Looking ahead to the third and fourth quarters, we believe that the US markets will be preoccupied with inflation concerns, concerns about the health of the overall economy, and geopolitical tensions. With the US economy growing at a 4.8 % annual rate in the first quarter it seems reasonable that the equity markets are performing as well as they did so far this year. However, fears about inflation and a slow down in the rate of GDP growth will quickly set in, giving way to a direction less market in the back half of 2006. After four years of economic expansion it is pretty tough to predict when this cycle will come to an end; but it is surely coming to an end at some point. Thus, we see the stock market being controlled by sentiments fueled by the data coming out. We will see any robust economic data being interpreted as good (economy is growing) or bad (inflationary). Weak economic data on the other hand will be interpreted as good (the Fed will stop raising interest rates) or bad (the economy is slowing down and so are corporate earnings). Our strategy going forward is to start locking in profits and slowly turning more defensive in our portfolio construction.

One cannot ignore the performance of the Energy and Materials sectors so far this year. While it is very tempting to increase exposure to those two sectors given their performance, it is more prudent to be selective in allocating capital to those two areas in our opinion. The main question that needs to be answered is whether the recent increase in oil prices is a result of a structural change, as many advocate, or whether it is just a temporary bubble, as many advocate as well. In our view, oil prices are positively correlated with global GDP growth and global geopolitical risks; particularly those involving oil producing countries. Given that GDP growth around the globe has been robust and geopolitical risk is pretty high vis-à-vis several oil producing countries then it is no surprise that oil prices have been hitting all time highs. Our position continues to be that GDP growth is cyclical and geopolitical risks are usually transitory factors and thus we expect oil prices to continue to fluctuate with a large risk premium built in. However, we are avoiding the oil sector all together at this point because of our value bias and our view that the consequences of being on the wrong side of such a trade are pretty dire at these levels. While we are avoiding oil, we are looking to increase our exposure to Gold. As we mentioned in our first quarter commentary, we believe that gold will offer a triple play on the three major themes that we see going forward: a hedge against geopolitical risks, inflation, and a weaker dollar.