The Rush Report



The Quarterly Market Rush Review

Q2 2007

By

Mark Rush

redgroup2@

July 1st 2007

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Disclaimers

Please keep in mind that I am not a financial advisor nor do I have a degree in economics or finance. Keep these facts in mind as you read and consider my unprofessional opinions… This is a hobby for me; continue at your own risk…

The purpose of this document is to stimulate thoughts about various investments strategies and ideas. You or your financial advisor are responsible for making your investment decisions and you need to decide if any ideas presented in this document complements your own investment goals and objectives.

Nothing in this document should be construed as tax advice or estate planning. Tax laws change often and any thoughts I may have on the subject are likely to be dated or obsolete. Before you attempting to implement any tax strategies you should consult a tax professional.

All thoughts and strategies are based on the assumption that the reader invests from the United States using US dollars and pays US taxes. All comments and views are from an American investment perspective. Many strategies consider US tax implications and currency exchange rates which may not be valid when not using US dollars.

I reserve the right to change my strategies and investments between reports without notice. My own investment strategies can be extremely aggressive and my portfolio should not be replicated by anyone, including me.

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

You are responsible for making your investment decisions and if anything presented in this document fits into your own investment goals and objectives please feel free to incorporate into your own strategies. I am sharing some of my thoughts with you but you ultimately need to make your own judgments about accepting or rejecting these concepts in your portfolio strategies.

Prologue

Welcome to this edition of The Quarterly Market Rush Review where I will attempt to briefly examine various financial markets and world trends. This is my time to reflect on stock strategies, current events, my personal portfolio performance, world events and their implications on investments.

My intent is to have each person that reads this document come away with at least one new idea regardless if they are just starting to invest or if they are using advanced trading strategies. I don’t expect each section to appeal to each reader.

As read through this review, even if you disagree with my thoughts, please take the time to think about your financial situation and think about ways to improve your situation. It is my goal in life to have my money working for me instead of me working for my money.

Feel free to email me with your thoughts, questions, and insights on the opinion that I put forth. One of the purposes of this document is to stimulate a dialogue around current events and their impacts on investing.

Introduction

The core commentary of this edition will be smaller than my typical reviews, especially in the area of new investment ideas. Normally I spend a few hours each week reading and analyzing the market during the quarter and then I will write a page or two every couple of weeks. During this past quarter I had to have some surgery to repair some faulty body parts that were injured while skiing this past winter. I managed to only miss about a week of work in total but it took about 8 weeks in all to get to a complete recover. Something had to give in life and my investments and this report are what suffered.

Unfortunately I picked a bad quarter to be lazy since the S&P 500 moved up 8% while I was on the sidelines. One of the great things about writing this report is that it forces me to look at how I am doing and it has reminded me that I was very negligent with my portfolio for the past few weeks. Now that I am recovered and I am starting to get back in the routine of life I will start putting the effort back into effortless investing.

Please give me feedback on what you think of the shorter report. I have been toying with the idea of only doing the full blown report at the end of the year and shorter reports each quarter to avoid repetition. Your feedback will help make the review better.

Regards,

Mark Rush

redgroup2@

Chapter 1

Market Indicators

Introduction

Last quarter I was nervous about the sudden drop in the Chinese stock market, the housing market, and the Yen carry trade unwinding. To add to that list, this quarter I am also concerned about what I feel is the poor economic policies path that the US seems to heading toward and more importantly the rise in long term interest rates.

The markets recovered quickly from the dip last quarter but now I find stocks are materially higher and the basic economics are about the same if not slightly worse. Most of my investments during the past quarter were in cash/short term bonds but I don’t want to miss out on potential continued market gains. On the other hand I don’t want to get caught if there is a sudden sell-off because the market is overpriced. I am stuck in the classic investor’s dilemma of fear and greed…

As I stated in my last report I plan to start getting into the market in September, so at this point I plan to slowly buy overseas stock and a few US stocks. I have been waiting for a dip and it never came, so I will slowly enter the market and expect to 80% invested by the time the next report comes out. Since the bond market jittery and since I don’t fully understand the direction of bonds, my uninvested cash will be in either money market accounts or in foreign currency ETFs. I will not be buying any bonds at this point.

Interest rates

The biggest “new issue” since the last report is the rising interest rates of the 30 year treasury notes.

Long term interest rates have been going up ever so slightly as of late. On the next page is a graph of the yield on the 30 year treasury going back to 1975. I drew a trend line starting around 1982 at about a 45 degree angle to the present day. My real concern is that long term rates have broken though that trend line that has gone back until 1982 (you could have been earned 14+% a year guaranteed for 30 years by buying Government Bonds in 1982)…

The yield on bonds have been dropping for nearly a generation, it has been the preverbal tailwind to this investment for years. For the conservative (wise) investor there has always been an incentive to invest in bonds now because rates were very likely to be lower tomorrow. If that paradigm were to change it would discourage bond holders from engaging in long term lending which is necessary for long term economic development.

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The question is what is causing the change in a 25 year trend? I am honestly still trying to figure this one out but I do have some theories. Maybe by the next report I will have a better explanation but here is the list of things that I have though of so far that could be causing higher interest rates.

• Bond investors may be expecting higher inflation in the future.

• Bond holder are looking for higher returns in other instruments

• Private equity deals are soaking up a lot of excess cash

• Foreign Central Banks are looking for alternative reserves to the dollar

• Good world wide economic data suggest other investments are better

• The falling dollar makes holding US bonds unattractive at current yields

• China is trying to diversify its trillion dollar investment portfolio

• The Euro offers an attractive alternative to the US Bonds

• Expectation that all central banks will continue to raise rates

• The previous bond yields were just too low

• Partial unwind of the Yen carry trade hit US bonds yields

• The meltdown in subprime lending has made buyers of bond nervous

• Asset inflation are being reflected into bonds

• Fed tightening over the past few year has found its way into the longer term bonds

• The beginning of baby boomers starting to live off of their savings???

• A little of all the above….

What does this mean for you and me? If this is just a blip up or rates don’t move up too much from here then it’s not necessarily a horrible thing, but if rates develop a new pattern over the coming years of constantly going up then that scenario is of great concern to me.

The worst case scenario (and highly unlikely) is it could create a viscous cycle for the government and consumers because they would always be paying more and more each year to service its existing debt. It would mean a steady decay in the value of housing, increase in taxes, further erosion of US dollar, and reduce consumer confidence. All in all it would mean a fall in the standard of living due to more resources being needed to service debt and those who loan us money being more reluctant to loan that money. We are a nation of borrowers and our current standard of living is based on cheap money.

Bottom line - after looking at all the current economics I am not too worried about the higher yield. Bond yield probably have been too low given the relative wealth creation and rise in commodities and assets prices around the world. I think it may be a beginning of a new trend of no longer falling interest rates but I don’t think that we are going to be marching back up to 14% yields any time soon. We need to add this to the list of things to watch and I am will get very nervous if rates go over 6%. I’m not too exited about it for now but long term yields will need to be monitored very very closely.

Housing Market

The housing market continues to be a drag on the economy. I am still thinking that we have at least 1 to 1 ½ years more of downside in the housing market. But I must point out that not all markets in all parts of the country are taking a beating (TX, NC, VA and OR being some exceptions) but overall it is a drag on the general economy.

The market has made realization that too many people took out adjustable rate mortgages while the Fed was in the process of raising rates (this was pointed out in Rush Review last year). How does the lending industry correct for these past sins? The lending industry will simply raise the requirements needed for new mortgages going forward. Remember nearly 20% of all new loans last year were “subprime” loans and now those individuals are facing a pull back in new loans and rising interest rates are going up. If you were a subprime borrower and your plan was to flip to a fixed rate mortgage once rates started going up, you now may be ineligible to get that new fixed rate loan. You are therefore stuck with an old loan with raising rates and it is very likely that you put very little (if any) money down on the house. This is a sure recipe for defaults and this has yet to come to full fruition.

On top of that, longer term interest rates are rising (the banking industry typically using 10 year treasuries to as a base for fixed rate mortgages). Bond investors are also demanding higher spreads on mortgage-backed securities due to uncertainty over the housing market and the subprime lending issues.

Interest rates are going up...

• Millions of adjustable rate mortgages are being adjusted with higher interest rates.

• Lenders are less willing to lend to subprime borrows (20% of the market).

• Home builders are still dumping inventory to raise cash.

• Fewer people can refinance existing loans because tighter credit standards

• Many people won’t be able to service their balloon payments

• More houses on the market due to foreclosures

• Increased housing supply with less qualified buyers (demand)…

Therefore…

• Housing price will continue to go down

Fortunately for us the rest of the economy is strong enough that this is not a devastating blow to the economy. Jobs and consumer spending continue to be strong and at the end of the day a foreclosure is not the end of the world if someone is gainfully employed. They loose their house (which they very likely had little money in) and become renters and the burden of debt is gone once the foreclosure is completed. After they have restarted their life, less one house, they can live a relatively normal life as long as they are gainfully employed. Not owning a house and having job is much better situation than having a house and no job.

Terrorism

Recently we have seen plots to blow up JFK and in UK the two car bombs discovered this week and an attack in Scotland. None of these attempts represented a real threat and these people, in my opinion, were just amateur “want-to-be” terrorist with no real terrorist links or backing. The problem is someday a “want-to-be” terrorist is going to be bright enough and motivated enough to actually pull something off that is truly devastating vs. someone who thinks simply putting a lot of gasoline in a car will yield a serious attack on western civilization.

We should see a little market sell off on Monday to remind us the world is not safe, but the market will forget about this incident in about a week or two. This is the new paradigm of investing; terrorist attacks will be part of the investment landscape for the foreseeable future and in general are in general are of little consequences for long term investing.

We have spent hundreds of billions on the war on terror to try to prevent potential billions in damage. It is, in a word, inefficient. We would make more progress by giving them MTV and McDonalds, cultural imperialism works and it is what they fear.

China

During the panic of last quarter the market sold off the Chinese ETF (FXI) and it got as low as $90/share. That same ETF is now trading just under $130. I sold my shares but kept my $150 calls which have worked out for me. The Chinese stock market is really the story of two stock markets, one is for Chinese citizens the only locals can buy, and the other is for international investors. The Chinese government is in the process of trying to deflate the local markets “irrational exuberance” with some limited success.

Another change in direction we have recently seen from the Chinese Government is that China recently gave the Blackstone group $3 Billion to invest for them. Traditionally the Chinese have held US Treasuries, roughly $1 Trillion (that is a T as in $1,000 Billion) but recently have decided to “diversify” its holding. I believe the expectation that a reduction in buying of bonds by the Chinese is partially responsible for the raise in long term interest rates.

China will continue to be an attractive place to invest for those who have the stomach for volatility for foreseeable future. A lot of market pundits expect their market to drop after the 2008 Beijing Olympics… I expect that if that were to occur, it will be the great buying opportunity of a life time.

On a side note, as I have stated before, I believe in the near future China will become the world’s largest economy. It not there yet but it is now the world’s largest producer of CO2, even outstripping the long term champion the United States. We are no longer the world’s biggest contributor to global warming. I expect in the next few decades this will only widen and the Chinese will dwarf the US and Europe combined by 2050.

US Economic Indicators (my view)

This section will review various indicators with my opinion of the probability of the event occurrence 0-100% and the impact on markets on a 1 to 10 scale. A “1” represents little to no impact on the markets while a “10” indicates that if the event occurs I expect a widespread sustained market change in investment climate.

US Gross National Product (GDP) grows stays above 2.5% for rest of 2007

Probability of Occurrence 50%

Impact 6

Outside the housing market the economy is strong. On the down side, energy prices, raw materials and food prices and interest rates are rising. I will be on the watch for when gasoline breaks $3.50 and any further raise in interest rates.

Also we need to watch if the dollar falls too much too fast. It may be good for our exports but let’s face it we import a lot more stuff than we export. A low dollar is inflationary since you will need to pay more for the things manufactured abroad.

If the dollar falls too much, foreign money will also leave the US and this will drive up interest rates (I believe we are seeing some of that already). I think the Fed will have to raise rates to prevent the dollar from falling too much.

The slow growth in economy is neutral for the market

Low unemployment

Probability of Occurrence 80%

Impact 7

The housing slowdown and layoff in the auto industry hasn’t seem to hit the unemployment numbers as of yet, I don’t really foresee a massive unemployment explosion. If employment stays strong, I believe this will get us though the current economic weakness. The graphics aren’t mine; they are your tax dollars at work.

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The low unemployment is a strong positive for the market

Federal Reserve raises interest rates this year

Probability of Occurrence 65% up from 50% in the last review

Impact 6

For now this is a neutral indicator but if any change in rates occurs this will be a negative indicator for the market. I believe that either a raise in rates (bad for investing) or a lowering of rates (this indicates that the Fed believes the housing market situation is serious) will be a negative for the market. I think the Fed is bias toward raising rates but I believe that the bond market is doing all the heavy lifting for the Fed at this point so they will keep rates at 5.25%

Fed Action is neutral for the market

Long bond yields rising is a negative for the (stock and bond) market

Inflation exceeds 3%

Probability of Occurrence 40%

Impact 7

Three forces are at work on this question; World production is producing more goods and services at cheaper prices, strains on world raw materials is causing higher raw material prices, and the falling value of the US dollar therefore the vast amount of products imported will cost more… So two items for higher prices and one for lower, I am voting for slight inflation next year due to the falling dollar being we are a net importer. Therefore the Fed will need to raise interest rates which will be bad for the US markets.

The falling dollar is causing mild inflation in the US; this is a negative for the market.

Continued strong spending by US consumer

Probability of Occurrence 50%

Impact 6

I think this is a much more important indicator that it was a few months ago. What I fear is that as the subprime mortgage fiasco will work its way through the lending system and all types of sub prime lending will be affected, including credit cards. A great many American consumers are not prime borrows. This indicator is to be watched with vigilance!!

So far this is a positive but I believe this indicator is weakening

Corporate profits exceed YoY growth of 10%

Probability of Occurrence 30%

Impact 6

It is general consensus on Wall St. that corporate profits will slow down in rest of 2007 which seems reasonable to me. I believe that corporations will not drag on the economy but won’t add as much as it has in the past few years. Profits are not falling; they just aren’t growing as fast.

Profit growth is down; this is a slight negative indicator

Real Estate prices drop greater than 10% in 2007

Probability of Occurrence 10% (down from 40%)

Impact 6

The prediction is clearly not coming true for a good part of the country. While prices have fallen, it is only been a few percent. I think we will get at least a 5% reduction this year and another 5% reduction next year for a total of 10% drop in the market.

Below is a chart of 30 year mortgage for the past 5 years. Currently the 30 year mortgage rates have jumped up to 6.29% from 5.72% in the last report, which in the scheme of things it a fairly large jump in 3 months.

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Now lets look at the implication of the small change in interest rates, at 5.72% a $100,000 loan will run $581.67/month while at 6.29% rate that same loan will run $618.32/month. Now you may be thinking that is only a $36/month change but let’s look at it from the perspective of home prices.

An important point to remember when people are shopping for a house is they don’t look so much at the cost of a house as much as they look at their monthly payments and what they can afford (or more accurately what they can borrow). Say a married couple can afford $1500/month maximum for a mortgage. With the last quarter’s rate they could spend $257,878 on a house (for simplicity sake they are financing 100% of the house). With the new higher interest rates they can now only borrow $242,593 for the same $1500/month payment. Assuming they are looking at the same house at different points in time they now must offer $15,000 less for the same house than they could have just three months ago. This small change in monthly payments equates to a 6% drop in the offer price they are able to summit for the same house for a very small move in interest rates.

Watch longer interest/mortgage rates, it can really cripple an already weak housing market.

This is a big negative and if mortgage rates go higher it’s a HUGE negative

$1,000,000,000,000.00 (Trillion Dollars) Trade deficit by 2010

Probability of Occurrence 50%

Impact 3(short term)

That is not a typo, T as in Trillion not B as in Billion. Last year we imported $763.6B. [pic]

Yes this is a bad thing also…

International value of the US dollar declining >20% in next 5 years

Probability of Occurrence 75%

Impact 7

Although the economy has grown over the past few years I don’t believe it can continue to support the current public and private debt burden. I believe that 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 a fall in US purchasing power.

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As you can see from the above chart, in 2001 it took about 85 cents to buy a Euro, today it takes $1.354 (about a 40% drop in the value of the dollar in the past 6 years and 1.8% drop since March) and I don’t foresee this trend changing anytime soon.

There was I time in my life when I thought I would move out of the US and leave my money invested here. It looks more and more that I may have gotten this scenario backwards; I should send my money abroad and getting superior returns due to world economic expansion and then get a currency devaluation kicker when I bring the money back into the US. As the dollar falls my money overseas is worth more.

This is a negative indicator.

Congress attempting to mess up the economy

Probability of Occurrence 95%

Impact 4

Congress is attempting to tinker with the economy and it will most assuredly have the most negative of consequences if it is successful. It despises big business, it wants to alienate China, attempts to prevent immigration, rollback free trade, raise taxes and attempt to redistribute resources that we can not afford. I believe that the more you attempt to control the economy the more you hurt it; it is in EVERYONES interest to have a strong growing economy. Lower taxes will help keep the economy and robust economic opportunities will help far more people than any government program.

Readers of my review know that I carefully consider the tax implications for any investment decision that I make. Any changes in the tax code will most assuredly change my investment behavior and the revenue stream that the government receives from my success. Current tax law encourages me to attempt to make money and allows me to change my investment strategies without a burdensome tax hit if I hold an investment for a year or more. I can afford to cash out of a position, pay taxes and move to a new investment. This tax policy allows me to change investments, adds liquidity to capital markets, thereby keeping the capital markets efficient.

An aggressive tax structure will mean that I will put my money into and investment and never move it, thereby never paying taxes. In my case, higher taxes will likely lower the government’s net revenue and this means a less efficient deployment of capital hence a weaker economy. It will likely reduce my returns, lower the government’s revenues and make the capital markets less efficient; therefore everyone gets less.

Again, how can this be good for the investor/economy?

Continued large world excess in liquidity (upgraded from 70%)

Probability of Occurrence 80%

Impact 8

Globalization has created unprecedented wealth and it is sloshing around the planet trying to find a home. Prices of investment instruments to put this capital to work will continue to rise as more and more wealth is created each day and must be put to work. Stocks and bonds are a commodity with a somewhat fixed supply and each day that demand for those products increases as more wealth is created wanting those products.

We need to watch a potential credit crunch in the US and we need to watch international money flows such as the Yen carry trade. This is a very very positive indicator

Overall Indicators

GDP Neutral/slightly positive

Unemployment Excellent

Interest rates Good/Weakening

Inflation Good/Weakening

Consumer spending Great

Corporate profits Neutral /Strengthening

Real Estate Bad

Trade Deficit Bad

Value of the Dollar Poor

Political climate Weakening

Liquidity Excellent

Over all the most important indicators are liquidity and jobs and both those indicators are good. The other factors are a drag on the economy but they are not dominating it.

Side note: I think I should work on a calculation/model to quantify these opinions for the US and world investment climate and see how it performs vs. stock returns. If anyone knows of a public index that they can pass along please send it to me.

Chapter 2

The Plan

Positives

• Growth in the developing world continues to grow at an unprecedented rate that is contributing to a massive increase in world wealth

• Growth in Europe and Japan is picking up

• So far the housing bubble unwind isn’t affecting the economy as much as I feared

• Interest rates remain relatively low (but are rising?)

• Unemployment is low

• We have a very competent Federal Reserve

Negatives

• A potential rise in interest rates on the longer maturity bonds

• The unwinding of the housing market

• High energy, metals and grain prices (inflation?)

• The new Congress seems tempted to fiddle with the economy

• Congress alienating China

• Executive branch alienating everyone else

• Volatile emerging markets assets

• Lower corporate profits growth rate this year

• Dollar is weakening

• Trade imbalance

• Budget deficit

• Potential of consumer credit crunch due to multiple factors

• Terrorism

What is the Plan?

After I got run over by the market last quarter, I’ve decided to try to be more optimistic about market… after all if you were always optimistic about the market for the past 10 – 20 years you would have been rewarded quite handsomely.

My problem is that once again I find something going on in the market that makes me nervous, the rise in long-term interest rates. I am sticking to my original thesis that you need to have a significant portion of you investments outside of the United States or investments within the US should be in corporations that have significant exposure to the world economy.

I am not fully invested in the market at this point but am going to reluctantly start buying sometime before the next report.

Chapter 3

Domestic Investment Ideas for 2007

I am still recommending avoiding individual stocks and I am emphasizing more focus on ETF and indexes. As I start to follow my own advice, my portfolio should start to look more like the advice that I dispense.

As I pointed out in my introduction I didn’t accomplish much research into the individual stocks during the past quarter so I don’t have a lot of new stuff to add.

Security Name Oil Services HOLDRs

Symbol OIH

Sector Oil and natural gas services ETF

Risk Moderate

Return High

Complexity Simple

Time Horizon Medium term (6-18 months)

Tax implications Dividends are taxed 15% rate

Account(s) IRA and Taxed

The need for new sources of oil is well established and there is a bidding war to get projects developed. This group is the equivalent to the guys who sold the picks and shovels during the California gold rush. I find this group under priced and expect strong growth for the next couple of years. This is a play on commodities, so this stock will peak someday and will need to be sold before oil prices reach a new equilibrium.

This ETF seeks to diversify your investments in the oil service industry through a single, exchange-listed instrument. The investment holds shares of common stock issued by specified companies that are involved in the oil service industry. There are currently 18 oil services companies included in this ETF.

Security Name Diamond Offshore Drilling (repeat)

Symbol DO

Sector Oil and natural gas drilling company

Risk High

Return High+

Complexity Simple

Time Horizon Medium term (6-18 months)

Tax implications Dividends are taxed 15% rate

Account(s) IRA and Taxed

About once a year I stumble across a company that I find a hard time believing the forecasts and this is one of those companies. This company has been trading between $70-$90 dollars for the past year but its earnings are expected to grow this year by 50% and again its profits are likely to go up another 50% in 2008!!

So you want to find some oil out in the middle of the ocean? These are the guys you are going to have to call to get the job done. This company is deepwater oil and gas drilling contractor. The company owns and operates a fleet of 44 offshore rigs. Its customers primarily include oil and natural gas companies and business is darn good.

This phenomenon is not only limited to Diamond Offshore, it is affecting the entire sector. Other stocks to research are Transocean (RIG) Noble (NE) and GlobalSantaFe (GSF). The Oil Services HOLDRs (OIH) ETF is a good diversified way to play these names and along with others in this sector. Diamond Offshore is my stock of the year…

Security Name Deere & Co (Repeat)

Symbol DE

Sector Farm Equipment

Risk Moderate

Return Moderate

Complexity Simple

Time Horizon Long term (6 - 36 months +)

Tax implications Dividends are taxed 15% rate

Account(s) IRA and Taxed

So you want to grow some corn to make some ethanol? These are the guys you are going to have to call to get this job done. Deere & Company manufactures and distributes agricultural and commercial equipment worldwide. As the grain prices have risen getting more out of each acre has become more and more important. That’s where these guys come in. Also as the world becomes richer, more third world countries can afford farm machinery.

I think that I am a little late in recommending this one because the stock has already run up but earning should grow by 30% next year. But I believe that it has longer term legs than my previous pick, this stock had more potential for sustained earning for many years to come. Also this stock pays a modest 1.6% dividend

Other Names

I am reluctantly pointing out Intel (INTC) and Sysco Systems (CSCO) again. I believe that we are starting a new tech cycle upgrade (albeit delayed after the release of Microsoft Vista). The risks are high but they have a great deal of their exposure to overseas market. Both these stocks have had good runs of late but I believe there is more upside but these investments tend to be much more volatile that most stocks.

Chapter 4

International Ideas for 2007

2007 Economic Growth Forecast by Country

|China |9.4% |Ireland |5.3% |South Korea |

|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% |

Year to Date returns based on risk tolerance

| |Risk |Balanced |Growth |Aggressive |

| |Adverse | | | |

|YTD Return |3.72% |5.75% |8.45% |9.57% |

|YTD implied Annual Rate* |7.44% |11.51% |16.91% |19.14% |

*YTD return multiplied by 2 to give an annual return if current trend were maintained

Recommended Investment breakdown by Category

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 Breakdown by Investment

|Name | |12/31/06 Price |Current Price |YTD Gain % |YTD Gain % w/ |

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

|SPDR S&P Depository Receipts |SPY |$141.62 |$150.90 |6.55% |7.41% |

|NASDAQ 100 Trust Shares |QQQQ |$43.16 |$47.60 |10.29% |11.21% |

|DIAMONDS Trust |DIA |$120.90 |$134.20 |7.87% |8.65% |

|Vanguard Value VIPERs |VTV |$68.23 |$71.89 |5.36% |5.98% |

|iShares Russell 2000 Index |IWM |$78.03 |$82.96 |6.32% |6.52% |

|iShares MSCI “EAFA” |EFA |$73.22 |$80.77 |10.31% |10.31% |

|iShares MSCI Emerging Markets |EEM |$114.17 |$131.65 |15.31% |15.31% |

|iShares Lehman 20+ Year Treasury |TLT |$88.43 |$85.17 |-3.69% |-1.78% |

|iShares Lehman 7-10 Year Treasury |IEF |$82.44 |$81.09 |-1.64% |0.24% |

|iShares Lehman Aggregate Bond |AGG |$99.70 |$98.36 |-1.34% |0.65% |

|iShares GS $ InvesTop Corp |LQD |$106.68 |$104.58 |-1.97% |0.26% |

|iShares Lehman 1-3 Year Treasury |SHY |$79.96 |$80.16 |0.25% |2.05% |

The above chart shows the YTD results of the various “core” ETF that I recommend for each individual, these returns are with and without dividends. As you can see the just about everything has done very well this year (so far) except bonds. The most notable returns are both foreign funds and the NASDAQ index.

What we can see from this is that bonds are loosing value and the monthly dividend check is just barley keeping up with the loss of underlying value. The question is will this trend remain or is this a good time to buy bonds with the yields higher??? That is the multi-trillion dollar question!!

Chapter 7

Final Thoughts

Highlights:

I am very unsure about where the market will be moving over the next couple of months; I thought the market was high last quarter and now its 8% higher. I am going to slowly raise my investment level by using overseas instruments during the upcoming quarter because I don’t want to miss out on the “free” money. This could be a big mistake.

I am watching for a precipitous fall in imports, tax receipts, and/or reduced sales at retailer. I am now watching that the long (30 year) bond doesn’t go over 6%. Any one of those events will be my signal to get out of the market. It could be next month, it could be this time next year, and it could be never.

Watch interest rates. This could be a real concern, if the 30 year bond stays under 6% we should be in good shape, if it starts to go lower again all stocks and the housing market will likely get stronger. If yields go over 6%, sell stocks buy bonds.

The Good

• The world is experiencing unprecedented economic growth due to globalization

• The world is getting richer and creating a lot of new wealth, for everyone

• So far the housing bubble unwind isn’t affecting the economy as much as I feared

• Unemployment is low

• We have a very competent Federal Reserve

The Bad

• Western populations are shrinking due to low birth rates (except the US)

• The unwinding of the housing market

• Higher energy, metals and grain prices (inflation)

• Long term US investment climate may change materially in 2008 and 2010

• Lower corporate profits growth rate this year

• The Dollar is weakening

• The Trade imbalance

• The US Budget deficit

The Ugly

• Social Security will eventually cause a hyperinflation sometime within 30 years

• The US Government borrows too much money and its citizens don’t save enough

• The new Congress doesn’t seem to understand basic macroeconomics

• Potential of consumer credit crunch due to multiple factors

• War! What is it good for? Absolutely nothing.

Things to know

• Long-term interest rates have been going up

• Oil and grain prices have been rising

• The investment world looks slightly worse off than it was during the last report.

• Have I ever told you to know everything you can about China?

• France may be the very early stages of a economic transformation

This is the conclusion of my abbreviated report, I hope to get the next report out October 1st and entertain you with my new thoughts and reflections. Please send any comments or topic ideas for future issues. GOOD LUCK and good investing!!!

Regards,

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Mark Rush

951 Fell Street #513

Baltimore, Maryland 21231

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