Economic Review and Market Outlook

Despite an unfolding economic slowdown, a market that is long overdue for a decline, and a real estate market that continues to deteriorate, the stock markets continue to do OK. In the past few months I have come to believe that the stock markets are benefiting from investors who are fleeing real estate and need another place to put their money. The choice is pretty much bonds at 4-5% – not a real attractive rate – or the stock market.

As long as the stock market remains healthy, the possibility of a rare economic soft landing rather than a full blown recession still exists.

Even commodity prices have begun to come down. Slackening demand for oil, concrete and other commodities is yet another sign of weakening economic activity, but it also means lower prices at the gas pumps. We have to accept the good with the not so good.

It is not really possible to know exactly what 2007 will bring. If the economy continues to slow there is some risk of recession and a large stock market drop. If growth re-accelerates we may see higher interest rates. We can’t know the future but can observe the changes and adjust accordingly. This is where our trend analysis comes in. If the market turns down, I expect this system to let me know early on so I can react for you.

The new year promises to be interesting, investment-wise. With each new tool I learn to use I feel the investment strategies I run for you just get better and better. The one thing that does not change is my goal of keeping my clients from ever getting caught in a major market decline like we saw a few years back. Occasionally I err on the side of caution and lose some opportunity, but that is better than losing money. If your accounts ever lag in a strong market, please remember that is the price we pay for the “fire insurance” aspect of my work for you.

Currently my most popular program is the All-Star Lineup, created by taking the best features of my already successful Core Value program and adding elements that helped my Primary Trend System perform so well in the bear market of 2000-02 plus a number of new fund categories.

All-Star also has a sophisticated diversification design with 30 investments, currently. Right now it has 35% of its money invested overseas, with about 45% well situated to withstand inflation or dollar devaluation. We will hold some bond funds as well as conservative stock funds, to provide protection from recessions, and give balance to some small investments we have in go-go areas such as India, China and Latin America. When one of our investments is in an uptrend we allocate more money to them, and when they enter a downtrend we will move to stronger investments or the safety of the money market fund. Stress testing this system with data from the ’00-02 bear market shows it has remarkably low account value fluctuations yet still out performs the stock index. I’m excited about this program!

Our Tactical High Yield strategy had another good year despite the fact that high yield bonds don’t pay much more than government bonds. Some day that situation will correct itself, but for now, we can enjoy it.

Hepburn Capital Current Investment Allocations

As of January 5, 2007

Please remember to let me know if there is any change in your financial situation, investment objectives, sensitivity to risk, restrictions you want on your account or if you simply wish to discuss a change of strategies used in your portfolio. In addition, we frequently update our SEC Form ADV, Part II to reflect changes in our business. If you would like a current version, please call the office and let us know.

Sincerely,

William T. Hepburn, President

1/11/2007