Stock Market Update

The market has worked steadily higher through the
spooky season. Investment managers have shown remarkable
discipline, not chasing the market when it gets 2.0 - 2.5%
above its 25 day M/A, and coming back in on the dips.
So the pace has been cautious and deliberate, and chief
investment officers have had little to yell about. It
remains a low volatility period, plodding along in a disciplined
fashion. Portfolios are being diversified away from
energies and commodities as the relative earnings performance
of these sectors appears set to lag the broad market.

The Fed is on hold as inflation momentum dissipates and the
economy falls into a slower growth mode.Investors are slowly
and deliberately coming around to accepting a successful
soft landing and are beginning to look forward to a strong
seasonal period spanning November through January.

The Democrats seemed to have gained some momentum in recent
weeks, but even if they capture one or both of the houses,
the market will settle for a gridlock scenario.

There has been talk of an October surprise all year. In the
early going, it was widely thought that Bush/Rummy would
bring troops home. The gold bugs remain firm that there could
be a pre-election raid on Iran, but that situation seems to be
processing through the rewards vs. economic sanctions route
for now.

My guesses for surprises are November events -- more troops to
Iraq and a possible Rummy resignation, coupled with more intense
fighting there. These events could raise concerns about the
budget and the US dollar and might disappoint the bond and stock
markets.

For now, I am stuck with the soft landing picture, but one with
possible fiscal complications later in the year.