Most major stock market indexes were on a roller coaster ride throughout the first quarter of 2007.

As 2007 unfolded, the bulls and bears dueled it out daily.

The bulls hung their hats on the thesis that the U.S. economy would slow to mitigate any inflationary pressures about which the Federal Reserve (the Fed) was worried about. However, the bulls also hoped that the U.S. economy would continue to grow and generate corporate profits. Economic growth of this nature could be a catalyst for stock prices to continue to rise.

Many economists call a slowing economy with subdued inflation a “ soft landing” or “Goldilocks economy.”

Conversely, the bears believe that the U.S. economy will fall into a recession or stagnate, and that inflation will again reemerge as a headwind. This scenario of a slow or contracting economy along with esca-

lating inflation is called “stagflation,&rdquo and was firmly implanted in the U.S. economy in the early 1980s.

The bears also worry that the housing sector will continue to decline as it has for the past six months.

Fueling the housing sector's recent decline is the hangover from the collapse of the sub-prime mortgage market. Over the past few years, the sub-prime mortgage market has created an artificial demand for housing by allowing buyers with poor credit history and no validated proof of income to acquire homeowner loans (liars' loans).

Eager sub-prime borrowers have flocked to equally eager lenders to borrow money in order to purchase homes that they can't afford even to rent, creating a phenomenal real estate boom in the past five years throughout the United States.

In the past few months, many sub-prime lenders have filed

or bankruptcy, leading to significant declines in most major stock market indexes on the days when the news of their demise was disseminated to the public.

Most major stock market indexes finished relatively unchanged at the close of the first quarter of 2007.

The bond market finished in lock step with the stock market as bond investors tried to interpret the Fed's resolve to leave short-term interest rates unchanged at both of its two meetings in January and March.

I remain cautious about the future state of the U.S. economy and the stock market.

Therefore, I continue to maintain a large percentage of my clients' portfolio assets in cash and the balance in the energy and precious metals sectors as a hedge against the geo-political uncertainty ahead.