I would like to thank all those who attended our market and economic presentations during the first quarter. They were very well attended. It was a pleasure to speak with so many of you to get your input regarding the recent historic market activity. As a follow up, I would like to review our thoughts about our current positioning and outlook.

SIGNS OF RECOVERY

Along with the recent March rally, we see encouraging signs of improved market performance. This supports the likelihood that the market is near the end of the bottoming process, which started in October when the market fell off a cliff. At these depressed levels, so much bad news has been priced into the markets that the downside risks have been significantly reduced. To be sure, downside risks still remain because there is still much uncertainty in the air. The stock market is crowd psychology in action, and confidence is an important ingredient for improvement. The government and the media are two of the main influences on investor and consumer confidence for better and worse. After some initial bungling and naive actions by the Obama administration, which served as the catalyst for much of the downturn, it is interesting to hear them change their tune from talking the economy down to talking it up.

Although Obama's true aspirations revolve around, as Charles Krauthammer said in his most recent column, the holy trinity of health care, education and energy in order to bring about a leveled and social democratic society, Obama has no choice but to focus on the economy first. He cannot move on to his real agenda without first getting the economy back on its feet in some form. Now that the administration has changed its tune, the main-stream media should follow suit.

During the waterfall decline in October/November and the slide in February, investor sentiment gauges hit extreme low levels. These low levels indicate that so many people are bearish and have already sold out of the market. Up turns off of extreme low levels on these indicators are positive signs and this has been occurring through March. Most measures of consumer sentiment are also stabilizing. The Consumer Sentiment Index actually rose for March and was better than expected.

Market volatility has subsided from record historical levels. Volatility levels are a good measure of the amount of fear in the market and indicate how hard the market is trying to shake people out. Those who are able to hold on through the "shaking" are left holding the productive assets that others then inevitably bid up. The February slide in the markets was not as widespread and without the same momentum as the October/November drop with some areas such as Technology holding quite well on a relative basis.

Whether you agree with them or not, the aggressive government policy responses will benefit the economy in the short-term. These policy responses which include interest-rate cuts, quantitative easing actions, bailouts, and fiscal stimulus packages are occurring on a world-wide scale. Don't underestimate the power of these actions in the short-term as they can have a profound effect. Yes, the government can easily be creating more potential long-term problems with these actions (i.e., inflation, expectations of being bailed out, higher taxes, unintendedconsequences, etc.), but as the credit mess starts to clear up, the rest of the economy is waiting to take off.

I believe the economy will turn positive on its own power regardless of the circus action in Washington. Businesses have significantly drawn down inventories and are running lean. Many will emerge from this downturn stronger than before. This will power a growth in earnings that will propel the market higher.

It is interesting to note that around the beginning of March many analysts and investment houses came out with their 2009 S&P 500 earnings forecasts. By applying a conservative multiple to the earnings, they were basically inferring that the S&P, which was just breaking below 700 at the time, was still overvalued and would continue to fall (e.g., Goldman Sachs came out with a forecast of $40/shr for the S&P 500). These forecasts are usually about as reliable as the weather on Mount Everest, and just as ill-timed.

CAUSES OF THE MARKET COLLAPSE

One of the main culprits of the market collapse is the market-to-market accounting standards that forced financial companies into a downward spiral by forcing them to value their assets at the last trade rather than by cash flows. In his recent Forbes column, Rich Karlgaard states that 70% of the banks worst assets still generate cash. Assets should be valued based upon cash flows and losses realized when an actual impairment occurs. Market value is important, but only if you intend to sell the asset.

Another constructive regulatory relief would be to end the short uptick rule. I can't figure out why this simple rule, which exacerbates downward movements, has not been suspended. It costs taxpayers nothing!

We are also beginning to see signs of a housing bottom. This is not to say that I think housing will move up, but instead, it will stop going down. Housing affordability has markedly improved due to lower prices and low mortgage rates, and the over-supply is working itself off.

Something to keep in mind is that the moves off of bear market lows can be quick and powerful often due to seller exhaustion and short covering of which the March rally was a prime example. At the end of February, there was so much cash on the sidelines. It represented 47% of the total market value! That is an astonishing figure! As confidence returns, you will see this money start to go back into the market. Interest on savings accounts and cash is next to nothing. With so much cash on the sidelines, who stands to "lose" the most? --those who are in cash and end up getting back into the market after it has recovered.

PARAGON'S POSTION

At Paragon Wealth Management, we are actively positioning into areas that move the best after a bear market bottom. These include asset classes such as small and mid cap, sectors including technology, consumer discretionary, industrials and emerging markets such as Brazil and China. As the days progress, we will be looking for pullbacks that have less downside participation, volume and momentum followed by rallies to secondary highs. It will still be a rocky ride as the market always is, but for the moment there is more risk to being outside of the market than in.