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Dear New World Investor:

The strongest markets consolidate by moving sideways with an upward tilt. The furious advance that drove the prior upturn flattens out, but all those who are waiting for a major correction to give them a second chance to get on board keep buying the little dips, so the big retracement never comes. By the end of July, the Dow Jones Industrial Average was up 4.5% for the year to date (YTD), and all the Dow Indices (Transports, Utilities) hit recovery highs, confirming a Dow Theory bull market signal. The S&P 500 was up 9.3% YTD, and the Nasdaq Composite that most closely parallels our portfolios rose a whopping 25.5% YTD.

The Dow climbed to more than 10% above its 200-day moving average, rebounding from 34% below its 200-day moving average in November. Since 1921, 18 of the last 21 times the Dow rallied from at least 10% below to 10% above the 200-day level, it went on to post an average 18% gain during the next 12 months. We saw this buy signal most recently in 2003, 1999 and 1991. There were 17 gains at the six-month mark, averaging 8.2%, and 18 gains at the three-month mark averaging 5.7%.

This week started off with the Nasdaq closing above 2,000 for the first time since October 1 and the S&P 500 closing above 1000 for the first time since October 6. That means the S&P is up 50% in five months from the devil’s low of 666 on March 6. Some commentators are pointing to the five-month, 48% rally from November 1929 to April 1930, which followed a 50% drop from September 1929 through November. But the historic parallel fails, because in 1929 the Fed was about to massively contract the money supply, causing thousands of bank failures. Today’s Fed is trying to blow another bubble to lift the economy into recovery, with massive increases in the money supply flowing first into financial assets and eventually into the real economy. It’s going to work, too – at least for a while. The bill is to be paid later, of course, with very depreciated dollars.

The Cash for Clunkers program is wildly successful, showing once again that (1) if you offer people free money, they will take it, and (2) if Congress sees a popular program that they can spend $3 billion on today, no one but Ron Paul will point out that the $150 million per year interest cost will continue into the future forever. In fact, Congress won’t even think about, because it’s only 453 days to election day and nothing buys votes like giving away money.

The market still has barely enough short-term energy to get the S&P 500 up to

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