FREQUENTLY ASKED QUESTIONS

Q: What guides your overall investment outlook? It seems like The Wall Street Digest consistently holds a bullish, optimistic tone in both bull and bear markets.

A: One thing about the stock market has always remained true:

“There will always be bull markets followed by bear markets followed by bull markets.” - Sir John Templeton

The bear market that began in March of 2000 ended on March 12, 2003, with astonishing profits ready to be made by investors who demonstrated a willingness to go back into the market while others remained sitting on the sidelines in fear.

Interestingly, our most recent and painful bear market followed the longest bull market in history. That major bull market began in August of 1982 with the Dow Industrial Average at only 777. Falling interest rates and declining inflation ignited the first leg of that bull market. Sound familiar?

The second leg of the most previous bull market began in the fall of 1989 with the collapse of communism when the Berlin Wall was torn down. Most nations in Europe and Asia switched from a Cold War political strategy that spent billions on defense to an economic strategy as a means to produce continuous economic growth. Properly executed, this strategy builds the wealth of a nation and the net worth of its citizens by producing a stable economic environment. The collapse of communism was the single most important economic event of the 20th Century.

The third leg of what is generally recognized as our most historic bull market of all time began in 1994 when Congress ratified the North American Free Trade Agreement (NAFTA) and the General Agreement on Trade and Tariffs (GATT). Falling trade barriers and the elimination of tariffs produced faster economic growth around the globe. The ratification of NAFTA and GATT was the second most important economic event of the 20th Century. And, on July 28, 2005, Congress passed the Central American Free Trade Agreement (CAFTA).

When The White House and Congress refused to regulate the Internet, America raced into The Information Age. An explosion of technology accelerated economic growth and stock prices exploded in 1995, 1997 and 1998. Despite the "Tech Wreck of 2000," the USA is—and will continue to be—a high technology, computer, software, information, Internet-based telecommunications economy.

The next five years will be the most exciting and profitable period that you and I have ever experienced. The Dow will reach 20,000 by 2010. If Congress and President Bush can agree on how to best fight the war on terrorism, cut additional personal and corporate taxes, create new jobs for outsourced workers, and also stabilize the global currency system, the Dow could pass 20,000 before 2009.

The Internet has changed the way the world communicates and conducts commerce around the globe. An explosion of Chinese logging onto the Internet will eventually free China from the shackles of communism and corruption. The explosion of e-commerce has already accelerated global economic growth.

Never before have there been so many investment opportunities for equity investors. The most significant investment opportunities will appear in The Wall Street Digest each month. For example, purchasing the right technology stocks today is like purchasing Ford Motor Company stock for $0.25 a share back when the first Model-T rolled off the first assembly line. Purchase the right technology stocks and/or industry sectors now and you, too, can be far wealthier than you could ever imagine.

Q: Why is it that when short-term interest rates fall, long-term rates do not necessarily fall? Although short-term rates were lowered eleven times by the Federal Reserve beginning in January 2001, the rate of a 30-year mortgage note seems to change daily due to the uncertainty of long-term interest rates. Please explain the relationship between the two and any correlation, if such exists.

A: Thirty-year bond prices and, hence, yields, are set by the free markets, not the Federal Reserve. Bond prices change minute-by-minute—even, second-to-second—depending upon supply and demand. Changing economic conditions around the globe cause bond traders to sell if they feel various events are inflationary. Selling bonds will push bond prices lower. As a result, yields move higher to compensate for the loss of value caused by perceived inflationary event. If traders feel various events are positive for the bond market or non-inflationary, bond yields will fall and bond prices will go up. Market interest rates have a historic tendency to rise in the first quarter and then fall for the balance of the year.

The Federal Reserve has no control over 30-year bond yields. The Fed uses the Federal Funds Rate (the overnight lending rate between banks) to execute monetary policy. If the Fed wants to tighten monetary policy for the purpose of slowing economic growth, the Federal Funds Rate will be raised. If the Fed wants economic growth to expand, the Federal Funds Rate will be lowered—as we experienced from 2001 to 2003, where the resulting one percent Fed Funds rate remained until the Fed again began raising the Fed Funds Rate in quarter-point increments in late-2004, and ending two years later in late-2006.

Q: Please explain the meaning of the Sales and Earnings percentages in your Buy Signal Bulletins. For example, does Sales 57% and Earnings 800% indicate a feasible increase in stock value?

A: A recommended stock and its symbol followed by Sales 57% and Earnings 800% indicates that the Company's sales were up 57% and earnings were up 800% for the most recently reported quarter. Sales and earnings results are from several sources, including The Wall Street Journal, Investor's Business Daily, Bloomberg, Zacks' Investment Research and Daily Graphs. These figures are usually adjusted minutely from time-to-time after an accounting firm audits the Company's figures.

Q: Why don't you advise a price limit on the purchase of your recommended stocks?

A: Price limits are valid for value type stocks and value investors. When a value-oriented money manager or brokerage firm gives you a limit price, it usually means that at the limit price, the stock is fully or fairly valued.

Value investing is not a good strategy in a major bull market. The Graham-Dodd Value Stock Selection Process is considered obsolete due to record global liquidity. The most proven strategy is Price Momentum and/or Earnings Growth. Using these two parameters, a computer can produce a list of stocks that will beat the pants off the best stock lists ever compiled by Graham-Dodd. The price of stocks at any given minute of the trading day represents the present value of all the company's future earnings.

Q: Why don't you give enter and exit price targets for each stock recommendation?

A: Setting a purchase price and a selling price for recommended stocks is a value investing strategy. Stocks recommended in The Wall Street Digest are rapidly growing companies from the fastest growing technology sector(s).

Stocks with 50% to 100% sales and earnings growth each quarter will usually double in price over a 12-month period. Our strategy is to structure a portfolio that will produce total average growth of at least 26% annually. That means an investor should be able to double the value of an investment portfolio every three years. The objective is to hold each growth stock until it no longer qualifies as a growth stock. The stock is sold when sales and earnings growth peaks.

Using a 8% to 10% mental trailing stop-loss will also "take you out" of a stock when a market correction is beginning to unfold in a bull market, or whenever extreme volatility exists—such as we have experienced during this extended bear market. The strategy of letting your profits run while closely limiting losses is a proven, profitable investment strategy when selecting rapid growth stocks in a major bull market.

Q: You list a date on each of the stocks in your "Recommended Stocks" list. Is there some place I should be reading for the most current recommendations, or are the recommendations sent via e-mail? And if so, how often are e-mail notices sent out?

A: You should make it a point to read The Wall Street Digest as soon as possible after we send you an e-mail notice that the newest issue is available online. (A link to our home page is always included in the "Current Issue Now Online" message.)

Subscribers to the online version of The Wall Street Digest receive a Hotline Update via E-mail every Tuesday and Friday by 6:00 p.m. EST. Interim Hotline Updates are sent whenever the Dow Industrial Average closes 200 points or more in either direction in a single session. In addition, Special Investment Alerts are sent to advise subscribers of outstanding buying or profitable selling opportunities that may occur outside of our normal Hotline Update E-mail schedule.

If you are traveling or unable to gain access to your E-mail account, you may call The Wall Street Digest's Telephone Hotline. The Telephone Hotline schedule is identical to our E-mail and Web site Hotline Update schedule. The Telephone Hotline phone number changes from time-to-time; however, subscribers to The Wall Street Digest may call 941-954-5500 for the current number.

Q: How do you recommend starting an investment program? By purchasing stocks only as they are recommended or by investing in the "Recommended Stocks" list regardless of how long it has been since they were initially recommended?

A: In order to become fully invested, new subscribers may purchase stocks from the "Recommended Stocks" list in the current issue of The Wall Street Digest and from the "Great Stocks to Purchase Now" recommendations shown in The Digest and also released on our Hotline Updates and Special Investment Alerts.

IMPORTANT NOTE: Never take new equity positions during volatile market conditions without first consulting the current issue of The Wall Street Digest and, most importantly, all subsequent Hotline Updates and Special Investment Alerts. We will always keep you informed as to our latest recommendations in these important updates.

Q: I notice your information on the "Recommended Stocks" list shows the date the stocks were recommended and the purchase price. Where and how do you list current recommendations?

A: We recognize your need to know about new stock recommendations in a timely manner. Our Hotline Updates and Special Investment Alerts will always keep you informed of our latest recommendations. Also, look for "Great Stocks to Buy Now" in monthly issues of The Wall Street Digest.

Q: I'm trying to plan for my children's educational needs. I'd like to pay for their college education with profits from their stock portfolios. What do you recommend?

A: Purchase shares of good quality stocks. Have your broker put the shares in your children's names or put the shares in an Educational IRA for your children.

Q: You often make the comment, "Maintain a close 10% mental trailing stop-loss on all positions." If a stock is bought at $50 and drops to $45, I understand that it lost 10%, so it's time to call my broker and place a sell order. But if the stock rises to $60 and then drops back down to $54, do you still sell? How about if it keeps rising to $70 and then drops back to $63? This "mental trailing stop-loss" can really keep investors on their toes and seems rather time consuming on a daily basis. Is there a program available that can track each stock based upon when it's purchased?

A: You have a clear understanding of the trailing mental stop-loss. There are several technical analysis programs that will handle trailing stop-loss efficiently. In this volatile market, however, taking a few minutes every day to evaluate your positions will cut your losses and help you to make far more money. I look at my stocks and mutual funds every evening.

A good way to tell if it's time to sell a stock is to keep track of its uptrend line. Draw a line underneath the stock's price uptrend. When the price breaks below the uptrend line, it's time to sell and put your money into a stock that is still consistently rising in price.

EDITOR'S NOTE: For those of you who consider yourselves to be regular investors, use the following guidelines on all positions: After taking a new position, keep a close mental stop-loss and sell your new position if it drops 8% from the entry point. Once a stock has gained 10%, use a 10% trailing stop-loss. As the stock rises in price, move the stop-loss "sell" point higher. Make sure you are consistent and disciplined in your use of stop-losses and percentages. Never invest more than 10% of your portfolio in any one mutual fund, and never more than 5% in any one stock.

Q: I'm new to investing and still unclear about the timing to buy, hold, or sell. Can you help me to understand your newsletter and recommendations better?

A: On a day-to-day basis, maintain a 10% mental trailing stop-loss. That means let your profits run as long as the stock doesn't pull back more than 10%. If your stock corrects by 10% or more on a closing basis—not intraday—then call your broker and liquidate your position.

Do not purchase a stock and then tell your broker to sell if it drops by 10%. Nor should you enter a sell order to sell a stock at a price 10% lower than the current price. Stocks have a way of getting sold by the specialists on the exchange floor during volatile days when prices take sudden dips. The specialist will "grab" your shares at a bargain price and then sell them at a higher price after the market bounces back. The floor specialists make a lot of money with this "grab-and-gain" strategy.

On a longer term basis, the market frequently rises to unsustainable heights as a shrinking supply of stocks (from corporate buy-back programs and mergers) are being chased by an ever increasing supply of money from mutual funds and pension funds.

Huge corrections will continue to unfold—usually in the fall—to bring valuations back to sustainable levels. These corrections will happen with increasing frequency as the number of shares available for purchase continue to shrink while the available money continues to grow relentlessly. The stock market is highly vulnerable to a correction during August, September and October—the three worst months of the year for the stock market.

A "sell signal" is sent to our subscribers when money flowing into the stock market turns negative. As mentioned previously, online subscribers to The Wall Street Digest receive Hotline Updates and Special Investment Alerts via E-mail. Our print subscribers are sent notices by First Class Mail, and our fax subscribers are notified via facsimile. The Wall Street Digest's Telephone Hotline is updated with the same information, which is sent via E-mail to our online subscribers.

IMPORTANT NOTE: We also post a free Hotline Update for visitors to our Web site, but Mr. Rowe's specific Buy, Hold or Sell recommendations are ONLY posted within the subscriber section of The Wall Street Digest's site.

Q: When you recommend that certain stocks be bought on "pullbacks," exactly how do you define a pullback?

A: Purchasing shares on pullbacks means to purchase or add to your holdings anytime the recommended stock experiences a pullback in price. For example, any day the Dow drops 100 to 200 points or the Nasdaq drops 90 to 100 points in the middle of a bull market would be a great buying opportunity for investors.

IMPORTANT NOTE: Never take new equity positions during a bear market, a major correction in a bull market or whenever other volatile market conditions exist without first consulting the Hotline Updates or Special Investment Alerts for our current recommendations.

Q: As a new subscriber, I'm somewhat hesitant to invest in stocks that appear to be moving downward just as you're recommending their purchase. How does this square with your philosophy of selling a stock if it should retreat 8-10% off its purchase price? Is my "gun shy" disposition merited?

A: Being "gun shy" and hesitant can actually be a healthy attitude--especially when volatile market conditions are present. Even though we're more than a year into this bull market, there are--and will continue to be--periods of volatility. As a result, the market reacts quickly to sudden bad news. For example, if a computer company warns that revenues are slowing, all computer stocks usually plunge in price for at least a day or two, and then recover.

Q: I am considering Fidelity's Select Technology Fund, but I understand Fidelity charges a fee for purchasing their sector funds. If that's true, do you know how much they charge? Is there a way to not pay a fee?

A: Fidelity no longer charges a sales fee. It's very easy now to concentrate solely on net performance to the investor. You can make a fortune by simply staying fully invested in the top five Fidelity Select funds.

Q: Has Japan's economy turned around? Also, do you think China's devaluing of its currency has made Chinese stocks a buying opportunity?

A: Japan has definitely turned its economy around and is possibly the hottest foreign market today. There is a very slight chance of a setback during September or October each year, however, when the global financial system is always extremely vulnerable.

China is another matter entirely. Stay away from anything sensitive to China's still overvalued currency. China was forced to devalue it currency due to mounting global pressures. The G-7 demanded that China revalue its currency to fair value. That must have sent a chill down the spine of the American retailers with manufacturing facilities in China. Their bottom lines and stock prices will fall as China's prices rise.

Do not purchase any Chinese bonds or Chinese stock offerings from Wall Street brokers. China cannot survive without a flow of financing from Wall Street brokerage houses. Like Russia, China will eventually default on its bonds and numerous Chinese companies will slide into bankruptcy.

Q: I'm considering borrowing money from my bank to fund an IRA. Is interest paid on a loan to fund an IRA tax-deductible?

A: Not to my knowledge, but don't let that stop you. Everyone should have an IRA. Be sure to fund your IRA on the first day of every year.

Q: I really appreciate your free report, "The 12 Investment Strategies of Every Successful Investor." However, as I tend to invest my capital in Puts and Calls, your Rule #10 caught my eye. Do you have any evidence to support your comments?

(Editor's Note: This question refers to a paragraph in Don Rowe's popular investment report, "The 12 Investment Strategies of Every Successful Investor," available via E-mail from The Wall Street Digest's home page. Rule #10 states, "Never Invest In Options! 85% of the people purchasing options don't make money; 85% of options expire unexecuted. You can be right about the up-trend of a particular stock or a specific market, but a 90-day correction or a sideways market can create a net loss for you.")

A: Ample research is available from the options industry to support this statement. Several good books have also been written on the subject. Unfortunately, most stock traders end up with a net loss for their efforts and give up trying to make the fortunes promised by the eager sellers of various trading programs.

Q: Why do you publish comments from other publications in The Wall Street Digest? Do you agree with their opinions? Please explain the significance of these opinions.

A: Unless otherwise stated, The Wall Street Digest agrees with the views of quoted publications. Our policy of quoting other financial publications helps to more fully describe the condition of the markets and the economy. Hopefully, this will help you make better investment decisions.

Q: I do not understand why large, well-known companies like GM, Ford, Microsoft, and Dell have such low price-to-earnings (P/E) ratios, while some companies like JDS Uniphase, Network Appliance, Brocade Communications, and Juniper Networks have such high P/Es. Does a low P/E imply greater value and lower risk?

A: In the past, value investing was a viable investment strategy, and may have been sound reasoning during extremely volatile market conditions. Before the Internet/Technology Revolution, analysts could read an annual report, study the numbers, determine if stocks had hidden values, and make some reasonable value judgments. And, given the three-year bear market that ended in March 2003, you can still do that if you want to own Old Economy stocks.

With technology stocks, however, you must understand the value of intellectual capital and the value of a viable new idea(s), which will not usually appear in the annual report numbers. With technology stocks, the analysts are looking at global growth with no end in sight.

For example, do you want to own GM with a P/E of 7 when most Americans already have one, two, or three cars in their garages? GM's market share continues to slip every year. GM used to sell 50% of all domestically-made vehicles; today, GM sell less than 28%. Also, GM has very limited upside growth potential. In fact, Detroit's Big Three has been surpassed by Japan's Big Three.

On the other hand, Network Appliance is producing and selling digital storage devices as fast as the company can produce them. Network Appliance is facing a tidal wave of demand that will increase fifty-fold over the next five years. Would you rather own GM (P/E of 7) or Network Appliance (P/E of 440), whose sales and earnings will increase a dramatic fifty-fold over the next five years?

Microsoft and Dell are both participating in a mature market because the Computer Revolution is over in the United States. You will see a reduction in future P/E levels for both companies, as well as their peer groups.

With only 300 million people hooked-up to the Internet by the beginning of 2001, Juniper Networks and JDs Uniphase will experience awesome growth by the time 50% of the world's population, or three billion people, are logging onto the Internet each and every day. Juniper Networks (P/E 989) produces the fastest Internet router, while JDs Uniphase (P/E 229) is the global leader in fiber optics. Do you want to own Dell (P/E 38) and Microsoft (P/E 32) and own shares in a mature market? Juniper and JDs Uniphase, with high P/Es, are participating in a market with enormous future growth and are capable of selling everything they produce.

Historically, a price/earnings ratio has never been a viable stock selection tool. Using a price momentum growth strategy to select companies in high growth industries and sectors has been far more successful than any other stock selection strategy.

Q: You often refer to the MZM or the M3 money supply. What do these terms mean?

A: The M3 money supply is the broadest category of the nation's money supply, i.e., a combination of all of the nation's money supply, including the M1 supply (money in circulation, such as cash and checking accounts), the M2 supply (90-day Treasury notes, etc.), and the MZM supply (cash and money at zero maturity). As a rule, the higher the number, the less liquidity, so the M3 money supply also includes all debt (mortgages, credit cards, loans, etc.).

Q: What is the Smart Money Index? Can it actually move the market?

A: The Smart Money Index is one of the market's most reliable technical indicators. Watch what the Smart Money is doing and you can easily forecast where the stock market is headed.

The Smart Money does not buy or sell stocks at the opening bell. Traders reacting to what happened overnight in Asia and Europe account for most of the needless volatility in the futures before the market opens. Over the long-term, events that unfold in Europe and Asia have very little influence on corporate profits in America. The bottom line for American investors is rising corporate sales and profits. Most everything else is noise.

Very often, economic news is inaccurate, or has very little effect on corporate sales and profits. Even so, market volatility is caused by emotional, knee-jerk reactions of traders in the trading pits. During the day, the stock market either over-reacts or reacts improperly to the news. Stock prices usually fall between 11:30 and 2:30 EST because the traders go to lunch and leave the market vulnerable to the short sellers. If stock prices are falling between 3:00 and 4:00 EST, you know that the Smart Money is selling and it is time for you to run for cover. If stock prices are rising relentlessly between 3:00 and 4:00 everyday, a bull market is underway.

The Smart Money waits until 3:00 to either sell or bargain hunt. You've heard the expression, "Never fight the Fed." The same warning applies to the Smart Money. If you are buying when the Smart Money is selling, you are on the wrong side of the market. This is always very costly.

The Smart Money Index is explained in detail in Don Rowe's special report, “The Smart Money Index has a Perfect Record of Correctly Forecasting Every New Bull Market!”

Q: Can you explain why exchange-traded funds have become so popular with investors?

A: Say you want to own a lot of stocks, but don't have the time to carefully track each of them. Also, you know the cost of multiple trades can add up quickly.

In the past, your best bet was to purchase a mutual fund. Now, however, thanks to the emergence of exchange-traded funds, most commonly referred to as ETFs, a whole new playing field has opened up for investors.

Many ETFs track an index, giving people access to a big basket of stocks. For instance, the Standard and Poor's Depositry Receipts are based on the S&P 500 indexes, the Diamond Trust on the Dow Jones Industrials, and the QQQQ on the Nasdaq 100.

That's not all, either. The ETF universe has rapidly grown to include bonds and commodities, as well as funds that track other countries' indexes. Through the end of 2006, the number of ETFs grew to 347 with $410 billion in assets, according to the Investment Company Institute. And, according to Morgan Stanley, there are plans to launch another 343 new ETFs--100 in 2007 alone. That's a massive jump from 82 ETFs with $64.3 billion in assets at the beginning of 2001.