Outlook

I currently have a market neutral(Longs-Shorts=0) position in my portfolio. The Volatility Index(VIX) hit a 10-year low early last week. This shows a high level of investor complacency. The major US indices are in an over-bought technical condition. My short-term trading indicators turned negative last week. These factors, combined with the above mentioned problems, leads me to my market neutral stance. However, there are several reasons that I am positive for the intermediate-term and will look to add market exposure at appropriate levels. Tax-cuts of $100B are due to hit consumer's pockets in the next few months, more than all of last year. Employment should show significant improvement either this month or next. Energy prices are falling. Natural Gas is down 29% in less than a month. Corporate profits are improving dramatically, leading to a significant pick-up in corporate spending. Inflation of just 1% gives the Fed latitude to keeps rates relatively low for an extended period.

The decline in the US dollar is making America's large global corporations more competitive. It does not appear that the US budget deficit is currently hurting our economy. The deficit is projected to be 4.2% of GDP in 2004. This is considered high, but not alarmingly so. It has been this high or higher several times over the course of the last 25 years. Even with the decline in the dollar and relatively high US budget and trade deficits, interest rates remain at 40-year lows. The US Government 10-year Bond is yielding 4.15%, the same as 18 months ago. This rate is down 39% from its recent high of 6.76% in 2000 and down 73.8% from its all-time high yield of 15.84% in 1981. I am closely monitoring this situation. Overseas investors hold a substantial amount of US government bonds. If they begin to seriously worry about our deficits or to experience significant currency losses, interest rates should begin to move noticeably higher as they sell our bonds. Lastly, even if the Fed raises rates soon it shouldn't do a lot of damage to the overall market for quite some time due to their extremely low levels.

Bottom Line: I am positioned for a near-term correction or trading range. I will trade opportunistically on both the long and short side, but not stray too far from market neutral at current levels. I will look to add market exposure into a 5-7% correction or as the market digests its recent strong move over time.