A Distilled Markets and Macroeconomic Letter
October 2007

Transparency Snapshot


The Markets


Stocks - Short Term - High Risk
The large commercial investors seem to still be positive on this market, which may push prices higher. The VIX (fear gauge) has been moving lower. The fundamental picture is bleak in my opinion. The credit crisis does not seem to be solved. Despite the current crisis I would not be surprised to see the markets move back towards their recent highs.

Stocks - Medium Term - Elevated Risk
I believe that the risk is the market averages may have quite low returns for some time or potentially flat/negative returns when inflation is taken into account.

Bonds
If the Fed ends up cutting rates more, the bond yields of longer dated bonds could move higher.

Gold
Gold one month futures are at $738.70.50 (9/25/07). Gold has had a big move up. Will it hold above the recent break out?

Oil - Staying High

Oil is at $79.40 (9/25/07). If we have a slowdown or recession, oil might have a steep sell-off. I think there is significant risk that with Fed rate cuts we could continue to see high/relatively high oil prices even with a slowdown recession.

The Economy
The housing crisis continues to worsen and there are plenty of Adjustable Rate Mortgages that could still reset to higher payments. New car sales are still off. Consumers seem to be loaded with debt.

The USD is at 78.32 (9/25/07) (stockcharts.com ticker: $USD). I feel that dollar based assets may be at risk in general, both near and longer term. The Dollar moved below recent support after the Fed rate cut.

Fed Funds are at 4.75%. I think the Fed sees serious issues facing the US economy and they seem to now be in a cutting mode.

Transparency Detail
Housing/Credit Crisis and the Fed

In my opinion, the Fed made an aggressive move in cutting their target rate by .50%. Many people were surprised by this including myself. The Dollar has moved down significantly. I donít think this will solve the issues at hand. This seems to be a preemptive cut and my guess is that they are worried about deflation from a credit contraction. Hussman has an interesting article on what the Fed actually controls via itís target rate.

Hussman states that there was no injection of liquidity at all with this latest rate cut. I think the above article is a must read. Oh, and market controlled interest rates rose last week, so I would not expect the rate cuts to translate into relief for those who have adjustable mortgages (ARMs).

Speaking of housing, there are some new charts just out. First a New York Times chart via The Big Picture.

Next is a group of charts that Bespoke Investment Group put on their blog showing what projected prices of housing in several markets.

The New Your Times had an interesting article about home sellers refusing to lower the prices that they are asking for.

There is a new interview on iTulip with Louis-Vincent Gave which is a great read. Iím looking forward to part two and I think this is a must read.

The Markets
Stocks

Fundamentals: You might want to read John Hussmanís commentary on market valuations. In short, the market is overvalued on an historical basis and many people seem to not believe that this is the case. I agree with Hussman.

Technical: On a very short term basis we may well see more upside in the markets. There is hope in the bullish camp that the general public will start buying more stocks and help to push the market higher. I feel that this may be tempered by consumer distress.

Bonds
After the Fed cut rates the 30 year Treasury yield rose and the price of the bond fell. If the Dollar continues to fall the price (value) of these bonds could fall further.

Gold
Gold has broken out above the recent high prices. It will be interesting to see if it can maintain this rally.

Reminder: fiat currencies are not tied to anything of tangible value. They are only worth whatever the market, and the public, feels they are worth. As more fiat money is created the value of this paper money should go down. In my opinion, the U.S. is creating too much money and so are China, Japan, and Europe.

Dollar | Currencies
The Dollar moved lower after the Fed rate cut. Iím looking to see if the Dollar can rally and if so how far. Long-term Iím still negative on the Dollar. The real story is the Dollar against gold, where the Dollar has lost a huge amount of value and may lose much more.

Oil
Oil is at $79.40 (9/25/07). There is risk that oil stays high. If oil prices move downward substantially, they may be pricing in a recession. A major concern with oil is the potential for a wider conflict in the Middle East, which could crimp supply. There are many other potential geopolitical risks to oil as well.

The Economy
The Fed

See above.

Housing
See above.

~ $1 Trillion in mortgages may reset in 2007.

The key chart to reference on housing via the New York Times.

The Consumer
I believe that many consumers have less home equity now than before because they have taken money out of their homes and spent those funds. Consumer savings rates are very low or negative. I believe that consumers are being gradually squeezed by high oil prices on one side and rising interest rates on another.

Transparency Strategy
My concept is to bring you a the most transparent look possible on the economy/markets via a quick read with plain language. This letter is geared toward the busy executive/business owner. If you are really short on time just look at the Snapshot section where I keep everything as brief as possible. In the Detail section I try to give a little more insight into my thinking without delving so deep that I stifle the reader.

When constructing portfolios, I take the client situation into consideration first and then combine that with the current economic/market factors presented in this letter along with well researched asset allocation strategies.

If you have specific questions on where I see things, or would like to discuss your portfolio, please feel free to contact me.

Eric Hodges
Financial Advisor
Stahlschmidt Financial Group

ehodges@sfg-financial.com

925 906 4600

500 Ygnacio Valley Road
Suite 150
Walnut Creek CA 94596

The information being provided is strictly as a courtesy. When you link to any of these web-sites provided herein, FSC Securities Corporation, makes no representation as to the completeness or accuracy of information provided at these sites. Nor is the company liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third-party technologies, sites, information and programs made available through this site.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The type of securities mentioned may not be suitable for everyone. Each investor needs to review a security transaction for his or her own particular situation. Investing involves risks including potential loss of principal.

The price of gold is subject to substantial price fluctuations over short periods of time and may be affected by unpredictable international monetary and political policies.

Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications and other factors. In General the bond market is volatile, bond prices rise when interest rates fall and vice versa. This effect is usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.

The price of commodities is subject to substantial price fluctuations in short periods of time and may be affected by unpredictable international monetary and political policies. The market for commodities is widely unregulated and concentrated investing may lead to higher price volatility.

The views expressed are not necessarily the opinion of FSC Securities Corporation, and should not be construed directly or indirectly, as an offer to buy or sell any securities mentioned herein. Investors should be aware that there are risks inherent in all investments, such as fluctuations in investment principal. With any investment vehicle, past performance is not a guarantee of future results.

Data contained here is obtained from what are considered reliable sources; however, its accuracy, completeness of reliability cannot be guaranteed.

Registered Representative offering securities and advisory services through FSC Securities Corporation, a registered broker-dealer member NASD, SIPC & A SEC registered investment advisor.