FINAL THOUGHT$
(for this year)  

With this dreadful investment year coming to a merciful close, we bring you our last GreenThought$ newsletter of 2008.  Today, we'll summarize the activity in the Emerald Allocation Strategy portfolios.  If you read between the lines, you can start to see us setting up for what we think 2009 will look like.  Our first GreenThought$ issue of the new year will be published the week of January 5, and at that point we'll fill you in.  Enjoy the rest of the holiday season, and thanks for allowing us to share our thought$ with you during this frenetic year.  We look forward to waging the battle with you in better times going forward.
 
HYBRID PORTFOLIO
Reduced Dedicated Short Equity - we believe that after a horrific 13 months, the stock market has likely set itself up for a 'bear market rally."  While we will hold our position in a mutual fund that actively shorts stocks, we sold out of our tactical S&P short position.  Bear market rallies being what they are, we would not be surprised if we re-initiated this position in the coming weeks or months.  However, given the often powerful nature of rallies from historically oversold conditions such as what we have had recently, we don't want to put a drag on our upside potential with too high a dedicated short position.
 
Sold High Yield Bonds - we clearly were early in our assumption of this segment's revival.  We bought this fund after it had fallen over 35% in a short period of time, and our rationale was that the mid-teens yield on the fund would be a sufficient cushion against the modest additional declines in price we were prepared to endure on the way to an eventual recovery and solid long-term return.  This theory fell apart when the flight to quality bonds and away from everything else intensified in November and early December.  We fully expect to come back to High Yield soon, but with our small 5% position having dropped 20% in under two months, we prefer not to impact the Hybrid portfolio's overall return from High Yield any further, for now.  Our feeling is that 2009 will start to show some improvement in credit conditions, particularly following the massive government stimulus package due during the first quarter.  If that lifts the shackles off of lending and encourages at least modest but responsible risk-taking on the part of banks and consumers, High Yield bond spreads should start to compress.  We'll monitor this closely and be prepared to re-enter this Hybrid sub-sector.
 
Bought and Sold REITs - speaking of "we were early," we bought a tactical position in a Real Estate mutual fund, in the belief that the REIT sector had finally showed signs of settling down and positioning itself for a near-term rebound.  Instead, the REIT index dropped over 10% in a single day and recovered about half that move the following day.  We can be patient and endure such wild swings in our longer-time-horizon portfolios, but we don't have much of an appetite for it in the Hybrid Strategy.  Sticking with our mantra of "keep losses short and shallow," we sold this position at a 6% loss, or less than a 1/2% impact on the total Hybrid Strategy portfolio.  This is a reminder that we continue to be in an environment where steep losses can occur anytime, anywhere.  Thus, the age-old tenets of diversification are as relevant today as ever in portfolio construction.
 
CONCENTRATED EQUITY PORTFOLIO
 
Added two new equity funds - we took the opportunity to buy two equity funds we have been eyeing for some time.  These funds both lost over 30% during the first 11 months of 2008 (during which time we did not own them).  Of course, all equity funds have hit the pavement over this time, but that signifies to us a rare opportunity to buy at very good long-term value some management teams (like these two) at a fraction of what we would have paid for them at any point since 2003.
 
Re-bought a longtime equity fund holding - we sold his fund just over one month ago to temporarily reduce our active equity exposure and for taxable accounts, avoid the fund's capital gains distribution which occurred just after we sold it.  A month has passed and we are gradually rebuilding our equity exposure after our cash position recently peaked at 40% of the portfolio.  We welcome this fund's prudent and patient approach back to the fold, and fortunately did not miss out on any special upward moves in its price for the month we did not own it.
 
GLOBAL CYCLE PORTFOLIO
Added to four core long-term positions - we added to our existing holdings in China, India, the Frontier Markets, and International Real Estate.  With the real possibility of a bear market rally of some magnitude in the near future, we believe these areas can potentially outperform the broad markets on the upside.  These are all high-Beta market segments, and the environment seems to us to be opportunistic for a matter of weeks to months.  Our cash and hedge positions give us comfort that if we are wrong, the declines can be contained.

The information provided in this report should not be considered a recommendation to purchase or sell any particular security.  There is no assurance that any securities discussed herein will remain in an account's portfolio at the time you receive this report or that the securities sold have not been repurchased. Prices, opinions and estimates reflect Emerald's judgment on the date hereof and are subject to change at any time without notice. Any statements nonfactual in nature constitute current opinions, which are subject to change. Projections are not guaranteed and may vary significantly. Further information on the firm and its advisory fees may be obtained from the firm's Form ADV Part II, which is available without charge upon request. Complete descriptions of all Emerald's products and benchmarks are available upon request.
           
 

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