The Stock & Bond Markets -
In November, I cautioned about investment optimism in light of the economic facts. While the timing for this warning was accurate, the forces driving the warning have gotten worse. 3rd quarter profits for the S&P 500 fell 25%, the biggest quarterly decline in almost 5 years and it looks like the 4th quarter could be worse with financial institutions cutting payrolls, capital spending and tighten loan requirements. The current corporate profit recession increases the odds of an economic recession in 2008. And so, the advice is to stay diversified in domestic and international markets (stock, bond, money market) and consider raising some cash to take advantage of lower prices down the road.

Bonds have been rallying on the expectation of further interest rate cuts by the Federal Reserve. Our recommendation in this market is to stay with Treasuries having short to medium-term maturities. The continuing decline in the U.S. dollar against international currencies is a concern although many expect the 12% decline in 2007 to end and possibly rebound in 2008. There is still cause for concern. Bill Gross, the world's biggest bond manager, recently stated that "what we are witnessing is essentially the breakdown of our modern-day banking system, a complex of leveraged lending so hard to understand that Federal Reserve Chairman Ben Bernanke required a face-to-face refresher course from hedge fund managers in mid-August." If the Federal Reserve can't figure the current situation out ...

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Real Estate Bubble? -
The U.S. housing market is entering the 3rd year of a slump with no let up in sight. In fact, many are predicting a worse 2008 than 2007 as many adjustable mortgage holders see their rates rise beyond their ability to pay forcing more foreclosures next year which were already up 94% this year. The result will be increased supply in a market that already has a record supply in the worst real estate correction since World War II.