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Special Alert: Market Liquidity Waning

(May 21, 2008)

Dear Subscribers and Readers,

I am not going to mince words here. We are now very close to closing out our 100% long position in our DJIA Timing System - the 50% long that we initiated on January 9, 2008 at 12,630, and an additional 50% long position on January 22, 2008 at 11,715.

Based on many leading and close-to-real-time indicators I am currently tracking, it looks like second quarter and third quarter GDP growth will continue to disappoint. Moreover, our liquidity indicators are now deteriorating. For example, cash acquisitions have dropped significiantly. In addition, there is a good chance that many financial companies, especially those in the insurance sector and in Western Europe, will have a need to raise more capital, thus adding a further constraint on market liquidity. The amount of money market fund asset growth in the United States has also slowed dramatically over the last few weeks.

As for crude oil, it is now way overbought but 1) China is still building inventories in anticipation of the Olympics and to fill up their own version of the strategic petroleum reserve, 2) Virtually all EM countries believe this is a supply constraint issue and thus are not meaningfully tightening monetary policy or doing away with their energy subsidies, 3) The growth of non-OPEC supply has continued to disappoint. The combination of bad government policies and a once-in-a-generation supply/demand issue is now forcing crude prices to blow off here, IMHO. It now looks like crude oil prices won't decline meaningfully unless (in order of probability): 1) Select economies in Eastern Europe collapse dramatically, 2) A significant number of EM countries cut down energy subsidies substantially, 3) The US or EM countries start to tighten their monetary policies. At this point, any further rise in crude oil/natural gas prices should effectively negate the effects of the fiscal stimlus.

Finally, the sentiment/technical situation - while not overly bearish - is nowhere close to signaling a hugely oversold signal. While the stock market decline should at least take a breather here, we are still very far away from getting the huge buy signals that we got in mid January and mid March. Because of this, there is a good chance we will turn neutral in our DJIA Timing System sometime in the next few trading days.

Yours Sincerely,

Henry To, CFA

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