Welcome to the May 21, 2008 issue

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The last Hotline emphasized the optimism that was building up in the markets. The Fed and oil prices managed to put a quick end to that this week. The message from oil, of course, is that the squeeze on incomes goes on. The oil tax on the American consumer, already steep, is not likely to be reduced much, if at all, in the immediate future. The message from the Fed, composed about a month ago, is twofold. First, "Don't get your hopes up. The economy is facing very tough times." The Fed then adds recovery is going to be very slow. Then there is the second message. This says, "Don't look for any more interest rate cuts. We've gone about as far as we can safely go, considering oil and food prices." In other words, once the tax rebates have done their work, the economy will have to rely on the lagged effects of the interest rate cuts already made.

The market did not like any part of the message. No wonder it sold off sharply. Where does this leave us? Remember that the market is a forward-looking mechanism. How far it looks ahead varies. We believe that the recent rally represented a longer-distance look. We see a shorter perspective taking hold now, which suggests a worried market. The worries will slowly lessen when oil prices retreat and the economic outlook brightens, as the Fed expects. Until then, expect a very choppy domestic market. Over the intermediate-term, we look for a recovering U.S. market. But first we have to go through this patch. We continue to view equities as the top asset class for investment now.

There is no change in our recommended allocations.

New Fund Ratings — For domestic stock funds, SIT Large Cap Growth is now rated Hold. For international stock funds, T. Rowe Price Emerging Markets Stock is now rated Hold.

The advice given for Vanguard European ETF in the forthcoming (May 23rd) issue of MONEYLETTER is incorrect. The fund is a Hold for MONEYLETTER Venturesome and MONEYLETTER Moderate investors, and is being sold in the MONEYLETTER Conservative as part of our rebalancing exercise.

The Economy — The Fed's review of the economy paints a bleaker picture of conditions and expectations than recent numbers depict. Effectively they look for both business and consumer spending to be very weak over the next few months, but they do see firming later on. As we see it, it now all depends on oil. We do see growth continuing strongly in Asia.

The Stock Market — The technicians are warning about trends being broken. We may find that a correction has begun. But we do not see anything worse ahead.

The Bond Market —

The Select Portfolio — There is no change for this portfolio.

We wish you all a restful, thoughtful Memorial Day holiday. The next Hotline is scheduled for Wednesday, May 28th at 7pm.

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