We are sure that you are just as happy to see this month end as we are relative to the performance of the stock market. This October was one of the worst months in the history of the stock market. The severe crisis in financials, the drop in consumer confidence and the upcoming election made many investors panic and sell stocks, with little to no regard for the fundamentals. In addition, many hedge funds were selling off this month due to client redemptions and reduced leverage allowed by lending institutions. All these factors converged to create a perfect storm. Stocks are now priced assuming a very severe recession or even a depression. We don’t believe we are going into a depression.

Going forward, there are some fundamental criteria that we monitor frequently that are very positive for the stock market the next few months: 1) The US Federal Government and central banks around the world are doing everything they can to avoid a depression. The printing presses are running to ensure that there is liquidity in the system. 2) The yield curve in the United States is extremely steep (short rates are much lower than long term rates). A steep yield curve is very positive and is a sign that the economy will rebound in the months ahead. 3) Historically, the stock market starts rising 3-6 months before the economy recovers. 4) Europe is far behind the US in cutting rates. In fact, The UK still has an inverted yield curve (short rates higher than long term rates) which is a drag on the economy. Europe has a lot of room to cut rates and we believe they will again cut rates in the near future. Such action helps fuel growth and also makes the dollar more attractive on a relative basis. 5) Stock prices are cheap, not only fundamentally, but also in comparison to the return on US Treasuries. The stronger the relative growth prospects equity investments have to fixed income investments, the more likely we will see net inflows into the stock market and there is a huge amount of cash on the sideline at the current time.

Technically speaking, the action of the stock market over the past few days is very positive. One indication would be the greater amount of buying in the stock market (ticks up) than selling (ticks down). Also, the relative strength of the market looks good: http://seekingalpha.com/article/102618-bullish-divergence-comes-to-the-market

The combination of good technical signs, along with fundamental criteria we illustrated above tells us that the backdrop for the stock market has begun to turn. We are now buyers at these cheap valuation levels and believe your portfolio returns will reflect a positive investment environment 12 to 18 months from now.

Jim, Mark and Greg.