The last two weeks have been very trying as oil prices have spiked and the stock market has sold off. Our portfolios have fallen back from the highs we set at the end of last month, but our commodity exposure has, as planned, mitigated the damage. I know this development is frustrating, but it is important to remember that we have a sound strategy that has stood the test of time. Furthermore, while Wall Street has suffered a setback, our strategy has still posted positive returns in a year when the S&P 500 is down over 8%.

I have not changed my outlook for the economy despite the rise in energy prices. If current prices are sustained for a while, I may need to reassess, but I believe there are reasons to think the spike will be short-lived. The extreme volatility we have experienced over the last two weeks, in commodities and stocks, is typical of markets at turning points.

The key to cooling the commodity bubble (and yes, it is a bubble), is the US dollar and on that front we have seen encouragement. The Euro peaked at just over 1.60 on 4/22 and is now at 1.54. Gold is down over 5% from its peak. Movements in gold and oil are positively correlated and while oil has yet to follow gold lower, I suspect that will happen soon. And with everyone seemingly long oil, when it breaks, the fall could be significant.

On the economic front, we continue to get data that is consistent with a slowdown rather than a recession. Just this morning the Commerce Department reported that retail sales for May were up 1%. Some of that gain was due to higher gas prices but even excluding sales at gasoline retailers, sales were up 0.8%. Furthermore, sales for March and April were revised higher. These statistics are not consistent with an economy in recession. Like Mark Twain, the death of the US consumer has been greatly exaggerated.

I have been selling into the rally in commodity markets as those markets appear to be reaching a climax. The hoopla surrounding the oil spike and commodities in general seems like, to quote that great linguist Yogi Berra, déjà vu all over again. Commodities are negatively correlated with stocks and as such act as a hedge. That hedge has worked exactly as I anticipated when I developed our strategy, but the commodity bandwagon is getting very crowded.

Times like this are frustrating but investors with a sound strategy merely need to be patient. I believe the key to producing consistently good long term returns is avoiding losses during tough times. During the last year of turmoil in the financial markets, our strategy has allowed us to do exactly that. I am confident that as the investment climate changes for the better, our strategy will continue to serve us well.

Joseph Y. Calhoun III is Chief Investment Officer of Alhambra Investments.

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