Market Update 3/4/08

   After rallying for nearly three weeks, equity markets sold off sharply on Friday to end the month in the red.  Dismal economic news including higher inflation readings, continued declines in home prices, and worse than expected orders for durable goods indicate the U.S. economy is brushing with a recession.  In addition, crude oil neared its inflation-adjusted record of almost $104 per barrel as commodity prices surged, putting further pressure on consumers and businesses.

   In addition, the credit market dislocation spread to high quality assets last week.  The municipal bond market is experiencing substantial liquidity-driven turmoil, as prices have fallen for 14 consecutive days and February was the worst monthly performance for municipal bonds in 19 years.  The selling pressure was broad-based, from high quality AAA-rated bonds to high yield bonds.  However, unlike the subprime mortgage crisis, the selling in the municipal bond market has not been caused by problems with credit quality.  As a result, this market dislocation has created a major opportunity for investors to take advantage of historically high tax-exempt yields relative to Treasuries.

   The current market environment is unfortunately consistent with our forecast for the first half of 2008.  Uncertainty over the ultimate scale of the credit crisis and associated de-leveraging process, along with the slowdown in the economy, has created a volatile trading environment.  We continue to advise a cautious approach to riskier assets.  We believe the S&P 500 has strong support near the January intraday low of 1270, and expect resistance near 1400 until uncertainties begin to ease.

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