visitors!

Greg

By proceeding, I acknowledge that I have read and understood the Disclosure and Copywrite Statements.

I have added a 5% position in United States Oil Fund (ticker symbol: USO) to partially replace the liquidated PIMCO position. USO is an Exchange Traded Fund (ETF) that tracks the physical spot price of West Texas Intermediate Light Sweet Crude Oil. The rationale is that oil prices have corrected approximately 35+% from highs set just a few months ago. I believe this correction is largely a result of short-term oversupply concerns. However, the long-term supply and demand outlook is supportive of higher oil prices.

I believe this is an attractive entry point. Of course, I can’t be sure that this is the bottom. Nevertheless, some material economic, geopolitical, and technical data seem to indicate that a base has been formed around $43. We purchased USO at around $45.83 on Jan. 24. It closed today at $49.14.

I’m watching closely.

Greg

Dear Clients.

Last week, I liquidated your entire position in PIMCO Commodity Real Return Strategy Fund (Ticker symbol PCRDX or PCRAX) which represented approximately 10% of your overall portfolios. PCRDX is a mutual fund that is intended to mirror the Dow Jones-AIG Commodity Total Return Index which is an unmanaged index comprised of 19 physical commodities. In case you’re interested, here are the approximate weightings of the commodities in the index.

Natural Gas 12.28%
Crude Oil 12.81%
Unleaded Gas 4.05%
Heating Oil 3.85%
Sugar 2.93%
Wheat 4.87%
Cotton 3.23%
Corn 5.94%
Coffee 3.02%
Soybeans 7.60%
Soybean Oil 2.67%
Aluminum 7.06
Copper 5.89%
Zinc 2.67%
Nickel 2.61%
Gold 5.98%
Silver 2.00%
Live Cattle 6.15%
Lean Hogs 4.39%

Here’s my rationale for selling the fund. First of all, I was on the right track in 2003 when I began to build positions in commodity funds to take advantage of what has obviously evolved into a structural bull market in commodities. The PIMCO fund has served is purpose in allowing us access to a broad basket of commodities. However, the disadvantage of these long-only “passive” index funds is that they maintain the same weightings without regard for the fundamental outlook of each commodity underlying the index. Holding a predetermined percentage of a commodity with poor supply/demand characteristics can exert significant drag on the overall fund’s performance. This is exactly what happened to PCRDX in 2006, and it’s the primary reason I’m disenchanted with passively managed commodity funds. Another reason is that there are alternatives available today that will enable me to manage more “actively.”

Innovative new products have been developed to help financial advisors and investment managers focus on certain opportunities without having to carry the baggage of entire indexes. After all, this is the era of Exchange Trade Funds (ETF). New ETFs may become so refined they can be used surgically on a portfolio. I intend to use these tools at Catamount until I devise another method, of which I’m diligently pursuing. I’m sure the solution will incorporate a long-short strategy along with an element of active portfolio management. There will be more on that subject in the future.

With all of this talk about commodities, I will leave you with a brief outlook on various commodities in 2007. I expect downward pressure on industrial metals prices (i.e. copper, zinc, nickel, aluminum) as the U.S. economy decelerates. As I have intimated in a previous writing, I’m very constructive on precious metals (i.e. gold and silver) because I believe the U.S. Dollar will continue to slide against other currencies and I suspect inflation pressures will mount. Finally, after a serious correction in energy prices, I’m bullish on oil and gas once again.

Greg

By proceeding, I acknowledge that I have read and understood the Disclosure and Copywrite Statements.

Dear Clients:

I bought a 5% position in Streettracks Gold Trust (GLD) for your portfolios on Monday. GLD represents an investment in actual gold commodity futures, not stocks of gold mining companies. Gold acts as a hedge against inflation and as a safe haven from challenging economic conditions. I believe we’ve chosen an attractive entry point for a long-term investment in gold. GLD dropped a little on Monday and Tuesday, but gapped up 3% on heavy trading volume yesterday. It’s a very bullish sign when an investment trades significantly higher on heavier volume.

Your position in Ishares Silver Trust (SLV) has been moving up substantially over the last two weeks. If you recall, your portfolios have been long SLV for several months now and we have added to the position a couple of times since the initial purchase. Silver is similar to gold in that it should act as an inflation hedge and a safe haven under difficult economic circumstances. However, unlike gold, Silver also has a variety of industrial uses beyond the jewelry trade. Currently, there is a shortage of physical silver to meet industrial demand and it could be years before the imbalance is resolved. For these reasons, I’m a strong believer in the investment merits of silver. Yesterday, SLV rose almost 5% on twice the average daily trading volume, a very bullish sign indeed.

As with any investment, GLD and SLV will not appreciate in a linear fashion. Be prepared to endure some volatility along the way.

Greg