We have maintained the view for some time that the stock market’s rally this year would extend well beyond expectations.  The market’s performance in the Third Quarter validated that assertion.  Having returned nearly to levels that existed prior to the collapse of Lehman Brothers in September 2008, the stock’s market next phase will depend upon confirmation of the economic recovery.  Heretofore, the market has been led by low quality, high Beta stocks - typical of a recovery off a generational market low.  In general, the worse the balance sheet, the better the company’s stock has performed.  If one eschewed low quality stocks and instead invested in companies with solid balance sheets, attractive valuations, and reasonable fundamentals, it is likely that performance has lagged various benchmarks.   

We have also maintained that the stock market was vulnerable to a correction.  We continue to believe that remains a possibility in the near future, but we would consider a retracement to be a long term buying opportunity.  Low quality rallies have never proven sustainable or long term.  We, therefore, believe this is an opportune time to upgrade the quality of portfolios as the economy enters the next phase of recovery – i.e., reducing dependence on government support while transitioning to a self-sustaining model.   

With regard to the economy, we believe the crisis/stabilization phase is over.  However, it is difficult to unconditionally accept the view that all aspects of the economy will quickly return to normal when nearly 6 million people lost their jobs over the past year.  We, therefore, anticipate that the transition phase will be neither smooth nor easy.  Nevertheless, we believe the markets have normalized and the economy has advanced toward recovery.  

Yields on short-term US Treasuries are now the lowest in the developed world – i.e., lower even than comparable Japanese government bonds.  This has facilitated massive, leveraged
speculation using the Dollar as a key funding source.  The implications for the long term value of the Dollar are worrisome.  Moreover, it presents problems with regard to the management of cash.  While we acknowledge the frustration associated with paltry money market yields, we urge investors not to lower credit standards or to increase risk tolerance for the sake of yield.  Many unresolved issues suggest this is not an environment for such strategies.  We are exploring methods of increasing the yields for cash reserves, but we continue to advocate that maintaining or upgrading quality should be of paramount importance.

From a long term perspective, we remain fascinated with how the global economy will perform in an environment of considerably less leverage and substantially more regulation.  While this prospect might discourage many investors, we look forward to a world of more sustainable, higher quality economic growth.  Heading into 2010, we recommend that investors remain well diversified, and we look forward to sharing our outlook for the markets.