Despite the Third Quarter’s extraordinary volatility, equities performed well.  
The problems in housing and mortgages seemed to spread well beyond the
financial markets.  The August jobs report served as the clear catalyst for
the Fed’s decision to cut both the Fed Funds and the Discount rates by
0.50% in September.  That report, along with an initial downward revision
to July, suggested that the dislocation in the credit markets was beginning to
“spill over” to the broad economy.  The September jobs report, however,
was relatively strong, and it included upward revisions to both August and
July.   

We maintain our view that the correction which ensued in early August was
both healthy and necessary for the long term viability of the markets.  We
also believe that this correction, while unsettling and difficult, will ultimately
prove itself to have been a buying opportunity.  In fact, since the August
market lows, returns have been rewarding.  The central question facing the
markets as we enter the Fourth Quarter is whether the disruption in the
financial/credit markets will result in a US recession.  As a corollary, will a
slowdown in the US result in a global economic contraction?

Clearly, certain sectors (e.g., residential construction; residential real estate;
mortgage finance) will require additional time before recovery.  However, in
general, the global economy continues to grow at a moderate pace with
certain areas demonstrating robust activity.  This leads us to be less US-
centric in our investment approach.  We remain favorably disposed to global
infrastructure, energy, health care, technology, and other areas not directly
affected by the credit markets.  We also believe opportunity exists among
certain financials that have been indiscriminately punished by “macro” credit
concerns.

In terms of future policy action, neither the September move by the Fed nor
the September jobs figure will end the debate as to whether additional rate
cuts are either forthcoming or necessary.  It is clear that this Fed is more
data dependent than the Greenspan Fed, and economic data are notoriously
volatile. Therefore, incremental news flow and economic indicators are
essential to forecasting future policy direction.  The market’s reaction to the
rate cut has been to “price in” rising inflationary expectations.  The
September jobs report seemed to validate these concerns while also
confirming a healthy economy.  As a result, those sectors leveraged to rising
global demand for commodities have received renewed interest.  We also
anticipate that the Dollar could soon find support from our trade partners.

To the extent, however, that renewed concerns over inflation prove
prescient, we feel it is prudent to remain defensive toward bonds.