Absolute Return Portfolio Management LLC

Global Equity Markets

Over the past month, the grave fears of inflation and economic slowing due to higher energy costs got a welcomed respite in the form of a 20%+ decline in oil prices. This provided some "fuel" for a rally in stocks. At the time of our last newsletter I commented there was not enough fear for a bottom and the market lacked the technical underpinnings for a substantial rally. We stand by that conviction today and view the equity market as overbought at present and subject to a decline to re-test the July lows.

In the intervening month there have been some improvements in the internal health of the market which bodes well for the intermediate-term outlook of 3-6 months. However, in the outlook for the coming weeks I expect that we will revisit the recent July lows. This should provide an adequate "structure" for a bottom that was lacking in July.

Hopefully, any retest of the July lows will find that the number of 52 Week New Lows has contracted thereby suggesting that substantial accumulation of equities has begun. Renewed concerns and fears in the sentiment indexes would provide a confirmation of a significant bottom should the anticipated retest occur.

If a re-test does not occur it would anomalous as the July bottom lacked any technical signal of strength and only showed a highly oversold condition. However, anomalies do occur and sentiment was pessimistic enough for a bottom in July. Our Domestic Equity model is showing some equity-style groups, particularly the small-cap segment, moving up the ranks though not enough YET to supplant the defensive Money Market position. Any continued strength in equities, which we don't expect at present, could see our Domestic Model moving into stocks after being defensive nearly all year long.

International Equity Regions

Our portfolios remain in a defensive position. The recent strength in the US Dollar is now undermining returns of overseas investments for US-based investors.

ASIA (ex-Japan) -

EMERGING MARKETS -

EURO -

JAPAN -

LATIN AMERICA (LatAm) -

USA -
(see Equity Style section for specifics)

Equity Style & Sector Trends

Our Domestic Equity Model suggests a defensive position at this time and our allocation to domestic equities remains 100% in money markets.

Investment Grade Bonds

As noted in the International Equities section, US Dollar strength is undermining overseas positions. Our Investment Grade Bond model is still favoring high grade international bonds but we are losing some ground due to this recent US Dollar strength. Time will tell whether the model opts for domestic bonds or can withstand the US Dollar rally. My intuitive view is the US Dollar rally is overdone in the short-term and we should see a short-term correction in the US Dollar. This would bode well for overseas holdings. We are currently only carrying 50% of our potential allocation to investment grade bonds due to this recent weakness and will assume a full weighting only if international bonds can resume their previous uptrend.

High Yield Bonds

Our models remain on a SELL for the High Yield Debt Markets.

However, this area is tightly correlated to the equity markets. As mentioned, a retest of the July lows might set up an intermediate bottom and subsequent rally which could bode well for this area.

Inflation Hedge / Real Assets

The substantial declines in oil and, too a lesser extent, commodity and gold prices have caused our overall portfolio to lose several percent over the past month. Certainly disappointing in light of the fact that portfolio values have held up quite well all year in spite of the global market turmoil of 2008. Yesterday, our Real Assets model sold Gold Bullion and this morning jettisoned the Commodity positions (which are heavily energy oriented).

GOLD Bullion - (GLD) - On a SELL signal as of yesterday.

Goldman Sachs Commodity Index (GSG) (largely energy ) and DB Commodity Index Tracking Fund (DBC) on a SELL as of today.

Real Estate - Our models rank REIT's as a SELL.