The Rush Report



The Q4 2010 Market Rush Review

By

Mark Rush

January 2nd 2011

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Preface

Once again, it is once again time for my quarterly market review, where I examine world events and attempt to understand their implications on the market. This is my time to reflect on current events, portfolio performance, and event scenarios, and their subsequent implication on world equity markets and my investment strategies.

As you read through this review, even if you don’t agree with my thoughts or analysis, please take the time to think about your financial choices and ways to improve your returns. It is my goal in life to have my money working for me instead of me working for my money.

Please email me with your thoughts, questions, and insights on the opinions that I present. The purpose of my effort is to stimulate a dialogue around current events and their impact on the markets.

This document may be distributed to anyone free of charge as long as it is provided in an unaltered form. I reserve all Intellectual Property Rights of this document.

Regards,

Mark Rush

Yellow Spring, WV

Please read this important notice

Disclaimers

As you read this document keep in mind that I do not have any special insights into the markets nor do I have any type of training or experience in any kind of investments. I am not a financial advisor nor do I have a degree in economics or finance. Remember these facts as you read and ponder my unprofessional opinions.

This document should not be construed as investment advice; you and your financial advisor are responsible for making your investment decisions. The purpose if this document is for me to “think out loud” and stimulate thoughts regarding my investment ideas for my portfolio. I am asking you for your feedback about my thoughts, strategies and conclusions.

Nothing in this document should be construed as tax advice or estate planning. Tax laws are complicated and change often. I do not have the time to follow changes in tax codes; therefore, any thoughts I may have on the subject are very likely to be obsolete or, at the very least, dated. Before you attempt to implement any tax strategies you should consult a tax professional or financial advisor.

All thoughts and strategies are based on the fact that I invest money from the United States using US dollars and pay US taxes. All comments and views are from my American investment perspective. Many of my strategies consider US tax implications and currency exchange rates that may not be valid when viewed from outside the US.

The views and opinions in this report are strictly my own based on publicly available information. I do not have any special perspective into the markets. Opinions stated are my own and do not reflect the opinions from any current, past or future employer.

I will/may change my strategy and investment ideas radically and suddenly between reports without notice to any receivers of this report. My own investment strategies can be extremely aggressive and my portfolio should not be replicated by anyone, including me.

I am an amateur investor and this document is a hobby for me. Any thoughts and concepts should be treated as such. Please consult a professional financial advisor before you make any investment decisions regarding your investment ideas, goals, and strategies. Continue reading this document at your own risk…

This report is subject to considerable error and the opinions can change without notice. Neither the information nor any opinion expressed constitutes a solicitation to buy or sell any securities or investments. Do NOT ever purchase any security or investment without doing your own and sufficient research. Past performance is not an indication of future results.

Chapter 1

The Basics

2011 and beyond Taxes

What occurred with the extension of tax cuts would have been nearly impossible to predict. For those who have been living under a rock. A last minute negotiations between the president and the Republicans has yielded a two year extension of the “Bush” tax cuts.

The upside of all this is I can save the taxes going up sections from 2010 and reprint it 2012 with the same dire warnings of how the economy is going come to a stop in 2013!

Please don’t attempt to use this report as tax advice, please help stimulate our economy buy seeking out a destitute tax professional in need of stimulus today. These comments are brief, incomplete and possibly wrong.

2011 Income, Dividends, and Capital Gains Tax rates

2012 will theoretically be the last year for the “Bush” tax cuts and that means that dividend, and long-term capital gains tax rates will remain relatively low: 15% for most investors for the next two year. However, that favorable tax treatment is set to go away on January 1st 2013; again this is subject to change…

|Income tax rates Beginning on January 1, 2013 on Ordinary Income |

|2013 Tax Rate |2011-12 Tax Rate |

|39.6% (+4.7 % healthcare tax) |35% |

|36% |33% |

|31% |28% |

|28% |25% |

Social Security tax holiday

The payroll tax holiday was enacted; meaning employees who pay 6.2% in Social Security taxes out of each paycheck will pay just 4.2% for the next year on wages up to $106,800. So this equates to a 2% raise for most people.

Alternative Minimum Tax

The alternative minimum tax patch continues into 2011 and the exemptions increase slightly. For married joint filers, the 2011 threshold is at $74,450 and $48,450 for single or head of household taxpayers and $37,225 for married taxpayers filing separate returns.

2011 Child Tax Credit

The $1,000 per child tax credit stays in place through 2012 rather than reverting to $500 per child. The credits begin to phase out for singles with adjusted gross income of $75,000 and $110,000 for married couples.

The tax credit of up to $3,000 for dependent care for children under 13 sticks too. If the kids are now in college, the $2,500 “American Opportunity Credit” for the first four years is available for anyone with a salary of $90,000 or less.

Estate Tax in 2011 and beyond

The rate has been lowered to 35% on an inheritance of $5 million or more. If no estate provision had been passed, this number would have been hit with a 55% tax on an inheritance of $1 million or more beginning 2011.

Now-2016 Credit for Residential Energy-Efficient Property

The current tax credit for 30 percent of the cost of installing solar water heating equipment, photovoltaic or fuel cell equipment, geothermal heat pumps or wind turbines in your primary residence or a second home expires at the end of 2016.



Marriage penalty relief

One benefit for married couples are that the Bush tax cuts fixed the marriage penalty. This is also extended through 2012. Before the Bush tax cuts, married couples got better deductions filing separately rather than in a joint tax return. Since then, the standard deductions for joint filers was double than that for individuals. Without these, joint filers with taxable incomes at $57,000 and above would have faced a tax increase in 2011.

Obama Care tax starting in 2013

Starting in 2013, a 0.9% Medicare surtax will apply to wages in excess of $200,000 for single taxpayers and over $250,000 for married couples. Also a Medicare tax will apply to investment income of high earners. A 3.8% surtax will be imposed on investment income with the lesser of their unearned income or the amount by which their adjusted gross income exceeds the $200,000 single or $250,000 for couples. The new law defines unearned income as interest, dividends, capital gains, annuities, royalties, and rents. Tax-exempt interest won’t be included, nor will income from retirement accounts.

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Chapter 2

Market Dynamics

(Predictions for 2011)

Economic Projections

It is time to review world events applying my “opinion” based on absolutely nothing other than my limited understanding of how the world works.

The purpose of this section is to highlight current risks in the market. I will attempt to quickly try to explain my thought process behind each rating.

US Economic Indicators (my view)

US Gross National Product (GDP) Growth > +3.0 % for 2011

My 2010 prediction was for the US GDP was +2.5 and seems to be coming in around 2.8%. This year I am predicting >3.0% in 2011. Most experts are predicting around 2.6% growth this year so I am going out a limb this time by being a tad optimistic. Yes, let it written that I may be leaning toward being optimistic.

The economy seems to be stabilizing and likely to expand this year

Unemployment of falls to < 9.0% by the end of 2011

I predicted 8.5% last and have been one of my biggest blunders since writing this newsletter. The latest unemployment report came in at 9.8% and my prediction was woefully wrong!

Next year is going to be a tough call, but I am going to estimate that we will have unemployment at 9.0% by the end of next year according to my super-secret propriety guessing method. Hopefully, for all of us, I am correct this time.

Unemployment is very high

Federal Reserve holds rates steady or raises interest rates 2011

You can’t lower interest rates lower than zero. I expect that we will keep rates low through 2011 although if I was the Fed chairman I would raise them to 0.5% immediately and consider 2% by the end of the year.

Low rates are good for the market…

Inflation > 2.5% in 2011

I was predicting 3% deflation in 2010 although we engaged in a massive printing of money (Quantitate Easing) I was completely wrong and inflation remained low. The current inflation rate is around +1.8%.

Currently we are not experiencing inflation or deflation and the vast increase money supply seems to have stabilized.

Modest increases in spending by US consumer in 2011

The consumer is slowly recovering.

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This indicator is improving

S&P 500 index hits 1415 in 2011

Corporations were financially stronger coming out of this downturn (except financial institutions) compared to other recessions. I expect the S&P index to reach 1415 this year.

I expect S&P 500 index to hit 1415 by the end of 2011

Stable (+5%) Real Estate prices in 2011

The 30 year mortgage rate is down to 4.97% down from 5.3% beginning of 2010 but much above the lows of 4% last summer. I expect as rates rise people will be forced to act. Real estate will probably never be cheaper and rates will never be lower. Home “affordability” is currently extremely high as long as you can get a loan.

I believe higher lumber, copper, oil and such are going to start having an impact on the cost of new construction (of what little there is) and start pushing up the prices of houses. This will largely be offset by higher interest rates.

Housing prices are stabilizing; interest rates are low

>$1,200,000,000,000.00 ($1.2 Trillion Dollars) budget deficit for FY 2011

Here is another one that I missed last year, I projected a mere $1.0 trillion budget deficit last year but I was wrong and its came in at $1.42 trillion. This year’s US budget spends over $11,000 per person in the US or roughly $45,000 per family of four. Did you get your fair share last year?

I believe thoughtless government overspending is harmful in the long run

International value of the US dollar declining >35% in next 5 years

Long-term, I don’t believe the US can continue to support the current public and private debt burden. In the long term the dollar has no direction to go but down. The combination of poor education, poor fiscal discipline (public and private), and mass retirement only leads me to believe over the next 20 years it would be better to place a significant portion of your investments overseas to obtain better growth and to take advantage of the eventual currency devaluation and fall in local purchasing power.

Bad for dollar based investing; Good for Foreign investments and commodities

Improved Liquidity in 2011

The below chart shows the TED (Treasury Euro-Dollar) spread. This shows the premium that banks must pay over Treasuries to get money. This is kind of like a fear index for the credit market.

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This indicator has improved significantly and near normal!

Technical Indicators

 

Technical analysis is the attempt to forecast the future direction of prices through the study of past market data.  I use Barchart ( ) to come up with an “objective” opinion of an investment.  I say objective since it is a purely mathematical method to project a direction of an investment.  Its primary ability (flaw) is that it tries to predict the future by interpolating from the past performance.  One phrase does come to mind, “Past performance is not an indication of future results”.

 

Model Portfolio and other technical indicators (+100% = strong buy; -100% = strong sell)

 

US Stock              6/31/10      9/30/10     12/31/10    Link                                       

SPY -100% +88% +80 %

QQQQ                  -100% +88%      +32%

IWM                     -80%  +80%     +56%

 

International

EFA                        -80% +80%      +96%

EEM                       -80% +96%    +100%

 

Bonds

TLT                       +100% +64%        -16%

SHY                       +96% +48% -8%

 

Gold/Oil/Dollar Idex/Euro/Yen

GLD                      +40% +96%      +96%

USO                       -80% +48%    +88%

UUP                      +16% -96%     -64%

FXE                       -48% +96%      0%

FXY                      +88% +96%     +80%

 

Volatility Index

VIX index              +80%        -24%      -16%      $VIX 

 

The technical indicators had no surprises for me. It is simply stating that all investments are good except dollar, bonds denominated in dollars, and the Euro. In other words buy anything and avoid western paper money. This is what the poor fiscal situation in Euro and the US yields; weak paper money. These indicators have confirmed my thesis.

Strong for all investments except dollar or euro based investments

The Volatility Index ($VIX) (stock market fear index) `

The Volatility index (VIX) can be thought of as the US stock market fear indicator and the lower it is the lower the fear in the market. The index is currently under 20.

These technical indicators have are positive for all stocks, and for not owning the US dollar.

Chapter 3

The Plan

Every trader reserves the right to make a more intelligent decision today than he made yesterday. - Sheldon Natenberg

Considerations

Quantitative easing – inflation, weak dollar, higher prices

Political – Gridlock, no changes in policy for 2 years

Tax cuts – Better capital flows, potential stock market gains

European sovereign debt – subdued economic growth in Euro zone

Economy

The economy is weak but stable and is likely to remain weak growth and stable through 2012. I would expect unemployment to start falling more quickly in 2012. What could have been a financial depression is turning out to be a deep recession. We are clearly recovering but will have several more bumps and close calls on the road ahead.

Inflation

 

I believe we are already seeing the signs of inflation and that means the prices of everything will go up. All raw commodities are up significantly this year. The commodity price index that I track is up 31% this year with oil up 25%. I am not sure how the government calculates inflation (but I am going to research it) but last time I went to the pump I was seeing some serious inflation.

I believe that this is just the beginning and these increases in raw materials will ripple their way through the economy much faster than the “experts” at the Fed anticipate.

I currently do not own tips due anticipation of all bonds prices falling.

European Markets

Things in Europe still look weak and will remain so for the foreseeable future. GDP growth for 2011 is expected to weak. If liquidity crisis starts back up again it will be initiated by European debt. I shall not make any new investments in Europe for the foreseeable future. I shall not invest in Europe or anything denominated in the Euro’s.

I still own a couple of European bank stocks (LYG and BCS) from 4 years ago

Stock market valuations

I expect the stock market to rise 10 -15% this year and the value of the dollar to fall. Holding dollars under these conditions would be ludicrous (assuming my predictions are correct). I am a buyer of things; I am avoiding US dollars (my savings are in Australian dollars via the FXA).

I am buying anything and everything. I especially like oil plays, India, Vietnam, REITS, and Australia.

The Dollar and US Bonds (the next bubble to burst)

I can’t emphasize this enough… I will not buy nor shall I ever hold US Treasuries Bonds. I am short US Bonds (via TBT). Yields are far too low for the risk being taken, the flight to “quality” and Federal Reserve intervention has artificially driven rates low (bond prices high) and they will fall hard when the recovery begins. I fully expect that interest rates will go up (bonds fall when rates rise) this year.

I am short US bonds via owning the inverse bond fund TBT and I am short put options on TBT.

Muni bonds

The extension of the tax cuts and rising rates are hurting muni bonds. I had a significant amount of these bonds but sold them shortly after the Federal Reserve announced its expansion of the quantitative easing program (QE II). The weakening dollar hurts these bonds, as the economy recovers people are going to move money in the stock market and that will hurt these bonds. The extension of the tax cuts reduces demand for sheltered income and the near bankruptcy of some state and city certainly has a part to play.

I own no muni bonds.

Corporate Bonds

Corporate bonds have a higher yield than Government bonds but I am still shying away from all “fixed” income assets. Something I am considerer is buying corporate bonds and selling (shorting) Treasuries. This would offer some protection from inflation and likely to yield a decent return under most circumstances.

I own no corporate bonds.

Financial stocks

Too risky… Still! I may be tempted to nibble on a few names this year if the economy continues to recover.

I bought a few shares of Goldman Sachs (GS) last year and still hold some shares Barclay’s (BCS) and Lloyd’s (LYG) from several years ago.

Gold

I fundamentally don’t like holding gold because it doesn’t produce any wealth, in fact, usually you generally need to pay someone to hold it for you (safety deposit box) or at least have some insurance to protect from theft.  Most other investments produce some sort of economic activity and generates some revenue, while gold just sits there.

 

I believe that gold is in the process of forming a bubble but the bubble is just beginning.  My experience is that things to tend to go on much longer than I expect so with this mind my target $2200/oz. 

 

I reluctantly am investing in gold and platinum. I am also considering buying some gold mining stocks for the longer term.  I like mines more from a philosophical basis because at least gold mines have creates some economic activity besides storage fees.

The more I look at gold the more I like it. I bought a few gold and a couple platinum coins early in 2010. I believe that is wise for me to have at least 1% of my net worth in gold but not more than 10% under any circumstance.

I own physical gold coins and own several call options on the gold ETF (GLD)

Oil/Energy

Oil has been remarkably resilient. The funny part is that investment has fallen in new fields and if the economy ever recovered then oil could shoot up easily from current prices. If the dollar weakens and/or inflation takes hold these stocks will outperform. I have a long term investment in the Canadian oil company Suncor (SU) that harvests oil from tar sands.

I own shares of Suncor (SU and a couple of drilling companies (PDS and DO).

Domestic Stocks

I prefer stocks that have exposure to the emerging markets and don’t depend as much or Europe or the US. International tech companies seem to be a better play.

I do not own any broad market US stocks or European stocks.

Chinese and Emerging markets

I am still a believer that these markets will drive the world economy over the next 50 years.  I will be investing there based upon these beliefs.  I am waiting for a major pullback to buy China and more of my current investments.  This and energy is where most of my money will be invested for the foreseeable future. 

I do not any Chinese stocks. I own IIF and VNM. I am waiting to buy the FXI and I will be looking at EEM also.

Summary of Mark(et) Economic Indicators

GDP Growth – The economy seems to be stabilizing and likely to expand this year

Unemployment – Unemployment is very high

Federal Reserve Bias – Low rates are good for the market…

Inflation – Currently we are not experiencing inflation or deflation except commodities

Consumer Spending – This indicator is improving

Corporate profits – I expect S&P 500 to be up 10-15%

Real Estate Market – Housing prices are stabilizing; interest rates are low

Budget Deficit – Disastrous

Dollar – Long term bad for US dollar; Good for stocks and commodities

Volatility Index – Down from highs, stabilizing

Technical Indicators – Strong for all investments except dollar or euro based investments

Liquidity – This indicator has improved significantly and near normal!

So… What is the Plan?

What a difference a year makes (or a tax law).

I believe that were will be having real troubles keeping up with oil demand when the world economy was good, as the recovery starts up again oil is going to shoot up again. It is already over $90/bbl already with only a modest recovery.

Longer term globalization has not and will not go away for the next 30 years. But the US has demonstrated its dependency on credit and if we add in the fact that we have a growing budget/dollar time bomb, it still brings me back to the same theme that I have had since the first issue of this report. With my long term view on global macroeconomics and my view of the US macroeconomics of the US debt markets, I have no choice but to invest outside of the US, minimizing my exposure to the US dollar and especially avoiding dollar denominated government bonds …

This year also I plan to reinvest back into dividend paying stocks and continue to buy oil investments, commodities plays, India, Australia, and buy China/emerging markets on any pull back. Add to that my current large speculative option play on gold while being short the US long term bond market (via TBT). I am currently looking at an option play on the eventual collapse of the Euro (buying puts on the FXE). To add the speculative thoughts, I also plan to buy puts on the 20+ year US Treasurer Fund (TLT) and/or calls options on the 2x inverse 20+ year US Treasury Fund (TBT).

And on a final note, since the Volatility index is low I also plan to buy some “insurance” on the stock market by buying very long dated put options. If the VIX continues to fall I may even buy some call options on the S&P 500.

Chapter 4

Investments Ideas for 2011

Short term cash

Australian Dollar Trust ETF

Symbol FXA

Sector Short term Australian currency fund

Risk Moderate

Return Low

Time Horizon Medium Term 6 -24 months

Technical Rating +100%

Tax implications Normal income

Account(s) IRA/medium term savings

This year instead of using the Short-Term Muni Bond Fund (SHM) or Short Term US Treasury fund (SHY) I will now using FXA as a medium term location to earn some interest on my cash. It currently has a 2.5% taxable yield to be paid at the owner’s marginal tax rate.

As the dollar falls this will fund will rise and the divined should increase by the same percentage. The Australian dollar tends to be linked to commodity prices. As raw material rise the $AU should rise also. Too bad the reverse is also true.

Reversed leveraged US Bond ETFs

UltraShort Lehman 20+ Trsy ProShares

Symbol TBT

Sector 2x leveraged short US long Bond EFT

Risk Speculative

Return moderate

Time Horizon Medium term

Technical Rating +8%

Tax implications Consult tax advisor

Account(s) IRA and Taxed

The investment seeks daily investment results, before fees and expenses, which correspond to twice the inverse of the daily performance of the Lehman Brothers 20+ Year U.S. Treasury index. This is what I will use when I decide that I want to short the long bond. This ETF moves opposite direction and twice as fast as the 20-30 year bonds.

Last year I had significant investments in this security and it loss about 25%. I am holding on and it is starting to recover. This is one of my larger investments right now. The technical ratings are somewhat neutral.

Oil stocks

Suncor

Symbol SU

Sector Canadian Oil sands producer

Risk Moderate

Return High

Time Horizon Long Term (36 months – 60 months)

Technical Rating +96%

Tax implications 1% dividend

Account(s) Taxable

This is a Canadian oil company that makes oil from oil sands through mining and in-situ technology and then upgrades it into refinery feedstock, diesel fuel, and by-products. It makes light sweet crude oil/diesel and light sour crude oil/bitumen.

Precision Drilling Trust

Symbol PDS

Sector Oil and Natural Gas Drilling Trust (Canada)

Risk High

Return Very High

Time Horizon Long Term (36 months – 60 months)

Technical Rating +80%

Tax implications Dividend tax rate of 15% does not apply to this instrument.

Dividends are taxed at your normal incremental tax rate.

Account(s) IRA only

Same type of deal here except that you are dealing with a Canadian Trust. This company owns 240 drilling rigs and deploys them around the US and Canada. They make money, pay expenses and distribute the remaining cash. They were paying about 10% a year but have reduced their dividends to conserve cash; once they start again I would expect a 10% dividend and a rocketing stock price.

Knightsbridge Tanker

Symbol VLCCF

Sector Oil Shipping

Risk High

Return High

Time Horizon Long Term (36 months – 60 months)

Technical Rating +24%

Tax implications “Foreign” entity tax rules

Account(s) IRA only

This company allows you to effectively be paid out from its profits from shipping oil around the world. It collects the money, pays expenses, and distributes the remaining money to its shareholders. This stock is volatile in the short run since the “value” moves significantly based on the daily shipping rate and the price of crude. This yields ~7.5 % for now. This company is a “foreign” entity that has some particular tricky tax rules associated with it (which isn’t worth dealing with), so I only will buy it in my tax deferred account (IRA Rollover)

Precious Metals

Gold

Symbol GLD

Sector Precious Metal

Risk Moderate

Return Moderate +

Time Horizon Medium term (3 months – 60 months)

Technical rating +96%

Tax implications Long term capital gain rate of 15% does not apply to this ETF.

Long term capital gains rate for this security is 28%

Account(s) IRA; short term taxed

What this ETF does is allows you to buy gold as if were a stock. Each share that you hold is equivalent to owning a 1/10th of an ounce of gold. The gold is stored in a bank vault in Great Britain. Gold has always been a currency of safety and I believe world demand for this metal is only going to go up as the world gets richer. Also as the US dollar falls gold will tend to go up. I believe that gold will be $2200 per ounce within the next few years.

Some other stocks that I researching and may buy on a stock market pullback.  

Drugs:     AMGN, BMY, MRK, PFE

Tobacco:               BT, MO, PM

Oil/minerals:         CVX, FCX, RTP, SNP, OIH

Banks:               GS, RY

Chapter 5

International ETFs for 2011

2011 Consensuses Economic Growth Forecast by Country

|China |8.9% |Hong Kong |4.4% |Taiwan |

|US Large Cap: |20% |30% |40% |30% |

|US Small Cap: |10% |10% |20% |30% |

|International: |10% |20% |30% |40% |

|Fixed Income: |50% |35% |10% |0% |

|Cash: |10% |5% |0% |0% |

US Large Cap:

SPDR S&P Depository Receipts (SPY) 33%

NASDAQ 100 Trust Shares (QQQQ) 33%

Vanguard Value VIPERs (VTV) 33%

US Small Cap:

iShares Russell 2000 Index (IWM) 100%

International:

iShares MSCI “EAFA” Europe, Australia and Far East Index Fund (EFA) 50%

iShares MSCI Emerging Markets Index (EEM) 50%

Fixed Income (Bonds):

iShares Lehman 20+ Year Treasury Bond (TLT) 25%

iShares Lehman 7-10 Year Treasury Bond (IEF) 25%

iShares Lehman Aggregate Bond (AGG) 25%

iShares GS $ InvesTop Corp Bond (LQD) 25%

Cash:

iShares Lehman 1-3 Year Treasury bond (SHY) 100%

Year to Date Returns

|Name | |12/31/09 Price |12/31/10 Price |YTD Gain % |YTD Gain % w/ |

| |Symbol | | |w/o Div |Div |

|SPDR S&P Depository Receipts |SPY |$111.44 |$125.75 |12.84% |14.44% |

|NASDAQ 100 Trust Shares |QQQQ |$45.75 |$54.46 |19.04% |19.83% |

|DIAMONDS Trust |DIA |$104.07 |$115.63 |11.11% |12.69% |

|Vanguard Value VIPERs |VTV |$47.75 |$53.33 |11.69% |14.32% |

|iShares Russell 2000 Index |IWM |$62.44 |$78.24 |25.30% |26.42% |

|iShares MSCI “EAFA” |EFA |$55.28 |$58.22 |5.32% |6.29% |

|iShares MSCI Emerging Markets |EEM |$41.50 |$47.64 |14.80% |15.66% |

|iShares Lehman 20+ Year Treasury |TLT |$89.89 |$94.12 |4.71% |9.07% |

|iShares Lehman 7-10 Year Treasury |IEF |$88.60 |$93.82 |5.89% |8.57% |

|iShares Lehman Aggregate Bond |AGG |$103.19 |$105.75 |2.48% |6.31% |

|iShares GS $ InvesTop Corp |LQD |$104.15 |$108.44 |4.12% |9.19% |

|iShares Lehman 1-3 Year Treasury |SHY |$82.96 |$83.98 |1.23% |2.27% |

Results for the various “autopilot” portfolios

| |Risk |Balanced |Growth |Aggressive |

| |Adverse | | | |

|’10 Return |11.17% |12.45% |15.53% |16.91% |

|’09 Return |11.14% |19.65% |31.48% |36.54% |

|’08 Return |-8.18% |-18.66% |-33.90% |-39.60% |

|’07 Return |7.82% |9.40% |10.04% |10.45% |

|’06 Return |9.72% |13.63% |19.09% |21.83% |

|’05 Return |5.49% |7.55% |9.73% |11.77% |

|Total return since inception |41.58% |46.31% |44.38% |45.00% |

Those who stayed the course through the crisis would have made most of their money back, if not all it they would have replicated this portfolio. It’s clear that bonds are underperforming and the NASDAQ and the emerging market funds outperformed. What I find odd is that starting in ’05 all four portfolios have, more or less, the same return of about 5% a year.

Chapter 7

Final Thoughts

The Good

Interest rates are low and credit has become more available

The risk of financial collapse has been nearly eliminated

Asia’s economic growth seems robust

Credit spreads and volatility indexes (fear indexes) are near normal

Economic stabilization has occurred around the world

World GDP is projected to be positive in 2011

Gridlock is coming to Washington

New innovations and new efficiencies are creating new wealth daily

The Bad

High US unemployment

Higher taxes in 2013 on capital/production

Oil is moving up faster than expected

The government has grown substantially and no end point is in sight

Iran’s nuclear program and Israel’s 238 thermonuclear weapons

North Korea

Health care reform (taxes on production more resources to consumption)

Housing crisis not over; large segment of population with mortgages and no jobs

Political class that believes that redistribution of wealth is a means of creating it

Quantitative Easing

The Ugly

Exploding budget deficit/national debt due to increased spending

We may be seeing the beginnings of a US Government debt spiral

Potential for US bonds may be downgraded

The European debt spiral has begun with some sovereign debt now rated as junk

California and other state/local governments debt situation/retirement liabilities

The US Social Security time bomb

Final thoughts:

I believe a major economic collapse has been averted and I have been slowly investing the markets. Investments with overseas exposure will be considered first in my portfolio due to higher expected growth rates overseas and continued appalling US fiscal and monetary policies.

The world will have very tight oil supplies one the economy starts to recover and most likely be over $100/bbl by the end of 2011. The main driver of this is that India’s and China’s economies are still growing and consuming more and more oil. Oil may be a tad overpriced at the moment. If oil drops to $65/bbl I will move significant amounts of capital to this space.

When everyone was borrowing I was saving and now that everyone is savings it is time for me borrow. I bought a house last year, this not so much of me being in love with real estate but has much more to do with tax avoidance and a back door method of taking advantage of potentially higher interest rates and future inflation. Some day you will tell people that you could have locked in that 4% thirty year mortgage but you didn’t take advantage of it. It will never be that low again!

This is the conclusion of my report, I hope to get the next report out by April 3rd 2011 and entertain you with my new thoughts and reflections. Please send any questions, comments or topic ideas for future issues to me via email. GOOD LUCK!!!

Happy New Year,

Mark Rush

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