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Money supply is shrinking. This fits my economic cycle model which is based on two simple observations. After 9/11, to offset deflationary trends, the money supply needed to expand. Once purchasing power returned, to offset inflationary trends, the money supply needed to be reduced. A tight money supply naturally tends to favor those who have money in the of form liquid investments like cash, stocks and bonds. These people can patiently wait out a market downturn. People who are leveraged in real estate often cannot.

The housing market is a good example of leverage. Credit Suisse analysts have recently concluded that the current downturn in housing is as much a function of deteriorating affordability as an issue of over-supply from fleeing investors and aggressive home builders. It is also a sign that the Federal Reserve Board’s strategy of tightening the money supply to reign in speculation is working. Moreover, Credit Suisse analysts have focused on the effect the subprime lending market has been having on money supply. There is a threat that if too many borrowers default on their mortgage payments, the money supply will become so tight as to significantly strain the entire economy. There is currently discussion in Congress regarding what analysts and legislators see as the need for underwriting reform.

Investors should recognize that while subprime lending risks have been heavily scrutinized recently, further risks to banks and mortgage companies exist in the alternative-A (alt-A) rated mortgage market. Alt-A lenders offer loans requiring little or no documentation to borrowers with good credit. Alt-A borrowers typically pay a higher interest rate for these no/low documentation loans. There is considerable risk associated with the lax underwriting standards and exotic mortgage products utilized in this segment.

The combined loan-to-value ratio of alt-A rated loans backed by real estate in 2006, was 88%, with 55% of homebuyers taking out simultaneous second mortgages at the time of purchase. Low/no documentation loans represented a staggering 81% of total alt-A originations in 2006, up from 64% just two years earlier. Meanwhile, a study by the Mortgage Asset Research Institute, sampling one-hundred stated-income loans with low/no documentation, found that 60% of borrowers had “exaggerated” their income by more than 50%.

This being a pre-election year, historically the market has done well. The Chairman of the Federal Reserve Board, Ben Bernanke, has thus far done a good job of restraining inflation while maintaining growth. Technical indicators point to a soft landing despite a cooling economy, and as long as the economy cools without a real estate meltdown, the stock and bond markets should do well. In conclusion, the money supply is getting tighter. However, it does not appear at this time that 2007 will be a recession year.

Finally, I would like to thank those who have referred people to me. I appreciate your continued confidence and support.

Contact us to learn more about working with Vaughn Woods Financial Group.

Best Regards,

Vaughn L. Woods, CFP®, M.B.A.

*Investors should be aware that there are risks inherent in all investments, such as fluctuations in investment principal. Past performance is not a guarantee of future results. Asset allocation cannot assure a profit nor protect against loss. Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. Views expressed in this newsletter may not reflect the views off Delta Equity Services Corp. The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. VW1/VWA0024

**Credit Suisse, Market Edge