Good Evening All!

If I may, one final comment (for now) on the brewing mutual/hedge fund
scandal. CNBC had a guest on a couple of days ago who is an
assistant business professor from California. He was asked about all of this
and had the following story. Some years ago, by chance, he
noticed that the price action on mutual funds seemed to have a pattern after a
certain degree of rise or fall in NAV (Net Asset Value). He did
all sorts of regression analyses on these and found that in a $ 400 billion
market the returns were less than a certain implied value. After
allowing for a 1% management fee (more or less normal) there was another 1%
discrepancy and he believes that this was caused by the
"hedge fund effect" - if we can call it that!

Let us put this in simpler terms. This 1% "hedge fund effect" amounts to $ 4
billion A YEAR - and that is money which should have
legitimately gone to the investors represented by the NAV of the fund in
question. Multiply this by whatever the number of years is
involved, and the theft is monumental. No wonder why it is that hedge funds
usually seem to have very large returns. Outright theft/illegal
trading will do that, and we have to ask ourselves what other refinements have
been discovered by hedge funds which have not been found out
by regulators, or professors from California.

Let us switch to pensions now. There are stories in the American media this
morning which shows the terrible effects of Wall Street's long
decline on what the average employee is going to receive in a few years. The
WSJ (we believe) is commenting on the fact that certain types
of pension plans are not $ 35 billion light in their valuations as previously
thought, but rather $ 80 billion short. Financial television is
reporting that the Pension Guarantee Board says that 80% of single employer
pension funds are underfunded to the tune of $ 400 billion.
Again, that is your money folks, and what you are not going to get if this
mess cannot be sorted out in the next few years.

But, can it be "sorted out"? The ever optimistic Larry Kudlow on CNBC this
morning stated that there are no problems because the stock
market is going to go up and as such the shortfalls are self correcting.
Kudlow is a perma-bull and as such has never (that we have heard) said
that the Dow was or is overvalued and looking to go down. It is perhaps
unfortunate that he believes this in the face of opposition from such
people as Richard Russell and Sir John Templeton, but the market will
ultimately determine who is right. However, that is not the way to
handle risk/reward plays. If one is "hoping" for a big move to bail one out of
a bad position (or a VERY bad position in this case!), then it
never seems to work out that way. Therefore, the logical solution must be to
prepare for more losses (i.e react to the errors made previously)
all the while hoping for a bit of a pullback. In this manner, if there is a
very strong rally, you will actually be ahead of the game, and your
pension plan payout targets.

Lastly, we wish to comment on the quality of news on the financial channels.
We suspect that this is tailored to meet the needs of declining
ratings (as is the case with CNBC we are told), but new depths are being seen
nearly daily. Serious analysts on important aspects of the US
and world economies are being given a minute or two or air time, whereas
people with a sports orientation are lionised and given vast
amounts of time to babble endlessly. We shall not go into the incredible
number of times that we saw the incident involving Miss Spear's
culottes in Washington yesterday, as she was celebrating the start of yet
another season of what passes for intellectual opiate for the masses
(the NFL).

To examine this phenomenon more fully, we saw "Mad Dog" Russo interviewed for
10-15 minutes on his thoughts for the upcoming
football season. We saw long commentaries about who was going to win the US
Open tennis championships now being held in New York.
More and more we are seeing fluff pieces about this and we think there is a
message here. It says that the average American investor is now
so transfixed by the possibility of getting out of very bad positions in
equities close to even, that s/he refuses to hear any bad news or
anything even vaguely thought provoking. Another possibility is that people
simply do not care about equities and the like anymore. They
are sick of the hype that is constantly thrown at them on this subject, and
may even be intellectually ground down by the never ending
recession. In this environment they want sports and football, and little else.
This lack of interest in the real world is quite serious in our
view, and is bearish on equities (and everything else we might add!) going forward.

Something is in the works in our view. The USD is being hit hard in Europe and
gold is sniffing at 380 (December contract). Keep this in
mind as we open the week.

Best Wishes