Caldwell & Orkin, Inc. which manages the Caldwell & Orkin Market Opportunity Fund, had several good comments in their Update newsletter. We thought a few key excerpts would be of interest to you.

It certainly seems that the emergence of Brazil, Russia, India and China (the BRIC countries) continues to impact the inflationary horizon. These countries inflate the prices of what they consume (commodities and raw materials) by increasing demand, and deflate the cost of what they produce (consumer and capital goods for export) given lower cost structures, which is enabled by cheaper money and lower wages.

There are numerous signs that the once white-hot housing market has begun to cool. The ISI Group’s homebuilders survey (under the direction of Ed Hyman, founder and chairman of ISI and ranked the #1 economist on Wall Street for 26 consecutive years) has declined to its lowest level since 2001, as has the National Association of Home Builders survey. Over the past six months, U.S. new home prices have declined -8.1%. According to ISI, this is the sharpest drop since the recessions of 1970 and 1982. Unfortunately, this slowdown in housing is beginning to have an impact on the consumer. A survey conducted by RealtyTrac showed a 68% year-over-year increase in mortgage loans in foreclosure in February. Anecdotally, the signs on local telephone poles advertising, "We will buy your house for cash!" have been replaced with, "Avoid foreclosure, call us!"

This economic expansion has seen extraordinary worldwide economic growth. This growth has led central banks around the world to raise interest rates. According to an April 28-29, 2006 Wall Street Journal article by Yuka Hayashi entitled Bank of Japan Shows Optimism, May Change Policy, the Bank of Japan now sees signs that the Japanese economy is strong enough to bring an end to the 0% interest-rate policy they have had in place since 2001. In fact, the economy may be strong enough for several rate increases over the next several years. The same edition of The Wall Street Journal had an article by Andrew Batson entitled China Likely to Take More Steps to Cool Economy, which indicated that market watchers believe the Chinese central bank will need to do more than the April 28, 2006 0.27% increase in their benchmark interest rate if they really want to slow their economy. Even if the Fed decides it is time to take a breather, they can’t control the impact of interest rate decisions of central bankers abroad, an important consideration in today’s global economy, especially in light of the fact that U.S. economic growth has a higher correlation with global short rates than it does with the Fed Funds rate. Does this imply the Fed has lost control of the U.S. economy? No, but it does make their job that much more difficult.

The surge in oil prices has left oil exporting nations with a surplus reserve of dollars. As the Fed moves towards a pause in rate increases, while their global counterparts continue to tighten, dollar returns become less attractive, and these nations are likely to begin diversifying out of their dollar holdings. Comments from finance ministers in Russia and Iran suggest that this exodus has already begun, as does the year-to-date -5.6% decline in the dollar spot index. Dollar weakness could force a more hawkish Fed in that it would make the price of U.S. exports more competitive abroad, thereby raising the risk that economic strength continues, and it could also add to inflationary pressures via rising import prices.

In India, manufacturing compensation per hour averages $0.64. In China, the average is $0.75. In the U.S., the same output would cost $23.17. The emergence of these developing economies is providing the U.S. economy a source of inexpensive labor and low consumer price inflation, but it is also spurring asset-based inflation as the emerging world builds-up infrastructure and demand increases for raw materials. Asset-based inflation is being tolerated so far, since "core" (ex - food and energy) prices have been mostly constrained.

Written By:

MICHAEL B. ORKIN, CFA

ROBERT H. GREENBLATT

J. PATRICK FLEMING, CFA

WILLIAM C. HORNE

of

Caldwell & Orkin, Inc.
6200 The Corners Parkway
Suite 150
Norcross, GA 30092
Telephone (800) 237-7073 or (678) 533-7850
E-mail: Update@CaldwellOrkin.com