A Distilled Markets and Macroeconomic Letter
March 2008

Transparency Detail
Fed Makes $200 Billion Available For Loans
The Fedís move to make $200 billion in loans available in exchange for mortgage debt, of questionable value, may help to slow down the credit crisis near term. I doubt, however, that this action will have a lasting effect and it may increase inflation pressures being felt in oil, gas, agriculture products, gold/silver etc. I think the support that these ďloansĒ provide to the markets will also be temporary.

Transparency Detail
Housing
I think the rather ugly estimates of 20-30+% down are quite plausible. The inventory of unsold homes is very large and prices are still too high. The list of housing woes and evidence of credit contraction is way too long for me to review here. In addition to iTulip.com, I read about these issues at http://calculatedrisk.blogspot.com/. The news is quite bad and getting worse.

Transparency Detail
Derivatives
The derivatives (CDOs, CLOs, MBS, CMBS, etc) that are built upon mortgage debt will, in my opinion, continue to be a problem until they can be liquidated or written down.

Transparency Detail
Inflation/Deflation
I tend to agree with Eric Janszen on this topic (). My view is that we may continue to experience price inflation while we are experiencing asset deflation and Dollar devaluation.

Please send me email if you are reading this on iTulip.com and would like to read Transparency in its PDF version that I email each month.

The Markets
Stocks
Fundamental: In short, I feel that the market is overvalued on a historical basis. If we see higher inflation, the market may move higher in Dollar terms but could well remain challenged in terms of other currencies. (This is still a potential outcome, but I think it is less likely than more market downside).

Technical: A major bounce materialized after the Fed announced a plan to lend money to the banks. The S&P 500 ended up over 1310, which may act as support. Short sharp rallies are typical of bear markets and I think that this rally will fail soon as it is now at an area of potentially strong resistance. 1310 to 1320 seem to be key levels.

Bonds
Iím concerned that longer dated bonds (5 years to 30 years) may fall in value at some point.

Gold
Gold seems to be reacting to the Fed rate cuts and financial/economic weakness.

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
Long-term Iím still negative on the Dollar. The real story is the Dollar as measured against gold and oil etc., where the Dollar has lost a huge amount of value and may lose much more. I am watching the Yen for signs of the ďcarry trade unwind.Ē

Oil
Oil is at $108.70 (03/11/08). There is significant risk, in my opinion, that it may stay relatively high indefinitely. If oil prices move downward substantially, this may be pricing in a global 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.

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 Snapshot
Stocks - Short Term - High Risk
Markets bounced today on news that the Fed is loaning banks up to $200 billion (More below). The VIX (volatility index or fear gauge) is at 26.36 (03/11/08).

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. The fundamental picture is bleak in my opinion. The credit/insolvency crisis seems to be getting worse.

Bonds
Treasury yields have moved down (again) and seem to be pricing in fear of recession etc. Iím still concerned about longer dated (5 year and longer) bonds loosing value.

Gold
Gold one month futures are at $976.00 (03/11/08). Iím watching Gold relative to stocks, Fed cuts, the Dollar, and other currencies.

Oil - Staying High
Oil is at $108.70 (03/11/08). If we have a global recession, oil might have a relatively 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 recession.

The Economy
The housing/credit/insolvency crisis continues to worsen. Home prices have fallen in many areas, some quite significantly. The Fed is worried and seems poised to cut rates further. I donít think these cuts will have much of an impact.

The Dollar (USD) is at 73.25 (03/11/08) (stockcharts.com ticker: $USD). I feel that Dollar based assets may be at risk in general, both near and longer term.

Fed Funds are at 3.0%. The 3 month T bill, at 1.46%, often leads Fed rate adjustments. I think the Fed will continue to cut rates if more bad news in the financial sector/economy/stocks/housing comes to light. I, of course, expect to see plenty of bad news.

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 FINRA/SIPC & A SEC registered investment advisor.