The Markets

Surging energy prices and a new round of credit related issues prompted most of the major averages to sell off last week. After solid advances on Monday and Tuesday, the Dow Jones Industrial Average lost 205.99 points (-1.68%) on Wednesday as part of an across the board sell off following new write-offs from Lehman Brothers (LEH). However, the blue chips picked it up on Thursday and Friday gaining 98 points (+0.8%) for the week to close at 12307.

In contrast to the last few weeks, the NASDAQ underperformed the Dow on a percentage basis last week as stocks such as Apple and Yahoo led the index lower. For the week the NASDAQ lost a modest 20 points (-0.8%) to close at 2454.

Year-to-date, the Dow is down 7.2% while the NASDAQ has lost 7.5% of its value.

The current range-bound market continues as the bulls and the bears battle stretches on. In the bulls’ favor is the logic that when news can’t get any worse, it can only get better. The bears argue that the continued slump in housing prices, the after-effects of a credit bubble, and oil at $140 a barrel all will serve to bring the market back to it’s March lows (and more). So far this quarter, no real progress on either front. The market gains from Thursday and Friday marked a clear difference in sentiment than what has been the case earlier in the week. However, the gains did not do much to improve the technical condition of the markets which broke down as a result of the weak employment report from June 6th. We continue to see high volume declines and low volume rallies, a typical behavior of the bear market we’ve been in for most of this year.

The Appleton Group Composites™

We continue to carry a more offensive posture today that we did at the end of March. However, we are starting to see evidence of increased caution on the part of investors, and as such are more likely to reduce at-risk investments than increase them at the present time. Our defensive allocations are currently limited to U.S. Government bonds and to cash, with no exposure right now to “bear market” indexes (investments that can profit from declining markets). The overall market has been volatile, but on balance has remained in a range and right now no additional changes are warranted. Overall portfolio performance has been sharply better than the vast majority of the equity indexes so far this year. It is our continued goal to produce portfolio growth over time that is useful and consistent, while only incurring the bare minimum of investment-related risk along the way.

Looking Forward

Our view forward is unchanged. We look for the Federal Reserve to shift its focus from the credit crunch and economic weakness to what is on a lot of consumer’s minds: inflation. There is an increased belief in the investment community that a bubble is building in the commodities markets, with extremely weak valuation in the U.S. dollar contributing to an exponentially strong valuation for practically everything else that is sold in dollars: oil, wheat, corn, rice, gold and so on. Precious metals and steel probably don’t have the potential for a real shift in sentiment, but starvation does. With rice, wheat and corn each up over 75% in the last year, the political pressure overseas to bring down prices is immense. This leads us to believe that we are likely to see a coordinated intervention by central banks to support the dollar, which would in-turn bring commodity prices down as well. The imbalance that currently exists between reality and speculation in the commodity markets will need to be corrected; look for Chairman Bernanke to become as creative here as he has in dealing with the credit crunch.

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