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AlphaProfit Newsletter: January Indicator Update
January 2, 2008

Dear Valued Subscriber,

The AlphaProfit model portfolios were repositioned based on December 31, 2007 closing prices. The Repositioning Alert and Model Portfolio Composition documents are available in the Subscriber Login area of alphaprofit.com. Here is a summary of the considerations that resulted in the repositioning changes:

Overview

Fears of possible worsening of the sub-prime mortgage crisis remain at elevated levels. The probability of the economy slipping into a recession or muddling along at near-recessionary levels in 2008 has increased.

In 2007, the U. S. dollar declined nearly 8% against a basket of six major currencies. We believe this should aid exports as cost-competitiveness of domestic companies vis-à-vis foreign counterparts improves.

Against this backdrop, we gravitate towards selected industry groups in the technology, healthcare, and materials sectors with the following two-fold objectives:

•  Shielding investment portfolios from the vagaries of the economy

•  Providing exposure to potential upside

Technology

With a relatively large fraction of revenue being derived from international sales, technology companies are expected to grow their profits at rates higher than those of most sectors in 2008.

Leading technology companies have quite a few things going for them. Microsoft is gaining traction in Windows Vista sales as consumers and businesses upgrade their operating systems in greater numbers. Google continues to dominate the Internet search business while making inroads into the wireless area. Apple's products including Macintosh computers, iPod music players and iPhones are popular with consumers.

Increasing use of smart phones is requiring the wireless infrastructure to be upgraded. Traditional telecom service providers are upgrading their broadband Internet service while large businesses are increasingly embracing Internet telephony.

Deal activity promises to be strong in the technology space with cash-rich companies like Microsoft and Cisco leading the binge.

Software company revenues tend to be somewhat less sensitive to economic vagaries than revenue streams of computer and telecom equipment companies. We include Fidelity Select Software & Computer Services (Ticker: FSCSX, Risk Rating: Average) in both model portfolios. Since software ETFs typically do not include exposure to Internet companies, we prefer a mix of Software HOLDRS (SWH) and First Trust Dow Jones Internet (FDN) in a 60/40 ratio for investors looking to exchange-traded investments.

We provide exposure to the computers and telecom equipment groups in the Core model portfolio, through Fidelity Select Computers (FDCPX, Above Average) and Fidelity Select Communications Equipment (FSDCX, Above Average). Internet Architecture HOLDRS (IAH) and iShares S&P GSTI Networking (IGN) represent our preferred exchange-traded alternatives for playing the computer and telecom equipment investment thesis.

Healthcare

In the healthcare sector, we prefer the medical equipment & systems group since demand for such products tends to be generally recession-proof. Aided by a weaker dollar, international sales are particularly strong. Companies are using cash to fund acquisitions as well as buyback shares. In recent deal news, Royal Philips Electronics NV has offered $5.1 billion to buy Respironics, a maker of medical devices that assist or monitor breathing.

We include Fidelity Select Medical Equipment & Systems (FSMEX, Below Average) in both model portfolios. iShares Dow Jones U. S. Medical Devices (IHI) offers a pure-play on the medical equipment industry for ETF investors.

Materials

We believe the materials sector will likely continue to benefit from the infrastructure build-out in Brazil, Russia, India, and China or the BRIC nations. Weakness in the U. S. housing and auto markets however presents risks to product demand. Within the materials sector, chemical companies are demonstrating strong pricing power and their shares appear most attractive from a valuation perspective.

We include Fidelity Select Chemicals (FSCHX, Below Average), a pure-play on the chemicals group, in the Core model portfolio. In the absence of pure-play ETFs for the chemicals group, iShares Dow Jones U. S. Basic Materials (IYM), Materials Select Sector SPDR (XLB), and Vanguard Materials (VAW) represent reasonable alternatives. Each of these materials sector ETFs have close to 50% of its assets invested in chemical companies.

S&P 500 Index

Trading at a forward P/E multiple of about 16, the U. S. equity market taken in aggregate appears fairly-priced. With earnings growth likely to slow, there are relatively few sectors and industry groups worthy of over-weighting. We prefer the relative safety of larger capitalization stocks and include the Fidelity Spartan 500 Index Fund (FSMKX, Below Average) to achieve a degree of diversification in the Core model portfolio. This fund seeks to track the Standard & Poor's 500 Index, a commonly used proxy for large-cap U. S. stocks. The SPDR S&P 500 (SPY) offers a cost-effective, liquid means to owning stocks in the S&P 500 index.

Sector Portfolio Indicator and Market Outlook

Following the repositioning of the model portfolios, the AlphaProfit Sector Portfolio Indicator™ is rated 'Buy'. This implies current prices are generally good to trade at.

Uncertainty on the magnitude of losses incurred by financial institutions on mortgage-related securities is weighing on investor sentiment. The Federal Reserve in conjunction with central banks of leading industrialized nations is working to shore up liquidity and stem weakness in the housing market from undermining the broader economy. Softening home prices, a relatively tight credit market, and rising petroleum product prices are pressuring the consumer.

The S&P 500 index closed December 31 at 1468. We expect this index to be range-bound between 1400 and 1550 until there is a clarity that the worst from the housing and home finance markets is behind.

The AlphaProfit model portfolio returns as of December 31, 2007 are as follows:

  ^* 2H07 refers to the June 30, 2007 to December 31, 2007 period.

The investment thesis and key risks for the funds included in the model portfolios will be elaborated in the January Report due for publication on Saturday, January 12.

Best regards,
Sam Subramanian
AlphaProfit Investments, LLC
Ideas. Insights. Results.
http://www.alphaprofit.com

Notes: The AlphaProfit Sector Investors' Newsletter™ is for information purposes only. AlphaProfit Investments, LLC is not soliciting any subscriber to buy or sell any security. Nothing herein should be construed as an offer to buy or sell securities or to give individual advice on investing. Before buying or selling any mutual fund, exchange-traded fund, security, or investment, read the prospectus carefully. For securities held in brokerage accounts, read the broker's specific terms and conditions which apply to trading of the securities. AlphaProfit Investments, LLC cannot and does not give any assurance that the present or future model portfolio changes will be profitable. Past performance is not a guarantee for future results. Factual material is obtained from sources believed to be reliable and is provided without warranties of any kind. AlphaProfit Investments, LLC is not responsible for any errors or omissions. AlphaProfit Investments, LLC neither is associated with nor receives any compensation from any of the mutual fund companies, brokers or entities connected with the exchange-traded funds mentioned in the newsletter. Please review our Terms and Conditions of Use and Subscriber Agreement which is available on our website at www.alphaprofit.com; they govern your relationship with AlphaProfit Investments, LLC, including, but not by way of limitation, use of this newsletter. No part of the AlphaProfit Information may be reproduced or re-transmitted in any manner without written permission of AlphaProfit Investments, LLC.

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