Since our last letter in May the overall market has done pretty well considering the ongoing headwinds caused by cautious investors and a plethora of geo-political unknowns. The market has climbed back from the year's lows in April and I am hopeful that we are gaining strength for a year-end rally. The market has advanced over this period because both the economy and corporate earnings have continued to surprise on the upside in each of the first 3 quarters of this year.

I have been spending a great deal of time analyzing the US economy. The real question going forward is how long will the economy in general and corporate profits in particular continue to grow at expansionary rates? Other questions: What is the state of the US consumer? When will high energy prices provide a significant drag on GDP growth? Will speculators stop bidding up the price of oil to inflated prices? When and how will the real estate bubble pop? Is it possible that we will see flat real estate prices for the next five years allowing income growth to catch up? What are companies doing with the hoards of cash they have accumulated? How is the rest of the world doing economically? Are foreign countries in a position to fuel growth for the companies we own? The answers to these questions will go a long way in answering how the stock market does in 2006. More on this in my January letter.

Today the market fundamentals remain strong and the last month or so has seen the market averages making a decent effort to rally but there still seems to be little confidence on the part of investors who seem to be preoccupied with real estate. I anticipate that we will see in the remaining month and a half of the year continuing signs that the real estate market is cooling off and rates will likely creep higher. My sense is that if energy prices are contained and interest rates do rise gradually, we could have a nice run up in stock values leaving us close to the range we anticipated in January (i.e. up 5 to 8 percent). If the energy prices continue to bid up and interest rates rise too fast the consumer is going to feel the pinch and the historically strong 4th quarter will be a dud. I am hoping for and anticipate the former.