2nd Quarter Commentary 2010

The Second Quarter of 2010 proved to be unusual, in that not all of what transpired could be explained in terms of normal market activity.  April started out well with our various portfolios selling across most business sectors into the mild market strength.  The first Quarter of 2010 had seen a moderate rise in our market risk indicator which continued in April.  In early May one of the most unusual trade days in recent memory occurred. A single trade, which has now been attributed to human error, drove a sharp sell-off on May 6th shocking even the most seasoned market participants. While short lived, it stopped most investors in their tracks.

The incremental selling triggered by the SignalPoint™ process in the months leading up to May had built respectable cash reserves in most portfolios.  Thus, when the market decline arrived in May, the stage was set for buying.  Initially the SignalPoint™ process triggered buying in the international arena for the stock ETFs.  The Euro currency dropped enough to trigger buying shares in the Euro Currency ETF, while the U.S. Dollar ETF rose enough to trip a small sale.  These two transactions nearly directly offset each other in size.  In addition, fear driven flight to quality led to a nice price increase in the US long bond ETF and another incremental sale was triggered in SignalPoint income portfolios holding this ETF. Although not as broad based as the selling in April, incremental buying in several business sector ETFs continued throughout May.

As June progressed we saw continuing reduction in market risk according to the SignalPoint Risk Assessment Model. Incremental buys continued to occur in many of the business sector ETFs as the month progressed. These buys modestly reduced the overall cash reserves of the various portfolios and shifted the portfolios to a slightly more aggressive posture. In contrast, the income portfolios saw a small incremental sale in the intermediate term bond ETF as this component gained value.

Overall for the Second Quarter, the SignalPoint portfolio cash reserves provided the cushioning desired during the market decline as designed.  In addition, the cash reserves funded incremental purchases increasing many of the equity position ETFs that had been slowly reduced in the preceding months due to the market strength. As expected the cash reserves in each portfolio also reduced the level of volatility in the portfolios when compared to their respective benchmarks.

As we enter the 3rd Quarter of 2010, we have an adequate cash reserve, reduced measured market risk and fresh inventory of equities. Looking back, our equity portfolios have performed well through the first half of 2010 and are outpacing their respective benchmarks over that time.

As always, if you have questions regarding your account or the SignalPoint™ portfolios, please feel free to contact us or visit us at http://www.signalpointinvest.com .

Thomas Veale

Chief Investment Officer

SignalPoint Asset Management, LLC

SignalPoint Asset Management has a longer time perspective than the media. Our risk assessment model helps to provide a framework of understanding the jumps and bumps of the market.  This week we continue to see relatively low risk of market participation relative to our database.  This week we see two components up and two down in their risk profile.  The net effect was a slight rise in overall assessment of risk.  Our cash reserves adequately cover the current risk profile’s requirements.

The Speculation component of our Risk assessment Model gave us concern in early May, however it has turned and is now quite bullish for the short term.  In May the best performing stock over the previous 13 weeks was up over 276%.  As of today the best performer is up just 82%.  In our opinion, the contrast in this performance reflects a significant contraction in the amount of speculative activity in the market place.  The contraction is generally a very healthy sign and indicative of near term potential for a market rally.

Our Relative Valuation component has pulled back significantly with the decline in the Price/Earnings ratio. While this component never reached bearish levels, it was rather optimistically high. Today it has retrenched a full 20%.  Again, this helps to put a floor in the recent market declines.

Overall, we see the Market Risk Indicator at the lowest level since May of 2009.  At that time the NASDAQ Composite was at 1719, the S&P500 at 883 and the Dow 30 Industrial Average at 8427.  Uncertainty is still relatively high and impeding a more general advance of the stock market.  Along with low Relative Valuation and Speculation, uncertainty makes for an attractive contrary indication for investors.  In summary, the current market is probably the most reasonably priced market we've had in the past year.

The initial plunge triggered a fair amount of buying activity in SignalPoint’s various portfolios.  Since then we’ve not seen a lot of follow up buying.  Only a few sectors have remained near their respective sequential buy prices.  We continue to watch for opportunities to redeploy the portfolios’ reserves of cash.  In our opinion, the discounts are not there yet, so we continue to wait

One school of thought is to build a “laddered” bond portfolio oneself. Another is to use professional bond fund managers and trust their abilities to build such structures themselves. There are now bond fund portfolios with specific maturity dates that one could use for such a ladder.

We currently use a variety of corporate bond funds from lower grade high yield to investment grade bonds.  Some of these bonds are owned through ETF structures and some are owned via Closed End Funds (CEFs). None of what we are doing is as structured as the specific maturity year funds mentioned above.  Those target a maturity date at some point in the future and represent an “index” of various bonds of that same maturity year. The funds we currently are using are of a “rolling maturity” nature.

We are dependent upon the individual fund managers to judge the structure of laddering for us as part of managing those funds. As for managing the “timing” of the use of our ETFs and CEFs, we allow the dividends and internal incremental selling of those bond funds to create a highly liquid reserve. The cash reserves are then redeployed when suitable discounts are available.

It can be expected that as interest rates rise, existing individual bonds will fall in “face value.”  Corresponding to this drop, any bond funds that own such debt instruments will fall in net asset value to correspond to the drop in face value of their portfolios.  We don’t intend to try to outguess when the inflation/interest rate train will pass, but we also don’t intend to stand completely in its way.  The SignalPoint Process is strategically designed to take advantage of market price swings.  Yes, the NAV of our longer term bond funds will be compromised.  If compromised enough to satisfy our Process, we’ll start to utilize our reserve money market funds to help average down our NAV, Share Price and average up our Effective Yield.  (As price/share and NAV drop – assuming no change in distribution per share – the effective yield rises. )

So, rather than attempt to guess at the specifics of a bond ladder’s structure, we choose to manage the price fluctuations as they occur.  Again, our model is “retrospective” rather than “predictive.”  Our SignalPoint Process is used on Government, Corporate and Real Estate income funds.  All of these will be influenced to various degrees as the Yield Curve and the and the overall interest rates change or rise. Usually the most direct change is to government bond funds as they have only the competitiveness of their yield to guide investors as to the proper price/share – there is no “growth” potential. With corporate and real estate income funds the effect is of different magnitude and duration because of the other aspects of the investment beyond the competitiveness of yield. In other words, long term appreciation potential plays a part in how these two are valued. Short term they’re affected nearly as directly as government paper, but in the longer term, their core value and potential growth come into play.

As an example, here’s the modeled results of one of Calamos’ products that we use in our High Income portfolio:

During the ’08 – ’09 panic we accumulated shares at a nice discount from the original price/share.  At the time of the additions, the distribution yield was far higher than the starting date.  This gave us a lower average price/share and higher yield per share.  Then as prices started to recover, when the SignalPoint model was satisfied with the gain, we took some profits and set aside the proceeds in money market funds until they are again needed. While money market rates are essentially nonexistent right now, the cash had previously earned us nearly a 30% short term gain.  So, we can afford to let it rest for a while before reuse and not lose much in the way of time-value.

So, rather than building ladders ourselves, we manage the “fund managers” relative to how the fund price/share, NAV and yield is concerned.  We can’t predict the timing or control the extent of the changes we’ll see to interest rates, inflation or shape of the yield curve.  We can react appropriately when the changes are realized, however.

In summary, medium to long term bond funds of a “rolling maturity” are very suitable for long term management using SignalPoint’s Process.  Fixed maturity funds face possibly greater volatility because of being date sensitive against an unknown future.  While the anticipated interest rate changes most likely won’t be as sudden as during the recent panic, the same strategy will be used, just over an extended period of time.  

In the mean time, the recent pullback in the markets has had the effect of lowering the market’s risk back below its 10th percentile (since 1982).  This has come through contraction of both our Speculation and Relative Valuation metrics. Relative Valuation remains bullish while the other three components remain neutral. 

I’ve been hearing this off and on for about a month. We’ve had several very large one day sell-offs recently.  We’ve also had some solid upward moves, generally immediately following the selloff.   A year ago on March 9th I suggested people might want to write to their Senators, Congressmen and to Mary Schapiro, Chairperson of the SEC and ask to have the “Up-Tick Rule” put back in place.  It is true, “something feels different” is the correct impression.  Mid 2007, after nearly 80 years of the Up-Tick Rule being in place to help stabilize negative markets, the SEC decided to remove it (under heavy lobbying from the hedge fund industry). We’ve witnessed the results. In my opinion, these one day massive selloffs can be directly linked to the loss of this control device.

Here it is, about 3 years later and the SEC still hasn’t put the rule or a reasonable alternative in place. Around the beginning of April of this year a variety of proposals came to the public for review. (read more here http://www.sec.gov/news/press/2009/2009-76.htm ) The 60 day public review period is coming to an end and we can hope that there is a replacement that has gained some favor for the individual investor. Clearly a short selling stabilizer is needed.

The “silver lining” of the recent market cloud is that we’ve seen our Risk Assessment Model pull back toward more moderate numbers. This week we had two components of our Risk Assessment Model move downward, one remain unchanged and one move mildly upward. The net effect is a contraction of risk. No components are bearish at the current time.

The SignalPoint process managed to deploy some of the Cash Reserves during the month of May, buying in several different sectors.  Most recently we saw buying in the Energy and Basic Materials sectors along with additions to Technology and Financials on the domestic front.  U.S. small and mid cap value funds also triggered some buying.  All in all, May has been a very active month for our portfolios.  We continue to see the BETA or portfolio volatility reduced by our reserves of cash, performance mildly better than market averages and appropriate inventory management of the Equity and Cash sides of our portfolios.

Over the last few weeks we’ve seen prices deteriorate across many asset classes with only a few sectors remaining relatively unchanged. Of those declining our SignalPoint process has triggered buying mostly in the non-U.S. markets, in those portfolios that contain these positions.  Recent activity is represented by the Latin America ETF shown below.

The longer term shows sequential buys followed by several sequential sales. But notice the change since the beginning of the year. We’ve now had a buy, a sell and another buy. This is yet another sign of the rising divergent thinking on the part of market participants.  Unsure of the “trend”, they are being whipsawed by the market.  Note how our SignalPoint process has been proactive in each area of the history shown. We used reserves of cash as the markets declined in ’08, recovered a sizeable reserve in 2009 and are now responding to the markets’ moves in this more choppy environment.

Our speculation component is starting to moderate back toward its neutral range. While there’s been a small net gain in the number of issues being traded on the exchanges, our IPO Zeal measure remains neutral. Relative Valuation remains bullish with the very low interest rates on short term treasury notes.

While our market risk measure isn’t as healthy as over the last 12 months, it remains in its overall neutral zone for now. This side of the “bell curve” is why our process utilizes a healthy reserve of cash. 

While this may seem a bit distant from our day to day activities, in my opinion our SignalPoint process is actually better designed for such projected economic times than it is for a stock market like we had during much of the ‘80s and ‘90s. There were very few strong cyclical moves for our Process during those times. However, we’ve had two massive market swings in just the last ten years. Each one has provided our Process with the necessary fuel to advance ahead of market averages by deploying our “insurance” of cash reserves during market corrections.

Our Market Risk Indicator has been benign for most of the last 12 months. Only in recent weeks have we seen the building of market risk pressure again. First it showed up in the Speculation component. Now it has started to spill over to the Divergence component. We should expect the Speculation to moderate over the next couple of weeks, but the overall shift is toward higher risk. The risk indicator’s Oscillator is +4 for last week, indicating a building of overall risk pressure.

With healthy cash reserves built into our portfolios, we’re believe we are well positioned for more cyclical activity.

Best regards,

Tom Veale

On the bond fund side, we saw selling in the longer duration funds BLV and TLT (20+ year bond funds).  This was a result of people selling yesterday and shifting assets to more conservative bonds of U.S. denomination.

So, while such a day isn’t healthy for the markets,  it is our opinion that yesterday was not a fundamentally driven event.   Rather it was another “shock.”

The SignalPoint portfolios continue to have their reserves of cash rising in sync with their rising values. Tight control of the total amount available for risk moderation through liquidity is our current activity. While interest on cash reserves remains exceedingly low, we anticipate a slow return to more normal interest rates.

Even Warren Buffett has now stated that government spending needs to be constrained. He mentioned govt debt being approx 10% of Gross Domestic Product and is unsustainable at that level. He related it to the WW II debt and said that we worked our way out of debt at that time through good planning and fiscal responsibility. He suggests that is now what we need again.

As the economy transitions from the emergency measures taken over the last two years to a less Keynesian norm we will see changes in taxation, interest rates and inflation. It would be difficult to predict how all these changes will influence the stock and bond markets. Especially difficult since the changes are not yet pinned down or in place. We at Signalpoint work hard on the aspects of investing that we can control and make adequate allowance for what is outside of our realm. 

We have seen continued selling across nearly all business sectors in our Signalpoint portfolios.  The main exception has been the Utility sector.  While Utilities have risen some recently, we have not seen enough upside movement to justify trimming back our positions yet.  On the income side there has been selling in the Real Estate sector, but the remainder of the income components have been in a holding pattern.

The Goldman Sacks fraud case has been occupying a lot of press and television time in the last week. This sort of focus usually has the effect of making investors a bit more cautious. The markets have moved well since the pause in late January, so another round of consolidation may be in order near term.  In both the larger and smaller capitalized ends of the market we’re seeing statistically above average levels of speculation.  It takes a 56% gain in the last quarter to make the “best performers” list in Value Line, but only a drop of 18% to make the “worst performers” list in Value Line.  This sort of imbalance usually doesn’t last.  Markets tend to consolidate the gains and to revisit the poorer performers to look for potential value.

The SignalPoint portfolios have held the cash reserve percent in a very tight range for several months.  Cash growth has matched portfolio growth keeping the percentage very steady.

1st Quarter Commentary 2010

In the first quarter, the US markets began well on the back of the very solid 2009 performance.  During the quarter, we saw a market lull followed by an 8% correction in late January and early February.  The market also had to deal with a some negative news, including several disappointing economic reports, a Fed hike in the discount rate (overnight lending rate), and growing fears about Greece’s and other countries ability to pay sovereign debt.  Despite this news, the correction had resolved itself with a strong close at the end of March resulting in another positive quarter (up about 4%).  We continue to believe the markets will face challenges including higher interest rates and the threat of inflation.  However, typically as companies emerge from a recession they tend to be lean and mean as a result of shedding surplus inventory, staff and trimming other expenses.  Thus, we are optimistic that productivity and earnings will grow for several more quarters, but believe corporate earnings must continue to show some upward movement to maintain the recent markets gains.

 As for SignalPoint portfolios, the strong markets advances from April of 2009 though the end of 2009 allowed most SignalPoint portfolios to buildup meaningful cash reserves.  As such, we were afforded a brief opportunity with the correction in late January and early February to redeploy a small amount of these reserves.  Specifically, we saw the Pacific Rim and the Latin American funds fall enough to justify making repurchases in our portfolios that offer that exposure.  (It should be noted that the international markets recovered nicely in March 2010, but finished flat for the quarter.)

 At the center of the SignalPoint investment process is constant focus on the level of market risk.  We manage this risk by reducing the portfolio market exposure during market advances which in turn causes portfolio cash reserves to build.  Since March of 2009, when most portfolios were fully invested, market advances have resulted in reduction of market exposure and a steady build up of cash reserves.  The balance between a portfolio’s market exposure and cash reserves is struck, in part, by keeping the selling moderate during these advances while maintaining adequate purchasing potential should there be a correction.  Looking back, our Risk Assessment Model  remained in the bottom 10% of our data base through December 2009, but now has slowly risen back to near the middle of its historical range during the first quarter of 2010. We believe we are in a fine position to take advantage of any meaningful correction, while still being in the game should the market continue to climb higher.

 As always, if anyone has questions regarding their account or the SignalPoint™ portfolios, please feel free to contact us or visit us at http://www.signalpointinvest.com/contact/ .

Thomas Veale

Chief Investment Officer

SignalPoint Asset Management, LLC

 Price/Earnings Ratios for the major indexes are as high as they were back in 2007. The good news is the short term interest rate is still nominal. In '07 short term rates averaged 4.67% for the full year. If rates were as high right now, this would give us a very bearish Relative Valuation. So, we will be watching the 13 Week Treasury rate very closely.

 The quarter ended with our portfolios well positioned relative to market risk.

The P/E of both the larger and smaller cap markets continues to rise. This means stock prices are rising faster than reported earnings. While still manageable, the trend can’t continue too much longer. Either earnings must rise or prices must stabilize (or drop). A year ago it only cost $11.60 to buy a dollar’s worth of earnings where this week that same $1.00 of earnings would cost $17.60. In the smaller cap stocks the situation is slightly worse. Last March one could buy a dollar’s worth of earnings for only $10.40, but today one would have to pay $18.60. Clearly, the bargains were there a year ago.

Still, doing a quick head count, we see over 1300 new highs with only 52 new lows this week. That is tempered only by knowing that just a year ago the markets were near their cyclical lows and the only way for most stocks to go was “up.” This can be seen in the shorter term volatility index (^VIX) as well. There’s little divergent thinking on the part of investors right now. All seem convinced as to the market’s general direction.

This general enthusiasm for the stock market brings back some money that had been on the sidelines for as much as 18 months or more. As the new arrivals are buying, the SignalPoint process has been slowly reducing its inventory. This has the effect of capping the amount at risk in the markets for our clients. With only one component currently slightly bearish we are encouraged by what we see in the portfolios. We remain cautiously optimistic.

One of the measures we review is the number of new highs and lows over a 52 week period. Since we’re exactly 52 weeks from the ’09 market lows, it isn’t a surprise that New Highs (1202 stocks) far exceed the number of New Lows this week (just 44 stocks). Such imbalance is only the result of the changes we’ve seen in the last 12 months. We expect to see these two values start to come back to greater equilibrium by the end of the 2nd quarter. Here’s a sampling of some ETFs we follow and where they’ve travelled over the last year:

Note how far many of these have risen in the last 12 months. Also note that many are very close to their current 52 week highs.

We’ve maintained tight controls on our cash build up over the last 6 months. Risk has remained moderate and cash levels have been appropriate for that level of risk. As we see measurable risk start to rise, we will allow cash reserves to keep pace. 

Let’s use the running of a business as a simple comparison. Dollars coming in equals our revenue. Dollars going out equals our expenses. The net difference is our gain or loss. So when we think about the macro economics of our country and the trade deficit, it is similar to a business running at a loss—a very significant loss. Imagine a business, your business, running at a loss every single year. Is the big picture of the issues surrounding our trade deficit getting clearer?

Some say that our dependence on foreign oil is the main reason we have a trade deficit. However, if we look at the 2009 figures, oil only accounts for approximately 40% of the total deficit. In the grand scheme, just take a look at where everything we consume comes from. Even the basic items, like a 69-cent paint tray liner at the local home improvement store, come from Vietnam. Seriously, we can’t even produce that domestically? So much of what our country’s consumption has come to is the low cost disposability of our society. Some call it the Wal-Mart effect. You know, everything is affordable if it is cheap enough, and when it breaks, don’t fix it, just replace it.

Most recognize that the US economy is a big machine of which 72% is driven by consumption. So, if we’re consuming “stuff” that isn’t produced or at least assembled here, then how are going to change the flow of the simple equation? Keep raising taxes? That would be like a money manager saying, “Hey, I don’t want to service more clients and work to grow my business, so I’ll just raise the advisory fees to those clients that I already have.” Is this not exactly the same thing as increased taxes?

So when will this change? When and how does the trade deficit reduce and maybe, just maybe, become a trade surplus like China? When we actually start producing U.S-made goods again. When we start being able to afford something produced in our country again. When Washington figures out the simple equation.

Imagine if our country was running with a $640-million-dollar surplus. Tax rates might just drop. Unemployment might just drop. Healthcare might be affordable and available for everyone. Isn’t that what we all want? Is that what Washington says they are trying to fix? Isn’t that the lost American dream? I say, start with the trade deficit.

It's a year from the market lows of '08-'09. That has brought about some interesting statistics in and of itself. The psychological crushing that took place a year ago is now being replaced with some more positive attitude by investors. Many companies are as "lean" as they've been in decades and this bodes well for bottom line profits as business continues to recover.  Likewise, across the broader spectrum, many of the portfolios offered by SignalPoint reflect similar recovery patterns to the market and have developed respectable cash positions over the course of this recovery.  We continue to be vigilant regarding measured market risk, potential for capturing profits and seeking new opportunities.

We are seeing a bit more differentiation between business sectors recently. Consumer spending has kept the consumer staples and consumer discretionary sectors relatively strong. Financials and Utilities remain weaker and near their 26 week moving average price. This is true on an international basis as well as with the domestic U.S. markets. Our precious Metals ETF position remains near its moving average price as well and off its highs of last November.

Our income portfolios did well in 2009 after recovering from the panic selling. These portfolios have remained relatively flat in recent weeks with the exception of the longer duration bond funds we watch. Those have shown mild weakness since the first of the year. While it’s too soon to redeploy our reserves of cash, we continue to watch for opportunities to do so.

The U.S. Dollar has shown stability and some mild appreciation in recent weeks. European currencies generally have been weaker against the dollar while Asia and Latin America have remained nearly unchanged against the USD. This graphic shows the latest 90 days of relative movement.

Note that the U.S. Dollar has shown good relative strength over this period. The opposite was true for the first half of 2009.

Risk remains moderate overall with the largest question mark being placed near the 13 Week Treasury rate.  While it could rise tenfold and not be very high (current yield is 0.112%), the overall influence on our Relative Valuation component would become bearish should the short term Treasury rate return to more normal levels.

4th Quarter Commentary 2009

2009 is a year some people will always remember and one that some people will want to forget.  There was much more than the usual amount of “noise” mixed with the “signals” we were receiving relative to politics, economy and the future.  It was more difficult than usual to filter out the noise.  Yet, as the year closed, we found even new sources of worry replacing those of the previous year. 

We started 2009 with many of our portfolios nearly fully invested.  The 2008 late year declines had used up significant portions of the reserves of cash usually held.  It wasn’t until around April of 2009 that we started to recover some of the reserves through sell signals.  Market risk was extremely low at the beginning of the year and remained so into April.  From April through June risk rose steadily as “reflex” buying showed heavy cash inflows into the stock and bond markets.  All ships were rising.

Market risk continued to remain on the high side of average through September.  As the market continued to rise, many of our portfolios continued to trim positions causing the cash reserve levels to rise to a more normal level.  This was true in our income portfolios as well as the ones designed more for growth.

The last quarter of the year saw markets plateau or decline slightly before the yearend rally.  Risk first moderated and then declined as the year came to a close.  It took most of 2009 for the Financial and Utility sectors to recover enough to generate some selling activity.  Most of the other business sectors had been more responsive to the general bullishness.  Precious Metals as a sector did well through most of ’09 but flattened in November and December.

The Pacific Rim and Latin American geographical areas recovered nicely in 2009.  The European markets lagged slightly and Japan was slower to respond and fell behind the other markets.  Even so, moderate selling in those geographical areas has provided reasonable cash reserves again.

Historically the cash reserves our portfolios carry have paid their own way through interest accumulation. In 2009 this was not the case.  The 13 Week Treasury coupon rate started the year at about .05%, peaked in summer near 0.2% only to slip back to around 0.07% by year’s end.  As it turned out, this was a good year to be lean on cash reserves.

At year’s end we saw the longer end of the government bond funds lose some of their appeal for investors.  While the value of bond funds was declining, the possible yield improved modestly. Anticipation of higher interest rates and fear of future inflation are the most suspect reasons.  If we see interest rates rise in 2010, we would expect bond fund prices to decline further.  With cash reserves available for those components downward averaging and yield improvement may be possible.

The U.S. Dollar generally declined against most currencies in 2009.  Japan’s Yen and China’s Yuan both remained nearly unchanged against the U.S. dollar.  Much of the speculation in currencies hinges on the large amount of government spending going on in the U.S.  However, many of the foreign governments are also doing similar “stimulus” spending.  This understanding has tempered the earlier speculation and the dollar stabilized during the last quarter of the year.

Tom Veale

Chief Investment Officer

SignalPoint Asset Management, LLC 

The uncertainty of reappointment of the Federal Reserve Chairman is now behind us. Another quarter of recovery was just reported on Friday morning, January 29th. While unemployment and foreclosure problems persist in some areas of the country, there appears to be a turning of those tides, too.

In general. our cash levels remain appropriate for the market conditions in the relevant portfolios. These cash levels should continue to keep the portfolios' BETA levels lower than their respective benchmarks.  Should the consolidation slide toward "correction" we are prepared to add to positions as relative discounts appear.

In our income portfolios, the cash component is not pulling its weight  as it relates to the portfolio’ yields.  With an improving economic outlook, we should see the FED start to bring the short term interest rate up from its near-zero mark. This will help the yield and the total return.  Also of note is with a rise in bond yields, bond funds sometimes fall away from previous highs.  If this occurs it will allow us to redeploy our reserves into higher yielding components, lowering average cost per share and raising average yield.

Market risk rose slightly during the week of Jan. 25th. The risk indicator's oscillator is showing a rising trend.  Moderate as it is, we're still nearer the "bullish" end of things than the "bearish."

We continue to watch the U.S. Dollar against many non U.S. currencies, short term interest rates, market earnings yield and many other factors.

Such events are relatively rare. There’s a school of thought that these are once-in-a-lifetime events.  But, our lifetimes are longer now and maybe this needs rethinking.  While our SignalPoint process isn’t specifically designed for such events, it is comforting to see just how well the machinery worked.  In general, our portfolios were rich in cash when market risks were the highest and were essentially without surplus cash when prices were at or near their lows. The money was put to work systematically as prices declined thus lowering our average costs and improving our chances of profitable recovery.

As we start the new year our accounts have recovered nicely and the cash levels have increased as the perceived market risk has risen.  Today our cash levels are closer to the middle of the historical bell curve than it has been for a long time.  From 2007 through 2009 it has ranged from one end of the curve to the other and now back closer to the midsection.

If we could measure the consensus opinion for the 2010 year from all the business news commentators and contributors, we probably could construct a bell curve of that data. Would it have any meaningful predictive power? There are those who feel the markets act in regular cyclical patterns that are predictable.  There’s another school of thought that considers the markets random in their movements.  The 2007 book “The Black Swan” (by H.H. Taleb) discusses “The impact of the Highly Improbable” – those far ends of the statistical probability projections.  It is usually assumed the safest bets have always been to stick to the highly probable.  However, history shows that the biggest changes have occurred when the least probable and non-predictable events have come along.  Portfolio designs including ‘shock absorbers’ that can adapt to rare or even unpredictable events would seem to be a logical choice.  Mr. Buy n’ Hold may have survived the last 18 months, but he consumed an unusual amount of Rolaids along the way.

Best wishes for a prosperous 2010.

This week the Value Line P/E is 16.6  which is very close to the 10 year average value.  Is that good or bad?  Well, it’s “average!”   It’s only when we add in another component that we begin to understand what the current P/E value means.  This other component is in the form of what competes for our investment dollars – short term interest rates.

When interest rates are high, people will use short term money market funds as a safe haven for their dollars.  This makes sense because high interest rates usually mean it is harder for businesses to borrow and therefore means slower corporate growth on average.  When rates are low, people seek better opportunity for their dollars and will venture into the stock market.  Again, when rates are low, business borrowing is easier and therefore companies can borrow to grow their businesses.

In this graphic, we first see the recent decade’s P/E ratio plotted against the S&P 500 Index.  Note the blue line shows the average P/E for the period.   At the bottom of the graphic, the interest rate history added as a separate element.  When added together, we see a range.  The Red Line delineates the most bearish 10% of the data where the Green line and below shows the most bullish 10% of the data.

As you can see, even though the P/E is “average” the combination of very low interest rates and the P/E is bullish.  This explains why SignalPoint is focused on the current interest rate trend right now.  If we were to see interest rates climb to even 4%, this indicator would be solidly neutral instead of bullish.  Note other times when the P/E has been around where it is now and see how interest rates at that time affected our review.  In 2007 it wasn’t so much the P/E that was “high”, but the combination of P/E and interest rates that signaled a high risk market. 

Of the four market measures, two are neutral, and two are moderately bullish.  Overall the signal is slightly bullish, but will remains so only as long as interest rates remain very low.  The P/E is probably as high as it should be with more normal interest rates. 

For the stock portfolios November was positive and regained most of the ground that had been given up in late October.  Income portfolios continued to bring in dividend income, while the inflation indexed bond fund rose enough to generate some profit taking.

Our market risk indicator continues to show good potential going forward should short term interest rates remain low.  Looking out 12 months, we believe much depends upon the interest rate environment.  The 13 week Treasury Coupon is currently has a remarkable 0.041% per annum yield!  Even extending our focus to the twenty year adjustable rate mortgage yield is only 4.19%.   If we assume interest rates are a “supply and demand” measure, there would appear to be lots of supply and not much demand.

 In the mean time, speculative activity in the major exchanges has moderated from the previous months.  This pause was necessary and healthy for the markets in general. Even while cumulative breadth has flattened out we still see more new highs than new lows over the last 52 weeks.

The majority of our portfolios’ positions remain closer to their next sell targets than their buy prices. Even a relatively small yearend rally will trip incremental selling. We continue to monitor all sectors closely. 

The Telecommunications sector rose this week signaling a 5% inventory reduction in some of our portfolios. That sector has lagged many of the others with which we work. It appears it is now catching up a bit.

Of our market risk measures, two rose and two declined in risk posture. There are now two bullish and two neutral. The overall reading is currently slightly into the bullish area of our database. The Divergence component may be locked into a statistically bullish posture for a while, since it was just about a year ago that the markets hit their first bottom. It becomes difficult to post “new 52 week lows” after such an event. This component will become more useful again sometime after March of 2010. For now it would appear that the majority of market participants see a steady continuation of “recovery.”

The other place we have seen heightened awareness of impending inflationary pressure is another sale of a small portion of our position in TIP, an ETF that is based in the threat of U.S. Treasury TIPS inflation indexed treasuries. Investors looking ahead for some inflation protection have started to shift assets toward these vehicles. The added demand has had the effect of raising the price of the underlying treasuries. Again, this rise in the price of the TIP component has triggered a profitable exposure reduction in this component to bring it back into line with the overall portfolio’s design.

In both cases, we see the SignalPoint Process responding to market conditions, not predicting them. SignalPoint’s 20/20 hindsight is of greater accuracy over time than speculation of future events. Other areas of the market will change in their own ways as time passes. Our Process tracks those changes and adjusts as needed.

Currently short term interest rates are near zero. Should economists and bankers anticipate and measure the beginnings of inflation, short term interest rates will begin to rise. This will push our Relative Valuation component from its current bullish stance to a higher-risk profile. It remains the only component we measure that is still bullish by historical measures and only because of the very low short term Treasury rates. The other three components are currently Neutral.

The declines seen at the end of October have helped to slow the pace of money returning to the markets. This has had the benefit of letting the markets cool off and our Speculation component reflects this fact.  It has dropped from a very bearish value a few weeks ago to a neutral ranking today.  Three of our four risk components are now neutral with just the Relative Valuation component showing a bullish signal.  Overall we see a decline in risk and appropriate cash levels in our portfolios.

The rapidly expanding number of exchange traded mutual funds gives us the ability to shop for the very best for each type of portfolio.  We currently use ten different ETF providers to accomplish our portfolio designs. More ETFs become available each month. As this ability to choose expands, so does our effort in building creatively designed and efficient portfolios.

In the last two weeks we’ve seen the markets move mostly sideways even while daily volatility has remained very high.  Due to the sideway movement, our trade activity in our portfolios has slowed significantly. For instance, this week there was only one sell triggered - the Precious Metals ETF in our Global Signal portfolio. Most portfolioscomponents remain much closer to their respective selling signals than their buying points. The cash reserve has acted as a buffer for the accounts adding desirable stability.

The Divergence component remains bullish, but has been rising slightly in risk. We are beginning to see a more divergent level of thinking in market participants. That can be good news in the longer term, but less enthusiastic in the shorter term. When all participants are thinking alike (either bullish or bearish) it is usually good for the markets short term.  When there are large numbers of participants betting both for a rising and falling market, it usually has meant a stagnate or declining market in the shorter term. On the NASDAQ last week there were twice as many declining stocks as advancing. This would indicate the beginning of the expected consolidation mentioned in earlier reports.  Trading activity also slowed after the beginning of last week.  Again, this is probably the market digesting the large gains of the last quarter.

Finally, our risk model continues to show “average risk” overall and remains in the manageable arena.  The portfolio cash reserves are coming in line with the risk level which allows our inventory to be sold should prices continue upward and ample reserves of cash for downside averaging should prices decline.    We continue to monitor the SignalPoint portfolios for potential opportunity.

It is important to note how bias the Speculation component is, however. It currently takes a gain of well over 100% in the last Quarter for a stock to make Value Line's Best Performers list. However, it only takes a price drop of about 10% for a stock to make their Worst Performers list. Normally there's better balance between the two indicators. One must remember that a 50% decline with a full recovery is the same as a 100% gain from the low point. Many, many stocks declined last year by 50% or more. So, if they've just returned to their original price, they could truly be up 100% - but effectively be "unchanged" over this time frame.

Sells in essentially all business sectors positions continued through the beginning of this week. This is true both domestically and in the ex-U.S. sectors. In most portfolios the cash reserve level continues to climb as sells are triggered, and are keeping pace with the portfolios' equity growth.  Our Currency Point portfolio shows a cash reserve (in U.S. dollars) of about 31% with the remainder in ten non-U.S. denominated currencies.  The cash component, which has risen slowly from 29% at the beginning of the year, continues to keep pace on a pro-rata basis with the invested positions of the portfolio which has moved ahead about 8% for the year. This portfolio is well situated to respond to changes in the U.S. dollar relative to foreign currencies going forward.  Finally, the three pronged approach of our Income portfolios (Government, Corporate and Real Estate) has done well in the last 12 months. The Income portfolios now have higher cash levels than any time this year. While growth going forward may slow, the income for which these portfolios were designed continues to flow.

All this has been against a background of moderately higher risk. The past few weeks have shown continued influx of sideline money returning to the market place. This excessive ‘demand’ for equities has led to unsustainable price rallies in common stocks on the NYSE as well as the NASDAQ exchanges. As of this week our Speculation component remains bearish while two others remain bullish and one neutral. Overall we’re in the middle of the “average risk” range. This is not a bad place to be considering the massive rally we’ve seen in stocks since the March lows.

For the last few weeks we’ve seen selling in essentially all areas of the market and have been accumulating cash in reserve for any future declines we may see.  This rise in indicated risk allows us to continue selling into the markets’ strenth.  While treasury rates remain historically low, it can be anticipated that they will at least return to more normal levels. If this were to happen, it would push the Relative Valuation component back solidly into its own bearish camp. So far only Divergence (a measure of homogeneous thinking by investors) is solidly bullish.  This says that investors are not yet fleeing the Merry-Go-Round.  It is very difficult to predict just how long such enthusiasm will last.  It is, however, reasonably easy to guess where the pendulum will swing once it starts to shift in direction.  We continue to seek profitable recovery of our cash reserves wherever possible.

Please note the current price and then the 52 week High.  In many cases we see that the current price is now very near the high for the previous 12 months.  It is of comfort to know that many of these components have generated sales and the positions are fully funded with reserves of cash at present.  While the interest earned on cash is nominal these days, most of the sales generated very handsome gains from the lows at which shares were purchased earlier.  Only the REIT funds are still considerably off their previous high water marks. 

Only the Speculation component remains in its bearish territory.  Divergence is very bullish, IPO activity is nearly nonexistant.   Of note in the Relative Valuation component is that the Price/Earnings ratio of Value Line’s 1700 stocks is now about where it was in 2007 before the market started to unravel.  The big difference is that back then short term interest rates were around 5% where they are less than 0.2% today.  Where interest rate go from here will determine if there’s any upside room for the markets.  Earnings may start to rebuild slowly and this would allow some further upside movement. However, if short term rates start to rise quickly, that could put a cap on further gains in the market for a while.

Our market risk indicator is in the lower 10th percentile of our data since 1982.  While two of the components remain bullish, one is marginally bearish and one is neutral.  With the market rallies of late, we’ve seen sales in our Currency, High Income, Global Signal and Balanced SP portfolios.  Many components are now fully funded with reserves of cash.

In Monday’s Wall $treet Journal (8/31/09), an article by Jason Zweig, starts off with “Don’t be Happy; Worry!”  He mentions the very low P/E back in March of this year – the lowest since 1986 – and how it’s risen to around 18.4.  Yes, this is true.  The pendulum has covered a great distance is a very short period of time.  He goes on to point out insider selling was very low from September ’08 through March of ’09.  He then tells us that in August insider selling rose to be 31 times as much as insider buying.  At SignalPoint we’re pleased to know we’ve been selling shares into the same strength that “insiders” have been exercising with their own holdings.

We have mentioned in previous Weekly Risk Updates the panic aspects of last year’s market (see Blog post for 11/17/2008 under “Get The Feed”), the deeply oversold conditions of the market from October through March (post for 03/02/2009), the requirement for consolidation because of “too much, too fast” in the way of recovery from the lows (see 05/25/2009 and 06/08/2009) and the return of worry about inflation (post 06/01/2009).  With all of this we’ve attempted to decouple the “Worry” and the “Happy” from investing.  We’ve attempted to moderate the emotional content and focus on the tasks at hand.

Other money managers might have thought our high cash reserves in 2007 were "unnecessary".  They might have thought that having almost no cash reserves well into the panic of late ’08 and early ’09 were “wrong.”  They might now be thinking with the 46% run up in the DJIA since March that not being fully invested would be equivalent to "missing the boat".  Our reliance on the SignalPoint Process steered us to heavy cash back in ’07, tacked us towards utilizing that cash to average down during the panic, and has now refilled the holds with some of that cash from profitable sales during the market’s recent rise.  It's clear that SignalPoint may just chart a different course.

As for today, the i-Wave Market Risk Indicator remains at the lower end of the “Average Risk” range.  This doesn’t mean “No Risk” but that risk is measurable and manageable.  Our Speculation component remains the only component that is currently bearish.  This compoents  reflects its sensitivity to the rapid rise in stock prices over the last 13 weeks - there are still 35 companies listed in Value Line’s “Best Performers – Last 13 Weeks” screen that have risen more than 100% in that short time.  (Six of these have risen more than 200%).  From this data you can get the feeling that there’s a bit of speculative activity present in the market.  Near term, second wave of consolidation may be needed to correct some of the excesses being seen.  Recession seems to be moderating, but earnings have yet to catch up with the curve.  We at SignalPoint remain poised with adequate cash reserves and a Process as to how to apply them if necessary.

Selling continued this week with Latin America, Health Care and investment grade corporate bonds. No clear pattern of sector rotation has appeared as of yet. With the exception of the long duration government bonds, the SignalPoint portfolio positions remain close to our targeted selling points.

With a month to go, the 3rdquarter has been very good so far. With the major US indices up 13% to 15% since the end of June, profit opportunities have resulted in trimming of certain positions thereby reducing portfolio risk.  The SignalPoint team continuously monitors the major business sectors, bond markets and currencies watching for investment and profit potential.

The Market opens on Monday and Wednesday weren’t pretty, but Tuesday and later on Wednesday we saw a mild return from the early weakness. So for all the “news” we see, the major markets have only moved between 1% and 2% to the downside. While CNBC may consider this "newsworthy", our SignalPoint process has been unmoved by this shorter term movement and has seen no need for activity.

Our market risk model has been hovering at or near the border between Neutral and Low Risk for several weeks now (approx 90% of the data since 1982 being more bearish than now).  This week it crosses the threshold once again to Low Risk for longer term market commitments.  Relative Valuation improved with a small drop in P/E while Speculation moderated.  Divergence remains very bullish and Zeal remains neutral to bullish.  Overall indicated cash reserve level remain historcally very low.  Our portfolios remain adequately funded with cash for the indicated risk level.

Best regards,

Tom Veale

This week there has been talk in the media about the U.S. Dollar possibly reaching a near term low point against many major foreign currencies.  Some expect a rebound over the next year or two. The SignalPoint process has been active with our CurrencyPoint portfolio (a new portfolio introduced recently) registering sales in foreign currency components. Last Fall and Winter as the British Pound Sterling was falling against the Dollar we used the relatively stronger USD to buy more of this currency fund. This example from the portfolio helps to describe the Process’s activity:

Recently SignalPoint reversed the effort by selling higher value foreign currency components and “buying” more inexpensive U.S. Dollar money market funds. Should the dollar strengthen from here, the SignalPoint process will again deploy the “stronger” U.S. dollars to repurchase weaker nonU.S. currency components.

With one of our Market Risk components bearish, two bullish and one neutral, we’re getting a bit of a mixed message. However, the overall Indicator is still mildly optimistic at this time showing a cash reserve goal in the lower 85% of our database since 1982. Market Price/Earnings ratios continue to push upward with the assumption that short term interest rates will remain low for some time to come. Recently polled, a large number of economists feel short term rates will start to rise slowly around the end of 2009 and will rise steadily for about 18 months thereafter. It is my view that we’ve seen about all the rise in P/E we should see with such a future for interest rates. Our Relative Valuation component combines the P/E with short term interest rates to come to a value that helps benchmark the combination against market moves. While currently bullish, if interest rates rise to around 3.5% for the 13 Week Treasury coupon, this component will be back in the Neutral range and showing little upside potential for the stock market. Coming out of recession, we should expect earnings to start to look better, year over year. That sort of comparison won’t show up until some time in 2010. So, as interest rates rise, we could see the P/E plateau or even decline slightly. This would tend to help keep a market rally alive.

Partially because volatility is higher in the portfolios with stock funds in them we’ve seen the greater activity. The income portfolios, however, are following the trend even if not at the same exact pace. The cash reserve levels have risen just since the end of the second quarter with selling across many business sectors. We’ve seen selling in all three areas of our income portfolios including government funds, real estate funds and corporate funds.

 Relative Valuation (RV) is increasing at the most rapid pace of the four components. This is because of the rise in the Price/Earnings ratio shown. As prices rise the P/E rises, too. The overall RV outlook is still bullish as short term interest rates remain very low by historical comparison. The other components remained mostly unchanged for the week.

As we’ve seen risk rise, our market risk assessment model has also noticed. Relative Valuation, while still bullish, has risen quickly in the last few weeks. The Speculation component that had signaled a warning earlier this year has started to level out. Relative Valuation and Speculation have offset each other keeping the overall risk level at the lower end of the Neutral range. Heavy market participation has been primarily driving advancing stocks while far fewer have been in decline. New Highs (52 week basis) are starting to rise statistically. New Lows remain a small percentage of the issues traded. Both the larger and smaller capitalized stocks are moving in harmony and our risk indicators for both are still in lockstep.

As always, we remain vigilant reviewing the general health of the markets and overseeing potential profitable activities.

The gist of the conversation centered on what is the greater emotion, fear or greed? What do you think? It’s an interesting study in human nature and it seems that while many are fear-motivated and that seems to be the prevalent emotion we observe and hear about these days, I believe that greed in fact is a more compelling emotion, at least in the world of making money, investing--and television reality shows.

When you are fearful, as most have been recently with the market's significant drops, you are left with a feeling of helplessness. The cliché "misery loves company" has never been more true, and when we hear that our friends are worse off just as we are, it might actually make us feel better. Sad, but true.

Contrast this with greed. Isn’t this the ultra-competitive nature of humanity quantified into money and all things material? When the stock markets rise year after year, people seem to lose control of reason and want to extend themselves way beyond what is prudent or logical. That’s because as their friends are doing better than they are, and the competitive streak, also casually known as “keeping up with the Joneses" sets in, their emotions push them to make decisions that aren’t fiscally sound. Think about extended credit, 125% loans, margin on investments and the TV show Deal or No Deal. What's wrong with taking a risk for the possibility of more?

While it seems that winning $200,000 during your 15 minutes of fame should and would be enough, how many times have people screamed out “No Deal!" when faced with the option of taking the deal and walking or risking more? More often than not. Sure it makes for entertaining television, but if you were there with the crowd yelling at you, would you take the money and run? Remember Fear Factor? This was an even more comical scenario of greed conquering fear. Contestants on that show will do anything for the prize.

So while most if not all would agree that investing in our future and retirement is a huge concern, it seems that people take unnecessary risks and let emotions affect decisions that are better left decided in the absence of emotions. Is this truly possible? Many have asked and I have pondered this myself. Can people really make decisions void of emotion? The answer is probably not. But, you can empower others to make decisions for you to reduce the emotional impact and associated stress.

While no one can make consistent and accurate predictions about what’s next, with the recent rise in consumer confidence and lift in the markets, isn’t this really just normal psychology? Doesn’t everyone want to feel better during a recession? Historically, yes. Doesn’t the economy usually rebound after a severe market crisis? Historically, yes. But won’t people still be greedy when the market returns are higher than the risk free money market rates, like during the last quarter? Yes again.

So while the future still remains to be seen, the past certainly has a way a repeating itself. However, let’s hope that 2008 doesn’t repeat itself anytime soon... “Deal!”

Click here to access the article from the Springfield Business Journal website.

Currently two of the four components are neutral and two remain bullish. Relative Valuation remains bullish, but it appears the markets are pricing stocks as though short term interest rates were nearer 5% than the very low 0.2% for the 13 week Treasury. Since the markets tend to anticipate, this might be a sign of where interest rates will go should inflationary pressures start to rise. Even a “reversion to mean” would push up short term rates measurably.

The consolidation period has left our portfolios in good shape so far. While there hasn’t been much in the way of trade activity or capital appreciation, the dividend distributions continue.

We continue to carefully monitor all the various components for changes in their status.

The inevitable separation of better and not-so-good companies has started to appear. The stronger companies’ stocks have held up well during the consolidation while the weaker ones have settled back. This has kept our Speculation component falling back toward a more normal range. It remains short term bearish this week.

Overall, most market participants have continued to drive more stocks toward new 52 week highs than toward lows. Out of the 6000+ stocks on the NYSE and the Nasdaq Composite Index only 32 hit new lows last week. This compares favorably to the 152 companies that managed to touch new highs. So, our Divergence component is bullish again this week.

Finally, there remains a slight net contraction in the number of issues available for trading each week. Our Zeal component measures this and shows the direction to be slightly bullish again this week.

The week saw a sale of 5% of the Healthcare position in Signal 10 portfolio, a sale of 5% of the Euro holding in Currency Point portfolio and a similar amount of a REIT holding in the Moderate Income Point portfolio. We also had a 5% sale in the shares of the 20+ year Treasury bond fund in our CU Income Plus portfolio. While the money market rates are very low, these sales have only just started to refund our usually generous reserves and don’t affect overall dividend performance of the portfolios to any significant degree.

This graphic shows just how far the Speculation component has ranged in the last 9 months:

Much of what has been seen in the last 8 weeks is somewhat ‘kneejerk’ reaction to how depressed all stocks were earlier. Considering 80% of the database since 1982 exists between the Red and the Green lines, you can see how far from normal the previous nine months have been.

Close scrutiny of our data shows there is need to complete this consolidation process before the markets can move forward. The second quarter of 2009 has been generous for most of the market. Our SignalPoint portfolios will be reviewed soon for their performance for the quarter. We look forward to comparing our activity to the general markets.

With the Speculation component decidedly bearish we still have the other three components giving bullish signals. If the markets do consolidate in somewhat of an orderly fashion, it can be assumed there is still some upside potential.

We are seeing some of this consolidation in both our Income and our Stock portfolios. As the pace of price rise has slowed, so has our selling of small amounts of the inventory. Most components are still closer to selling shares than buying more at this point. We expect to see the Speculation component start to moderate in the coming weeks which will bring the overall risk level back to the mid-average risk range.

The composite has moved all the way through its Neutral range in just three weeks to be borderline High Risk. A few weeks ago I mentioned corks rising rapidly to the surface. I believe this is what we are seeing. Driven down by short selling, panic and fear through the start of March, stocks have had almost nowhere else to go but upward. Still, it’s hard to imagine that Pier 1 Imports is worth nearly 1000% more than 13 weeks ago. Or, that Benihana’s restaurant is doing so much better that its stock is now worth 272% more than in March. These percent changes only make sense when we look further back in time to see how far they had fallen by early March.

It will most likely take the markets some time to consolidate all these extremely rapid gains. Further, there will be a delay before companies start to show a return to more normal business. It would be reasonable to assume that the markets would move generally sideways until we again see some solid earnings and moderate growth.

Still, the statistics also show very strong technical uniformity in opinion among market participants. Very few new 52 week Lows are being seen and the Absolute Breadth (advancing stocks vs. declining) has been very strong:

The graphic shows nicely the time when essentially everything in the way of stocks was being sold. It now shows that since March, essentially everything has been on market participants’ shopping lists.

We remain vigilant in watching how the markets are acting and continue to sell incremental amounts of stock funds as prices rise.

In the late ‘70s and much of the ‘80s we were paying for the huge spending effort related to the Cold War and Viet Nam. How did we pay? We paid with a tremendous increase in money supply and the resultant inflation. I’m not attempting to pass judgment here, just stating the facts. We are again involved in skirmishes and a terrorist “cold war” that are proving to be expensive. We are again spending money not currently being collected by the IRS. So, how will it be paid for this time? My guess is the M.O. won’t have changed.

What happens after such periods? Usually there are attempts to get inflation under control via increased interest rates. This increase will spread up and down the yield curve once the effort is under way. High interest rates are very hard on commerce. Usually business growth slows during high interest rate times.

The next phase is to “stimulate” by reducing interest rates. This is when we start to see expansion of commerce and usually a bullish period in Stocks.

Stocks and bonds react differently to the cycle of interest rates (which are driven by inflation). Each works its own way through such times. At SignalPoint our process keeps both our Equity and our Income portfolios moving in appropriate manner for the conditions. Long bond funds will be weaker as interest rates rise. SignalPoint will accumulate more of such bond funds during their weakness (average down in Price and average up in effective Yield). Later when interest rates start to decline, the long bond funds usually appreciate nicely – all the while with handsome payouts.

Stock prices initially fall as interest rates rise based upon a slowing economy. Lower stock prices usually equate to better dividend yield. At SignalPoint if the discount on share prices is big enough, we’ll start the accumulation of shares during this initial phase of the inflationary cycle. Then as interest rates start to recede, the markets respond and we start to liberate some of the inventory accumulated earlier.

So, while such times can be uncomfortable, proper management of investments helps to lessen the impact. The SignalPoint process is less concerned with Inflation and more concerned with controlling risk, seeking value when making purchases and realizing profits when selling. In doing so it responds appropriately to whatever the markets’ latest concern might be.

This week our Market Risk Indicator rose closer to the middle of its Average Risk range. This is again being driven by the apparent speculative activity at the stock exchanges. The SignalPoint portfolios have been quite busy on the Sell side in Basic Materials, Consumer Cyclical, Corporate Convertible Bonds funds, Global Government bond funds, Industrials, Energy, Consumer Staples, Info Tech and Real Estate. Not many stones were left unturned. Portfolio Cash Reserves have been rising slowly with the rise in the apparent market risk. Our other three components remain moderately bullish.

While the corks are returning to the surface it can be very exciting. However, when they do surface, they don’t usually continue to rise. Instead they will bob there for some time waiting for the tides to lift or lower them again. They were driven deep in last year’s tsunami – they’ve risen quickly in recent weeks. The Speculation component shows this and tempers our enthusiasm relative to how far the corks will rise. Relative Valuation indicates that the broad markets are as yet not over-valued. We do see a difference between the larger cap and smaller cap areas of the market, however. It is the larger caps that show the higher speculative activity right now. While smaller caps usually are the “early recovery” stocks following a recession, the larger caps usually respond first after a panic as we had last fall.

The smaller cap stocks may still be the group that responds more quickly to economic stability and recovery as that develops. In the mean time we’ve been fortunate enough to take small profits as they appear and limit risk exposure as it has been rising via the SignalPoint Process.

Following our inventory control process and our market risk indicator we continued to decrease inventory incrementally. Sales were realized in Industrials, Telecommunications, Info Tech and Basic Materials.

In our CurrencyPoint portfolio we sold a portion of our Australian Dollar fund. The U.S. Dollar continues to cycle up and down against various foreign currencies as the trichotomy of “inflation vs. deflation vs. stagflation” gets daily air time on the business news channels.

The CurrencyPoint portfolio was modeled for three quarters of ’06, all of ’07 and ’08 and the first quarter of ’09. The actual portfolio was first funded in late 2008. CurrencyPoint’s objective is moderate income, portfolio stability and profitable currency trend capture over time. This portfolio is made up of exchange traded funds representing short term government treasuries of 10 non-U.S countries.

Finally, our i-Wave Market Risk indicator fell slightly for the week. Two components remain unchanged and bullish while one rose and one fell. Only one component is currently bearish: Speculation. The speculation indicator declined modestly this week, but still shows speculative activity is high right now. The markets typically consolidate such rapid gains with reasonable poise.

The other components remain bullish with only slight rises in risk profile. Overall the i-Wave is still mildly bullish even with the Speculation increase. The markets will consolidate this recent activity and afterward we’ll still have a moderately priced market.

So, with the inflow of investing dollars, what has happened? Many of our various portfolios have risen enough to generate some selling activity. Here’s an example of an income component:

The moderate cash reserves have been reused several times to capture small gains for the portfolio since last fall.

A similar picture can be seen in many of the domestic business sectors and in the international arena as well. These markets were hit hard during the decline but have started coming back nicely.

While the short term looks a bit overheated, the longer term prospects remain good. The very low risk levels seen over the last two quarters allowed the SignalPoint process to work on its “accumulation” side. We’re now just beginning to see it “distribute” a small amount of the added inventory.

Three of the four i-Wave components rose in risk level this week, but only one of them is currently as high as ‘neutral’ with the three remaining solidly bullish. It is important to understand how rare it is to have all four components in harmony as we had earlier this year. Even three giving the same bullish signal is unusual. Overall the i-Wave remains in the bottom 10th percentile of its historic range since 1982.

While many of our component ETFs were near 100% invested during much of the last 6 months the recent selling has brought the cash reserve levels up near the suggested level of the i-Wave. This “final filter” for the SignalPoint process continues to be a good guide.

The market tends to react in a reflex manner after severe declines like the ones we saw in early March. Since then we’ve seen our Speculation measure return from very bullish to its current Neutral rating. In Value Line this week, all 41 stocks in their “Best Performers” list have gained over 100% and the “best” is up over 500% in the last 13 weeks. When we compare that to the start of 2009 it is rather remarkable. The year started with no stocks in Value Line’s 1700 with a 13 week gain of over 90%. We see the same in Value Line’s Expanded Edition. All of the 50 stocks in their “Best Performers” list are also up over 100% in the most recent 13 weeks (the best up 500+% also).

Only Speculation is currently showing a Neutral ranking; all other components are currently still “bullish” even if they are rising slightly in risk. P/E ratios remain low, short term interest rates are also very low. We continue to keep a close watch on each component of our various portfolios with an eye on limiting market risk exposure and capitalizing on profit opportunities as they appear. Short term LIFO gains are being used to fund our money market reserves.

While pockets of the economy remain very depressed, many have maintained profitability during this remarkable recent 6 month period. It is a credit to corporate management that they have been able to respond as well as they have under the extraordinary circumstances. It may be a while before the markets fully appreciate this staying power. We continue to monitor all the major business sectors, income markets as well as the U.S. Dollar against major foreign currencies.

As mentioned in earlier editions, the incredibly quick turn in consumer spending in the 4th quarter of ’08 didn’t really show up in corporate earnings results last year. Now we’re beginning to see just how grim it was for businesses. 1st Quarter results will show a portion of the earnings damage that occurred. As I said before, even the most astute business manager couldn’t have foreseen such a dramatic shift in spending patterns.

Because quarterly results are rearward looking, these unhappy reports are looking more at the past than the future. Consumers have started to return to a higher level of purchasing and the economic engine is at least idling along.

The SignalPoint process has been busy in the last few weeks. We’ve seen a variety of our portfolios starting to trade to capture some of the more recent improved prices. Slowly we’re starting to see the Cash Reserve side of our portfolios rebuild. Modest selling has occurred in several business sectors.

Of our three goals, Price Appreciation over time, Dividend Capture over time and Profitable Volatility Capture over time two have been contributing to results in the 1st quarter. Price appreciation takes time but we’ve sewn the necessary seeds.

Even with the recent improvement in market psychology our risk indicators continue to show very low levels. Still in the lowest 5% of our database since 1982 we see little sign of overheating in general. The smaller cap stocks, however, are starting to see a larger amount of speculative activity. Even with this, the larger and smaller cap markets continue to move nearly lockstep.

It is interesting to note that the long period of nearly no Initial Public Offerings has started to thaw. A few new company listings have appeared in the last couple of weeks. Our Zeal measurement isn’t sensitive enough to see such a small statistical change, but the news is interesting. Usually a company likes to take itself Public when P/E ratios are more generous than right now. If at one point in time the market is willing to pay $20 for a dollar’s worth of earnings why would a company be willing to “go public” when the general market is only paying around $12 for that same earned dollar? This helps explain the lack of IPOs in recent months. The improvement in P/E in recent weeks is helping to get the IPO activity started again. This is a very early sign of a “return to life” in the market place.

Price/Earnings for the 5000 stocks in Value Line is still a moderate number. When combined with the 13 week Treasury coupon rate it indicates very low risk when compared to our 27 year database. While 1st quarter earnings may show the stresses of the halt of consumer spending in the 4th quarter, it appears the spending pendulum has started to return to a more normal path.

Overall market risk has risen slightly in the last few weeks. It still remains near the very bottom of our data history. The rapid decline in Cumulative Risk continues as this image shows:

The steep slope from the start of the 4th quarter of ’08 continues through the current week’s data. Weekly we review all our data for signs there has been a shift in direction. Historically as this graphic shows, risk moderation and expansion can continue for very long periods. The rate of change is what is of interest currently.

With mortgage money now becoming available at near record low interest, consumer spending is starting to recover. On a trip last week I found airports busy and parking well utilized. It is interesting to note that overseas travel remains slow while domestic travel is strong for a recessionary period. Business conference activity slowed dramatically in the short term, but long term planning and bookings remain very strong.

It would appear that those with an investing horizon longer than three heartbeats are becoming more willing to again participate in the U.S. equity markets. Strength in Financials, Industrials, Information Technology and Basic Materials are early signs of this longer term vision. We are seeing strength overseas as well. Geographic areas of Europe, Asia and Latin America are showing gains from their recent lows of 20% to 30%. We remain vigilant, watching for opportunities to capture gains and reduce risk.

While there is now measurable speculation returning (more so in the smaller cap stocks) it statistically has had little impact on our risk indicator so far. When we look at our Speculation component in particular we see 38 company stocks that have more than doubled in the last 13 weeks. As an industry, pharmaceutical and biotech companies make up a significant portion of these rapidly rising stocks.

Just a few weeks ago the Value Line median dividend yield was at about 4%. Because of the rise in prices of stocks that yield is now down to an effective 3.3% as of this week. That’s a big move. But it is worth remembering that the median yield in 2007 at the market peak was only 1.6% or less than half the current level. U.S. Treasury yields are very low on shorter term notes. Only when one reaches out past 10 years does one see yields similar to the current Value Line level. So, while the longer treasury notes and bonds have relatively low risk of principal, they only just compete with current average stock market yields.

This portfolio was started with a very low level of cash reserve as our Risk Indicator has been in the bottom 10th percentile of its range for quite some time. So, this first sale adds some cushion and some latent purchasing power to the holding for the future.

The strong market activity for the last two weeks has helped many of the business sectors. With such a strong upward move we see three of our four market measures rising slightly in their evaluation of risk. However, all components are still showing very strong bullish signals. Seeing these slight rises in measured risk serves two purposes, 1) to execute Sell orders as our targets are reached and 2) make sure our Equity/Cash balance remains appropriate for the market risk.

While the number of “new 52 week highs” is still small, the number of “new lows” is shrinking quickly with the change in market attitude. Speculation is measurable, but still miniscule compared to historical norms. With interest rates and P/Es remaining very low, our Relative Valuation component is exceedingly bullish right now. The stock markets tend to anticipate what the economic conditions are going to be in the future. If true again, this would suggest the markets see economic recovery starting 6 to 12 months out. At what speed and to what level there is recovery is still undetermined. Our SignalPoint process will be at work, however.

Undoubtedly at this point, developed nations of the world understand the full impact of America’s consumption, or lack of it, and the rippling effects through most economies. As we are all hopeful the Stimulus will live up to its name, here are the category highlights of what it’s hoping to stimulate:

Tax Relief $288B

State & Local Fiscal Relief $144B

Infrastructure & Science $111B

Protecting the Vulnerable $81B

Healthcare $59B

Education & Training $53B

Energy $43B

Other $8B

So there we have it….$787 billion ready to go to work…hopefully. As you break this down among the 300 million American citizens, that’s about $2,623 per person of relief in one form or another. As I talk with individuals about their opinions on first the TARP and now the Stimulus, perspectives are varied as to their intent and effectiveness, but the one string of consensus is that we all want stability.

Can I make a suggestion? Let’s quit worrying about inflation for a moment and shift our focus to deflation. For the pundits who say inflation is a major concern, I would ask them to look at Japan over the last decade. It actually appears that inflation may be our friend to a degree of course. As an example, if property values were to increase, this would help shore up the books of many banks. I know when many people hear “inflation” they think $4 a gallon gas. Fact is, those really high prices were largely because of speculation, not inflation.

Even as I write this piece about the Stimulus and ask provoking questions about where we’re at and where we’re headed, I am cognizant to this being economics as well. It seems when we boil it down, we all simply want answers. But truly are there any? How many times can we tell the story in the hopes of uncovering yet another nugget? Even non-financial programming has a budgetary slant these days like Rachel Ray cooking dinner on 2 bucks.

We all realize that there are real economic issues, in fact unprecedented in certain respects. But if we seriously keep hearing the sky is falling or already did, we will be perpetually depressed. Fact is, as a nation, we’ve seen hard times before and somehow weathered the storm and got through it. I’m sure we will this time too. Hopefully sooner than later.

I think next time I’m going to write something about gardening, that way I know there will be some growth. Actually, I am going to offer some real suggestions that I believe will help your businesses. Simple observations and what appear to be common sense, yet very much unpracticed.

Even with the bold upward moves there were only 26 new Highs (last 52 weeks) showing for all 6300 stocks on the NASDAQ Composite and the NYSE. There were over 1300 new Lows registered last week, so the good stocks are still being overwhelmed by the bad statistically. However, when we look at the Advance/Decline data, we find 5300 stocks advanced compared to about 900 that declined for those two exchanges. So, while not making a lot of new yearly highs, the markets did make a truly bold move. This week so far has shown some healthy short term profit taking along with continued market advances through the Tuesday close.

We maintain our vigil with all portfolios looking for opportunities to profitably capture a portion of the markets’ high volatility. Market dividend yields are higher than short term treasuries all the way through the 20 year (see last week’s report). Generally this starts to attract money from the sidelines back toward common stocks.

Three of the i-Wave components fell in indicated risk while one remained unchanged this week. The overall effect was to take our market risk indicator down to a very low level. This equates to an excellent time to be either adding to positions already owned by investors or starting new investments.

The graphic shown here relates what very low risk 13 week Treasury’s pay vs. what the median dividend rate of the Value Line universe of 1700 stocks. When the Treasury rate is high and dividends are low, this has been a risky time to own stocks and mutual funds. Opposite that is when interest rates are very low (like now) and average dividends are quite high (like now). Such times are quite low in risk for investors since it usually corresponds with markets that are depressed in price.

As you can see here, with the 13 Week Treasury Coupon Rate being under 0.3% and the median dividend of all stocks in Value Line that pay such dividends at 4.0% the graph goes well below the zero mark. The current reading is then minus 3.716. In the eleven years shown here that is the lowest level achieved. In this case, short term treasuries have a very hard time competing with even the average dividends of stocks. This is just one more indication that the market is heavily over-sold.

Should any of you be motivated to contact the SEC to state your opinion relative to restoration of the Up-Tick Rule here’s their address:

SEC Headquarters, 100 F Street N.E., Washington, DC 20549, Attention: Mary Schapiro – Chairman

For over 70 years the Up-Tick rule helped make for orderly markets during both good times and bad. It never inhibited short sellers, but only made for a better planned sale by someone determined to “short” a stock, or as now with “short index funds”, short the market. Their test period for deciding whether the rule was still needed was about two years during a very bullish and low volatility market. Since removal, volatility has soared and shorting has been unmerciful and without logic. Think of it as the “dark side” of irrational exuberance. Feel free to Google “Uptick Rule” and also to read about it at the SEC web site: http://www.sec.gov by using their SEARCH function in the upper right hand corner of the home page. It is interesting to note that since the removal of this rule “short index funds” and “ultra short index funds” have blossomed as new products. Now, an investor, with the click of a button can short the entire group of 2000 stocks in the Russel 2000 Index. Indiscriminate shorting of all companies, whether they are earning money, growing or are going out of business. I don’t know what they were thinking. I can imagine there was a very strong “lobby” working on SEC to have had them make this change, however.

Please remember that our letters to our government do have an impact. SEC is a government agency. They need to hear from us or they have no direction.

Fear halted Consumer Spending in the latest 5 months. This can be seen nicely in this graphic captured from the CNBC Website on Monday. Now the drop in Consumer Spending has stirred ‘fear’ amongst investors.

(Courtesy of CNBC)

As you can see, it is as though all consumers, acting in unison, cut up their credit cards.

The ripple effect is that sales and then earnings, especially in the consumer sector of the economy, are going to suffer in the short term. For the longer term investor, this is a speed bump, and doesn't mean consumers won't ever spend again. But the pendulum did swing rather wildly and rapidly. Even the most astute business manager would have had a hard time reacting quickly and properly to this change.

Once the economy starts to operate more normally there will be a return to profitability. As that occurs the stock market should respond favorably. Watching the consumer confidence statistics may be one sign of the start of a recovery.

Inside the i-Wave the Speculation numbers are starting to look a bit more interesting. Last week in Value Line the "Best Performer, Last 13 Weeks" had risen over 440%. It now takes a gain of almost 65% just to make the list. There are now 16 companies on the list who's stocks have risen more than 100% in the last 13 weeks. Back in January it only took a rise of 8% to make the Best list and the top dog was only up 80% - not a single stock was up 100%.. So, there is some money starting to flow back toward some stocks. This is true in both the larger and smaller cap sections of the market.

We continue to navigate this troubled sea. Our income portfolios have been active in recent months doing some capture of shorter term profit opportunities. This holding has shown activity on both the buy and sell sides.

By capturing price changes since the beginning of October, 2008 this holding has managed to diminish the effects of market price fluctuation. Currently the price/share is down about 12% in the last 5 months, but the account's value is break-even because of SignalPoint's activities.

We will, from time to time, review other portfolio components as well.

This is the Stimulus Package as passed by the United States Government in February 2009. The links provided herein will provide direct information about the Stimulus package details with an in-depth view into the following categories and how these dollars are anticipated to boost and stabilize the US economy.

Tax Relief $288B

State & Local Fiscal Relief $144B

Infrastructure & Science $111B

Protecting the Vulnerable $81B

Healthcare $59B

Education & Training $53B

Energy $43B

Other $8B

http://en.wikipedia.org/wiki/American_Recovery_and_Reinvestment_Act_of_2009

http://www.whitehouse.gov/the_press_office/arra_public_review/

http://www.huffingtonpost.com/2009/01/24/house-stimulus-bill-full_n_160569.html

 Click here to download PDF

The cumulative effect is we see a slight rise in the i-Wave value from a week ago. Market risk remains near the lowest levels measured since starting the database in January of 1982. I've checked around some reliable sources to see if we are unique in our view of future potential vs. market risk. Looking at Value Line's "3-5 Year Appreciation Potential" (VLAP) we see them estimating a 150% gain for the 1700 stocks of their regular edition. The chart below shows the actual results 4 years after a specific range of VLAP.

As is shown, usually they've been pretty close historically. When we look at the VLAP against the markets themselves we see it has corresponded nicely (inversely) to the direction we've seen. The lower the stock indexes go, the higher the VLAP has climbed.

So, it appears that Value Line agrees with our i-Wave as to the general condition of the market place. Its current level is +150% and it's been over +100% since the markets started to rapidly decline in October.

How does the VLAP look on shorter and longer time horizons? This next chart shows its 12 and 60 month returns from various levels.

While these charts relate to the Small Cap Index, there is generally good correlation between the smaller cap stocks and the larger caps over time. While the Small Cap Index probably rises faster than the larger cap indexes, it is safe to say they also rose.

Now, it would be hard to find any verification of this optimism when looking at the daily volatility. Every day brings a new wave of bad news - even when the news is good. Many companies are reporting reasonable earnings, but nobody is taking notice. Nobody seems to want to hear any good news or maybe nobody wants to report it.

My good news is that our indicator has been very reliable for decades. Value Line's VLAP has been very reliable for even longer. It's hard to take the long view when so much negativity comes at us from every direction. All the more reason to filter out the noise and concentrate on the Signal.

Our i-Wave remains unchanged this week - still showing very low risk going forward as we measure with our various components. All four components still continue in their own "bullish" ranges. There is now greater balance between the best and worst performers on the market than there's been in several months. This would indicate that at least some money is being shifted around in anticipation of improvement in some businesses. Maybe this is the first glimmer of light at the end of this long bear cave we've been in for the better part of a year.

I don't know how we can afford to run our government as a re-run of "Queen For A Day", nor do I know how to repair the psychological damage that has been done by the Media and last year's election 'debates.' I do know that companies come out of recession leaner and more profitable than when they enter. This has traditionally been very good for shareholders who've accumulated equity interest during the darker times.

If one is looking for bad news, one is rewarded with an abundance of it from every corner. Here at SignalPoint we attempt to filter the noise and boost the signal when analyzing what is happening. When the panic started at the beginning of last Quarter, it appears that many a purchasing department was told to delay buying as long as possible. This has caused a chain reaction of shortages on one end and inventory on the other. At the same time, the poorly worded addresses by public figures shocked consumers into a similar "purchasing department" holding pattern. In a matter of 13 weeks the country went from being on a spending binge to tightly holding purse strings. While some spending is beginning again, it is the discounters that are doing the business as higher priced stores and specialty retailer report low traffic and sales.

It was an exaggeration to say this was "the worst economy since the Great Depression" during the presidential campaign. However it was also a very large mistake. It's hard to compare a 7+ % unemployment rate to a 25% Great Depression level and be talking about the same thing. Even the '80s had 11% unemployment and interest rates in double digits. Capital equipment spending ground to a halt for years. Plant capacity utilization was well under 70% during much of that decade. So maybe they should have said it's "... the worst economy since the '80s" but that doesn't have as much "drama."

The economic slowdown is not just a U.S. happening. The same panic that gripped the U.S. consumer seems to have gripped the rest of the world as well. Even so, hidden deeply behind all the "bad news" there's the start of spending again around the globe. It was reported that in January, automobile sales in China were larger than the U.S. for the very first time. Yet, depending upon which article you read, this is either "good news" or "bad." In one sense it seems the U.S. is in a bad way. However, when we read deeper we find that U.S. as well as many other auto companies and parts suppliers are heavily involved in China. It is nearly a certainty that the U.S. sales were extremely low and will probably rebound in the near future. It's also near certain that as sales of autos in China continue to grow, the suppliers for that new business will also see business grow.

So, as we watch the world as well as the business news, keep in mind that there's more noise than signal much of the time.

(Courtesy of BARRON'S)

We're starting to see more balance in the Advance/Decline ratio on a weekly basis. So money is shifting positions, but not necessarily exiting the market as it was during the '08 Panic.

Our four i-Wave components all remain decidedly bullish. There are early signs of speculative activity warming up, however. This is to be expected after markets have declined so steeply. At this point we can consider it rebound or maybe reflex reaction. It appears the speculation is hotter in the smaller cap stocks right now and the larger caps are still pretty cool. New 52 week highs remain very low by historical standards, however, indicating that any speculative activity is focused on a very tight group of stocks.

The cumulative effect of all the below average risk data since near the start of 2008 shows up nicely in our i-Wave Cumulative Risk graphic.

In it we see the two previous years of continual above average risk followed by a slow decline through the first 3 quarters of 2008. Then we see the slope steepen as risk declined precipitously and remained low right through the end of January.

We continue to monitor Earnings, Interest Rates, Speculation, Investor Sentiment and IPO activity for signs of rising risk. Right now it is quiet on essentially all fronts.

The stories continue. People have told me they don't want to open their year-end statements because they don't want to see how bad the year ended. At dinner the other evening a gal asked me if I thought there was 'anything' worth an investment. For those of us in the business of investing it can be both easy and very difficult understanding such thoughts. It is easy because we've seen up close just how nasty a bear market can be. At the same time we can have difficulty understanding such wide spread pessimism. I don't think we're wild eyed optimists, but we do see that pessimism can be overdone.

When a market becomes what is termed "oversold" there are a variety of statistical measures that can be observed to see if the condition is mild or severe. The same is true of "overbought" markets. For instance, right now it takes a stock price gain of 31% in the last 13 weeks to show up on Value Line's 41 "Best Performers" list (the best 2.5% of all stocks in Value Line). That tells us that 97.5% of all 1700 companies Value Line follows did worse than this, but doesn't necessarily tell us much else. However, when we note that it takes a stock price loss of over 67% over the same period to make VL's 41 "Worst Performers" list, we see quite a bit more.

When we compare the information shown above to, say, the "tech bubble" era of early 2000 we fill in more gaps in understanding. In January of 2000 Value Line showed it necessary to have more than a 110% gain in just 13 weeks to make it onto the "Best" list. Also, on the "Worst" list we saw it took only a 31% loss go make that list. So, right now the two lists are quite a bit different from back in 2000.

Other market data also gives an indication the overall stock market is still doing what it loves to do. To an impartial observer it would appear the stock market's motto is, "Anything worth doing is worth over-doing!" People think of the stock market as "doing" something. In fact it's individual and collective investors who are the ones "doing." We would be hard pressed to blame the fans at a football game for the team's failure on the field. In a sense we also have a hard time thinking of market misbehavior being the result of massive numbers of people making bad choices.

Our i-Wave market risk indicator again is showing us several things. Its showing us there's better value available today than at any time since possibly the early 1970s. It's showing a very low level of speculative activity. It's showing a strong consensus opinion at all levels of participation of extreme pessimism (the consensus is usually wrong in such cases). Finally, it is showing us that nobody wants to go through the expense and effort to bring new businesses "public" through initial offerings. In other words, all four of our main indicators are extremely bullish right now.

The last item (IPO) is of interest. If one had an "average" company back in 2007 and wanted to have an "initial public offering" of stock, that company could have looked forward to having the stock priced at about 19 times its earnings. (If earnings were $1 per share, the stock would have sold for about $19) Today, if that same company decided to take the company to the public market, it would only get maybe 11 times earnings as a stock price. ($1.00 of earnings would give a stock price of only about $11 per share). So, it's pretty easy to understand why there's very little IPO activity right now. It’s also indicative of the relative value that is now available to investors.

I personally don't know what it will take to "restore confidence" to the stock markets. I am reasonably sure that it will return, however. The sentiment pendulum has been swinging way to the pessimistic side. SignalPoint has chosen a path of averaging down during this steep decline. We look forward to a "reversion to the mean" of market sentiment.

It takes a rather remarkable bit of circumstance to drive all components below their 10th percentile. Certainly we all can attest to just how remarkable 2008 was. Yet with all the damage to net worth during the year, the markets are offering better value than at essentially any time since January of 1982 - the beginning of the long running bullish period that lasted nearly two full decades.

While I don't have data for the 1969 to 1974 bear market, when it was over, it offered value that has been considered by many to be a "once in a lifetime" opportunity. In 1974 the average Price/Earnings ratio was amazingly low and interest rates were quite moderate. The incomplete data that I do have for that era indicates this current market to be not as great a value, but not too far off. So, while not a "once in a lifetime" event, it certainly measures to be a reasonable chance to do some good as investors.

When we filter out most of the background noise, we find that the economy is damaged, but not dead. Different business sectors will recover at different rates. This is why we advocate highly diversified investment platforms. Each cork will rise at its own rate as the recovery gets under way. Along with any market recovery, we should be able to start the process of rebuilding our reserves along with that part of the cycle.

The rapid gains seen will need consolidation as we saw last week. While the wholesale selling we saw after the start of October was stunningly across all investment classes, the rises have been less broad based. Last week, for instance, we directed some selling of corporate convertible bond funds as prices in that sector had risen nicely. We continue to watch all sectors for signs of activity.

World news seems to be somewhat of a driving force for the markets right now. Middle East tension and the upcoming U.S. Administration change are on the news constantly. Year end economic and financial data will be showing up in everyone’s mail boxes now that 2008 had ended. It will take time for investors to “tune out” 2008 and start to think about the future.

The profits taken recently on the longer bond funds seem to have been done in a timely fashion. Those same funds have fallen under some selling pressure since then. Both Stable and Balanced Income benefitted from that effort. Also, the real estate investment funds in those accounts have shown some recovery now that tax selling season has ended. As a last item of good news, some of the higher yielding corporate bond funds have risen nicely from their lows of November. The income portfolios rose between 10% and 15% for the last month of the year.

Our i-Wave market risk profile again shows most of the downside risk has been experienced. Upside potential remains at a greater probability when viewed from the vantage point of the IW's 26 years of data. It remains in the lowest 1% of the database relative to risk. Three of the four components remain in their own bullish areas while the 4th edges closer to its own bull territory.

Not once since January of 1982 have we had so many weeks in one year showing unusually low market risk. Between early November 2007 (our last high risk signal) and the end of January of 2008 the markets had already given back nearly 20%. This is the usual measure for a "market correction." From there the markets continued to stay relatively flat through the end of September. After that a near free fall took the major indexes down to about half the '07 highs. What had been a "correction" turned into panic selling.

While not wonderful, we have seen general index rises of about 10% from the lows set around Thanksgiving. All of this activity, all of the very high levels of volatility, the tremendous volume of short selling, will likely make 2008 a record year on many fronts. 2009 beckons and our SignalPoint equity portfolios enter the New Year essentially fully invested. Our income portfolios also enter 2008 at near fully invested. It is rare to have so many asset classes all under duress at the same time. This, too, will mark 2008 as an unusual year.

Best wishes for 2009

The New Year will bring in a change of executive administration to our nation's capital along with a number of new senators and representatives. That is going to be the main topic of discussion for the first part of January. On the business channels there will be lots of talk about Year Over Year results. Those talks will lead to prognostication about 2009's prospects. SignalPoint will continue to watch the markets closely for signs of strength and recovery. With unprecedented low risk being measured by our i-Wave we can assume only that the downside risk is now limited. Attempting to gauge the upside potential is difficult at best.

If we assume a reversion to mean for the various components of our i-Wave, there is an indication that Speculation will start to come back to the markets. Divergent opinion about the markets' direction should start to build and Relative Valuation can withstand a large increase in either interest rates or Price/Earnings with no immediate problems. It would appear that we will continue to see very low levels of Initial Public Offerings as there's no incentive for private companies to "go public" right now.

Please have a safe and fun filled holiday.

The i-Wave has three components rising slightly this week. The slightly higher risk rankings also raise the IW slightly above its all time low seen recently.

The rate at which risk is falling has slowed and should go back to zero soon. The market has been relatively steady now since the week of October 13th (Yes, there's been plenty of inter and intraday volatility, but the weekly closes have been roughly +or- 5% or so.) The number of 52 week "new highs" bottomed a few weeks back and is now starting to show signs of recovery. New lows over the last 52 weeks have also stabilized. Speculation remains very low, but slightly higher with the Smaller Cap stocks.

Relative Valuation remains very low with short term interest rates a non-issue and broad market P/E values lower than we've seen in a very long time. Even with recession and earnings contraction there's a lot of room before Relative Valuation would return to a point of concern.

It would appear the worst of the market storms have passed. There will still be some shock when the end-of-year statements are mailed to investors, but it won't be new news to any of them. Tax selling is coming to an end soon, too. All in all it would appear a foundation is solidifying across all the U.S. exchanges.

We will continue to monitor the various statistics of our i-Wave for signs of market recovery. Many times there will be "too much, too fast" when recoveries start and this, too, shows up nicely in our risk assessment model.

Three of the four components were unchanged this week with Speculation being the exception. It dropped to yet another record low. It takes only a 1% gain in the last 13 weeks to make Value Line’s “best performers” list and the best of that list is only up 37.7%. Compare that to the “worst” and we see it takes a drop of 84% to make that notorious list and the entire range only drops to 94%. Obviously there’s been significant bias on the selling side. While the smaller caps are a bit more optimistic, there again we see a massive bias against accumulation by speculative investors.

Should the markets find a base here, the i-Wave numbers will start to head back toward more normal levels. It’s rare enough to have three components all in concert in either bullish or bearish times. Here we see them also at or near all time record lows since starting the database in 1982. While it won’t be known which prognosticators are right about the future, we do see two healthy signs 1) low valuations and speculation and 2) higher than average volatility. The higher volatility should allow our process to capture some internal profits while the market is at reasonable valuations.

Last week we were able to capture some profits in the 7-10 year and 20 year treasury funds in the Stable Income and Balanced Income portfolios. This allowed for adding to real estate income positions using the proceeds.

There are a lot of questions these days about government spending, capital gains and taxes in general. What really constitutes an Economic Stimulus package? If we as a taxpaying community are ultimately paying for the TARP (the bailout package), then who is providing us with economic stimulus?

Our trade deficit is more than $2 billion per day. Combined with our federal deficit this cost raises to a combined amount in excess of $3 billion a day. Quick math shows that this costs us over $1 trillion dollars every year. What this truly means is our country is losing $1 trillion of wealth every single year.

GOP pundits are quick to point out that the national debt has augmented from $5 trillion to $10 trillion under the Bush Administration over the last eight years. If this issue is not addressed, it will continue to be a problem for President Elect Obama’s Administration and the situation will become worse.

How much worse? If for instance the national debt doubles again over the next administration to say $20 trillion and we have to pay a nominal rate of 5% on that debt, the interest alone will be costing $1trillion every single year.

Obama’s message, “Change: Yes We Can” resonates with a lot of people – clearly, he won the election. One of the biggest changes we need to make is our dependence on foreign oil. It’s a change that affects both the health of our environment and our trade deficit. We need to take the alternative sources that we already have, including wind, solar and hybrid technologies, and continue to use those technologies so that that they become the standards, not the alternatives. These changes call for better education of our current and future workforce and we need to implement these solutions swiftly and without hesitation.

Economically, the unfortunate fact remains that this great country which use to be the manufacturing super power of the world just 90 years ago, now imports more that it exports. Over time we have become a more educated and sophisticated country, and yet we have morphed into a service-based society. Though I question how much service we are all really receiving and worse yet, who is providing those services? You already know the answer to this question as well.

Many believe that America’s last great resource is our knowledge and ingenuity. Agreed. But take a look at who’s occupying our universities. According to the Institute of International Education, the number of international students attending U.S. universities has increased by over 7% to 582,984 students in just seven years. Our weak economy and the exchange rates have made U.S. schools a bargain for students from abroad. So I ask where we are headed. I hope for the long term sake of this country that so many want to be a part of, the message that prevails over the next administration is not “Change: Yes We Can”, but “Change: Yes We Will”.

We need to get back to our roots of innovation, creation and exportation. Doing this will create more jobs for Americans on U.S. soil and help to solve our trade and federal deficit. As I once learned in a business economics course, great economies do not thrive by everyone doing each others laundry.

So, is it true that this is, “….the worst economy since the great depression…..” as the politicians preached recently? Well, it’s one of the worst stock markets we’ve had in a long time but the economy hasn’t yet ground to a halt. With all four of our IW components dropping in risk this week and 3 of 4 at or near the lowest levels seen since 1982 it would appear the markets are pretty well washed out. Trade volume increased as the week progressed with about 15 billion shares trading hands on Friday. It was Friday that also saw a late day reversal and a substantial closing rally.

We were able to add to our Global Signal portfolios mid week and made some minor purchases in our Balanced Income portfolios as well. Balanced Income components hold a lot of preferred shares in many different industries. These help to keep the overall yield up in these funds. Recently there’s some talk in the press and on business stations that possibly these preferred shares now offer a very handsome total return as the yields are good and the prices are depressed. These are the very reasons we are adding to our positions.

From the onset of panic in October of 1987 to the market lows took 6 weeks. Our current peculiar market started really unraveling the first week of October, so we've now just finished the first 6 weeks. Last week tested the previous lows. There's still almost 7 full weeks until the end of the tax year and there could still be some harsh tax related selling taking place. This will affect the "bad" stocks more than the "good" (if there are any!). It is also of some interest to note that the Nasdaq Composite had recovered all but 13% of its pre-crash high by the end of 1988.

From here going forward the markets may remain rather volatile. That particular measure seems to have been charged with extra juice ever since the '07 ending of "the up-tick rule" that short sellers used to have to follow. Even with the volatility, longer term investors should start to see a more solid footing being cast between now and the end of January. Panics consume a lot of extra personal energy on the part of speculators. They will start to fatigue and change to another pattern of activity somewhat less demanding of their energies.

Relative Valuation shifted upward this week, but is still far below its more average range. So, we have three of our four components showing very bullish signals. IPO activity continues to be nearly non existant right now so our 4th component is neutral.

Overall, our larger and smaller cap risk indicators are both in in the lowest 10 percentile of their history from 1982 to present. A lot of discussion in the media and financial press is now focused on the next two quarters of earnings. So much so that we can assume stock prices are reflecting the anticipated near term earnings drop. Rarely have market sell-offs been as broad and deep as the one we've just experienced. It offers those who wish to start investments a rare opportunity to buy into a deeply discounted market.

Many of the sectors we watch have risen from their recent lows but still have a distance to travel before we will react. The discounts now seen compared to the last 12 month highs is simply amazing. Real Estate Investment Trusts are off nearly 50% from their year highs on average. Energy stocks show a discount of 40% from highs. Even health care, which held up quite well this year, has now dropped to about 30%. When we look overseas we see price drops of 35% to 65% for whole regions. With such high correlation world wide in markets it is hard to find an island of sanctuary.

For those who have been working with SignalPoint through September and October there's been efforts to carefully shop within our portfolios to utilize the available cash. Technical indicators such as the Bullish Percent Indexes for the major industrial categories have risen from their lows. Profit taking continues to affect several of these with each attempt at a rally. It would appear that Telecommunications and Information Technology are reviving. We may have to wait until after the 1st of the year to any rally of substance. Tax selling season continues through year's end. In this last stage, many times the "bad" get worse while the "good" get better. There's not much in the "good" column this year. We continue to watch each sector, category and style of investment for signs of recovery.

Again this week three of the four components are deep in their own bullish territory while the fourth remains neutral and of no real consequence. These three components are in the lowest 2% of all their historic data relative to risk and IPO activity continues to be essentially zero. Only December of 1974 would have offered a lower Relative Valuation than we currently see.

While it might seem a bit late that this new low is being reached, we depend upon Value Line and Barron's for the data on which the i-Wave is based. The Value Line data tends to lag "real time" by about 1 full week. Based upon what we are seeing and last week's mild rebound for the Dow 30, the Nasdaq Composite and the Standard and Poors 500 indexes it appears much firmer footing has been found. Assuming that Tuesday brings a 'clean' election with no chads cluttering up the results, we should start to see the return of more orderly market movement. The next two quarters will remain emotional with earnings being watched and, most likely, over analysed.

We continue to watch both the domestic and non U.S. markets carefully. We're also watching the financial sector with great interest. Exchange rates are still moving around daily but the moves are not as dramatic as a few weeks ago. Our Financial, Biotech and Telecomm ETF holdings are rebounding nicely so far. The Energy sector rose some last week but is weak as of this AM.

The i-Wave gave us fair warning of high risk in the market place in 2007. It now continues to guide us through an unusually turbulent period on the stock exchanges, world wide.

Again this week we see three of the four components deep in their own Bullish territories. There’s no IPO activity so our fourth component is not telling us anything right now. With the elections just days away, we may see some interesting activity. Afterward, maybe we’ll start to see something a bit less predatory going on in the markets.

Further, this last week saw only 14 new highs for the last year versus around 1200 new lows. Even so, the major indexes managed to finish the week out with a slight gain over the previous Friday.

Our i-Wave remains very bullish. Three of the four components remain in their own bullish territory and the last is neutral and not relevant right now because of nearly zero IPO activity.

Even looking back over the last month or two it is hard to understand just how far fear has carried this market. Election turmoil, bank liquidity, mortgage dislocation and "negative spin" by most major news agencies have turned a reasonable economy into a circus and a "cliff hanger" into a cliff diver. If there's good news to be drawn from all of this it is twofold. 1) Weak hands have been burned and will be slow to return to the market. 2) all of the recent past has added onto the "wall of worry" which most investors will have to climb going forward. This should make for a healthier overall market going forward.

While not all is settled and not all can be known about the effect of government money being involved in the banking business, there is an apparent world wide calming that is taking place. As I look over the various Exchange Traded Funds we use in our portfolios I see a much more orderly market in every corner of the globe. The ease of selling and high level of liquidity allowed short term speculators to empty their accounts of equities around the world but not without some serious collateral damage. However, now that the selling seems to have abated to a degree cautious long term investors are using their own reserves add to their own holdings.

Well, this week it almost did.

Never before (since 1982) has the IW given us such low suggested cash reserves. Should the markets remain weak we may actually see it suggesting the unthinkable - Margin buying. While I'm not personally a fan of using debt for investing, responsible use of debt for any business can be of benefit. When you look at the attached graphic, you'll see that even the volatile times we've had in the last 12 months pale in comparison to this last week.

The IW is up to the challenge, however, and the data is current enough to make good decisions going forward. This week we have three of the four components giving us very strong Bullish signals. Relative Valuation, Speculation and Divergence are all shouting that this is a special buying opportunity. Zeal is neutral and, as we can imagine, there's not much in the way of IPO activity right now.

I don't know if today's activity is a sign that the eye of the storm is directly overhead if it's actually passed. I do know that wise use of surplus cash is being confirmed by our model and our risk indicator. We've been steadily building out our positions in the U.S. and world markets. Our cash reserve levels are now, in sync with the IW, at very low levels also. Now we'll watch to see if the seeds we've planted start to grow. Our model will be there to help us take in the harvest, too.

The most immediate response in our data base for market risk shows up in Relative Valuation which dropped to an even better value this week. Value Line's P/E ratio for their Standard 1700 stocks dropped to 14.4, the lowest level since the week of March 10th, 2003 - the bottom of that bear market. Relative Valuation that week was 15.4 while today it is 15.52. From that low point we saw the Nasdaq Composite Index rise 119%, the S&P500 up 92% and the Dow rose 84% through last year's peak.

Our Divergence component also reacts quickly and shows the lowest level in several years. It says that essentially everyone who has witnessed the "play" has voted to sell the market at any price. Usually when we've seen this sort of low value, the market is nicely higher at the 3 month and 6 month points in the future. There continues to be some speculation, but moderate by historical measures. This is bound to drop further as Value Line's data catches up to real time.

So, how does the market seem compared to the 2002-'03 bear market bottom? By our usual measures it seems to be highly oversold and one of the best values seen in 5 1/2 years. We continue to prudently deploy our Cash Reserves as the markets have been descending. This downward averaging can be compared to tilling and planting seed. If the seed's vital force is still there, we'll see green sprouts sometime in the future. We'll be ready to harvest profits when they mature, as well.

Utilities
Industrials
Consumer Discretionary
Basic Materials
Energy Exploration and Production
Private Equities
Technology
Telecommunications

During a very brief mid-month rally we actually saw a small portion of our Financial sector shares get sold. All the more proof that having a plan in place and proper execution will prove far better than the average investor's guess about the future.

On the international front we've seen additions to our positions in Europe, Latin America and the Pacific Rim.

With such a broad sell off around the globe, it's no wonder that investors are wringing their hands. Our plan was to have the necessary liquidity to purchase shares if the discounts proved good enough for our models. This liquidity was there and has been used efficiently without disturbing anyone's sleep. While the volatility may not have ended, it is possible that it will start to diminish once Congress acts on a plan to put a floor in the domestic housing and financial markets.

There's much talk now about how all this has affected the consumer. The economy, being linked directly to the consumer's wallet will feel the effect as well. How much is still up as a big question.

A peculiar item showed up this week in the data for the IW. It shows an increase in the number of stocks that have gained over 100% in the last 13 weeks. So, it appears there is some money selectively moving around in the market place. A quote from the CNBC anchor, Erin Burnett, "It's hard to be a stock picker in this sort of market." seems to capture the essence of what is going on. While that quote could go down as the biggest understatement of the year, it does point out that there's not just selling going on out there. Underneath the broad indexes, there are individuals and institutions making adjustments to their portfolios and some of them are actually accumulating.

Well, the week's bipolar breakdown surely caused some investors to search in their toolbox for their favorite Gut Wrench. By week's end there had been around 2500 new 52 week lows posted. The surprise was that there had also been well over 400 new 52 week highs also recorded. It's this sort of statistic that drives our Divergence index. It zoomed up into its own bearish territory for the first time this year. It indicates extreme market confusion about the near term future.

A bunch of stocks that usually don't trade much in a week's time also returned to active duty. This changed the Zeal component. You'll see that it is still closer to "bullish" even though it rose quite a bit this last week.

Speculation in the larger caps is nearly non-existent and in the smaller caps has moved to slightly bullish. So, when the week came to a close, nobody was "speculating" by our measure. Relative Valuation actually fell a bit for the week based upon a contraction of the short term Treasury coupon rate.

Overall, there may be a bit of data lag in the material we use. That could mean the Speculation component may also be bullish once the data stream catches up a bit.  Even though the two IW measures are still both bullish, they're closer to Neutral than they've been. Also, it's rare that we have one component Bearish and another Bullish at the same time. So, I guess we could say we're cautiously bullish, realizing the market participants are in a high state of confusion.

Opinion on the economy seems to be shifting from the former idea that it was going to be a sector specific recession to a more general type of slow down. The reverse of "wealth effect" is being expressed as the reason. There are a lot of lose ends needing tying at this point but since the markets usually "lead" the true economics.  While our cash reserves are not as deep as they were, we still have purchasing potential left. As the dust settles, we may see the stronger sectors harvesting some profit and refunding our overall reserves even while some lag behind. Sector rotation will remain SignalPoint's friend.  

Well, the i-Wave is unmoved by Lehman's and Merrill's problems. It's also unmoved by the trauma being realized by the Gulf Coast's recent storms. It has, however, continued to log an unusual number of "low risk" weeks during 2008. Low risk obviously doesn't mean "no risk" but when we look back over the last few years, we see that we also were experiencing above average risk for a long time, too.

While not much "fun" it hasn't been a disaster unless one's entire pension was invested in Lehman Bros stock or possibly Freddie Mac's. Looking over our year to date and quarterly returns for 2008, we've managed to cushion the bumps associated with market by keeping losses much lower than those of the S&P 500. Time and again, the value of diversification comes into play. Time and again, having a plan for what to do when the market winds shift, shows its value. Time and again having a "rainy day fund" gives us the chance to participate when opportunities present themselves.