This Month's Issue: Key Points

Our first article this month examines fundamental and dividend index weighting. Before investing in funds based on these approaches, investors need to ask what caused them to outperform market capitalization based index products, and whether these causes will continue to exist in the future. We conclude that, like the small capitalization anomaly, the fundamental and dividend weighting anomalies should disappear, or at least shrink in size over time. However, at least in the short term, these new products may well outperform. Our next article reviews new commodity indexes and investable products launched last month. We still prefer the Dow Jones AIG index. On the product front, we like the new ETF launched in Germany that tracks the Rogers International Commodities Index (it's an improvement on the existing product that tracks the GSCI). Assuming the IRS agrees with Barclays view about their tax treatment, we also very much like the new iPath Exchange Traded Notes launched in the U.S. whose return tracks the DJAIG index.

Our next feature looks at current bond yield spreads and asks what they may be telling us. Wc conclude that they compensate investors not just for default risk (which itself can only be assessed with uncertainty), but also liquidity risk and the risk that the financial system will switch regimes, from the current low volatility/high return one into the more turbulent high volatility/low return alternative. We also conclude that bond spreads are low relative to history and in light of current conditions, suggesting overvaluation exists.

Our third feature article looks at the recent jump in the VIX volatility index, and what it may imply for conditions that lie ahead. After reviewing the historical performance of other asset classes after previous jumps in the VIX, we conclude that a well-diversified portfolio should be able to weather whatever storms lie ahead. Our next article updates our economic outlook and warning indicators. We present excerpts from last month's annual report of the Bank for International Settlements (the central banks' bank). It largely mirrors our view that while the global economic and financial system has proven remarkably resilient, the pressures continue to build and could easily trigger a sharp downturn. We present a scenario of how this could unwind across different asset classes, and the key indicators investors should monitor.

This month, we also analyze the impact of rebalancing decisions on the probability that an investor will achieve his or her long-term goals. We conclude that rebalancing when at least one asset class is ten percent or more above or below its long-term target weight makes the most sense. This month's product and strategy notes look at a new study that shows how badly investor were hurt by chasing performance over the past twenty years; how 401(k) plan administrators aren't good active fund pickers; whether or not there will be a residential property crash (the OECD says maybe, Harvard says not likely in the U.S.); why investing in illiquid assets is "the poor man's alpha", and the challenges faced by someone who tries to use Rydex new currency ETFs to create their own foreign index.

| This Month's Letters to the Editor: Investing in Commodities/Legg Mason and Index Investor's Opinion on Leveraged Index Products | Fundamental and Dividend Weighted Indexes | Product and Strategy Notes: Depressing Dalbar Study; More 401(k) Fund Choice; Residential Propert: Is a Crash on the Horizon; Poor Man's Alpha; New RYDEX Foreign Currency ETF | Economic Warning Indicators Update | Asset Class Valuation Update - Revised - Includes Property, Commodities and Volatility and Updates to Sector Rotation Watch | Global Asset Class Returns | When And How Should You Rebalance? | What Do Bond Spreads Tell Us? | Another Month, Another Crop of New Commodity Products | This Month's Issue: Key Points | Volatility is Up: So What? |