The third quarter of 2009 came and went, the rally continuing strongly throughout most of it, sustaining only a few bumps along the way.  On the whole, the value side of the investment universe outperformed the growth side, while mid-caps outperformed both large and small-cap investments.  Of the three most commonly followed US indexes, the NASDAQ had the best return during third quarter while both the S&P 500 and the Dow Jones returned virtually the same amount.  When we expand the time frame to include all of 2009 (through 9/30/09) we see that growth investments outpaced value investments in all three of the market cap spaces (large/mid/small-cap) and that mid-cap has returned the highest performance through the first three quarters of 2009.  For the major indexes, the NASDAQ led the way through the first three quarters of 2009 with a return of more than double the next closest index, the S&P 500. Throughout the quarter we saw volatility, as measured by the VIX, move around quite a bit.  It ended the quarter lower than it started though, implying more stability in the markets going forward than there was at the start of the third quarter.

As we moved through the third quarter, there were some signs that the economy is recovering from the turmoil of 2008.  Many investment gurus are calling for a reversal of the upward trend, with some even calling for the markets to break down through the March lows before the markets moving into a true bull market.  If this were the case and the markets did, in fact, go down to the lows of earlier this year and then start upward from there, then we would have completed what some call a “W” as far as the returns on the market.  This type of recovery is not unusual and occurs with the vast majority of market corrections that have been observed around the world over time.  The course that we are currently on is “V” shaped, which is much less common in history, but has occurred to some degree a few times in the past.  We think that we could easily experience a market correction in the coming future because the markets have increased in value so quickly, as many investors have jumped onto the bandwagon, believing that the worst is behind us.  Investors have put money into many of the asset classes just because they have been going up recently without paying any attention to any fundamental reason for an upward move.  As with any investment, if there is a lot of money chasing it (demand) and there is no real change in the number of investments (supply), then prices will move up.  We could describe these upward movements as bubbles since there is no underlying change to warrant such movement.  That could be exactly what we are seeing in the US financial markets at the moment.

Last week saw the major US indexes lose value and continue a downward movement that started the previous week.  While we could consider the last two weeks a reversal of the upward market trend, the markets are still trading in a fairly narrow band.  This trading band, coupled with the fact that there was probably some window dressing last week by the major market movers, leads us to think that this was just a short-term correction.  Now if trading continues to move the market lower and volume picks up on the downward days, then we could be in for a meaningful correction.  In that scenario, we will take some risk off the table by either selling some positions or adding a hedge in order to better protect against the downward movement of the market.  For the week, all three of the major indexes moved lower, which assisted the price of oil in spiking up more than six percent.  The US dollar continued to decline in value over the course of last week as there was more thought that the international community will become less dependent on the dollar in the future.  This week should reveal a lot about the markets.  Hopefully a market direction will be found so that we can adjust our investments accordingly.

For the trading week ending 10/2/09, the returns in our portfolio models were as follows:

	Last Week	3rd Quarter 09	Year to Date	Since 12/31/07
S&P 500 WD (benchmark)	-1.80 %	15.62 %	15.67 %	-27.12 %
Aggressive Model	-1.40 %	4.58 %	5.63 %	-7.04 %
Growth Model	-1.14 %	4.42 %	5.63 %	-4.90 %
Moderate Model	-0.65 %	4.36 %	4.35 %	-5.02 %
Stable Model	-0.83 %	4.45 %	6.05 %	-4.82 %

With the pull-back we experienced last week, we hit our selling point on three of our tradable funds.  We sold the Small Cap Value (RYAZX), Mid Cap Value (MLPIX) and Mid Cap (UMPIX).  Since those are tradable positions and we felt that there was substantial downside risk to the holdings, then if we are proven wrong we can reestablish the position without any problem.  We continue to look for areas of the market that are presenting opportunities.  One such area that we are currently evaluating is Latin America.

Economic Wrap Up: Last week was very busy for economic news releases, with the vast majority of them coming in negative for the overall markets.  The week did start out on a relatively good note with the Case Shiller US housing Index information being released to show that housing prices through July on a year-over-year basis slid by only 13.3 percent.  This was better than most had expected and continues to strengthen the belief that we have hit bottom in the housing market.  The good news did not stay around very long because only a few hours after the housing price information was released the consumer confidence figures for the month of September were released to show a decline over the previous month’s reading.  The figure was nearly 10 percent below the expectation on Wall Street.  Negative movement in consumer confidence is a very troubling development because the US is still vulnerable and is depending on the consumer to help lift our economy out of the down turn.  On Wednesday, the final release of the GDP figures for the US during the second quarter of 2009 showed a contract of 0.7 percent.  While this release was somewhat better than expectations, it was still negative and indicates that the US has a good distance to go before we get back to an expansionary time.  Also on Wednesday, there was news that unemployment during the month of September rose by much more than expected.  On Thursday, there were many economic news releases, the most important of which were: personal spending for the month of August raising by 1.3 percent, construction spending increasing .8 percent during the month of August, and pending new home sales for the month of August raising by 6.4 percent (much higher than the expected 1 percent).  All of that positive news, however, was trumped by a worse-than-expected ISM Index release, which showed a decline over the previous reading and turned out to be much lower than expected.  Rounding out a week of poor economic news releases was the confirmation that the unemployment rate in the US did move up incrementally to 9.8 percent, ever closer to the magical ten percent figure.

After such a happening week in the economic news releases, it will be nice to have a little lull in the action this week.  There will be only two scheduled announcements that could impact the overall market – those being consumer credit and wholesale inventories.  The consumer credit figures for the month of August are being released on Wednesday and are expected to show yet another month of contractions in the amount of credit floating around in the financial system.  This, in turn, could impact spending in this country as consumers continue to have a limited ability to purchase on credit.  On Thursday, wholesale inventory figures are released, and are expected to show a decline of one percent during the month of August.  While a decline may intuitively seem like a negative for the economy, it is actually a good thing because it shows that goods are still being purchased.  Also, at some point in the future, companies will have to increase inventory levels in order to replenish what has been taken out during the downturn.