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Capital Growth Letter

Newsletter Overview
Printing Schedule
Weekly Hotline
Getting started as a new subscriber
The Value Line Market Timing Program

Newsletter Sections
Opening Section
The Investing Environment
  -The Yield Curve
  -Current Trends
CGL Asset Allocations
Stocks Section
International Section
Bond Section
Collateral Coverage
Related Topics
Group Power
Sector Select ETF Portfolios
Core Portfolio

Printing Schedule
The Capital Growth Letter is generally published on the third Saturday of each month. The publication date may be changed when market action dictates.

Weekly Hotline
Posted online every Monday by 5:00PM PT, except the Monday following the publication of the newsletter. This is our main avenue of communication between issues. Includes information on the status of the ETF Program and the Value Line Plan. Scroll down from the current hotline to see previous postings.

Getting started as a new subscriber
The Capital Growth Letter has been in existence since 1988. As a new subscriber we do not recommend that you immediately buy the existing positions in the portfolios. It is best to purchase existing positions on pullbacks and/or add new positions as they are recommended.

The Value Line Market Timing Program
This is a purely mechanical system based on the Friday close of the Value Line Geometric Index and it is used as a guide to market operations. The simplest way to use this system is to confine one's buying to times when the plan is long and confine one's selling to times when the plan is short or out of the market. Another approach is to hedge one's long positions when the plan is out of the market.

The VLP is updated via the Monday Hotline, at which time we give you the next Friday’s reversal number. If the system is long and closes below that level it will reverse to short. If the system is short and closes above that level it will reverse to long. You can see a chart of the Value Line Geometric Index at: chart for VAL-I The symbol on Yahoo! Finance is ^VALUG. Here is a link to retrieve a Yahoo! quote:^valug

Having the reversal number in advance may allow you to trade on Friday shortly before the close if it is clear that the reversal will be triggered, getting in or about a day early. Given the strong trends we have been seeing late in the day, this type of front-running should be relatively safe.

We based the VLP on the Value Line Geometric index because it is an equal-weighted index that tracks 1,700 stocks and gives a good picture of the action of the broad market. The fact that it is a geometric index and mathematically must underperform all other commonly accepted market measures is not a problem in this application as it is being used to generate signals, not for investment. (One cannot invest in the Value Line Geometric, as there is no investment vehicle for it.) For trading we recommended that you use a broad market index fund such as the Russell 3000 iShares.

Opening Section
Each issue opens with a core analysis and a discussion of our current investment guidelines including any changes in allocations. There are frequent tutorial pieces in this section.

The Investing Environment section presents a series of proprietary market models that focus on four areas: monetary, sentiment, valuation and trends.

Monetary presents our Fed Action Model. This model is designed to forecast the next policy action of the Federal Reserve Board. It is based on the relationship between policy-set interest rates such as the Federal Funds Target Rate and the Discount Rate and market-set interest rates such as Fed Funds futures, Treasury bills and LIBOR. Two supporting indicators are presented, the yield curve and a measure of monetary growth. Monetary growth is depicted as the annualized rate of growth of M2, a broad gauge of the U.S. money supply.

The Yield Curve is the difference between the yield of a 10-year Treasury note and a 90-day Treasury bill. A chart of the 10-year note can normally be found on page 5. We include the yield curve because it acts as an at-a-glance health gauge for the economy. In order to get the most out of the yield curve, the level of interest rates and the yield curve must be compared simultaneously. High, moderate and low are relative terms that we define as where we are in the range of the past four-years. The table below is a very rough guide to interest rates and the yield curve at various stages of the economic cycle.

Economic PhaseInterest Rate LevelYield Curve
TroughLowFlat to mildly positive
Early expansionLowFlat to mildly positive
Growth phaseModerateMildly positive
Late expansionHighFlattening to Inverted
Early declineModerateInverted to flat
Late declineLowFlat to mildly positive

Sentiment presents two models of investor sentiment. Net Bulls is our analysis of the Investors Intelligence poll of investment advisory sentiment. It is the percent of bullish investment advisors minus the percent bearish. To focus on extremes in firmly held beliefs, the model disregards those expecting a correction. The key levels are +20 and -20. The second sentiment indicator is a Hines ratio based on all options traded on the Chicago Board Options Exchange. This variation on the traditional put/call ratio includes open interest in addition to volume. It was developed by Ray Hines, of The Wall Street Generalist. The formula is:
Hines ratio = (call volume / call open interest) / (put volume / put open interest)
We monitor levels greater than 1.2 (bearish) or less than 1.0 (bullish).

Valuation presents the yield, price to book value ratio and price / earnings ratio for the Dow Jones Industrial Average. The models are driven by where we are in the immediately prior four-year range of values and reflect the last signals issued.

Current Trends, our trend analysis, is based on the rate of change of a 50-day moving average for the intermediate term and a 200-day moving average for the long term. These are not optimized averages; rather they are the most commonly cited trend measures. As such, they are good indicators of publicly perceived trends and useful gauges of market psychology.

CGL Asset Allocations - Bottom Right Side of Page 1 A bar chart depicting our view of the optimal deployment of assets for an "average" investor given our current market outlook. Very conservative or very aggressive investors may wish to tailor these allocations to suit their preferences.

Stocks Section
The stock section provides an overview of the US stock market and anticipated trends. Each issue includes a chart of a major US stock market index with Bollinger Bands®. The other charts may illustrate our analysis or depict positions in the portfolio. Comments on industry group action can also be found here as well as updates on The Value Line Plan, a basic market timing system based on swings in the Value Line Geometric Index. The Value Line Plan utilizes weekly data and enters or exits the market each Friday based on a stop announced on the prior Monday via the Hotline.

International Section
This section contains our thoughts and analysis on the international scene along with investment recommendations. We view international investing as a very important part of a balanced portfolio.

Bond Section
This section provides an overview of the bond market and anticipated trends. Every issue includes a chart of US 10-year T-note yields with Bollinger Bands. Changes in the price and/or quantity of money and fiscal policy are considered not only for their impact on bonds, but also for their impact on stocks and the economy.

Collateral Coverage
Each issue also contains sections devoted to the energy market, precious metals, commodity prices and the dollar. Charts vary for these areas depending on the analysis presented. These areas are analyzed primarily to provide information for our primary investment process.

A chart of the CGL Commodity Composite is often included in the newsletter. This is a proprietary composite. The components are the Reuters, Moody's and CRB Industrial Commodity Indices. These are sometimes called spot commodity indices. The CGL Commodity Composite is equally-weighted index of the three.

Related Topics
Some issues contain a section called the Reading Rack for those who may be interested in books, articles or material for further exploration. There is an occasional section called Computer Corner that focuses on investment-related technology and software. View From the Beach presents John Bollinger's opinion piece. Finally there is a schedule of John Bollinger's appearances, seminars, etc.

Group Power
Pages 10 and 11 present a wide variety of data from, our unique daily industry-group research product. Much of this data is not available elsewhere and is highly useful for both stock-market timing and stock selection. Group Power is delivered daily on-line or via e-mail. A listing of the Group Structure is available to all Group Power and Capital Growth Letter subscribers. To make the best use of Group Power subscribers should read the Introduction to Group Power.

Group Power Sector Rankings
Broad economic sectors indices derived from the stock market are ranked by performance in three time frames in this section to give insight into the macro trends in the US stock market.

Group Power Statistics
A wealth of unique market-timing data derived from our industry group work is presented in tabular form. Various aspects are often commented on in the stocks section of the letter.

Industry Group New Highs and Lows
A list of Group Power groups trading at new yearly (52-week) highs and lows. An interesting contrarian strategy is to use these lists as lists of potential reversal candidates.

Group Power Industry Group Rankings
This is a momentum ranking of the Group Power industry groups. Its main use is to determine which market groups are attractive or unattractive. The current momentum ranking is presented along with those from five, 10 and 20 days ago, allowing you to see changes in leadership trends. Some subscribers who do mutual fund switching use this ranking to move their assets to funds that are expected to outperform.

Sector Select ETF Portfolios --Further Details
In addition to our core portfolio we present relative-strength driven portfolios consisting of exchange-traded funds——ETFs. These three portfolios, International, Style and Sector, are mostly mechanical. They use a cast-out relative-strength method.

The strongest shares are purchased and held for as long as they remain above the median ranking. When they fall below the median ranking they are replaced with the highest ranked share not held. A bit of discretion is used. We will not buy overextended shares for example, but the approach is largely mechanical. These portfolios are not subject to market timing other than that described above and are designed to be a free standing, straight forward way of allocating funds to market sectors based on relative strength.

Since the Sector Select ETF Portfolios are long only, we do include a couple of rules to help protect capital in declines. For example, if we rotate out of a sector because it drops below the middle of the pack, we will not replace it unless there is a viable candidate with positive momentum. This has two effects: First, it prevents us from buying into a decline by postponing the purchase until after a rally has been initiated. Second, it serves as an implied allocation mechanism by lightening up our holdings when momentum is negative.

Changes to the ETF portfolios are announced via the Weekly Hotline and Special Hotline.

Core Portfolio
In this section all outstanding recommendations are listed with appropriate supporting data. The ET rating is the Potential rating for the security from The Group Rating is the Potential rating for the group from The performance numbers are based on the average daily price the day after the recommendation was made.