Despite the recent volatility and increased investor fretting over the sub prime market, I continue to like equities here and suggest a net long position. Liquidity conditions globally still remain healthy. Yields are going up across the globe but the cost of and access to capital still remains attractive. This is in the context of equity valuations which are still very attractive. As a result, I still expect more M&A activity driven by both strategic buyers and private equity.

Global GDP growth also remains robust with the U.S. apparently accelerating out of a mid-year lull. ISM data continues to improve, implying that the corporate sector is in good shape. Regarding consumers, there is valid concern, near-term, that the consumer is weakening. Credit card debt is on the rise, retails sales are mixed and second quarter retail company reports have been poor. Combine this with increasing concern about the sub-prime market, and one could very easily paint a poor picture of the consumer. However, the long term drivers of consumer health are wage and employment growth, both of which remain healthy. Furthermore, sub-prime borrowers account for six percent of homeowners. According to the Mortgage Bankers Association, 35% of homeowners own their houses out-right. The real risk of the sub-prime deterioration is its potential indirect impact on investor perceptions of risky assets.

It is also worth noting that Inflation globally remains in check. I am fascinated by this idea that China is now exporting inflation, which is probably correct, but it is also probably a multi-year trend which is just starting. The Fed continues to be concerned about inflation in the U.S. but will probably not raise rates for the remainder of 2007. However, I now think that a rate increase in 2008 is possible which is a change from my prior view. Given the strength of the U.S. economy and the limited damage caused by the sub-prime debacle, I now think a rate cut is unlikely.

Lastly, market expectations appear to be fairly low. Consensus earnings growth for Q2 is 4%. While material costs and wage increases will certainly weigh on companies, revenue growth continues to outpace cost growth due to healthy global demand and a favorable environment for price increases. The fact that hedge funds are significantly short the major indices is also suggestive of low expectations.

In terms of what looks attractive currently, I still am biased toward growth stocks driven primarily by valuation. I expect large cap to out-perform mid and small cap which could under-performance as riskier assets get re-priced. A weak dollar also helps the large caps. I think industrials, particularly the infrastructure and water plays have run ahead of themselves. Technology stocks are looking more attractive and I continue to like healthcare. Soft commodities still look interesting here but metals look pricy. Energy is still attractive longer-term but some valuations, particularly in the alternative space, are looking rich. I would advise caution. I also continue to prefer international stocks over U.S. stocks. Valuations still look better abroad, economic growth is higher and it looks like the dollar will continue to decline. Need I say more?