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Dec. 27, 2006; 9:37 AM: Apple was the big stock news item this morning, with the stock
options backdating scandal continuing to weigh on the stock price. The stock opened
down about 5%, but has since rebounded to down only a little over 1.5%. Steve Jobs, the
co-founder and current CEO has now hired his own attorney, so this indicates that he may
have a dispute with Apple concerning the details of the backdating. The report today also
indicated that some documents may have been forged by Apple executives, and these
docs could directly implicate Jobs. If Jobs is personally involved, it could be devastating
to the stock. In other news, the new homes sales number for November came out - up
3.4%. This is a government survey number and is gross, meaning that it does not take
cancellations into account (currently cancellations are running at 40%).

Inventories of new homes were down to 6.3 months from about 7.4 in October, according
to the survey, and the median home price was up slightly. This is all positive for the
housing market, at least on the surface. However, seasonal factors may be at work here,
given that this time of year is historically weak for home sales, it is highly likely that
home builders purposefully have reduced output, and have timed the completion of
homes available for sale to coincide with the Spring, which is the best time of year for
home sales in general. Nevertheless, housing stocks are up on this news.

For 2007, the CNBC "Big in '07" survey found that oil is expected to stay between $60
and $70 per barrel; private equity transactions should continue their strong activity levels;
GDP growth should be slower than in 2006; and the financial and healthcare sectors are
expected to be the best performers, and the oil and materials sectors are expected to be
the worst.

Friday is the last trading day of the year, so any tax-loss selling must be done by Friday at
the latest. Investors should consider the merits of their investments before selling for a
loss, and if long-term prospects are attractive, it may not make sense to sell for the loss.
Investors should also consider the overall levels of the market indices and determine how
their individual investments fit within the context of expectations for the markets overall.
Asset allocations, sector allocations, industry allocations, and individual securities
characteristics should all be reviewed and evaluated considering their appropriateness,
given the investor's long-term investment strategy.


Dec. 21, 2006; 9:27 AM: This is the third longest rally in the history of the stock markets
without at least a 10% correction. I feel strongly that the only reason we haven't already
seen a correction is that no one wants to pay taxes on their gains, so they are waiting till
January to sell. I do expect a 5 to 10% correction in the first quarter, with stocks at high
historical valuations getting hit hardest, along with those companies that have had bad
news recently. I have been selling into this rally and have also added many short
I am about 70% short to 30% long excluding cash. I have substantial cash balances, and
have entered many limit orders based on technical analysis of stocks that I like
fundamentally, so I am ready to take advantage of a correction, should it come. I would
suggest doing any tax-loss selling that makes sense, and holding that cash for
opportunities that arise in the event of a correction. I would also suggest looking to take
profits on positions that have performed well this year, and that currently have valuations
that are high given earnings growth rates, P/E ratios, etc. It is great to have a strong year,
but if the market corrects and gains are given back, in the long run, you aren't making real
progress. The goal is to make real money over the long-run, so this is a good time to
review your managers or investment vehicles and be critical of any that employ a buy and
hold type of strategy. If there is a correction, the buy and hold approach will likely give
away a lot of what was gained in 2006. Investors may want to consider taking money
from their buy and hold managers / investments, and move those assets to managers /
investments that employ other strategies that benefit most in rotating or sideways

Dec. 19, 2006; 7:34 AM: Oracle had disapppointing numbers yesterday after the bell,
and is off over 4% this morning, putting pressure on the whole market. I think at this
point investors are looking for direction, and for a reason to sell to take profits, so it will
take a lot to keep individual stocks moving up from here in the short-term. Housing starts
looked decent today, although the homebuilding stocks are all down so far. PPI came in
well above expectations, putting pressure on stocks as this indicated the possibility of
increasing inflation. The Taiwan stock market was down over 15% overnight, forcing the
Tai government to reverse its decision to employ currency controls. International traders
are waiting to see if it spreads to other Asian countries in the following few trading

Just a quick tip for anyone working with commissions-based brokers / financial advisors
– be very leery of anyone recommending transactions right at the end of the year, other
than possibly tax-loss selling. The reason for this warning is that commissions-based
brokers have a financial motivation to advise trades, especially at year-end. Many have
bonus structures based on their annual total commissions generated, and this puts added
pressure on them to increase December production. They also want to have a good year-
end to pay for Christmas, etc.

Also, be very careful about taking any recommendations to buy mutual fund shares at
year-end. This can be a problem because most mutual funds distribute capital gains at
year-end, and even if you just bought the fund the day before the distribution, you are
responsible for the taxes on the cap gain. So, this year being such a good year for market
performance makes this risk especially great. In general, be very suspicious of any
financial advisor recommending any transactions right at the end of the year. Make sure
there is a reasonable, specific positive benefit to you personally, before you agree to any
trades at year-end.

Dec. 13, 2006; 7:55 AM: Yesterday, the Fed left rates alone. This is the fourth meeting
in a row that they have left rates unchanged. Today, energy inventories showed crude
dropped 4.3 million barrels; gasoline fell 100,000 barrels; and distillates lost 500,000
barrels. Energy prices are up across the board, but the drop in inventories makes sense in
the context of existing inventories - there is such a large glut and the supply chain for
energy is stuffed so full, that inventories had to come down to bring supply and demand
back closer to balance.

The Dow made a new, intraday high this morning right off the open, hitting 12,368
before giving back some of the 42 point gain. Yields on treasuries (2-year 4.7%; 10-year
4.56%) fell after the Retail sales figure for November increased by 1%, showing strength
across the board in almost every category. The interesting thing about this number is that,
if you look at the information released from the actual companies, it doesn't make any
sense. For instance, Best Buy (BBY) just released disappointing earnings, and Corning
(GLW) announced last week that orders for flat panels were light, yet the retail sales
number indicated that the consumer electronics component was the strongest contributor
to the gain for November. Also, the auto sales number shows a 3.2% increase over the
past three months, yet the automakers have reported declining sales in the same time-
period. This highlights the lingering problems associated with government data.

The Dow is up 15% year-to-date; the S&P 500 is up 13.2%; and the Nasdaq is up 10.4%.
I have been calling for a correction of something like 5 to 10%, and I believe it will come
in the short-term. It may be that investors are holding out until 2007 so that they can
avoid creating taxable gains in 2006. I would not be surprised to see the sell-off begin
before the year end though, as hedges, mutual funds, and other institutional investors
lock-in profits.

Investors should be looking closely at their potential tax liability and should be
formulating their plan for raising necessary funds for tax payments. Also, this is a good
time of year to evaluate asset allocations, since the markets have had substantial gains
this year. Rebalancing back to target allocations keeps portfolios in line with stated risk
parameters, etc. It is also a good time of year to evaluate investment managers or mutual
funds to identify any problems regarding style drift or substantial underperformance. An
example of style drift would be a manager hired as a large cap value manager that decides
to shift to growth because value doesn't look good anymore. This is unacceptable because
this change affects the investor's asset allocation, and also shows inconsistency on the
part of the manager. Style drift can be very damaging in volatile markets, and over long

Dec. 8, 2006; 7:32 AM: Abby Joseph Cohen of Goldman Sachs spoke this morning,
saying that she expects overall market gains of around 10% in 2007, putting the Dow at
13,500; the S&P 500 at 1,550; and the Nasdaq up to around 2,700. I think these levels are
possible, but I feel that there could be a correction of 5% to 10% in the first quarter,
leaving the upside from the correction low at possibly 10% or better for the Dow and
S&P, and maybe a little better upside potential for the Nasdaq. Volatility should increase,
since it has been at historically low levels this year, pushing investors towards higher
quality, large cap stocks, and growth should outperform value. Options premiums should
also increase in general with volatility, providing opportunities for covered call writing.
GDP growth should slow to around 2.4% for 2007, and inflation should remain in check.
Stocks look much more attractive than real estate, bonds, and commodities, and I expect
that relative valuations will continue to favor stocks for the balance of 2007 and beyond.

The bond market, notwithstanding its recent increase in yields, is predicting a recession
early next year. The stock market is still predicting a soft landing (slow-down, but no
recession). Historically, the bond market has been a better economic predictor, so it will
be interesting to see what happens in the first to quarters of 2007. I am currently about
70% short and 30% long in hedged portfolios. The markets main remain strong through
the end of the year (the so called Santa Claus rally), but I think the beginning of 2007
could be negative, with a sharp sell-off providing opportunities to cover shorts and
increase long positions. Corrections are typically short in duration and investors
interested in taking advantage must be ready to react, with purchase candidates identified
along with price targets, stop-losses, profit targets, etc.

As usual, I will not be traveling for the holidays, so I plan to continue updating the
Commentary page through the end of the calendar year. I would like to wish everyone a
joyous holiday season and send my best hopes to all for a prosperous 2007.
Dec. 7, 2006; 10:54 AM: The markets are virtually flat today, as is oil. An interesting
development in the sub-prime mortgage industry as the announcement yesterday that Bill
Dallas is shutting the doors of Own it, a company that has about $8 billion in sub-prime
mortgages outstanding because they do not have the capital to repurchase their
outstanding mortgages. They issued about $1 billion in mortgages last year, and with
foreclosures up 100% over the past 8 months in California, the glut of their new sub-
prime mortgages was just too large to handle. This may be only one of many failures of
small and mid-sized firms in the mortgage industry that we see over the next year or so,
and it certainly indicates that the state of the industry, especially in California, may be
much worse than current data suggest.

The yield curve has flattened slightly, although it is still inverted. The ten-year is
currently yielding 4.49%, and the two-year is at 4.6%. The ten dropped in yield to 4.4%
recently, so it has made a fairly strong rebound. The ECB raised by 1/4 point today,
putting a little more pressure on an already weak dollar. The recent dollar weakness is a
conundrum for policymakers, especially for the Fed because a weaker dollar is good for
trade with China, so most of Washington doesn't mind if the dollar stays fairly weak,
while the Fed has to worry about the possibility of high inflation if the dollar falls too
much, leading to the Fed raising rates to strengthen the dollar at the expense of throwing
the economy into recession. This will be a top and recurring story in 2007.

I would like to offer my deepest sympathies to the entire Kim family for their devastating
loss of James - a man who acted as a true hero and sacrificed his life to save the lives of
his wife and two young daughters. No words can accurately express the weight of a loss
so great.

Nov. 30, 2006; 2:30 PM: For November, the Nasdaq, Dow, and S&P 500 all achieved
gains, with the Nasdaq up 2.7%; the Dow ahead by 1.2%; and the S&P 500 adding 1.6%
for the month. After third quarter earnings releases, which were released primarily in
October, economic data have dominated the relevant news impacting markets. We have
seen signs of a slowing, but still growing economy; relatively low inflation, and
persistent consumer spending, despite the obvious and significant weakness in the real
estate market.

I have been calling for a short-term correction in stocks for the past several weeks, and
we did finally see some signs of a short-term market top on Monday, when consumer
confidence, and same-store sales at Wal-Mart came in weaker than expected, and the
dollar broke a key support level at $1.27 versus the Euro. You can see on the chart below
that Monday’s large drop penetrated the short-term support line. Although Tuesday’s
early trading brought the Nasdaq Composite Index further below support, the markets
rallied over Tuesday and Wednesday, pushing the index back above support. Should we
get another push down through support, especially with a close below the support line,
we should get a reasonable, healthy correction, potentially down to the 200-day moving
average (blue line), at around 2,243. This would represent a fall of about 7.5% from its
current level. This would not indicate that we are entering a bear market period, but
would simply represent a normal correction within a longer-term bull market phase. One
key difference this year is that we did not experience the normal negative market
conditions during September and October, rather the markets continued the rally, and
have been on a five month, steady run-up with no major correction. Normally, the
markets will do poorly in Sep and Oct, and then rally into Christmas, as investors feel
more optimistic, and look forward to the New Year. We have the additional interesting
historical backdrop, which is that we at the end of the second year of a President’s second
term, and historically stocks do not perform well (it is typically the worst performing year
of the four). The second half of the second year is usually the worst period of time for the
four year period. The third and fourth years of a President’s second term are usually the
best two of the four, with the third year being the best and the fourth the second best. This
is certainly not always the case, but there have been many statistical studies conducted on
the markets’ performance to support this.

So, where does that leave us? I believe that after we move through a short-term
correction, which will likely occur over the next two or three months, and will be of a
very short duration, we will continue in a bull market phase, supported by low inflation;
relatively few Fed rate changes (up or down); Slower, but positive GDP growth; a
continuation of the slowing housing market (but not enough to kill the consumer); high
single digit earnings growth for 2007 S&P 500 stocks; falling commodities prices overall,
but with high volatility; and a wide trading range for stocks overall, with the best
performance gains achieved through sector rotational approaches based on a trading
range market environment.
                                Nasdaq Composite 11-30-06

Nov. 29, 2006; 8:35 AM: Today's trading has been driven primarily by more economic
data, as well as opportunistic trading based on Monday's declines. GDP for the third
quarter was revised up from 1.6% annualized, to 2.2%, indicating that the economy has
been growing at a faster pace than previously thought. The trend in GDP growth is still
down, meaning that economic growth is slowing, which is OK as long as the pace of the
slowing doesn't accelerate to a pint that creates the fear of a recession. The other news
today is that new home sales were down 3.2% for October versus October 2005, and
were down much more than the expected 2% decline. New home sales for September
were also revised down. The median price of new single family homes actually increased
by 1.9% for October versus October 2005, but inventories increased from 6.4 months in
September to 7 months in October. A really interested and disturbing number I saw this
morning is the current total housing-related employment versus the historical average
going back to 1983. It shows that the industry is currently 1.1 million jobs above the
average, meaning that a return to the historical average would mean a loss of over 1
million jobs nationwide. This could be particularly important with regard to consumer
sentiment and consumer spending on a national basis, and could also be negative for our
local economy due to the high employment concentration we have in that industry. As I
mentioned on the radio show a few weeks ago, I believe we are at the upper end of a new
trading range for stocks, and I expect further declines in the short-run. I like stocks, as
mentioned previously, in comparison to other asset classes, but I feel valuations,
especially in light of the slowing of economic growth, are extended.

Nov. 28, 2006; 11:36 AM: After yesterday's dramatic fall in the stock markets, today's
activity is a little more subdued in comparison. The news today has been mainly
macroeconomic in nature, with existing home sales coming in up 0.5% unexpectedly.
However, prices for October were down 3.5%, the largest one-month drop ever, and the
third month in a row of price declines. Despite lower prices, which provided the spark
that pushed existing home sales up, inventories increased to 7.4 months on average.
These are all national averages, so some individual markets have had much more
substantial declines. Keep in mind that the 30-year mortgage rate is about 6.1%,
mortgage rates are still very low and very attractive. When mortgage rates rise, and they
will, prices are going to suffer far more than they have to date. I still believe that,
although the housing market has slowed considerably, and prices have declined more
than 10% from the peak, that prices in some markets ill decline an additional 20% or
more from present levels.

Bernanke also spoke today, as is Greenspan. Bernanke's comments were fairly benign,
indicating that the Fed is content to wait and watch. It seems about even between those
economists who believe that the Fed's next move will be an increase versus those that see
an easing. The Durable Goods number came in down 8.32%; a huge dip, which is
positive for inflation, but not so good for the economy.

Nov. 22, 2006; 12:06PM: Today's news is a little light, with the holiday tomorrow and
the early close Friday. Kirk Kerkorian sold 14 million shares of GM (He had 56 million)
to finance his bid of $55 per share for MGM, so GM is down over 4% today after bad
days yesterday and Monday. Dell had good earnings, reporting $0.30 per share versus
estimates of $0.24, and $0.25 for the same period last year. Oil is down about $1, with
inventories coming in well above expectations. We are awash in oil, with virtually no
land-based storage available, and some suppliers renting tankers to store excess crude.

The Bill and Melinda Gates Foundation, along with Carl Icahn, have invested in the
homebuilders, with the Gates Foundation putting around $240 million into a basket of
stocks including KB Home, Pulte, and Centex. This explains why these stocks have been
rallying in the face of very negative industry news. I don't see this group doing anything
for at least the next six months...that is except going down further. The retail sales
numbers from Friday will be interesting, and should give us some indication of overall
Holiday sales. We will see those results early next week.

The Dow is up 15% year-to-date; the Nasdaq 15% in the last three months, and 12% ytd;
and the S&P 500 is up 13% ytd. The holiday period is usually bullish for stocks, but
September and October are usually negative, and were not this year. I expect at least a
5% pull-back in the overall markets, with the Nasdaq probably giving back more than
that, and some individual stocks showing even more volatility. I like equities longer-term,
versus all other asset classes. But, I am looking at valuations which overall are not
sustainable, and thus, I feel I can buy stocks cheaper. I have been selling into the rally,
and now have substantial cash balances available for new purchases, once prices allow.
The pull-back may not occur until after the holidays, and we could see more upside in the
interim. Investors who have large gains, and who are not willing to wait-out a pull-back
should consider taking those profits, keep in mind the tax consequences.

The fixed income side looks less attractive than equities, with Bill Gross of PIMCO
stating yesterday, that he believes economic growth will slow to less than 2% next year,
forcing the Fed to lower short rates, pushing the ten-year treasury to below 4%. He is
recommending short maturities (2-years or less), and has been selling longer-term bonds.
PIMCO is also warning that corporate bonds without significant protections may be
unattractive, as private equity firms issue new debt to make acquisitions, subordinating
existing bonds, and lowering their value. I disagree that the ten will go below 4%, and
feel that the Fed probably gives us one more increase before possibly lowering rates in
the second half of 2007. I agree that GDP growth will likely slow, probably to between
1.5 and 2% in 2007, but not enough to cause recession. I expect the yield curve to steepen
to a positive slope, causing the ten to go to higher yields around 5 to 5.5%, even as the
short end moves lower from current levels.

Nov. 17, 2006; 7:25AM: Housing starts for October came in down 14.6% to a six-year
low, and are down 27.4% from October 2005 levels. Permits are down 28% year-over-
year for October. We don't concern ourselves with starts in SB because we have minimal
new home construction. However, this is a strong indication of the overall slowing in the
housing market, which clearly shows that we are in the midst of, and not close to the
bottom of, a major downtrend in the housing industry.

This is yet another indication that prices are likely to fall, especially in markets with the
largest price gains (like SB). New home prices have already dropped by 10% from peak
levels, and many experts believe that existing home prices have already dropped
significantly. Keep in mind that this 10% decline is an average over the entire country, so
this indicates that in some markets, prices are down substantially more than the 10%
average. The other big news today is the IPO of the Nymex (NMX), which priced at $59
and is trading around $138. The Nymex is the trading floor and system that handles
commodities and futures contracts, etc, which have been some of the hottest trading
vehicles over the past several quarters.

Nov. 15, 2006; 12:23PM: The October Fed minutes basically signaled that all members
are concerned about inflation, but that they feel the housing slowdown does not threaten
the overall economy. The housing slowdown on a national basis does not appear to be a
serious threat to the economy, although in certain markets - those that have experienced
the greatest increases in prices - could see sustained, significant downside (my opinion,
not the Fed's). The Fed seems to be using the language of the minutes in an attempt to
restrain spending and other forces that put upward pressure on inflation. The markets
sold-off a little after the release of the minutes, but are still up nicely today.

I like stocks compared to other asset classes, but feel we are close to the top of a new
trading range, and that adding new money to stocks at current valuations should be
undertaken with great care. With that said, there are always opportunities to buy good
companies in any market. I pay close attention to the overall market levels and typically
will not buy when markets are extended. If the S&P 500 peaks, it could pull-back to
1,327, which represents a good support level for the index. I would be more comfortable
with purchases, and more aggressive with purchases, as the S&P moves down towards
support. I still like tech, financials, healthcare, and industrials.
Nov. 15, 2006; 7:20AM: Yesterday was an impressive trading session, with stocks
trading higher across almost every sector. Bonds also did well early as the economic data
showed that inflation is under control. The most significant move was in the S&P 500,
which broke-through 1,389 and closed at a multi-year high. The Russell 2,000 is at
historic highs today, and so far, the markets are pushing slightly higher, consolidating
gains. I am watching the economic and stock-specific data this week, especially the Fed
minutes and retail sales numbers, which will give us a preview of holiday season sales. It
appears unlikely that the Fed will move again before the end of the year, and economists
are mixed as to whether the next move will be up or down. I look for stocks to be volatile
for the remainder of the year, with an upward bias, and with retail, tech, and large-caps in
general leading the way. A few groups of note are the homebuilders, which have run-up
in the last few trading sessions, due to bottom fishing and lower long rates; financials;
tech; and biotech stocks. I would not be a buyer of the homebuilders (I am short this
group). The key for the housing market will be the level of long-term interest rates, which
I believe will move higher as we move into next year. I expect the ten-year treasury to be
above 5.5% sometime in the second half of next year, pushing mortgage rates into the
mid 7s or higher. The steepening of the yield curve could have a dramatic affect on
mortgage rates, especially the 30-year fixed, which is what borrowers will continue to
scramble to refinance into as rates rise, and as their adjustables ratchet up. On the radio
show a few weeks ago, Steve and I discussed the local housing market and disagreed on
whether prices were headed down or not. For anyone who owns property, I hope I am
wrong, but based on all of the data I see, I believe strongly that prices are going to fall
significantly over the next few years. I believe that lower rates, coupled with creative
financial engineering (interest-only loans; adjustables; refis at greater than 100% of
equity, etc.) have combined to push prices weill above reasonable valuations. Santa
Barbara is one of the top ten overvalued markets, and to me it seems obvious that the
markets that benefited the most from the low rate, cheap money environment, will suffer
the most when that stimulus is removed.

Nov. 14, 2006; 6:54AM: Wal-Mart and Home Depot announced earnings today, with
WMT reporting a better than expected 11% gain in earnings, and an in line 12% rise in
revenue; and HD missing on every front, with eps down 3%, and revenues up 11%. The

Producers Price Index fell 1.6% for October versus an expected decline of only 0.4%.
Retail sales also fell but were in line with estimates, with a 0.2% decline and a 0.4%
decline excluding autos. The markets rallied initially, but have now faded. Bond prices
are up (yields down), with the dollar weaker. Metals have been weak of late, with the
exception of gold, which rallied late last week after China announced they would
diversify their cash reserves, although gold is down considerably from its recent high.
Copper is close to a 4-month low, and looks close to breaking a support line at $3.07,
which could send it down to the $2.34 area. The bond market is signalling a much slower
economy for 2007, with very low to no inflation. Without economic growth of at least
two to three percent, stocks will have a hard time growing earnings that compare well to
those of 2006. Stock investors will need to be selective and price-disciplined, with sector
rotation a key determinant to profitable investing in 2007.
Nov. 8, 2006; 7:10AM: Just to make this point up front, any comments I make regarding
politics have nothing to do with any personal bias or feelings I may have about policy,
individual candidates, or political parties. Everything I write here, or that I say on the
radio relates directly to, and only to, how political issues affect the markets. I do not want
to offend anyone, and do not express any personal opinions regarding my perceptions of
the positives or negatives of any candidate or party. OK, now that I have that out of the
way...last night's election results send a strong message that the voting public repudiated
the current Congress' track record, scandals, and lack of direction on the Iraq war. The
dems picked-up 26 seats - far more than the 15 they needed to take control of the House.
In the Senate, dems and republicans currently have 49 each (technically the dems have 47
with 2 independents, but the independents, Joe Lieberman of Connecticut, and Bernie
Sanders of Vermont, are really dems), with Virginia and Montana too close to call, and
with votes still coming in. My feeling is that, if the dems take control of both houses, it
will be negative for stocks in general, and especially for specific groups like drugs,
defense, etc. I'm confused as to why investors ran the markets over the past two days. The
only explanation is that they were afraid not to be in the market, in case the election went
the other way. I still believe stocks to be the best asset class in terms of relative valuation,
but I feel that individual stock selection, price discipline, and fundamental and technical
analysis will be key to strong performance in the current market environment. It looks
like it will be a stock picker's market for the foreseeable future, so buy and hold strategies
will likely underperform for at least the next several quarters. The election results are also
interesting in terms of their implications for the presidential election in 2008. The
republicans have a lot of work to do if they want to hold the White House next time. It
seems to me that the republicans, who were supposed to be for lower spending (fiscal
responsibility) and less government, really shot themselves in the foot with the current
budget deficits. I will concede that the wars have been expensive, and perhaps without
those additional costs, it is possible that spending may have looked better. But, the reality
is that conservatives have become disgusted with their party and this certainly contributed
to the losses republicans suffered in this election. Stem cell research also seems to have
been a deciding factor for many voters. Immigration was another, and the dems may
provide some positive progress in this area in terms of pro-business immigration policy.
Despite a strong economy voters have spoken and have spoken loudly for change, and
republicans should take a step back and reevaluate their strategies before 2008 if they

want to gain ground. The expression, "be careful what you wish for" comes to mind, and
I think the dems have been given a mandate, but also have taken on a great responsibility
to deliver on the promises they have made to change things for the better. Let's all hope
they can deliver.

Nov. 3, 2006: This week ended with the sixth down day in a row for the Dow, and
significant negative economic releases from various sources, including the ISM. The jobs
number today was actually pretty strong, with positive revisions released (again), which
seems a little suspect given the proximity of the elections. The unemployment rate is
down to 4.4%, a level which I do not recall seeing in my lifetime. Oil spiked today on
news of threats to Nigerian oil production, as well as traction gained from the OPEC
production reductions, which supposedly went into affect this week I have serious doubts
as to whether the members will comply with their reduced production levels, given the
still very high price per barrel of oil on a historical basis). I am still short the oils,
homebuilders, utilities, REITs, and a few individual equities. I also have substantial cash
balances, but I entered multiple limit orders for stocks in the Industrials, Financials,
Technology, Consumer Discretionary, and Healthcare sectors. I expect further declines in
the stock market indices next week, as we push through the elections and more earnings
and economic data. So far, we are about 80% through the S&P 500 earnings reports, and
they have been stronger than expected, with growth averaging over 17% compared to the
consensus of 14.3% eps growth.

I feel that we will either have slower economic growth in the 2.5 to 3% range, or a lesser
possibility of a mild recession. In either of these scenarios, sector rotation should be the
determining force with regard to equity performance. It should be a stock pickers market,
with the overall indices range-bound for several quarters. As this is my specialty, I feel I
am in a unique position to derive stronger than market performance over the 2007 - 2008
investing environment. As I stated on the radio show this week, if the democrats win one
or both houses of Congress, the groups most at risk are oils, drugs, defense, and high
dividend-yielding stocks in general.

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