January 6, 2007

Hello,

I hope you are doing well.

Last month, the market had a very strong start but the rally has faltered since. We believe the market has set a very important top which may be difficult to reach again, despite strong seasonal effect between December and April.

Our next InvestWELL Report will be released on February 3, 2007 (following the Labor Report).

Derek Polcyn

P.S. This is a non-member version of InvestWELL Report. Please sign up for the membership ($39 per month) to receive the full benefits of our membership. 



In This Issue:

Investment Idea
Quiz
Our Results
Market Highlights
Behavioral Finance Indicators
Answer to the Quiz

Investment Idea

Question: Is it better to own stocks with lower or higher volatility?

Answer: A lower volatility is preferred, assuming that returns are the same (we are not discussing the effect of correlations which would introduce another dimension). In simple terms, a lower volatility means a lower risk and a better sleep at night.

Quiz

Which of the following investments would be expected to have the highest level of volatility?

A) S&P 500 Index
B) A well-diversified portfolio of stocks and bonds
C) A portfolio consisting of only companies dealing with commodities
D) A government bond from a G-8 country

Answer to the Quiz at the bottom of the newsletter

Our Results (Cumulative %)

Investment Strategy – MEMBER SECTION

InvestWELL Pickshas managed to outperform the S&P 500 index but the difference has narrowed recently (Chart 1). Also, our portfolio holds smaller cap stocks, which are subject to a greater volatility.

Chart 1.

Market Highlights

• During the last month, the US equities first advanced strongly and then were pulled back by the forces of gravity to almost exactly where they were a month ago (Charts 2 & 3).

Charts 2 & 3. S&P 500: 3 Years and Last Month

Charts courtesy of StockCharts.com

• During the last month, the Canadian equities suffered heavy losses due to a large exposure to resources in the Canadian index (Charts 4 & 5).

Charts 4 & 5. TSX Canada: 3 Years and Last Month

Charts courtesy of StockCharts.com

• Last month, the US employers added 167K of new jobs while the unemployment rate held steady at 4.5%. The media blamed the relatively strong employment numbers for the decline in the market but we feel that the market was ready to go down and all it needed was a good excuse.

• Last month, employment in Canada increased by 62K, pushing the unemployment rate back down to the 30-year low of 6.1%. Employment grew by 345K in 2006, the highest growth rate since 2002. The western provinces have experienced the highest growth of employment.

• First, Americans quit buying homes. Now, they may have stopped fixing and furnishing them too. Home Depot Inc. has reported a drop in profit, amid mounting evidence that the US housing slump is getting worse. Home Depot's chairman and CEO Mr. Nardelli said job losses in the home construction market are the worst he's seen in 35 years, and the pain is starting to spread to the home renovation market.
  
• The head of the United Arab Emirates central bank said it will convert some of its reserves of U.S. assets into the European currency. We believe that other central banks are ready to take similar action which will result in making the US dollar move in one direction – down.

• Behavioral finance compares the performance of Main Street investors against professional managers tells us that it is virtually impossible for Main Street investors to beat the pros for two reasons: 1. Pros have a competitive advantage, with tons of fancy analytical, database, timing, tax and regulatory tools. 2. Professional managers play the game full-time, every day, all year. Hence, Main Street investors are playing with a huge handicap.
  

Opportunities and Risks – MEMBER SECTION

Behavioral Finance Indicators (see explanation) – MEMBER SECTION

Charts 6 - 8: Advancing/Declining Line, AAII and Equity Put/Call Ratio




Charts courtesy of StockCharts.com and DecisionPoint.com

Answer to the Quiz

C is correct. Commodities are very volatile and so are the companies that deal with commodities. The volatility could be somewhat lessened by holding companies involved in different commodities (with cycles offsetting each other).

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Disclaimer
InvestWELL Financial’s first priority, as a provider of independent and unbiased financial information, is to educate our clients. Not only do we provide practical information about securities, but we also coach our clients to become successful independent investors. As such, InvestWELL Financial does not assume any responsibility whatsoever for the use of any information from the website or related publications. Although all sources of information are vetted and the information is believed to be reliable, it is not provided as investment advice. Past performance is not an indicator of future performance in securities. Each portfolio must be balanced and based on personal circumstances. High-risk investment decisions should be made in consultation with an investment professional.

InvestWELL receives no commission or benefit of any kind from the companies whose securities InvestWELL Financial showcases. We do not necessarily own shares in the showcased securities, but if we do, these shares would only form a very small part of widely-held and publicly distributed companies. There is no intention whatsoever of profiting in a manner where the price-impact of trading or holding of a security might arise. The website and related publications of InvestWELL Financial are intended to only be used for educational purposes.