Dear Clients,

Here’s an update. I invested 10% of your portfolios in the S&P 500 index on Friday. As such, we participated in yesterday’s rally by adding about +1.5% to the total value of your portfolios. As mentioned in my blog last Thursday, a rally was overdue but did not expect a 10% move. In stock market history, only 2 other days experienced a rally of this proportion or even in the ball park. Both days occurred in bear markets. Yesterday was an anomaly.

The market opened significantly higher again this morning but began to sell-off almost immediately. Based on my indicators, the market is due another day or two of consolidation (sideways or downward action) particularly after such a strong upswing. If the indexes can stabilize, there may be little more upside. But when the rally losses momentum, I suspect the markets will get trounced again as investors focus on the economic backlash caused by frozen credit markets. Even if the credit markets start to function correctly, the economy has already suffered severe damage that will be reflected in the economic data over the weeks and months to come.

With all that said, the extremely oversold conditions presented a trading opportunity, not a long term buying opportunity. Anyway, it may not hurt to nibble a little in here. I may look to add to our current long positions within the next couple of days.

If you are worried about missing the train, you shouldn’t be. Bear market bottoms rarely turn this quickly. We will have ample opportunity to scale into stocks when a new bull market begins. So far, pundits have declared 3 or 4 bottoms that have proven false. There were 6 or 7 false bottoms in the 1929, 1973, and 2000 bear markets. It’s important to keep days like yesterday in perspective. Survey results indicate that the vast majority of private investors chose or were ill advised to remain invested the market despite the economic headwinds. Most non-clients with which I have spoken lost 40-50% of their portfolio values. To use a $100,000 hypothetical example, investors who remained fully invested watched their portfolios deplete from $100,000 to $60,000 in the last 12 months. Naturally, events like yesterday’s enormous rally appeal to human instincts for greed. And, it all sounds incredible until you consider that most people’s tattered hypothetical $60,000 portfolios only increased to $66,000 on the rally. Factually, a future return of 67% is required to climb back from $60,000 to $100,000. Based on S&P 500’s average annual historical return, that objective could take 6-10 years.

By comparison, $100,000 invested in Catamount managed portfolios edged up to approximately $101,000 over the trailing 12 months and gained roughly 1.5% yesterday to end at $102,500. Obviously, smaller percentage gains on a larger capital base can produce significant absolute profits even with a fraction of the exposure.

The key take away: Never allow your portfolio to sustain large losses in a bear market. I’m watching the situation vigilantly.

The S&P 500 Index closed at it historic high at 1565 exactly 1 year ago.Today it closed down (-41.9%) to 909.If measured from its all time intraday high of 1576 on October 11, 2007, the index is down -42.3%.I feel extremely fortunate to report that we have sidestepped the disaster. Catamount’s Managed Portfolios are +1-2% over the same time period.

In my September 17 comments, I stated that the precipitous sell-off in the market deserved a reprieve and that any bounce should be used to liquidate stocks.A violent two day rally offered little time to react, but, hopefully you took action.What ensued was a vicious capitulation for the history books.The S&P 500 shed a shocking 28% in the 14 trading days since September 19^{th .}

As you may know, I have expressed grave concerns about the condition of the capital markets for a couple of years as evidenced by the cautious, if not gloomy tone of my blogs dating back to November of 2006.If you really want to get depressed, you can read them in chronological order below. Anyway, what I saw brewing was a burgeoning credit bubble, widespread real estate speculation, soaring home prices, unbridled consumer spending, rich stock valuations and rampant inflation – a perfect prescription for a meltdown. Unfortunately, my greatest fears are now playing in a theatre near you. Despite my preparedness, I’m astonished at the fury of this latest selloff.

So, where do we go from here?In my February 2, 2008 comments, I encouraged readers to at least entertain the notion that the stock indices could fall to the lowest levels of the bear market of 2000-2003 which were approximately 770 for the S&P 500 and 7200 for the Dow.This would equal a 50% drop from peak to trough.The indices are not far from those depths. Given the facts, it may not be perverse to assign some probability to an even greater decline. However, bear markets rarely reach bottom in such a linear pattern as they are characterized by a series of dramatic selloffs and powerful rallies.It usually takes 18-24 months to complete the cycle which means we might have another 6-12 months remaining.

Indicators suggest that stocks could stage a rally soon.The next upswing could be one to remember, but, if I had to guess, the market will succumb to gravity and eventually rollover to test the lows of the last bear market. Of course our investment strategy will evolve as the facts and circumstances change.

We are in treacherous and seldom traveled territory and making sound investment decisions under these conditions is more art than science.Having avoided the first 42% of this decline should offer some comfort and cushion for Catamount clients. Thank you for your support and patience.