InvestWELL Financial Inc. - Markets This Week

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September 8, 2007 Dear Subscriber, We hope you are doing well. The market has completed its highly overdue correction and will likely experience a sustainable rebound which will last for several months. It may not be an easy ride, but it may be quite profitable (as they say "rallies need to climb up walls of worry"). Our next InvestWELL Report will be released on October 4, 2007 . (following the Labor Report which is generally recognized as a "market mover"). Derek Polcyn, President In This Issue: Investment Idea Quiz Our Results Market Highlights Behavioral Finance Indicators Answer to the Quiz

Investment Idea Given the current interest in the housing market, we are reprinting an investment idea that we used previously. Hopefully, it will clarify the confusion regarding mortgage payments. Question: Assume a person pays $1000 per month for rent. If a mortgage payment is also $1000 per month, does it make sense to buy a house? Answer: We need to look at the situation in a broader context and we will keep the situation at the simplest level. From an income statement point of view, the above logic is correct. A person simply substitutes paying rent with mortgage payments. From a balance sheet perspective, we need to consider the future value of the house. Let us assume hypothetically that a year after the purchase the house goes down in value by $30,000 (or 10%). Here is a situation from a balance sheet perspective: Assets = 300,000 – 30,000 = 270,000 Liabilities = 300,000 – 2,000 (the mortgage portion paid off during a year) = 298,000 Hence, Total Equity = Assets – Liabilities = 270,000 – 298,000 = -28,000 The house buyer lost $28,000 during one year.


Quiz Assume your monthly rent and your mortgage payments are the same. Last year, you bought a house for $400,000. This year, your house has appreciated in value by $8,000. What is your total one year return? A) A) More than 2% B) 2% C)1% D) Less than 1% Answer to the Quiz at the bottom of the newsletter


Our Results (Cumulative %) Investment Strategy – MEMBER SECTION InvestWELL Picks has managed to maintain its maintain its gains vis-à-vis the S&P 500 index. In fact, our portfolio is handling very well against the drop of the market. Chart 1.


Market Highlights During the last month, the US equity market been extremely volatile (Chart 2 & 3). The market participants were trying to determine the direction of equities and attempted to test various support and resistance levels. Charts 2 & 3. S&P 500: 3 Years and Last Month Charts courtesy of StockCharts.com During the last month, the Canadian market has done better than the US market as the sub-prime lending practices were not perceived as to be as serious as in the US (Charts 2 & 3). Charts 4 & 5. TSX Canada: 3 Years and Last Month Charts courtesy of StockCharts.com Last month, the US economy unexpectedly lost 4K jobs for the first time in four years. The spill-over from the housing market is believed to be responsible for the disappointing labor data. The drop in employment, following a month-long increase in the cost of credit prompted by losses in the mortgage market, is generally believed to be a sign that the U.S. expansion is in jeopardy. InvestWELL believes that the U.S. expansion is still intact and it may be another couple of years before the U.S. economy enters into a recession. Last month, the Canadian economy added 23K new jobs while the unemployment rate remained at 6.0%, the lowest in the last 33 years. So far, it appears that the Canadian economy is able to perform well, despite the woe south of the border. Countrywide Financial Corp., the biggest mortgage company in the U.S., may reduce its workforce by 10,000 to 12,000 in the next three months, a 20 percent cut. Countrywide's cuts are the biggest in the mortgage industry during the worst housing slump in 16 years. The percentage of home owners receiving foreclosure notices hit record highs in the second quarter. The largest numbers of foreclosures and delinquencies have occurred in subprime mortgages, but data released this week indicates the problem is now spreading to other types of mortgages. InvestWELL will be watching these developments very carefully. The U.S. Congress returns from vacation and is ready to propose a variety of mortgage borrower protection legislations. The Democratics have already announced plans for a bill that aims to curtail predatory lending by prohibiting prepayment penalties on subprime loans, making it illegal for lenders to write subprime mortgages for prime borrowers.


Opportunities and Risks – MEMBER SECTION Behavioral Finance Indicators (see explanation) Here is a direct quote from the Behavioral Section in last month's Member newsletter: "Overall, there is a high probability that the market will bounce back in the short-term. However, we still question the market's ability to sustain these short-term gains in the intermediate time frame." The market indeed bounced back from last month's low. 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 A is correct. Your house has appreciated in value by 2%. At the same time, during the last year, you paid off a portion of the mortgage (e.g. 1/25, 1/30). Hence, your total return is more than 2%.

Thank you for reading InvestWELL Report. This is a non-member version of InvestWELL Report. Invest WELL Financial.com


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