The Rush Report



The Quarterly Market Rush Review

Q3 2007

By

Mark Rush

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September 30th 2007

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Preface

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

My intent is to have each person that reads this document come away with at least one new concept 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 thesis, please take the time to think about your financial situation and think about 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.

Feel free to email me with your thoughts, questions, and insights on the opinion that I cover. One of the purposes of this effort is to start a dialogue around current events and their impacts on the markets.

Regards,

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Mark Rush

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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.

Introduction

This past quarter certainly had more excitement than I would have ever liked to see in the investment world. The world financial market had a massive jolt caused by the US housing crisis and many major institutions shuttered. For a few days liquidity almost dried up and the various Reserve Banks around the world were required to inject hundreds of billions of cash back into the financial system to prevent worldwide credit collapse. This was certainly the most serious shock to the financial markets since 2001. It will go down history along with 1987, the S&L crisis, and dotcom bust.

I think this past quarter will go into the history books, not so much as what happen (and what is still going to happen) but what could have happened. I have been bearish the market for a while and even I was stunned at the how serious the situation had become. Looking back, all the signs were there, in previous reports I have been talking about the housing market, the Yen carry trade, and especially the sudden and unexplained raise in interest rates. Yet even I did not get out of the way of this market because I thought that globalization would trump all other concerns.

Fortunately when the market began to fall I only had 50% of my portfolio invested in stocks but, as I have often recommended in this document, I also owned some S&P 500 index puts (a type of portfolio insurance). Owning these puts cuts portfolio performance over the long haul but it sure does help you sleep at night when the world is imploding.

The other big news was the Federal Reserve Bank lower rates and to no ones surprise the dollar immediately fell like a rock. For you that have not been following international currency trading, the dollar is at all time low against the Euro and the Canadian is now worth the more than the American dollar.

The big question is where do we go from here? Is it over? Should I sell what is left of my portfolio? Is the world financial markets about to unwind and is all money going to become worthless? Should I sell my house and move the hills will a car full of camping supplies with trunk full of dehydrated food, gold and your trusty shotgun?

Well obviously the world has changed dramatically for investments. This liquidity crisis is not over by any stretch of the imagination but the world continues to grow and the crisis is to some degree limited to the US (which I find funny that the dollar initially jumped when the US lead meltdown caused people to engage into a flight to “quality”)

I have given some thought to these complex issues and hopefully I will be able to give the readers something to think about…

- Mark

Chapter 1

The Basics

(Vastly over simplistic answers to very complex questions)

What the hell is a hedge fund and how do they make money?

A hedge fund is typically a small group of unregulated financial professionals that manage large sums of leveraged capital. Each hedge fund has their own methods for making money but typically it involves some sort of leverage. When I talk about leverage I am typically talking about borrowing money at cheaper rates and investing it at higher rates. Borrowing money is just one way of achieving leverage; some of the other ways are to sell stock short or trade in options market.

One example of leverage is the Yen carry trade; let’s suppose XYZ wants to start a hedge fund and it goes out and raises a billion dollars. They sit around and think about how to invest that money and any traditional method only gets them the standard 5-10% that you and I get for our money. Normal market returns will not get you that house in the Hamptons or pay for your new Ferrari. Since a majority of your compensation as a fund manager is based on getting 20% of the profits how could your team possibly live on a mere $10-20 million a year?

The answer is leverage. Say you go to a bank in Japan and say they currently are loaning money at ½% and you show the bank manager that you are a hot shot hedge fund manager and have a billion dollars under management so they graciously loan you $9 Billion!! So now you have $10 Billion dollar so you go out and buy some US treasuries at 5%. Walla… you now have moved out of the upper middle class…

Once we do the math, we can see that $10 billion dollars invested at 5% yields $500 million but you owe the Japanese bank $45 million in interest payments. Let’s add some currency hedging cost to the mix to bring the total expenses up to $100 million. So, after we run the numbers, the fund has a billion to invest, they borrow $9 Billion at a cost of a $100 million a year, they invest $10 billion in US bonds at 5% to yield $500 million/year, net profit is $400 million, standard fee is 20% therefore you and your crew earn $80 million dollars… The investor is happy because, unless there is a global meltdown in credit, they get the remaining $320 million on a billion dollar investment or 32% return on their investment. If properly executed, you can consistently outperform the market.

How do you and I invest in such hedge funds since $10,000 invested at 32% for 20 years yields $2.5 million? You can’t: your government has determined the average investor isn’t sophisticated enough to earn these kinds of returns and the “retail” investors are forbidden. You literally need to be a millionaire to get these kinds of return. If everyone could jump in these kinds of investment the margins would go away, thank goodness the government is reserving these kinds of wealth creation vehicles for only those who are able to deal with kind of wealth. To save time and effort I will save the rest of my libertarian speech for another issue of the Rush Review.

Should I pay off my house?

Some of my readers are fortunate enough to have reached that point in their life when they can safely ask the question, “should I pay off my house”? It is a legitimate question that hopefully all of us will be fortunate enough to ask some day. Although I haven’t owned a house in nearly 5 years, I will give you my thoughts if it were me, each person needs to balance what they want out of life and come to their own conclusions.

Obviously this can be a material change to your lifelong financial situation (potentially better or worst) so I highly recommend talking to a professional financial advisor prior to even contemplating this strategy. This will likely be one of the most important decisions you make in your life and if you were just to borrow money to partake in more conspicuous consumption, I would say “pay off your house”!!!

Me personally if I were in this situation, I would refinance my house and take out a 30 year loan fixed interest rate loan and use that money in the stock market.  I would only borrow the lesser of 80% (to avoid PMI insurance) of the home value or borrow only enough so that I could easily afford the new mortgage payments so that the payments actually becomes more of a forced savings plan. 

 

In this situation I would think about diversifying my asset base by having property, stocks and some tax deductible debt.  In my personal opinion, under certain conditions debt should be considered an asset as a hedge against higher interest rates/inflation.  Why do I think that housing debt is good and think that any other type of debt is bad? Because I believe that housing debt allows your wealth to work for you at higher returns while the government gives you a tax deduction. Normally borrowing money is a very bad idea (except houses and some student loans) but since the tax code subsidizes this kind of borrowing it can make sense to do this under certain conditions, especially if you are in a higher tax bracket. 

So its time for one of my example with too many numbers in it, lets say I make $50,000/year and my take home pay is $3000/month after taxes. I live in a house a bought 15 years ago that cost $100,000 but is now worth $300,000. Current mortgage payment is $500/month.

In this case borrowing $240,000 would be kind of foolish since the mortgage payment would be nearly $1200/month. Under this circumstance I would likely only recommend borrowing half that amount ($120,000) so the payments are around $600/month (close to what you are already paying).

I then would take the $120,000 and invest it in the stock market. Personally I would choose some higher dividend paying stocks for two reasons. First if done right you could receive several hundred dollars a month in dividends. Second if the market were to fall radically, high dividend paying stocks tend to drop less. The type of stocks I would look for would be a diversified portfolio of high yield, low volatility, steady growth, with long track record of increasing dividends. I am not going to name names; you and your financial advisor should be able to find a good portfolio that fits the bill.

Advantages

Tax Break

This is the easiest to justify, if you have a high income you need the tax deduction. The higher tax bracket you are in the more the government pays you for borrowing money. Tax deduction (depending on circumstances) could be as high as $6000/year per $100,000 borrowed. That means you could get (depending on tax bracket) $1500-$2000/year of real money back from your favorite federal government per 100k borrowed.

Believe it or not, due to the way tax laws are written, if you were able to borrow 100k at 6% and invest in a qualified stock that yielded 6% and you are in the 25% tax bracket you would actually make $50/month in net tax benefit. The 6% loan is fully tax deductible while the yield on a stock is only taxed at 15% yielding a real tangible benefit at tax time of $600 more each year in your pocket than you would have had. If you are in a higher tax bracket the benefit is even higher…

In essence, your government will pay you to borrow money against a house.

Leveraged Returns

This strategy is like setting you your own mini hedge fund. The trick is to borrow at 6% witch gives you an effective rate after tax rate of 4-5% depending on tax rate. If you then invest that money get a long term gain that is at 8% (effective yield of 7% when using long term capital gains). If you were to execute properly this strategy over the long term could yield up to ~$300 month of extra income for life per $100,000 borrowed…

In the long run real estate doesn’t behave that well, 5% year vs. stock market of 8% year.  The main reason people got “wealthy” in real estate wasn’t because their house did so well on its own, it was because it was a leveraged investment i.e. people made money by using someone else’s (the banks) money.

Most people initially put 20% or less down on their house. People didn’t make out because they invested $20,000 dollars in a house and it went up to $120,000. They got rich because they put $20,000 down on a house borrowed $80,000 and the house went to $200,000 and still only own little less than $80,000 to the bank. The house doubled but your return would be 500% base on your money.

Potential second income

Let’s say I borrowed that $125,000 and put it to work in high yield stocks and buy several bank stock, REIT’s and trusts that pay high dividend yields. If I borrow at 6% with a tax break, I could have an effective loan rate of 4% if in a high tax bracket. I could invest in something that has a higher yield and might nearly make my monthly mortgage payments. You may ask, what is the point of that?

Chances are in 10 years from now those dividends will be materially higher and the loan payment will remain constant while the size of the stock will likely double or triple in value. Each year as companies pay out more in dividends to keep up with inflation and growth; the difference between what you receive in dividends and what you pay in mortgage should increase. When the mortgage is paid off, you will still be receiving the dividends… but then it would be time to get another loan against the house wouldn’t it??

Diversification

It may seem a little counter intuitive but I would consider a mortgage an asset. I don’t want to get into all the nuance of run-away inflation but if you had a house and borrowed money and invested in stock, if an event of sudden dollar collapse or run away inflation occurred the value house and stocks would be maintained but the effective value of loan would fall (see next bullet point).

Inflation Protection

If inflation spiked to 10% year for 10 years, assuming real prices didn’t change over that 10 year period, the $300k would be worth $300k in real dollars, the stocks would be worth $120,000 but the loan would only be worth $40,000 in today’s dollars for a net gain of $80,000 in real dollars.

Debtors always prosper in times of rising inflation and having debt will protect you from erosion of other assets. Even with moderate inflation, 15 years from now your mortgage payment will be pathetically small in terms of inflation adjusted dollars. Because of inflation, you're essentially taking full value dollars now to pay off smaller, lower valued future dollars.

Refinancing option

What if interest rates fell materially, then what? First thing is if long term interest rates fell both the house and stocks should rise materially. Assume that if interest rates fell by 50% both your stocks and house value could double in value for a net gain of $120,000 in real dollars. Oh, yeah you what to do about your “expensive mortgage”… go refinance it at a lower rate and cut your payments in half… In all scenarios this is the absolutely best thing that could happen to you.

Liquidity

Suppose you have a house paid off and the worst happens to you. You loose your job and a major medical bill occurs. If you paid off your house, could you get money by taking out a loan? The problem is that you may not find a bank that will grant you a loan with high medical bill while unemployed…

If you already have a loan and it’s invested in the stock market you would simply sell the stocks, take some of the money and pay your medical bills, then use the remaining money to continue to make the mortgage payments and live off of. In my worst case scenario, I lost my job and got hit with $50,000 in medical bills I still would have $75,000 cash ready before I had to get rid of the house. Under this scenario if the house paid off and if I couldn’t get a loan I would need to sell the house. Believe it or not borrowing money if done correctly, in my opinion, makes you more secure.

Risks

The most obvious statement is that if you have problems with spending/credit card debt you should not pay your house off early. Only fiscally conservative people should attempt this. So if you are looking to use this money as a way to “invest” in a new kitchen or car: DON’T…. If you even think that anything below might apply to you: DON’T Borrow against your house!!!!!

Bad saver

If you’re the type of person that can not save any money and once your get some extra money into your hands you spend it, this idea would be a horrific strategy for you. Who are bad savers? If you don’t have easy access to 6 months salary (and borrowing doesn’t count) and you have more than $3000 in credit card debt…. PAY OFF YOUR HOUSE, in fact go get a bigger house so that if forces you to save more and spend less.

Big spender

If your plan is to go borrow the money and then get a great big new car and boat… PAY OFF YOUR HOUSE and pay off your credit cards…

Benevolence

If you are the kind of person who likes to help people too much… PAY OFF YOUR HOUSE… It’s nice to help people it’s just a bad idea to do it with borrowed money.

Stock market roulette

If you are a rampant speculator in the stock market since they have banned on line poker and you have found yourself day trading stocks instead…. PAY OFF YOUR HOUSE. If anyone were to invest in the market instead of paying off their house it should be only in conservative well diversified investments!!!!!

Possible Scenarios of borrowing and investing

Loss of employment/major recession

It is possible to loose your job and the stock market to be in the toilet due to a recession. In this case you would need to sell stocks at the market low that you bought potentially at twice the price. My thought is if you had paid off your house now you may have to sell it at the market low, same effect but under my scenario you still are living in your house.

Housing market collapse

Give back the house, keep the stocks… This is too good to be true; they will come after your stock portfolio with a vengeance. At least you got a good loan while prices were high.

Stock market collapse

This is truly your biggest danger, it is important that you have a very well diversified conservative portfolio. It may be fun to bet all your money on Google but chances are we will barely remember what Google was in 30 years from now. Be conservative, as if you house depended on it.

Worst case scenario, the housing market tanks, you loose your job, the stock market crashes, stocks stop paying dividends…

Yeah, you’ll be filling for bankruptcy… Chances are if all those events have occurred the world has bigger problems. There are not free lunches and this is the risk that you take, chances of this scenario are real. Hopefully the government will come up with a bail out plan for you.

What do I think the most likely outcome of this strategy over the next 20 years?

First inflation will inevitably add value to the house and stocks, assuming that it stays at a modest 2-3% one would expect the value of the house and stocks to go up. Assuming normal market trends the house value should double and the stock portfolio should at least double. After deducting your house payment you would come out several hundred thousand ahead. Dividends on your stock should materially outpace the mortgage payment in about 10 years offsetting any “house payment”. In essence you will get two more free houses out of the deal.

Bottom line is that you should be able to invest in such a way to get nearly enough income to almost cover your mortgage payment. What the point of that? The point is in 10 – 20 years your value of your house will increase and the value of your stocks will increase, the burden of debt will decrease! When all is said in done you will likely double you return of just house alone. If done right this can really improve your net worth in the long run, if done wrong you can completely screw up your life immediately.

You really really need to speak to a financial adviser on this one!!!!!!!

Chapter 2

Market Dynamics

Interest rates

I have no doubt that short term interest rates are going lower in the US for the next several months. Personally I am not taking this as a good sign because I believe that it will cause inflation in the long run and lead to even higher rates later. The problem with misguided monetary policy is that one you “solve” one problem (Greenspan cutting rates too much after 9/11) you tend to create several new ones to replace it (housing debacle, higher long term rates and a falling dollar). I expect to see the dollar to continue to fall since we import so many goods (oil and manufactured items), I would expect those items to become more expensive, hence inflation. Also I believe that we are flirting with stagflation for the first time in 30 years.

I believe that we have borrowed so much money that it’s impacting the dollar, and since a lot of our loaned money comes from other countries they will need ever higher interest rates to offset the falling dollar. We may have soaked up most of cheap money around the world to pay for social programs, cars and houses (or better know as a lifestyle)

In the last report I pointed out that long term interest rates have been going up and breaking the long term trend line going back to 1982. My real concern is that long term rates have broken though that trend line and being a nation of borrows (public and private) that it may materially change the way we live in the long run. Hopefully the higher interest rates will retard consumption while encouraging savings.

The list of reasons of why I think interest rates will continue higher.

• Investors may be expecting higher inflation in the future for the US.

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

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

• China is trying to diversify its trillion dollar investment portfolio in other places

• The Europe offers an attractive alternative to the US Bonds

• The previous bond yields were just too low

• Savers in the third world are going to become consumers

• The meltdown in subprime lending has repriced perceived risk

• We are beginning of baby boomers starting to live off of their savings

The worst case scenario (and highly unlikely) is a debt spiral that could create a viscous circle 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 decline in our 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 (is the US becoming a “subprime” borrower?).

We are a nation of borrowers and our current standard of living is based on cheap money, this could materially change in near future. Imagine that instead of a house someone took out an adjustable rate mortgage against an entire country and they got some teaser rates and just before rates started to go up. One would think that maybe that person would get their country repossessed if they fell behind in payments. Imagine that country being the US with relative low interest rates and owing nearly $20 trillion of debt with higher rates for the foreseeable future… Will the UN come try to come and repossess our country and evict us??? Will China come and repossess California? Our current habits are unsustainable. We, as a nation, owe about $66,000 for every man, woman and child legal and illegal in this country in public and private debt.

Housing Market

In my report in March I made the statement that…

I believe the three “acts” of the housing bear market are:

Act One: Build and they will come!

Act Two: I have to repay this loan?

Act Three: Banks liquidate and crush housing prices…

In March I also stated that I thought we were in the beginning of Act Two. Looking back I am now must make a correction to my statement last March. At that time we were only finishing ACT One; we are just now just beginning of Act Two. Act Two will play out for about another year or so, and I now expect Act Three to take another year or after that. Bottom line is that I expect the housing slump to go on for at least two more years. Just remember in only took Japan about 15 years to solve their real estate problems.

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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 in nearly every issue). 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 mortgage industry typically use Libor (London Interbank Offered Rate)rate instead of US 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)

• People are going to be required to have a down payment to buy a house…

• Home builders are still dumping inventory to raise cash to stay in business

• Fewer people can refinance existing loans because of tighter credit standards

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

• More houses on the market due to foreclosures and selling buy builders

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

Therefore…

• Housing price will continue to go down for the foreseeable future…

The Federal Reserve did lower interest rates, but this will not save the housing market. The net effect of lower rates will be to help the rest of the economy and spread out the pain of the housing market. One half of a percent will not save the housing market one bit; it may however save the rest of the economy.

Fortunately for us the rest of the economy is strong enough that this is not a devastating blow to the economy (but it doesn’t help). 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. If someone has their house repossessed (which they very likely had little money in) and become renters their 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 renters 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. The lender will suffer a bigger monetary loss than the borrower in most cases… The borrower will suffer the larger emotional loss. Unfortunately politics are about emotions and not about the proper allocation of resources.

China

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 think if a sell off were to occur, it will be the great buying opportunity of a life time. Chinese stock prices will still higher next year than they are today…

Our government’s claims that the Chinese currency is too cheap relative to the US dollar therefore China is selling us stuff too cheaply? I find this a bid odd that we are actually complaining that the Chinese are charging us too little for the things that are manufactured over there. I personally have never complained that a car, house, shirt or bar of soap was too cheap. Only in the world of politics would one want to go to the World Trade Organization to force someone to raise their prices… If the Chinese want to sell me stuff too cheap…great, bring it on!!!

Forcing China to raise prices will never bring manufacturing jobs back to the US. Even the Mexicans lost out to Asia, are we really interested in moving $.60/hour jobs to the US when our minimum wage 10 times that? We have record low unemployment and 20 million illegal immigrants to supplement our work force. “High paying manufacturing jobs” is a myth created by the 20 years after the end of WWII when the US was the only industrialized country able to make things because it was not laying in ruin. Except for the brief period of time, “high paying manufacturing jobs” only exist in utopian brains of Lou Dobbs (CNN) and Pat Buchanan. To save time and effort I will save the rest of my libertarian speech for another issue of the Rush Review.

Economic Reviews

US Economic Indicators (my view)

It’s time to review world events 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 sell off. This is a totally unscientific based on my opinions with absolutely no other basis other than my limited understanding of world issues.

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 Gross National Product (GDP) grows >3% in 2008

Probability of Occurrence 30%

Impact 6

The housing market, construction and domestic auto production are taking a beating. Credit is getting tighter but so far the economy is ok but I fear it is getting weaker. I will be on the watch for lending tightening that occurs outside the real estate, specifically credit cards. I believe that over tightening of credit card lending could put us in a recession. I was worried that we would have a recession this year, the housing issues that I have discussed for almost two years are now upon us, if we are going to have a recession it will be 2nd half of 2008. I believe that there is about a 30% chance of a recession in the next two years.

Also we need to watch if the dollar falls too much more. 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. Long term I think the Fed will have to raise rates to prevent the dollar from falling too much.

The potential for a recession is a negative 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. I do think that unemployment will edge up .5% over the next 18 months. Notice the chart below it seems that unemployment has bottomed around 4.5%

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The low unemployment is a strong positive for the market

Federal Reserve raises interest rates this year

Probability of Occurrence 5% (down from 50%)

Impact 7 up from 6

The Federal Reserve lowered interest rates by ½% in their meeting this past month.

As the housing market collapses the Fed will continue to lower rates to save the economy but the world demand for commodities (food, metals, and energy) continues to put pressure on prices and will certainly cause inflation. If the dollar falls substantially I believe that we will need to raise rates to prevent a stagflation scenario, albeit relatively mild.

This is a short term positive indicator for the market; longer term, not so much...

Inflation exceeds 3%

Probability of Occurrence 65% in two years (up from 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 and maintaining ample supply, and 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, therefore I am voting for slight inflation next year due to the falling dollar being we are a net importer. Since the Fed is lowering interest rates which makes the dollar worth less for an overseas investor, the dollar will continue to fall causing even higher prices (in terms of the dollar) for all imported goods.

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

Continued strong spending by US consumer

Probability of Occurrence 50% (downgraded from 60%)

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 sub prime 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!!

Delinquent payments on credit cards, 30 days late, ran at 4.64 % in July ‘07 up from year ago, when the delinquency rate was 4.18 percent.

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

Corporate profits exceed YoY growth of 10%

Probability of Occurrence 20% (downgraded from 30%)

Impact 6

It is general consensus on Wall St. that corporate profits will slow down in 2008 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. Companies with a lot of foreign sales / exposure to globalization should do well aided by profits being measured in US dollars which are falling in value.

Profit growth is down; this is a slight negative indicator

Real Estate prices drop greater than 10% in 2007

Probability of Occurrence 70% (upgraded from 40%)

Impact 6

Currently the 30 year mortgage rates are holding at 6.49% up quite a bit from last report. Currently I don’t own a house and plan to rent for at least one more year because I expect housing prices to come down more. Last month the Year over year fall in prices was 8%

Obviously this is a big negative.

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

Probability of Occurrence 50%

Impact 3(short term)

Imports are down a bit

Exports are up a bit

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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

Think back to the days of your childhood when you would come across a Canadian coin in your pile of change and how your mother would explain that they were not worth as much as an American coin of the same face value. Now the Canadian mothers are explaining his to their children about the US coins. The Canadian dollar is now worth more than a US dollar.

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 fall in local purchasing power.

[pic]

As you can see from the above chart, in 2001 one US dollar could buy $1.60 Canadian, today a US dollar only can buy 99 ½ Canadian cents 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.

Democratic 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 means a less efficient deployment of capital hence a weaker economy. It will likely reduce my returns and the governments simultaneously.

Again, how can this be good for the investor?

CBOE Volatility Index (VIX) (New Rush Review indicator)

Current value 18%

Impact N/A

One of the things that I like to look in market is the VIX, what is it and why should you occasionally look at it? Volatility is simply a measure how choppy the market is behaving; since the VIX is actually traded it reflects individuals and institutions views on what volatility expectation will be over the next 30 days. Some people have refer to this as the “fear index”, I don’t like that description, but it has some basis it true since the VIX does tend to peak in the middle of a market panics.

I am going to add the Volatility index to the Quarterly discussion. As pointed out this is a good gage into “perceived” fear in the market. It has no weighting and I have no impact rating for this index, it only potentially shows a little bit about how the market feels about itself. Also when the VIX is low this generally is a good time to buy those put options that I talk about for “insurance”.

[pic]

From the chart above you can see that the “fear” peaked in August and has been coming down. The up trend is bad for investments while the recent down trend is a good thing for the market.

Liquidity

Probability of Occurrence 50% (downgraded from 70%)

Impact 8

Liquidity almost dried up and could have caused a worldwide credit meltdown… I have stated that I felt that this was one of the most important indicators. I still believe that it is and it materially weaker than in the last report.

It was very negative recently but it shows signs that it may be improving due to various reserve bank interventions. This is still a big market negative.

International / Foreign policy issues:

Destabilization of Pakistan in the next 2 years

Probability of Occurrence 40% (upgraded from 30%)

Impact 8 (upgraded from 6)

I have been worried for a couple of years that radical elements in Pakistan would seize power there and gain control of military and its nuclear arsenal. My major concern is that the Islamic Republic of Pakistan has tested nuclear weapons and has at least 25 nuclear warheads. If a coup were to occur or the radical elements gain control of the country I would become very wary of any shipping containers coming from Pakistan because it may contain some very unwanted cargo.

War in Iran

Probability of Occurrence 10% in next 3 years

Impact 8 (down graded from 9)

This is a dangerous game of chicken that neither side should be playing…

War with China over Taiwan

Probability of Occurrence 90% in next 40 years

Impact 8

We will send our carriers, the Chinese will damage one of our carriers with torpedoes, and we will have a choice, go nuclear or go home. We will go home. This will be the official changing of the guard from America the sole Superpower to China on the path of sole Superpower. Our global alliance will shift from Europe to India; for they are encircled by Muslims to the west and communist (in name only) to the north.

International Economics:

Continued growth in China for next 5 years (Downgraded from 80%)

Probability of Occurrence 70%

Impact 8

According to the CIA China is the second-largest economy in the world after the US, although in per capita terms the country is still poor. At current growth rates China could be the world largest economy by 2020 based upon purchasing power parity.

Continued growth in India

Probability of Occurrence 70%

Impact 6

If they were only to become as capitalistic as the communists, they could achieve as much if not more than the Chinese. They have a socialist bend to the country that is ingrained into the culture that is holding them back. I still believe it is a good investment… second best but still a good investment. The Indian market isn’t as “frothy” as the Chinese market so I invest there so I am not totally “China”.

Play: Purchase IIF/IFN/INP or Indian mutual funds

Post Play: Retire rich…

Continued growth in Australia

Probability of Occurrence 70%

Impact 5

Despite recent pullbacks in the commodities markets I still believe that Australia is still a great lower risk way to benefit from the growth in Asia.

Play: EWA

Post Play: Retire and live well…

Chapter 3

The Plan

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

- Sheldon Natenberg

Market Review

Ok, we got through all the data and issues that we should be watching… What should the typical investor do? On the one hand we have all sorts of bad economic news…

• 2008 Adjustable rate mortgages peak around summer

• 2008 Beijing Olympics theoretically marks the peak of the Chinese stock market

• 2008 Presidential Election will cause uncertainly (more in the next issue)

• 2009 Democrats will control the White house and the legislative agenda

• 2010 the Bush tax cuts expire

All these events are big negatives for the US economy for the next 3-5 years… But on the other side of the coin (the rest of the world) the global economy is exploding…

The world economy creates over $45 Trillion of goods and services each year and is growing at 5% a year. Over the next 20 year more than $1 Quadrillion dollars will have circulated creating more wealth than all the rest of human history combined. In the long run, the housing market “event” is a barely a footnote in the history world markets. Participate in the world wealth engine!!!

There are no doubts in my mind that if I were to invest in any index and looked at it in 10 years I will make money. The question is what about the here and now and the not too distant future? Also we need to breakdown where we are going to invest.

I do consider myself a patriot, a registered voter and I a proud military veteran with 6 years of service to our country, but in good conscious I cannot recommend investing in the United States economy. My fundamental reasons are that Social Security and health care are slowing bankrupting our county and devaluating the dollar, our government is becoming more socialistic while the world is becoming much wealthier because of capitalism and more competitive (China has become a capitalistic powerhouse and even France is starting to turn away from socialism), our society emphasis consumption instead of investing, our primary education system is broken just when the world is emphasizing intellectual capital. Many of our politicians don’t understand basic economics and our citizen’s vote for the person that appears to give out the most freebies and offer the easy answers (there are no free lunches).

Even more troubling is that as a society we seem to lack personally responsibility; when we make bad choices, we as a society accept excuses and scapegoats. Is America over weight because of McDonalds or is it that people eat too much? People who live in big houses and drive 45 miles to work don’t cause global warming, its Exxon, Ford, and GM… To save time and effort I will save the rest of my libertarian speech for another issue of the Rush Review.

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 is picking up

• Interest rates remain relatively low at this time

• Unemployment is low

• We have a reasonably competent Federal Reserve

Negatives

• Reduced global liquidity

• Economic growth slow down in the US is expected this year

• Possible recession in the US next year, damaging world investing…

• The unwinding of the housing market

• Higher energy and grain prices (inflation)

• The Congress is inept and wants to showboat instead of fixing real problems

• Emerging markets are getting bid up on speculation

• Lower US corporate profits growth rate next year

• Dollar is weakening

• Trade imbalance

• Budget deficit

• Potential of consumer credit crunch due to multiple factors

• War on Terror/global instability

So… What is the Plan?

I only expect moderate growth US stock market (an average of 5% per year) until after 2012, until our brief attempt of socialism and centralized planning has failed utterly. I do expect to see strong growth overseas for the foreseeable future so for those of you with long term investments you may want to consider more weight to the global economy. Any new money or dividends, I will be putting into gold (GLD) until the next market drop. If a major market sell off occurs this year it may be a good time to sell gold and get back into foreign ETFs.

I expect longer term money not to be so cheap, I have been reading some of Alan Greenspan’s comments lately (haven’t gotten to his book yet) and he seems to make a decent case for long term rates going up to 8%. Given this kind of prediction and some of the other data we have discussed in past issues (interest rate trends) it may be foolish to hold any long term US based bonds. The next few years could be tricky for the average US investor. This will especially be true as our first wave of boomers retire and hit the Treasurer’s coffers.

My long term preference is to invest outside the US for the next few years due to my expectation of the falling dollar, poor US economic/political policies, and strong economies overseas. One big danger is that if the US economy were to falter it will drag the all the world markets down in multiply amounts of loss in the US markets. If the US market drops by 10% it would not surprise me to see emerging markets to fall 10%-30%. Higher reward yields higher risks.

I personally will be fully invested in oversea stock all around the world, when I feel the market is getting frothy (DJIA of 14,500???) I plan to sell short the S&P index (SPY) but keep all my foreign stock. So in essence I will be long overseas and short the US as a hedge. I am also toying with the idea of shorting long term US Treasuries.

If the market starts to go down, I will put all my money into the British Pound (FXB) and Gold (GLD) and keep my shorts against the S&P 500 index (SPY)

On the plus side, with some patience, any declines may offer some incredible buying opportunities. Some examples are the banks and housing related stocks that are likely to fall more in the upcoming months, if one is wise and jumps in when everyone else has given up some money can be made. There will be a time and a place to buy Bear Stearns, Bank of American and Home Depot at unheard of low prices…. Just not now….

So my personal investment plans….

I will invest overseas… Globalization will continue with or without the US

I will only consider US companies with heavy international exposure…

I will buy Gold (GLD) for medium term investments

I will put free cash into the British Pound (FXB) instead of US short term bonds (SHY).

Avoid All long term US denominated bonds (if you must own bonds buy European)

Avoid all retail and housing stocks

Avoid businesses that lend money to consumers

Huge buying opportunities may appear in the next couple of year but not now

Chapter 4

Domestic Investment Ideas for 2007

I am still recommending avoiding individual stocks and I am emphasizing more focus on ETF and indexes. I only have US stocks that have a significant amount of their growth from overseas sales or international commodities that will hold their value as the dollar falls…

Gold

Symbol GLD

Price $73.51

Target $1000 (end of 2010)

Sector Precious Metal

Risk Moderate +

Return Moderate

Complexity Simple

Time Horizon Medium term (3 months – 60 months)

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

Account(s) IRA and 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. The Gold ETF is currently around $735 an ounce which I believe is overdone just a bit, if I were to try to buy some I would wait for it to come down $20-$30. My target for the ETF for buying gold is $70.50 per share.

San Juan Trust

Symbol SJT

Price $33.80

Target $45 (end of 2010)

Sector Natural Gas Trust

Risk Moderate +

Return Moderate

Complexity Simple

Time Horizon Long Term (12 months – 24 months)

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

Account(s) IRA only

Basically with this trust you own some of the natural gas in the San Juan basin in the western US. They sell it and give you the money each quarter. Currently the yield is about 10% but longer term natural gas could go much higher (due to high oil prices) and the yield could go much higher and/or the stock price will increase. Be aware that trusts do not pay corporate taxes therefore dividends are at your normal marginal rate.

Deere & Co

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 or wheat? 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 and will need farm machinery.

Other stock that I like…

Cisco (CSCO)

The internet is booming and Cisco makes a lot of the equipment that is the backbone of the internet.

Gambling

Wynn resorts (WYNN) and Las Vegas Sands (LVS)

If you are going to gamble with you money you should be with the house. I picked these two stocks because they both have casinos in Macau. This is the Chinese luxury/gambling province. Consider it the Vegas of Asia, although it actually does more business than Las Vegas.

Food

Yum Brands (YUM) and McDonalds (MCD)

Both KFC and McDonalds are making out on world globalization. As people get richer they can afford fast food. You may consider it a step down but billions don’t.

Energy

I don’t see how you can go wrong owning energy long term. It might be nice to wait for a dip. OIH is the oil services ETF and XLE is the energy ETF.

Chapter 5

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 |7.14% |9.77% |12.34% |13.27% |

|Implied Annual Rate* |9.52% |13.02% |16.45% |17.69% |

*YTD return multiplied by 1.33 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 |$152.58 |7.74% |9.10% |

|NASDAQ 100 Trust Shares |QQQQ |$43.16 |$51.41 |19.11% |20.09% |

|DIAMONDS Trust |DIA |$120.90 |$138.91 |11.66% |12.98% |

|Vanguard Value VIPERs |VTV |$68.23 |$71.51 |4.81% |6.10% |

|iShares Russell 2000 Index |IWM |$78.03 |$80.04 |2.58% |3.02% |

|iShares MSCI “EAFA” |EFA |$73.22 |$82.59 |12.80% |12.80% |

|iShares MSCI Emerging Markets |EEM |$114.17 |$149.45 |30.90% |30.90% |

|iShares Lehman 20+ Year Treasury |TLT |$88.43 |$88.72 |0.33% |3.40% |

|iShares Lehman 7-10 Year Treasury |IEF |$82.44 |$83.88 |1.75% |4.80% |

|iShares Lehman Aggregate Bond |AGG |$99.70 |$100.02 |0.32% |3.60% |

|iShares GS $ InvesTop Corp |LQD |$106.68 |$105.49 |-1.12% |2.47% |

|iShares Lehman 1-3 Year Treasury |SHY |$79.96 |$81.26 |1.63% |4.57% |

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 barely holding value and the monthly dividend check is keeps the return slightly positive.

Overall I am pleased with all indexes and still continue to think that this is the optimal way for a person to invest that does not want to put a lot of time into managing their money. Even the risk adverse investor has received 7% year to date.

Chapter 7

My Holdings and Performance

Don’t be foolish enough to try to replicate my portfolio, very few money professionals would even remotely approve of this portfolio. This time it is a ridiculously aggressive/bullish portfolio.

Taxed Account YTD Holdings and Returns

|Name | |Price |Price Paid |Total ’07 Gain |Portfolio % |

| |Symbol | | |% | |

|Lloyds |LYG |$44.46 |$46.35 |-4.08% |19.15% |

|China Fund |CHN |$49.22 |$43.93 |12.04% |15.90% |

|Intel Jan-08 $15 Call |NQAC |$11.03 |$6.00 |83.83% |11.88% |

|Morgan Stanley India Fund |IIF |$50.86 |$47.20 |7.75% |10.95% |

|iShares France |EWQ |$38.46 |$38.87 |-1.05% |8.28% |

|Cisco Systems |CSCO |$33.13 |$29.94 |10.65% |7.13% |

|Indonesia Fund |IF |$12.59 |$11.70 |7.61% |6.78% |

|iShares Emerging Markets |EEM |$149.45 |$141.70 |5.47% |6.44% |

|iShares Japan |EWJ |$14.34 |$14.77 |-2.91% |6.18% |

|iShares Brazil |EWZ |$73.55 |$72.44 |1.53% |4.75% |

|Archer Daniels Midland |ADM |$33.08 |$36.69 |-9.84% |2.49% |

|EWJ Jan 08 $20 Call |EWJAT |$0.05 |$0.70 |-92.86% |0.08% |

|SHORT GM $30 Puts |GMXF |$0.78 |$1.40 |44.29% |-0.17% |

|Miscellaneous | | | | |0.07% |

|Cash or Equivalent | | | | |0.09% |

| | | | | |100.00% |

This portfolio has done poorly this year but has recovered all of its losses and starting to make some gains. The year to date gain is only 3.55% underperforming the S&P and all my portfolio indexes in chapter 6. The big contributors to my low gains are positions that I no longer hold such as home depot.

My largest holding is Lloyds bank in the UK. I mostly own that one for the long term due to its high yield (6%) and the low tax rate on the dividends (15%). When the market fell during Q3 I bought some shares in The China fund which gained 12% in just a few weeks. I still own shares of Intel from a year and a half ago and that has been a strong performer.

I own various ETF in various regions of the world and I also own ADM. I bought ADM thinking that it would be a good agricultural play but waiting for a little pop so I can sell it and buy some Deere (DE).

IRA Account YTD Holdings Returns

|Name | |Price |Price Paid |Total ’07 Gain |Portfolio % |

| |Symbol | | |% | |

|Barclay's India ETN index |INP |$72.70 |$62.03 |17.20% |15.79% |

|iShares Australia |EWA |$31.79 |$29.11 |9.19% |13.81% |

|Wynn Resorts |WYNN |$157.56 |$118.60 |32.85% |10.27% |

|FXI China Index $150 Call |VHFAZ |$50.90 |$10.50 |384.76% |9.95% |

|iShares Europe Australia Far East |EFA |$82.59 |$80.00 |3.24% |8.97% |

|ProShares Ultra S&P 500 |SSO |$95.48 |$84.44 |13.07% |8.30% |

|iShares China index |FXI |$180.00 |$136.47 |31.90% |7.82% |

|San Juan Trust |SJT |$33.80 |$33.64 |0.48% |7.34% |

|Archer Daniels Midland |ADM |$33.08 |$35.36 |-6.45% |7.19% |

|iShares Japan |EWJ |$14.34 |$13.74 |4.37% |6.23% |

|Intel Jan $25 calls |INQAE |$2.24 |$1.75 |28.00% |2.43% |

|Intel Jan $20 calls |INQAD |$6.20 |$5.00 |24.00% |1.35% |

|CASH: | | | | |0.56% |

| | | | | |100% |

As per the plan in the last report I started buying investment slowly during the quarter, when the market sold off I was only 50% invested. As the market continued to sell off I moved more money from conservative to aggressive investments. Overall I beat the S&P 500 index with a 15.82% gain even beating my aggressive portfolio in Chapter 6 of 13.67%.

I am playing a dangerous game right now. I sold all my puts (insurance) and have very little “cash”. I am watching the market very closely; obviously these gains can be given back rather quickly so I need to be ready to sell at any time. I feel that I have a better diversification than normal although I do have almost 18% of my portfolio in the FXI or FXI calls. At least it’s better than when I had nearly 50% of my portfolio in Intel.

I bought the Jan ’09 FXI $150 calls at the beginning of the year and at the time it was 2% of the portfolio, and now its 10% due to the nearly 400% gain. Obviously this index is what is driving my portfolio returns. Also the Indian and Gambling (WYNN) purchases are also helping the portfolio also.

The only portion of the portfolio that I don’t like is ADM. If the market ever pops on this one I plan to sell it and buy something else. I plan to get out of Intel either in Jan or when it hits $30/share.

Chapter 8

Final Thoughts

The Good

• The world is experiencing unprecedented economic growth due to globalization

• The world is getting richer

• 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 is picking up

• Interest rates remain relatively low but likely to go up

• Unemployment is low but is likely to go up

• We have a competent Federal Reserve

The Bad

• Possible recession next year in the US

• The unwinding of the housing market

• Higher energy, metals and grain prices

• Democrats in control of economy in 2009

• Long term US investment climate 2010 due to tax cuts expiring

• Chinese markets are getting bid up on speculation

• Lower corporate profits growth rate this year

• Dollar is weakening

• Trade imbalance

• Budget deficit

The Ugly

• Social Security will eventually cause a hyperinflation sometime within 20 years

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

• Potential of consumer credit crunch due to multiple factors

• Potential for national debt spiral

• Free health care for everyone in 2010… Dollar collapses (more)

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

Things to know

• Short-term interest rates have dropped long term rates are going up

• The investment world looks much riskier than it was during the last report.

• Oil prices have gone up and grain prices are setting new highs

• China!

Final thoughts:

The housing market is a $1 trillion dollar problem in a $13 trillion US economy and $45 trillion world economy. When Japan started to unwind at the end of the 80’s nearly $20 trillion was lost between real estate market and the Japanese stock market. Japan is still there… When all is said and done, all the houses will still be there and someone will be living in them. This is nothing more than the shifting of wealth, from current owner and lenders to future owner and lender.

China will be the world’s largest economy by the year 2040. On a purchasing power parity basis it will very likely overtake the US as early as 2015. This will have significant world geopolitical and socioeconomic consequences for everyone on the planet and have given in and starting to invest in China. Learn what you can about China and India it will be very important for your long term financial well being.

I am watching for a precipitous fall in imports, tax receipts, and/or reduced sales at retailer. 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.

Globalization helps the economy. Cheaper goods and services appear on our shores everyday and despite the common misconceptions globalization benefits the US.

The US will pullout of Iraq in the couple of year and this should hurt the economy in the short term but help interest rates (by not borrowing lots of money to buy bullets). I expect the next administration to limit defense spending (positive for the economy as long as we don’t get attacked) so shy away from defense stocks.

World is getting richer, more and more consumers of goods and services that can afford to buy things magically appear with each passing day… China is a big new customer for BMW’s.

In future reports I still need to discuss the travesty called Ethanol, the Social Security debacle, views on the upcoming elections and I am also planning to do a special section on global warming … I hope these subjects to be interesting reads and hopefully some good investment advice will come from it. At the very least; some very good hate mail will be sent my way. After all, a true libertarian will endeavor to piss off both sides…

This is the conclusion of my report, I hope to get the next report out January1st 2008 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 and good investing!!!

Regards,

Mark Rush

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