We are in a historically unprecedented time for both the stock and bond markets.

The Bad & the Ugly

• October was the most volatile month in the S&P 500 Index’s 80-year history.
• Retail sales fell a record 2.8% in October (only 0.5% when auto and gas sales are excluded) – the fourth month in a row sales declined.
• US auto makers are pushing for a bailout.
• Unemployment is up to 6.5% and will probably continue until it reaches 8-9%.
• Foreclosures up 25% from a year ago.
• Uncertainty about the new administration.

The Good & Not So Bad

• Oil prices are down – $1.79 a gallon at the BP station two buildings from THOR.
• The yield curve is very steep. This is a precursor of positive things to come in the economy. For more information on why this is good, see the link below which will take you to a very well written article by PIMCO, the largest bond manager in the US.http://www.pimco.com/LeftNav/Bond+Basics/2006/Yield_Curve_Basics.htm
• The credit markets are flowing again. The 3 month Libor rate was 5.15% a month ago and it is now 2.24%.
• Interest rates have been slashed worldwide and will continue to drop, especially in Europe.

The fluctuations in the market are driven by different camps deciphering between the bad points and the good points. At this point, stocks have been beaten down so far that we believe a very severe recession or even depression has been discounted into the market. If we experience a very severe recession, stocks are currently fairly valued. If it is not that bad and the economy responds to the steep yield curve and influx of cash from around the world, stock prices have the potential to rise significantly from these levels. The news is going to be bad over the next few months as more corporate layoffs are announced and the unemployment rate rises – expect horrible headlines. Bad news on the economy is not necessarily bad news for the stock market. The stock market is an indicator of what to expect to happen in the economy ahead. The past two months are telling us the economy will be bad for the next several months. However, the market will rise months (usually 3-6) before we see a recovery in the economy. We believe that the economy will recover next year and that stocks are poised to move on the upside in anticipation of a better economy down the road. We are also of the opinion that stock prices at this level have very little downside risk since they are priced for a “worse case scenario.” Either way, there still will be bumps in the road ahead and more price fluctuations. Don’t be surprised to see more +500 and -500 point days ahead.

No Place to Hide: THOR’s model has been very successful in the past in determining investment styles that will perform better in the future. Even with how bad our market is, the US is the best performing market in the world and our underweighting to international stocks has been positive this year. However, in the US, all investment styles have been hurt. Click here for recent JP Morgan piece that shows that all styles – large, small, growth, value) are down significantly since the market highs in October. There has been no place to hide in the equity market during this panic. People are selling everything indiscriminately.

As always, we appreciate the trust and confidence you have placed in us. Please do not hesitate to contact any one of us if you have any questions or concerns.

Sincerely,

Jim, Mark and Greg.