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August 2010 Investment Journal 

The month of August is in the books and here's our "view from the front lines".
Economic data was weaker for the month, with the Employment Report the early focus. Prior gains were revised down, and the current jobless number was higher than expected. Huge numbers of labor force participants continue to drop off the rolls altogether, as they have stopped looking for work. Fed regional banks reported slower growth, and purchasing managers indices demonstrated less investment activity.
Undoubtedly these reports influenced Fed policy makers, who announced that they were downgrading their view of the U.S. economy. They would therefore be using proceeds of maturing securities to purchase longer term Treasury bonds, rather than taking money out of the system. This has been called "QE Lite", or quantitative easing lite, as the Fed committed to maintaining, but not expanding, the overall monetary base. Late in the month, the Fed's gathering in Jackson Hole WY confirmed that the Fed is ready to become more activist in its market policies (we think outright interest rate targeting--buying bonds to force them to a pre-determined level--is a real possibility.)
The bond market responded very favorably to this news, with the ten year Treasury Note yield moving from 2.90% to 2.47% during the month. Equity markets slipped 4.8%, as analysts revised their earnings forecasts down. Gold rose due to heightened sense of risk aversion, closing up $67 to end at $1,236 an ounce.
Going into the fourth quarter, we expect volatility to rise. Seasonally, stocks tend to weaken. Bonds have had a huge run and the question is how much lower they can go. Most market observers are skeptical that bonds offer any value, but in a long de-leveraging/deflationary period which we believe we are in, rates likely can stay lower for longer than many think. Japan, for example, has experienced a decade long period of low interest rates, yet their currency is hitting new highs. This counter-intuitive outcome is causing a lot of investors to re-think the whole interest rate/currency intersection.  
Thank you for your support, and, as always, we welcome your questions and comments.
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