If you want to answer the question how will the stock market do in the coming months and in 2007, the answer lies in answering a simple question. Will current economic trends lead to a "soft landing" as the Federal Reserve Board is trying to accomplish or will we experience a "hard landing" that the Federal Reserve historically causes when they get it wrong. As of the writing of this newsletter, my answer is … I don't know. It could go either way.

Not necessarily what you want to hear from the guy charged with navigating your financial future, but we live in complex times. The US economy/markets are increasingly influenced by more and more factors. As these factors grow, the interrelationship among them becomes more complex. Globalization is truly accelerating the need for investors to rise above their financial emotions and the noise of a 24/7 news cycle and think critically about the fundamentals of the economy and markets. I have been spending a great deal of time doing just that.

Year to date the US stock market (as measured by the S&P 500) has performed pretty much in line with our expectations. It peaked in May, corrected into early June and has been slogging back towards the highs of the year. I expect the remainder of the year to be bumpy as trends unfold and investors struggle to determine the pending outcome of the soft landing/ hard landing debate. That being said, come year end, I still expect the US market to be up 5-8 percent for the year.

To give you a better understanding of all of this, let me summarize briefly what is happening in the economy/markets. On the plus side stock valuations remain favorable, corporate earnings remain strong (though slowing), interest rates are still rather low historically (though rising), productivity rates are still healthy ( but slowing), corporate liquidity is high (i.e. lots of cash), and overall economic activity is relatively strong (GDP is on target for 3+ percent growth in 2006). The negative side of things is less concrete. The negatives seem to be characterized as trends that could develop but are not happening yet with significant affect. These include: high energy prices slowing economic growth (not really happening yet); the potential for the real estate market bursting (becoming more likely); the Fed going too far in trying to contain inflation by raising rates too far; and the corresponding slowdown of consumer spending if one or any combination of these things pans out. The growing uncertainty of the negatives and the fact that many of the positive trends are showing signs of maturation, creates the potential for increasing volatility and market underperformance in the second half of 2006.

As a result we have been analyzing our portfolios with an eye towards making sure we are well diversified and overweighed in companies that should do well in a slower growth economy. These companies generally will have global business and better then average dividend yields. In addition we are carrying a bit more cash into the historically weak Fall season in case there is the opportunity to pick up some bargains in a market pullback. Until then, our eyes are focused on the developing trends that might give us a clearer vision of what the ultimate outcome of the slowing economy will mean to the markets.