Market Comment: The third quarter of 2011 will go down as one of the most volatile quarters in history. The stock market faced a variety of headwinds leaving investors more confused, concerned, and pessimistic than they have been in my thirty years as an investment professional. In a relatively short period of time, the markets were jolted by the threat of a major meltdown in European sovereign debt, the potential shut down of the U.S. Government, and the fears of another recession after barely recovering from the last one. When combined with a general lack of trust in the lawmakers of this country, it is not hard to understand why people are so concerned and pessimistic about the future. If we slip into a recession, it will be self-inflicted due to a lack of consumer confidence. The one piece of good news associated with all of this is that periods of extremely high levels of pessimism often lead to outstanding performance in equity markets. During the third quarter there was very little differentiation in the performance across market sectors, company sizes, or fundamental quality. This suggests that companies have just become ticker symbols to investors rather than, in our portfolio’s case, high quality, rapidly growing, small-cap companies. We believe that a catalyst for higher stock prices will be the third quarter company earnings. Of the small cap companies that have reported thus far, 66% have beaten expectations for top line growth and 54% for bottom line. We expect this trend to continue and ultimately force investors to focus on company fundamentals, rather than the macro backdrop. Also, any incremental improvement in the overall health of the U.S. economy will help investor sentiment, bringing more capital into the market. Our works suggests that if there is a significant move in equity prices during the fourth quarter, it will be higher.

Sector Comment: As has been the case for some time, the best action can be found in healthcare related sectors lead by Medical Systems/Equipment, Products, Medical-Biomed/Biotech and Computer Software Medical. Consumer related sectors are also acting well, led by retail and restaurants subsectors. Both Information Technology Hardware and Software have recently turned up and look like they are going higher. For now, avoid natural resource sectors including the Steel Producers, Mining Companies and Oil and Gas related sectors. Also most groups in the Financial Services sector are struggling, led by the weakness in Money Center Banks, and Investment Bankers and Brokers.

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