Welcome to the October 15, 2008 issue

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Last week we spoke about fears of a mega-recession, and today those fears dominated markets from Hong Kong to New York. The economic news was bad in Britain and here in the U.S. These are reports on last month’s activity. We know that this month’s report will – at best – be no better.

Last Friday’s panic selling was stopped by Washington’s new program of investing directly in individual banks. The first signs of thaw of the credit freeze have appeared, but as Chairman Bernanke said today, thawing will not occur overnight. Meanwhile, the recession is once again the deep worry of the markets. If it were not for the election we believe a second stimulus package would now be on the way. Both candidates want one, but details are lacking, and one cannot be enacted until the new Congress convenes.

That leaves it up to the Fed. We expect a one-half percentage point cut to 1% shortly. Even so, the economic news will remain poor. While the global markets cope with the economy, stocks have now become very cheap. Does anyone care? Yes. A prominent institutional investor and long-time bear, Jeremy Grantham, indicated that he has begun to buy because stocks have become cheap. While they are cheap, they are also facing deep pessimism.

We are reviewing our allocations with both conditions in mind. In the short run, with the election holding up any new initiatives, we do not expect sustained market gains. After the election, we expect clarity on what to expect in terms of stimulus as we move into the new year. We expect that patience over the next few months will prove rewarding in the months that follow. Today’s valuations should incline investors toward buying rather than selling. We expect the recovery period ahead to be extremely volatile for some months before the market regains its footing.

There is no change in our recommended allocations

New Fund Ratings – Because of the extreme volatility we have seen over the past week, with 1100-point gains and 750-point drops, we believe our ranking system will be subject to large recommendation changes that will be subject to reversals as soon as they are made. Therefore we are holding off on new recommendations temporarily.

The Stock Market – Today’s selling was totally indiscriminate. This is a derivatives settlement week and some of the selling may be attributed to that factor.

The Bond Market –

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

The next Hotline is scheduled for Wednesday, October 22nd at 7pm.

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