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Risk Premiums For The Dow Indices

Running on Empty

July 18, 2008

Risk Premium: RUNNING ON EMPTY

For The Week Ended July 18, 2008

THE BEAR MARKET IS WAITING IN THE WINGS

The Dow Jones Industrial Average gained 396.03 points this week (3.57%) ending at 11496.57 thereby just missing the requisite 20% decline needed to be “officially” declared a “bear” market. Since reaching its record-high close on October 9, 2007 of 14,164.53, the Dow dropped past the 20 % threshold at several points during the week, finally closing out the shortened trading week 18.84 % down from its all-time high. The Dow’s fall paralleled that of the other major market indexes such as the broader Nasdaq and Standard & Poor’s 500 (S&P). Since October 2007, the Nasdaq Index has also slipped into bear market territory, down 21.69%, whereas the S&P 500 is off 19.45%.

We continue to caution about the treacherous nature of this market slump. We feel that portfolios should be overweighted toward cash in order to deploy funds as opportunities present themselves. Until our risk premium model begins to provide bullish signs we think investors should hold onto their cash since stock prices are likely to fall further. Since our model suggests that the Dow continues to have more downside risk, we do not rule out the possibility of it falling below 11,000.

NOTHING MAGICAL ABOUT THE 20% RULE

A fall of 20% or more from a high is a common belief held by many investors to confirm a bear market. Our Risk Premium Index model began signaling a bear market in August 2007 and remains in bear market territory. Since the 20% rule is loosely based on empirical evidence, we hope investors were not waiting for one or all the major stock indexes to fall in excess of 20% before coming to the realization that a bear market was underway.

BEAR MARKETS ARE NOT TO BE TRIVILIZED

In practical terms, it is very difficult run-up in stock valuations, with P/E ratios in to invest profitably during bear markets although, over time, values will start to emerge. Bear markets are not to be taken lightly. For example, the 1973-1974 slump lasted 694 days (23 months), with the Dow down nearly 45%. It affected major stock markets throughout the world. By contrast, the 1987 bear market began with a bang and was of a relatively short duration. On Black Monday (October 19, 1987), the Dow plummeted 508 points, losing 22.6% of its value in one day, while the S&P 500 dropped 20.4%, and the Nasdaq 11.3%. The 1987 crash is believed to have been caused by an unwarranted valuation in the U.S. significantly above the post-war average. The S&P 500 was trading at 23x earnings, a postwar high and well above its average of 14.5x earnings.

WHILE WE WERE CELERBRATING JULY 4^TH

While we were celebrating the July 4th Holiday, stocks in London approached official bear market status. The FTSE 100 Index closed at 5412.8, its lowest level since November 2005. The U.K. benchmark has declined 19.6% from its high reached in October 2007. Whether or not the FTSE breaks through the 20% threshold is not especially relevant. What is obvious is that stocks in many countries are not performing well. The weakening economies in Europe, Asia and the U.S. have the same common denominator, namely, the escalating cost of energy (i.e. the run-up in oil prices) which is bleeding businesses as well as consumers.

RISK PREMIUM STATISTICS

§ The Industrial Risk Premium ended at 1.32% versus 1.31%

§ The Transportation Risk Premium decreased to 3.38% from 4.48%

§ The Utility Risk Premium increased to 6.65% from 6.34% n

Date	July 11, 2008	Date	July 18, 2008
DJ Industrial Risk Premium	1.32%	DJ Industrial Risk Premium	1.15%
30 Year Treasury	4.47%	30 Year Treasury	4.57%
Industrial Risk Differential	-3.15%	Industrial Risk Differential	-3.42%

Date	July 11, 2008	Date	July 18, 2008
DJ Transportations Risk Premium	4.48%	DJ Transportations Risk Premium	3.38%
30 Year Treasury	4.47%	30 Year Treasury	4.57%
Transportation Risk Differential	0.01%	Transportation Risk Differential	-1.19%

Date	July 11, 2008	Date	July 18, 2008
DJ Utility Risk Premium	6.34%	DJ Utility Risk Premium	6.65%
30 Year Treasury	4.47%	30 Year Treasury	4.57%
Utility Risk Differential	1.87%	Utility Risk Differential	2.08%

Disclaimer: The information set forth herein has been obtained or derived from sources generally available to the public and believed by Whitehall Financial Advisors LLC, and its affiliates (“WFA”) to be reliable, but WFA does not make any representation or warranty, expressly or implied, as to its accuracy or completeness. The information contained herein is thus NOT intended to be used as the primary basis of any investment decisions. This information does not constitute investment advice. The information disclosed is also not an offer or a solicitation of an offer to BUY or SELL any security. The opinions, comments and conclusions discussed in this report may not be suitable for all investors or transferable to all investment opportunities. Investors must make their own investment decisions based on their specific investment objectives and financial position as well as use independent investment advisor(s) — WFA should not be considered as the primary source or basis for any investment decision. This publication should be deemed advertising under all applicable, respective state laws. Additional information is available upon request. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Opinions and estimates may be changed without notice, and WFA disclaims any obligation to advise you of any such change. WFA, or one or more of its partners or employees, from time to time may have long or short positions in, or buy and sell, the securities discussed herein. And WFA may underwrite or provide investment banking, credit or other financial services to companies discussed or referenced in various WFA publications, as well as those of others, including any and all media venues in the future.

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