Signal Type	Trade Date	Index	Return since issued
		Nasdaq 100
		Russell 2000
		S&P 500

Market Update

Stocks retreated this week as investors apparently decided to lock in some of their profits ahead of the holidays. In light of the almost uninterrupted run-up since late July, this week's pullback did not come as a surprise as markets cannot keep going up forever without pausing along the way. We will point out that the selling occurred on lower volume, a sign that institutional investors were not eager to dump their shares. To put things in perspective, the S&P 500, Russell 2000 and Nasdaq 100 are only respectively down 1.14%, 2.08% and 3.90% from their peak closing prices, well within the range of a normal pullback, defined as a loss of 10 percent or less. On the economic front, the Labor Department reported Tuesday that wholesale prices increased by 2% in November. The number was much higher than expected, but removing volatile food, energy and auto prices, the core PPI (Producer Price Index) only rose a tame 0.2%. The major indexes moved lower Thursday after the Philly Fed announced that its index of manufacturing activity fell to -4.3 in December, renewing fears of an economic slowdown. Countering this, the Commerce Department showed Friday that personal spending in November was at the highest level since July. It also announced that the core PCE price index, a key measure of inflation closely watched by the Fed, was flat for the month, therefore confirming that inflation pressures are moderating.

For the week, the S&P 500 and Russell 2000 respectively lost 1.14% and 1.50%. Both indexes remain above their respective 50-day and 200-day exponential moving averages (EMAs). The Nasdaq 100 suffered more, as it shed 3.31%. It is now located slightly below its 50-day EMA, but remains well above its long-term 200-day EMA.

For its part, our World Index Ranking portfolio only lost 0.94% this week. The current portfolio consists of the 5 top-ranked world indexes as of December 8, which marked the beginning of the latest 4-week holding period.

Our current Buy signal remains in effect.

Trend Timing School

ETF dividends and distributions

Maybe it is because the IRS mandates that all ETFs distribute substantially all their income and capital gains at least annually that this is the time of the year when most ETFs distribute. Many ETF holders have been surprised at sudden price drops which are inexplicable when looking at the index which they should track. Since market indexes do not take into account distributions, most investors assume it is the same for the ETFs which track them. Not so. Not only do ETFs distribute, but distributions can be quite substantial. To understand why the share price drops, it is important to review how distributions work.

Except as directed by the IRS, the ETF's Board of Directors can decide on the frequency, schedule and amounts of the distributions the fund makes. Many funds handle distributions quarterly, others do it annually. QQQQ for example had their last quarterly distribution on December 15, 2006 (a $0.054 dividend) while the ProShares family had their first on December 20^th. The reason the dates are important is because there are key rules that relate to specific dates and who receives the distributions. Let's review the date terminology.

• Ex-dividend date
  This is the day from which the security trades without the dividend. To qualify for the dividend you have to buy the ETF no later than the day before the ex-dividend date
• Record date
  The date of record is two business days after the ex-dividend date. On this day the ETF administrator looks at their books to see who is an official shareholder of the fund. Remember that your purchase has to have settled (3-days) for you to be the official shareholder
• Payable date
  This is the day on which the ETF actually pays the shareholders of record

To illustrate a specific example, we look at the distribution schedule for the ProShares ETFs. At the top of Table 1 below you can see the key dates for their 2006 distributions. The bottom line is that if you had purchased your shares no later than Tuesday December 19 you were the holder of record on December 22, which means that on December 27, the payable date, you will receive the dividend payment.

Table 1: Distribution schedule for ProShares ETFs

Ex-dividend date:	12/20/2006
Record date:	12/22/2006
Payable date:	12/27/2006

Fund Name	Ticker Symbol	Dividend	Short-Term Capital Gain	Long-Term Capital Gain	Total Distribution	Total Distribution (%)
Short QQQQ	PSQ	$0.98	---	---	$0.98	1.57%
Short Dow 30	DOG	$0.94	---	---	$0.94	1.50%
Short S&P 500	SH	$1.16	---	---	$1.16	1.87%
Short MidCap 400	MYY	$1.94	---	---	$1.94	3.06%
Ultra QQQQ	QLD	$0.11	$5.14	$0.17	$5.42	6.60%
Ultra Dow 30	DDM	$0.65	$5.96	$0.18	$6.80	8.26%
Ultra S&P 500	SSO	$0.43	$3.25	$0.12	$3.80	4.39%
Ultra MidCap 400	MVV	$0.41	$3.76	$0.17	$4.35	5.51%
UltraShort QQQQ	QID	$0.57	---	---	$0.57	1.06%
UltraShort Dow 30	DXD	$0.61	---	---	$0.61	1.06%
UltraShort S&P 500	SDS	$0.72	---	---	$0.72	1.24%
UltraShort MidCap 400	MZZ	$1.14	---	---	$1.14	1.84%

The table also contains the actual amounts and composition of the distribution for each fund. The short funds only pay dividends, no capital gains. The long and leveraged funds pay both dividends and capital gains. For tax reasons, the short-term and long-term capital gains are broken out. Looking at the total distribution which combines dividend and capital gains, three funds have distributions of over 5%, including the Ultra Dow30 ProShares (DDM) topping out at 8.26%. Note that we are not tax advisors and that you should consult a licensed professional to determine how these dividends, short and long-term capital gains will affect you.

The way distributions manifest themselves for shareholders in the short term is a wash. Since the fund pays you the distribution out of their accumulated cash, the net asset value of the fund diminishes approximately by the amount paid out. This explains why the share price gaps down at the open on the ex-dividend day by about the amount of the distribution. For the shareholder who will receive that amount in cash, he sees no dip in price. Yet, if he re-invested the distribution he would end up with more shares than he had before the distribution and effectively gained a bigger share of ownership in the process. The rest of us cannot simply rely on closing prices to calculate performance. For example, DDM did not drop 8% in value on December 20^th which explains why we always use dividend and split adjusted prices for our performance numbers. Yes, ETFs have also been known to split, to whit, the QQQQ 2:1 split on March 20, 2000. For those interested in calculating adjusted prices, read "Your QQQQ results do not match my calculations anymore. Why?".

Despite the potentially heavy tax consequences of these ETF distributions in non-tax sheltered accounts, with selected funds, the distributions contribute substantially to the overall performance and cause the funds to actually outperform the indexes that they track.

FAQ of the Week

Question: What is an ETN and is it as good as an ETF?

Announcements first: the iPath MSCI India ETN that we mentioned in last week's FAQ has started trading this Wednesday December 20 on the New York Stock Exchange under the symbol INP. Last week's mention generated lots of "What is an ETN?" type questions that we will try to answer here.

Unlike an ETF which represents a share in underlying commodities or securities, an ETN (Exchange-Traded Note) is a senior debt note issued by Barclays. They are debt obligations like a bond; they mature in 30 years, and guarantee to gain 100% of the performance of the tracked index. To use Barclays' own words "iPath ETNs are unsecured obligations of Barclays Bank PLC and are not secured debt, are riskier than ordinary unsecured debt securities and have no principal protection." The big catch with ETNs is that they are simply an "I Owe You" with only the credit worthiness of the issuer as guarantee, and this represents a default risk not found in ETFs. Yes, Barclays Bank is one of the world's largest and most respected financial institutions, and has an 'AA' credit rating from Standard & Poor's. Large reputable banks have gone under before and they will again, especially with the large derivative portfolios many of them have been crafting in recent years (famous investor Warren Buffet calls derivatives "financial weapons of mass destruction".)

Beyond the credit risk there are a few other differences between ETFs and ETNs such as expenses. Most index ETFs have low yearly expense ratios as shown in Table 2 below. In summary, the expense ratios of Barclays ETNs seem higher than most index ETFs but substantially less than closed-end ETFs.

Table 2: Expense ratios of different types of funds

Fund Type	Fund Name	Ticker Symbol	Yearly expense ratio
Large index ETF	Nasdaq 100 Trust Series I	QQQQ	0.20%
Specialized index ETF	United States Oil Fund	USO	0.50%
ETN	iPath Goldman Sachs Crude Oil Total Return ETN	OIL	0.75%
ETN	iPath MSCI India Index ETN	INP	0.89%
Closed-end ETF	India Fund	IFN	1.47%

As far as their performance goes we would prefer a lot more data to issue judgment. There is not a long track record nor are there many ETN products to look at. Until the launch of INP this week, the only ETNs in existence were three iPath Commodity ETNs in existence and all were introduced since June of this year:

• iPath Dow Jones-AIG Index Total Return ETN (DJP)
• iPath GSCI^® Total Return Index ETN (GSP)
• iPath Goldman Sachs Crude Oil Total Return ETN (OIL)

For whatever good such a short comparison is, we wanted to see how an ETF and an ETN following approximately the same index compare tracking wise. Chart 1 below compares USO (an ETF) and OIL (an ETN) since its introduction this summer. They are very closely matched. Be sure to note that by using an oil sector example we do not recommend investing in oil or other commodity sectors in conjunction with the TimingCube signals because they are not always well correlated with the broad stock market that we track.

Chart 1: ETF (USO) and ETN (OIL) performance correlation

With all of this in mind it seems that ETNs and ETFs are very comparable in many respects, but we feel that ETNs should deliver higher performance to offset the default risk they have, or lower costs which they have not. Whenever there is an index ETF as an alternative, we would stay away from ETNs.

Warm wishes and until next week.

The TimingCube Staff