Absolute Return Portfolio Management LLC

Global Equity Markets

Last week I pointed out that both sentiment and market breadth heralded the continuation of the decline that began late last month. Yesterday's dramatic drop is precisely the type of bull market correction I described. It struck fear into investors about the viability of the current rally and raises doubts about its continuation. So, we are well on our way to a bottoming process...

I believe that most of the price damage has already occurred. However, sentiment measures have not retrenched quite enough to suggest adequate fear and concern. This suggests a possible bounce followed by a re-test of recent lows and the passage of 1-2 weeks as the market grinds out a bottom.

More importantly, the intermediate-term outlook remains bullish. Weekly sentiment gauges, though rising dramatically from the March lows, have not yet reached levels that would tilt the risks against us. This short-term correction has helped to alleviate the overbought condition that existed and provides the necessary backdrop for another leg higher in this bull market advance following a short hiatus.

It is interesting to note also that market leadership is firmly in the hands of Mid-cap and Small-cap stocks domestically and emerging market regions overseas. Leadership stemming from these riskier asset classes illustrates the adoption by investors of greater risk based upon improving confidence in the advance's sustainability.

International Equity Regions

Persistent US Dollar weakness coupled with superior fundamentals puts International Equity regions among our highest allocations.

Our current aggregate allocation is as follows:

• 33.3% Europe
• 33.3% Emerging Markets
• 33.3% Latin America

ASIA (ex-Japan) -
Asia's momentum stalled towards the end of the recent advance. In some ways hinting at the forthcoming decline. We have no Asian positions but would consider the region a HOLD.

EMERGING MARKETS -
Rated as a BUY, our top diversified pick is VWO. EEB and EEM are close seconds.

EURO -
Rated as a BUY. We own EFA.

JAPAN -
Still on SELL.

LATIN AMERICA (LatAm) -
Rated BUY. Top-ranked diversified LatAm ETFs include GML and ILF. EWW and EWZ are top-rated single country ETFs.

US Equity Markets (Equity Style Model)

Our primary equity models are bullish. Our current allocation changed modestly this week through a reduction in Small-Cap Growth with the proceeds going to the predominant Small-Cap Value weighting. Allocations are:

10% Small-Cap Growth
70% Small-Cap Value
20% Large-Cap Growth

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:

• 100% Emerging Market Bonds

Inflation Hedge / Real Assets

Current allocation:

• 50% Gold Bullion
• 50% Real Estate Investment Trusts (REITs)

GOLD Bullion - (GLD) - On a BUY. After nearly a 1.5 year trading range, Gold has decisively broken out to the upside confirming the uptrend. We don't invest in Gold Equities due to their extreme volatility but they remain historically undervalued relative to bullion.

Goldman Sachs Commodity Index (GSG) (largely energy ) and DB Commodity Index Tracking Fund (DBC) on a SELL . This area bears close watching. Though mired within a trading range since June, Commodities are poised to breakout to the upside. Monetary and fiscal policy is creating a precondition of increasing inflation that would support an advance.

Real Estate - Our models rank REITs as a BUY

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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