Dear Subscribers,

Note: The following commentary contains an announcement of our latest newsletter - "The Retirement Advisor" - which is a collaboration between fellow newsletter writers David Korn of Begininvesting.com and Kirk Lindstrom of Suite101.com

Ever since we started our regular commentary in late July 2004, there have been numerous times (whether it is in our commentaries or on our discussion forum) when we discussed the potential impact of the changing demographics picture on the stock market and other financial assets, not just in the United States but in other developed countries as well, such as Japan, Germany, the UK, France, and Italy. We kicked off the discussion with our June 24, 2004 commentary ("Aging Demographics - The Other Super Secular Trend"), with a brief background on the rapidly deteriorating demographic situation in many countries in the developed world - concluding that not only will the "social welfare state" not survive in Western Europe, but that many countries in Western Europe (and Japan) will need to become much more competitive in order to compete in the world economy going forward, not only because of the younger (and growing) population in countries such as India, Pakistan, and Iran, but also because of their restrictive immigration policies. To that end, the United States still has a significant edge.

Meanwhile, our August 29, 2004 commentary ("Economic Survival in the 21st Century") discusses the three most important questions for financial survival in the 21st century - with those being rising energy prices (oil was at $45 a barrel at the time we penned that commentary), the need to understand your own psychological makeup and how it affects your investment decisions, and finally, the "super secular trend" of aging demographics, as well as the fact that life expectancy will continue to expand going forward. Our last commentary on the topic ("Demographics do Matter"), published on August 11, 2005, summarizes the possible/probable scenarios on the demographical impact on the world's stock/financial markets, assuming that current savings and spending patterns remain the same. The conclusions are scary.

That being said, however, there is no reason to expect that savings and spending patterns will remain the same going forward. There is literally over a hundred variables which could tilt the outcome on the bull's side, such as higher-than-expected productivity growth, or a changing attitude of retirees - whether it is through working longer or taking more equity risk in their retirement portfolios (by definition, if a retiree knows that he is living longer than ever before, he will logically allocate more of his portfolio into equities). Over the last decade, there has been a growing trend of older workers working past or seeking a new job after retirement - and this trend will continue to grow as the service sector continues to expand and as knowledge becomes ever more important. In a manufacturing economy, older workers tend to be less productive than younger workers are, but the reverse is true in a service/knowledge economy. Companies like Home Depot today are going out of their way to hire older and experienced workers.

Our mission has always been to help our subscribers navigate the treacherous financial world of the 21st century, starting with the plunging stock markets in 2001 to 2002, the subsequent cyclical bull in 2003 to today, rising commodity prices, and the proliferation of alternative asset classes such as hedge funds, private equity funds, infrastructure investments, and so forth. For some people who are active traders or who spend a significant chunk of time managing and investing their portfolios, I believe you should read everything you can get your hands on - whether it is our commentaries or the numerous posts in our discussion forum. For the majority of subscribers, your best bet would be to evaluate your risk tolerances, your time horizon, and your financial goals FIRST. The best advice I could give you is to realistically evaluate your current financial situation and save for those goals - through prudent asset allocation and capital preservation. Make no mistake: We have been 100% long in our DJIA Timing System since late September 2006, but we will not hesitate to go completely neutral or even go short should our valuation, sentiment, and breadth indicators tell us the market is making a significant top.

Again, for the majority of subscribers, your best bet to retire comfortably is through prudent asset allocation and capital preservation. In this day and age, there are not many subscriptions that can fulfill that role - not the permabulls, permabears, or the majority of anyone in between. To that end, I am very excited to announce the inaugural issue of The Retirement Advisor newsletter. This is a brand new newsletter that is the result of a collaborative effort between myself, and fellow newsletter writers David Korn, editor of BeginInvesting.com, and Kirk Lindstrom of Investment.suite101.com.

The Retirement Advisor was created to help individuals who are approaching or in retirement. We are very proud of the newsletter that we have created, and believe that you may have an interest in subscribing. Our inaugural issue is free to download to give you an idea of the type of content you will receive as a subscriber. You can access the newsletter by going to TheRetirementAdvisor.net where you will see a message at the top of the page telling you how to download your free issue. Here is the url: http://www.theretirementadvisor.net

Alternatively, you can directly access the newsletter by clicking here. I look forward to seeing some of your feedback as well as (hopefully) some support by subscribing! Together, we can definitely navigate these treacherous financial waters just up ahead.

Before we continue with the rest of our commentary, let us do an update on the two most recent signals in our DJIA Timing System:

1st signal entered: 50% long position on September 7th at 11,385, giving us a gain of 1,102.02 points

2nd signal entered: Additional 50% long position on September 25th at 11,505 giving us a gain of 982.02 points

As we discussed last week, some of our readers have specifically asked when we would exit our long positions in our DJIA Timing System - given the "profits" that we have made over the last four months or so. My answer: The U.S. stock market remains in a cyclical bull market, and until we see signs of a significant top, we are not scaling back just yet. Whether we will just scale back to a 50% long position or go short - this will depend on my future convictions. For now, those convictions are firmly in place for a continued run in this bull market. If, however, the Dow Industrials rallies 500 points within the next week or so (on weak breadth or weak volume), then we will scale back our long position to a 50% long position in our DJIA Timing System. Readers please stay tuned.

As of Sunday afternoon on January 28, 2007, we are still fully (100%) long in our DJIA Timing System and is still long-term bullish on the U.S. domestic, "brand name" large caps - names such as Wal-Mart (which is now making a serious effort in the Chinese market by acquiring Taiwanese-owned Trust-Mart and naming a more aggressive new head of operations in China), Home Depot (which is now also expanding in China), Microsoft (I expect Vista to rake in the cash over the next couple of years), IBM, eBay, Intel (Intel is now close to two generations ahead of AMD), GE, and American Express. We are also bullish on Yahoo, Amazon, and most other retailers as this author believes that "the death of the U.S. consumer" has been way overblown. We also believe that the combination of Microsoft Vista, Office, commercialization of the solid state hard drive, and commercialization of solar energy will be a boon to semiconductor companies, such as SanDisk, Samsung, and Applied Materials. Moreover - judging by what we saw at the Consumer Electronics Show in Las Vegas a couple of weeks ago, there is a good chance we are now seeing a revival of Sony as a great global corporation (barring a global economic recession, the rest of this and the next decade will be known as the age of the emerging market consumer). We also continued to be very bullish on good-quality and growth stocks in general.

In the short-run, the narrowing breadth in the market continues to bother me, but as long as folks are selective with their individual stock picks (or as long as they are invested in a large cap index such as the S&P 500 or the Russell 1000 index), the rally should still have further to go before fizzling out. For now, I believe the upcoming week should be okay for the stock market. Watch out for February, however, as it not only has been a historically seasonally weak month, but the February 9 to 10th weekend is also time for the G-7 meeting - which could potentially act as a catalyst for a stock market correction (e.g. if the governments of the G-7 decides to coordinate a rise in the Yen - thus prematurely ending the Yen carry trade). As for the global stock market rally we have been witnessing over the last few years, I also believe that rally will narrow going forward - with the U.S. stock market being the stand-out. I also believe that energy has made a good short-term bottom, and that while energy should continue to struggle this year, the secular energy bull should remain intact - as long as there is no significant breakthrough in battery or solar energy in the next few years.

Speaking of the Yen carry trade, the rubber band is now getting very overstretched, as exemplified by the record short position held by the large speculators (and record long position by the commercials) of Yen futures contracts on the Chicago Mercantile Exchange. At this point, however, small speculators are still neutral, with 52% of them bullish. Once small speculators (who historically have been the greatest contrarian indicators) go net short, then it may be time to start thinking about going long the Yen for the inevitable short squeeze. Following is the relevant chart from Softwarenorth.net showing the net positions of the large speculators, the small speculators, the commercials, and the total open interest of the Japanese Yen futures contracts:

Besides the Yen carry trade, there is another market we are keeping watch on - and that is, China. For subscribers who have been keeping track of our discussion forum, you may know that I am getting increasingly weary of the Chinese market. There is no doubt that the Chinese market - most notably the financial sector - is now in a bubble (ICBC now has a market capitalization of more than $250 billion, which makes it the second largest bank in the world in terms of market cap and trailing Citigroup by less than $20 billion). Let us now take a look at the market capitalization of the Shanghai Stock Exchange. Following is the monthly chart showing the market cap of the Shanghai Stock Exchange from January 1995 to November 2006:

The market capitalization of all the stock exchanges in China has surpassed $1 trillion at the end of November 2006 - a double in less than 12 months! Moreover, as I am finishing this commentary, the Shanghai Composite is up another 2%, and 40% higher than the November closing highs. Official data has not been released yet, but it looks like that the market cap of the Shanghai Stock Exchange could easily surpass US$1.25 trillion by the end of this month, or in other words, a triple in just over a year. The combined market cap of the Shanghai and the Shenzhen securities exchanges is now approximately 55% of China's GDP - which is about the same as the U.S. average for the last 80 years (but still trailing India's 100% number). The trailing P/E is now 33. Is the Chinese stock market now in bubble territory? You bet - but as in all liquidity-driven booms, it will only end when liquidity disappears. And given the recent recapitalization of the Chinese financial sector (with the $70 billion of new money coming in from the recent spate of IPOs to multiply with), and given that many foreign investors are now obsessed with investing in China, there is no question this will go on for the foreseeable future - possibly (and probably) until the Beijing Olympics in September 2008.

Look - it does not take much to move a $1.25 trillion market. From the end of September 2006 to the end of 2006 (in three months time), the market cap of the NYSE Composite increased from $18.7 trillion to $20.2 trillion - an increase of $1.5 trillion. During the same time span, the market of the S&P 500 increased by $700 billion. Given that China is still growing at a 10% pace, a couple of 25 basis point hikes will definitely not slow investments and potential overcapacity. Moreover, it now looks like that the U.S. economy has recovered from its slowdown during the third quarter of last year - paving the way for further investments in Chinese manufacturing and construction going forward. Short China at your own peril - especially since we are now in the very emotional/possible "blowoff" stage.

More follows for subscribers...