Absolute Return Portfolio Management LLC

Global Equity Markets

I mentioned in my previous October 2nd report that while the majority of price damage had likely occurred, sentiment measures had not retrenched quite enough to suggest adequate fear and concern for a bottom. I indicated that this suggested a possible bounce followed by a re-test of recent lows and the passage of 1-2 weeks as the market ground out a final bottom. We got a bounce, in fact a push to new highs, but with even more excessive bullishness and deteriorating market breadth. This concerns me.

At Friday's close, Equity Put/Call Ratios reached higher levels than those of the market peaks of July and October 2007. For those without a chart of the market handy, these were THE peaks of the bull market which presaged 2008's disastrous bear market decline. Though I am not suggesting a bear market is imminent, it shows the heights of optimism we have reached and just how quickly the problems of only months ago have magically "disappeared".

Coupled with these extreme levels of bullish sentiment we are seeing the first significant cracks in the underlying breadth of the market. The recent push to new highs last week were NOT confirmed by several intermediate-term indicators of market breadth. This coupling of deteriorating market breadth and extreme bullish sentiment worries me and has brought the specter of a more serious decline to the forefront of my concerns.

I have defensively positioned the portfolios; especially equity related and equity correlated assets classes. This may be a short lived retrenchment but one that I strongly feel is necessary. The models which drive our selection and allocation process are designed to follow and react to trend changes rather than anticipate them. My concern today is that a significant correction could occur so rapidly that even with the sensitivity of our models they may not be able to react quickly enough to protect our hard-won profits.

In the coming weeks/months I would like to see investor optimism abate as a result of a correction or consolidation. Further, I would like to see the market's internals resolve their weakened state and thereby become suggestive of a market advance once again. Until that time I am strongly recommending defensive positioning, tight stops and reduction of allocations to high risk asset classes.

International Equity Regions

I have taken defensive action on behalf of the portfolios due to my aforementioned concerns.

US Equity Markets (Equity Style Model)

I have taken defensive action on behalf of our portfolios based upon my aforementioned concerns.

Investment Grade Bonds

High Grade Corporate and International Bonds remain on a BUY. We favor International Bonds due to US Dollar weakness which translates into currency gains for non-US holdings.

Our current allocation is:

• 100% International Investment Grade Bonds

High Yield Bonds

Our High Yield Bond model is on a BUY. Our current allocation is:

• 50% Emerging Market Bonds
• 50% Money Market

Inflation Hedge / Real Assets

Current allocation:

• 50% Gold Bullion
• 50% Money Market

Absolute Return Portfolio Management LLC provides absolute return oriented portfolio management and institutional research on global macro trends including equity style rotation, global regional equity trends, short-selling and market neutral strategies as well as fixed income strategies. Contact us for information on account minimums and institutional research offerings.

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