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Fourth Quarter 2006

2006 experienced a remarkable global growth rate at close to 4%, driven more than in previous years by the emerging economies in China, India, and Russia. Record levels of liquidity were seen, aided in part by a savings glut in Asia which in turn kept global interest rates relatively low. We are still cautiously optimistic for 2007; the market remains well-oriented and we see no signs that liquidity is drying up. Earnings growth is still evident, although going forward it will likely be at a lower rate than in 2005 or 2006. Historically the market usually does well in a pre-election year, as the incumbent party attempts to push through consumer-friendly policies.

At the top of the list of risks for 2007 would be a sharper than expected U.S. slowdown due to the dramatic decline of the housing market. Sales of previously owned homes are estimated to be down 8.6% this year from 2005, while sales of new homes are down 17.7%. Many are anticipating a worsening of current pullback, especially if the Federal Reserve Board increases current historically low interest rates after leaving them unchanged in their three meetings since August. Fortunately, core inflation, the Fed’s biggest concern, has recently been quite moderate with a 2.2% year-over-year increase in November. GDP growth has slowed from 5.6% in the first quarter of 2006 to 2.6% in the second and 2.0% in the third quarter. Unemployment is currently at a low 4.5%, while the real average wage of non-executives has risen more than 2% over the past year. Weakening employment growth is beginning to suggest that job market is stabilizing. Current risks include a newly elected Democratic congress, whose agenda of increasing the minimum wage adds to the risk of inflation.

The price of oil is down since a summertime peak above $78/barrel, closing out the year below $61/barrel after hurricane fears did not materialize. However, Mid-east political instability remains a concern as Iraq struggles with civil war and Iran pursues nuclear ambitions. Furthermore, the United Arab Emirates has recently stated it will sell U.S. dollar holdings to increase its holdings in Euros from 2% to 10%, and Qatar, Sweden, Italy, and Russia have expressed similar intentions. The U. S. dollar has been beaten down as debt has risen and U.S. and European interest rates have become more closely aligned. Currency issues in China are also of grave concern; the U.S. trade deficit with China is expected to top 2005’s record of $202 billion, with the artificially devalued Yuan being the primary culprit. During a December visit to China by a U. S. delegation, China claimed it will allow more flexibility in its currency, but did not commit to a timeline.

In the midst of such mixed economic messages, the stock market performed very well in 2006. The Dow rose 16.2%, the S&P 500 added 13.6%, and the Nasdaq rose 9.5%.

Grant Rogers Elizabeth Allen

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This report has been prepared by Metis Capital Management LLC. This report is for distribution only under such circumstances as may be permitted by applicable law. It has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. It is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. No representation or warranty, either express or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein, nor is it intended to be a complete statement or summary of the securities, markets or developments referred to in the report. The report should not be regarded by recipients as a substitute for the exercise of their own judgment. Any opinions expressed in this report are subject to change without notice. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results. The analyst responsible for the preparation of this report may interact with trading desk personnel, sales personnel, other analysts, journalists, and other constituencies for the purpose of gathering, synthesizing and interpreting market information. Metis Capital Management LLC is under no obligation to update or keep current the information contained herein. The securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. Options, derivative products and futures are not suitable for all investors, and trading in these instruments is considered risky. Mortgage and asset-backed securities may involve a high degree of risk and may be highly volatile in response to fluctuations in interest rates and other market conditions. Past performance is not necessarily indicative of future results. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related instrument mentioned in this report. Metis Capital Management LLC accepts no liability for any loss or damage arising out of the use of all or any part of this report.

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