2006 4th Quarter Newsletter

Hello!

After experiencing the best year for stocks since 2003, when U.S. equity markets staged a remarkable recovery from the 2000-2001 bear market, we look to 2007 with cautious optimism. A review of 2006 shows the major indexes posted healthy gains, led by the Dow Jones Industrials up about 16.3%, the S&P 500 adding 13.6%, and the NASDAQ Composite tacking on 9.5%. And not only did stocks make significant gains in 2006, but the bond market moved in lockstep with stocks - a rare Wall Street event.

Our optimism is buoyed in part by the way our economy has digested negative events, such as record high oil prices, higher interest rates, and a slowdown in the housing markets. In addition, consumer spending remains resilient, the job growth rate remains solid, and the healthy pace of capital investment could be signals that underlying economic fundamentals are stronger than generally recognized.

Our cautious stance is supported by the specter that the recent sharp decline in housing starts will influence growth, employment, and production patterns in 2007. If the housing correction turns out to be more severe and widespread than seems likely at present, economic activity could be directly affected through additional cutbacks in housing starts and its effects on employment in construction and housing-related industries. More indirectly, it might also result in the restraint of consumer spending as both homeowners' equity and household wealth is reduced, and perhaps by affecting consumer confidence as well. Because consumption makes up more than two-thirds of aggregate expenditure, any significant effect on consumer spending arising from further weakness in housing could have important implications for the economy.

For now, relatively low interest rates and sturdy job growth in non-housing-related sectors seem to mitigate risks that the housing correction will have a more negative economic impact. Thus, an important question to be answered is whether the Federal Open Market Committee, the policy-making body of the Federal Reserve, will feel comfortable enough with the balance between inflation and a moderating economy to consider lowering interest rates. If inflation seems to be accelerating, an interest rate hike could still be in the offing.

Because we appear to be in a period of economic transition it is important that we review your portfolio soon to see if adjustments might be needed. As usual, you can contact me at 949-788-7700 if you would like to schedule an appointment or conference call. Wishing you and your family a healthy, happy, and profitable New Year,

Regards,

Andrew C. Karlinski, CFPR

Web:
Email: akfinancial@mscmail.biz
Phone: 949-788-7700
Fax: 949-788-7710

Securities offered through Mutual Service Corporation
Member NASD, SIPC

AK Financial Group is not associated with Mutual Service Corporation. This is not an offer to sell securities, which may be done only after proper delivery of a prospectus and client suitability is reviewed and determined.

This letter represents the general economic outlook of this firm and does not constitute investment advice, nor should it be considered predictive of any future market performance. Past Performance is no guarantee of future results.