October 2007 Newsletter

Monthly Performance Tracking Report ( Total Return as of September 30, 2007)

Model Portfolios:	September	Y-T-D	12 Mos.	4 Years	8 Years
Performance Xtender	4.9 %	8.1 %	14.5 %	61.9 %	335.3 %
Max Xtender	3.5 %	3.1 %	15.3 %	66.8 %	788.1 %
Compared to Traditional Strategy:
Balanced Portfolio (60% stocks 40% bonds)	2.3 %	5.2 %	10.3 %	41.5 %	47.1 %

Dear Subscriber,

This issue of the newsletter includes the following:

Monthly Tracking Report: Get an update on the current performance of our Model Portfolios compared with a traditionally balanced buy and hold portfolio consisting of 60% stock funds and 40% bond funds.

Performance Analysis: Read a detailed explanation of Model Portfolio performance covering the different time frames presented in the Monthly Tracking Report.

Market Commentary: This month we discuss the model portfolios' staying in a defensive posture in the face of stock market strength.

Model Portfolio Allocations: Check the most current portfolio allocations for our Model Portfolios. (Note that allocation changes are announced by email in a separate Trade Alert.)

Performance Analysis

The Performance Xtender was up 4.9% in September and has gained a cumulative 8.1% year-to-date, out-performing a traditional "balanced portfolio" consisting of 60% stock funds and 40% bond funds. The Max Xtender model portfolio was up 3.5% in September and has under-performed a balanced portfolio year-to-date.

Both model portfolios have nicely out-performed the traditional porfolio over the past 12-month period.

Four Year Performance Graph (As of September 30, 2007)

Performance Over the Bull Market Cycle: Both model portfolios have also significantly out-performed the traditional portfolio over the previous 4-year period which encompasses most of the bull market cycle that we are currently in. You can see from the chart above that the model portfolios achieved this performance kick at the expense of some additional short-term volatility.

Performance Over Multiple Market Cycles: The more significant benefit of following these model portfolios can be seen in the longer term ... over periods that are long enough to include one or more bear market cycles. An 8-year look back period is long enough to include the severe 2 1/2 year bear market cycle that lasted from 2000 through late-2002. Over this period of time, the cumulative return of the Performance Xtender (based upon a combination of live returns and "backtested" returns from computer simulation) was 335% ... many multiples of the traditional portfolio which returned a cumulative gain of only 47% in 8 years. The Max Xtender, which uses leverage, gained about twice as much with a cumulative 8-year return of 788%.

• The simple reason behind the models' huge gains over a traditional portfolio is their ability to dynamically shift investment allocations to avoid huge losses and even make gains during bear market cycles. While a traditional portfolio will lose significant value during a bear market, the model portfolios make money and are able to compound profits on top of profits. The cumulative benefit of such compounding becomes huge over time after one or more bear market cycles.

While the model portfolios are somewhat more volatile than the traditional portfolio in the short-run, they are much less volatile in the long run because they can avoid the very deep losses suffered by traditional buy-and-hold strategies from which an investor can take years to recover.

Market Commentary

Model Portfolios Hold Defensive Postures

Executive Summary: Our quantitative models continue to hold lower stock market allocations as part of a defensive posture required by a "Neutral" market reading. A "Neutral" reading means there is a significantly increased likelihood of a serious drop in stock market valuations. In spite of the recent strength in US stock market averages, our statistics measuring the underlying health of the market continue to show broad deterioration, suggesting that there is still significant risk to the primary bull trend.

The stock market broke through key resistance (at about 1500 on the S&P 500 index) during September and has advanced to set new highs. Once again, the 200-day Moving Average provided critical technical support to the bull market trend.

The Resiliance of the Market

Much of the recent commentary from stock market pundits has focused on how resiliant this market has been in the face of strong headwinds. Not only is this country working through an historic collapse in the housing market, but a major credit crisis has been triggered as well. At the same time, the US dollar is hitting new lows and the price of crude oil is setting new highs. And it seems that every week, more economists are pronouncing increased odds of a recession in the US.

But for the time being, the bulls have won the day. They point to the fact that consumer spending and employment in the US are holding fairly steady. In addition, global economic growth is benefiting some sectors of the US economy and inflation still seems to be under control. And some analysts are now arguing that the worst of the credit crisis is behind us.

Surface Appearances versus Underlying Realities

By the looks of the primary market indices ... the Dow, the Nasdaq and the S&P 500 ... the bull market is alive and well.

However, beneath the surface is a picture of deteriorating internal health.

The key statistics we follow that gauge the supply and demand for stocks in the market are flashing the kinds of warning signs that appear before the end of every bull market. What we are seeing is a flight to quality and a narrowing of investor demand. The recent strength of the market has mainly been reflected in the prices for Large Cap multinationals and the sectors that are benefiting from strong global economic trends. Many Small-cap and Mid-cap stocks are languishing as are whole sectors that are based upon the domestic US economy.

Bull markets are based upon a broad demand for stocks across most sectors. The kinds of statistical deterioration we are seeing now are more consistent with the terminal stages of a bull market.

Model Portfolios Postured for Heightened Market Risk

Our models read the current deterioration in the market's statistics with an objective eye and conclude that the risk in stock market valuations has gone up substantially.

That is why the models have remained defensively postured since the volatility spike in July/August. They will remain so until they see much more broadly-based participation in the market upswing combined with healthier levels of upside volume that suggest a return of broad and deep participation.

Recommended Model Portfolio Allocations

Model Portfolio: 'Performance Xtender'

(A model portfolio that invests selectively in stock market index funds, plus certain market sectors such as Energy, Gold and Real Estate, and in an Inverse Fund ("Bear Fund"), depending on current market trends for each type of investment. The allocation mix is designed to beat the market significantly during both bull and bear markets with only a limited risk of volatility.)

... Portfolio as of September 30, 2007 ...

Current Recommended Portfolio Allocations	Rydex Funds		ProFunds		ETFs
	Allocation	Ticker	Allocation	Ticker	Allocation	Ticker
Large Cap Stock Fund	30%	RYZAX	30%	BLPIX	30%	SPY
Energy Sector Fund	20%	RYEIX	14%	ENPIX	20%	XLE
Precious Metals Fund	20%	RYPMX	14%	PMPIX	20%	GLD
Corporate Bonds, or Money Market	30% Money Market Fund . ProFunds investors should have 42% in money market.

Model Portfolio: 'Max Xtender'

(A model portfolio that invests selectively in stock market index funds and in an Inverse Fund ("Bear Fund"), depending on current market trends for each type of investment. During strong market trends ... either bullish or bearish ... the model uses up to 2-to-1 leverage to magnify returns. The allocation mix is designed to beat the market substantially during both bull and bear markets but with a relatively high risk of volatility.)

... Portfolio as of September 30, 2007 ...

Current Recommended Portfolio Allocations	Rydex Funds		ProFunds		ETFs
	Allocation	Ticker	Allocation	Ticker	Allocation	Ticker
UnLev'd LargeCap Fnd	100%	RYZAX	100%	BLPIX	100%	SPY
Corporate Bonds, or Money Market	ETF Investors: Note that the SPY position is un-margined.