Portfolio Update - 07/24/07

By proceeding, I acknowledge that I have read and understood the Disclaimer, Performance Reporting Disclosure and Copyright Statements . Just wanted to give you a quick update on our portfolio which has experienced some positive action lately – FINALLY! After today, My Core Portfolio is almost back to even. The Focus portfolio still has some catching up to do but given how I have it invested, it won’t take long with many more days like today. I’ll report YTD figures at the end of the month. The trends that I have been anticipating have started to emerge over the last couple of months. Several of these trends have accelerated over the last several weeks. Our portfolio is positioned to take advantage of these trends and has appreciated nicely. Of course, the market is still up for the year and I’m down so we have some catching up to do. The key trends that have emerged are as follows:

1. The US$ has broken through its previous multi-year low at 80.39. For all intent and purposes, this represents the US$’s all-time low. It was lower at one point but that was before the introduction of the euro which was then substituted for several European currencies. As I said in my quarterly update, I am surprised by the timing of this development as I expected it would take place but only after the Fed hinted at lowering rates and inflation data subsided. Practically, every position in my portfolio benefits directly or indirectly from a falling US$.
2. The sectors that I feel will lead the market down continue to underperform. Small-caps, Financials (IYF), REITs (IYR) and Utilities (IDU) have significantly underperformed the market. These sectors will be the hardest hit during the next cyclical correction. The following is an update on how these sectors have underperformed the broad market.

Ticker	IYR	IDU	IYF	S&P
Peak	94.57	104.35	129.54	1539.18
Current	74.27	96.13	109.73	1511.01
% Loss	(21.5%)	(7.9%)	(15.3%)	(2.7%)

3. The PMs (Precious Metals) have seemingly reestablished their historical non-correlation to equities. As you know, one of my biggest fears has been a liquidity crunch that would lead to depreciation in all asset prices – equities as well as the PMs. The recent behavior of the PMs has served to alleviate some of my apprehension about being invested heavily in this space but I’m not entirely comfortable just yet. The PM stocks have still shown an annoying correlation to equities rather than the Metals but this should eventually correct itself.
4. Bond Yields continue to stay elevated as the market comes to grips with the reality of inflation in the marketplace. As I said in my Quarterly update, the disconnect between inflation pressures and inflation expectations has been the primary cause for losses in your account. It seems that Wall Street’s denial of the reality of inflation is gradually coming to an end.
5. From a technical standpoint, market breadth continues to deteriorate but is not quite signaling a bear market. Today, declining stocks outnumbered advancers by a more than a 6:1 margin. Leadership could be best described as bi-polar. The number of highs versus number of lows has been close to even over the last several weeks despite major indexes hitting new highs. Last month, I discovered a new indicator called the Hindenburg Omen. This has come up positive every day for the last 5. The homebuilders, which I warned about in April, have been destroyed the last several weeks. The I-shares Homebuilders Index ETF (XHB) fell 4.5% today to a fresh 52-week low.

I’m encouraged about the trends in the market place and I believe that over the next 12-24 months, our portfolio will appreciate substantially if these trends continue. With that being said, several of our positions are a bit overbought in the short-term and I wouldn’t be surprised or discouraged to see us give a little back over the next month or so. I’ll provide a more in-depth update at the end of the month. As always, please do not hesitate to contact me if you have any questions or concerns about your account. All the best, Matt