OUTLOOK

"Lesson Learned on Using Proxies"

2/27/2007

As we stated on 1/5/07, the XAL index would decline at least 5% from the level of 61.74 within 4 weeks. On 1/31/07, the XAL reached 58.22 which is 5.70% below the specified level of 61.74.

Although the XAL reached our forecasted level, the proxy of IYT did not correlate well with the XAL. Instead of profiting from a decline in the XAL Index, the proxy of IYT moved inversely with XAL.  As a result, our short position of IYT finished down at -4.87% despite the XAL Index moving in our favor.   In the future, we will attempt to use vehicles that directly track the indexes we trade rather than using proxies.

Mark Yuan, CFA