Welcome to the June 11, 2008 issue

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As we have been told, the market can do anything, and this week we have had proof of that. Suddenly, inflation and higher interest rates are the fears that are driving the market. For much of the previous weeks, the concern was the weak economy. The weak economy still exists, as Bernanke reminded us in the very same talk which is quoted as evidence higher interest rates are on their way in the very near future.

Behind this fear of higher rates here is the fact that rates have been going up in Asia, and there is a realistic expectation that a twist of the rate screw is about to occur in Europe. But these are separate economic areas from our own, and the economies are under different stresses. Of the major economies, the U.S. is the one that is facing the most stress from the housing crisis and associated weakness. Though the Europeans are willing to raise rates, even if only as a sign they are serious about inflation, we do not see the U.S. following suit. We think the market has raised a hobgoblin and is afraid of its own creation.

It is one thing to see the end of lower rates; it is another to see the immediate arrival of higher rates. We agree the next move here is to higher rates, but that is many months and a stronger economy away. Despite this week's battering, we continue to favor stock funds.

There is no change in our recommended allocations.

New Fund Ratings — For domestic stock funds, two funds are now rated Buy: Third Avenue Small Cap Value and Fairholme Fund. Brandywine Blue is now rated Hold. For international stock funds, T. Rowe Price Emerging Market Stocks is now rated Buy. MSCI Emerging Markets is now rated Hold.

The Economy — The market overreacted to the large jump in the unemployment rate. The economy is weak, but still growing. We see growth picking up as we move into the fall.

The Stock Market — We are in a severe global correction. Rising rates in Asia are the chief cause. We think the U.S. position is different. We do not see a near-term sharp rally here, but we do see the selling ending soon. We see U.S. stocks as offering good value now.

Bond Market —

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

The next Hotline is scheduled for Wednesday, June 18 at 7pm.

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