• We have commented on our cautious views of the markets in our previous newsletter. As you can see from the table below, our conservative positioning of the accounts paid off- we have significantly outperformed the markets in the First Quarter of 2007:

• We are hiring: if you know somebody who might be interested in working with us, please direct them to: http://www.vegacapital.com/about_jobs.php
• We started using new and innovative instruments to hedge our market exposure as per our models and economic outlook (see below).
• Our assets under management have increased by 9% this past quarter - thank you all for the referrals.
• We continue with our bi-monthly educational seminars - if you are interested in attending, please let us know. We do not have the exact date for the next one, but will keep you on our mailing list for the updates. Please, send the requests to info@vegacapital.com
• We continue to implement new backoffice software, PortfolioCenter® in order to improve our internal procedures and external reporting. We hope to complete the transition to the new systems by July 2007. Therefore, our clients will see new and improved reporting in the next quarter.
• We remain extremely cautious and incline to agree with Dr. Alan Greenspan's remarks that corporate profit margins have peaked, and hiring and capital expenditures are slowing - we do see signs of serious deteriorations in many areas of the economy - please read our market comments below which is the most significant part of today's newsletter.

NEW DEVELOPMENTS FOR QI-2007

• As you already know, we have introduced two new programs for qualified clients : Vega Equity International and Vega Alternative Investments.
• Vega Equity International seeks to produce superior returns with risk characteristic of broad international equity portfolio.
• Vega Alternative Investments seeks to achieve returns that are uncorrelated with the traditional returns from equity and fixed income holdings by investing into alternative investment instruments (such as currencies and commodities).
• We believe that Vega Equity International and Vega Alternative Investments programs provide our clients with an excellent opportunity to diversify their holdings and thus improve return-to-risk ratios for their assets. We at Vega are strong believers in the power of diversification. Please feel free to contact us to discuss how these new programs can benefit your portfolios.

Even a superfluous look at our portfolio tells you a lot: at the end of January we had almost 25% in Money Market Funds, 12% in inflation-protected treasury bonds, 5% in Gold. Our overall exposure to the U.S. markets was reduced to approximately 60%. And this positioning of the portfolio was reflected in the performance - while the markets were down for the month of February (S&P was down almost 2%), our portfolios went up by 0.7% (on gross basis). At the end of March, we have added new positions to the portfolio that move counter to the market direction. These are similar to "short"positions with double leveraging in S&P 500 and NASDAQ. It means that if the market goes down by 1%, the corresponding position will go up by 2%, and vice versa (!). This further reduces our exposure to the U.S. markets to about 30% and provides additional defense against the bear market.

The latest real estate message we are getting from one economist after another is like a broken record - in brief, that the housing slump is pretty much history, the market is stabilizing, and a lively rebound in home prices is in the cards for the second half. However, there are more than $2 trillion worth of short-term fixed mortgages resetting at higher interest rates in 2007 and 2008. We expect home prices nationally to fall between 5%and 10% from current levels by year's end and to extend those declines to between 15% and 20% by the end of 2008.

Do you know anybody who took the adjustable rate mortgage recently (say in the past year or two?). How about those mortgages with interest only? Negative amortization? Did you hear about getting the mortgage even if your credit is bad? No income verification? Sounds familiar? As nice people from New Century Financial discovered, there are indeed people with bad credit and no income. New Century Financial is filing for Chapter 11. The Irvine, California-based company fired 3,200 employees, or 54 percent of its work force. It plans to sell most of its assets within 45 days through the Chapter 11 process. New Century was the largest independent U.S. provider of "subprime" mortgages, or home loans to people with poor credit histories. More than 30 rivals have sold or closed similar operations in the past year!
What is the real impact on US Banking sector, or on US economy in general - nobody knows. Talking heads on CNBC and even some officials from Federal Reserve Banks are telling us that there is no significant impact, may be "a minor impact." We tend to think otherwise.

For the first time in the nation's history, a significant number of Americans are being threatened with the loss of their home even though they still have a steady, good-paying job. It's not just an issue for people with poor credit, those with subprime loans. It also affects people with good enough credit to qualify for a prime loan. Known as Alt-A mortgages, these loans were written for 1 in 5 U.S. mortgages and could have a big impact on the economy and on credit markets -- bigger, perhaps, than the effects of the recent shockwaves buffeting the subprime-lender market, economists say. This threat is new in American history. Its impact on the economy, and upon the American Dream, is uncertain.
In the past, homeowners have generally lost their home to foreclosure only when they suffered a major life-changing event, such as loss of their job, a major illness or death of a family member. A big jump in foreclosures was unheard of outside a recession that brought high unemployment.
But now, because of the recent popularity of loans geared to let people buy a more expensive home than they can truly afford, all it will take is the passage of time to trigger a default. At some point, all these loans are adjusted to switch from a low, subsidized monthly payment to the full amount required to pay off the loan.
In the not-too-distant future, millions of Americans may receive a letter advising them of their mortgage "reset" or "recast" with the same dread they now feel for a pink slip or for bad news from their oncologist. The only difference: they know (or should know if they noticed what they were signing) exactly what's coming: An average monthly increase of $1,512 in their monthly mortgage payment.
Because this risk is so novel, experts don't have a clear grasp yet on how big of an impact the credit crunch might have on the economy. Most economists say the problems won't spread too far beyond the poor, and that the extent of the losses to families, mortgage underwriters and investors will be small in the context of a $13 trillion economy. But others think the risks are widespread and that the economy could be hit hard by the failures in the credit market. It could take years to fully recover.
And then there's the chilling effect of a slowdown on consumer spending. According to Federal Reserve data, consumers have taken about $3 trillion in equity out of their homes in the past five years, adding about 7% to disposable incomes every year. That boost kept the economy humming and has driven the personal savings rate below zero for the first time since the Great Depression. If home prices fall or even flatten out, consumer's ability to fatten their wallets based on home equity would be curtailed. Even consumers who didn't take out any equity increased their spending during housing's big heyday, and they'll probably slow their spending as prices flatten out. Homeowners experiencing rising equity felt richer and didn't feel the need to save as much. Economists say consumers spend about 5 cents of every extra dollar in housing wealth. In addition, households faced with much steeper mortgage payments would cut back on discretionary spending to avoid defaulting on their mortgage.
According to the S&P/Case-Shiller index, U.S. home prices were up just 0.4% in December 2006 compared with December 2005, and prices were falling in most metro areas at the end of the year. Even in the San Francisco Bay Area, prices fell at a 5.5% annual rate in the last half of 2006, and 9.2% in San Diego.
Someone with a $500,000 mortgage (not uncommon in the Bay Area where such loans are popular) with a 2% teaser rate could find her $1,850 monthly payment rising to $3,500 or more. That would represent a mortgage payment of more than 50% of the median household income ($86,300) in San Francisco.
Large percentages of recent buyers ranging from California and Florida to Washington and Virginia will face an additional shock because they took out a negative-amortization loan. Nationally, about 10% of the loans taken out in the past two years had negative amortization, including about 24% of the loans in California and 29% in the Bay Area. These loans allow buyers to make minimum payments that don't cover all the interest due each month. The interest that isn't paid is added to the principal. The shocker comes when the principal grows to a pre-determined level (perhaps 110%, or 115% of the original loan) and the loan is "recast" immediately as a fully amortizing loan, in some cases resulting in a doubling of the monthly payment.

O.K, what else?

We are being told that it is the earnings of the companies that define the market prices of the securities. The earning season is around the corner, and we just have to sit and wait. Oil? We do not need to comment here - we are using the same gas pumps as you do. Iran? Elections? Hillary? Markets do not like "unstable" and "unpredictable" situations. Of course, if we are wrong - we'll be very happy. We still have a significant, while very reduced exposures to the markets. Let's see what future will bring.
Meanwhile, we remain very cautious for the nearest term, at least till the middle of the summer, and will continue to reduce or increase the exposure to the markets as the new data points become available for our analysis. For now, we adhere to the famous saying by J.P.Morgan:

"NOBODY WENT BROKE BY SELLING TOO EARLY."

¹Vega Capital Group LLC ("Vega") is an independent adviser registered with the Securities & Exchange Commission. The performance shown reflects actual performance for representative accounts. One representative account is selected for each strategy. The selection of representative account is based on the following factors: cash flows into or out of account for the reporting period, size of account sufficient to be representative of the strategy, average trading expenses. Performance of other accounts managed under the same strategy may vary. The firm maintains a complete list of its accounts performance, which is available upon request. Past performance is not indicative of future results. Accounts under Vega's management are not insured against loss of principal, and may loose value. The U.S. Dollar is the currency used to express performance. Returns are presented net of management fees and include the reinvestment of all income. In addition to an advisory fee, performance shown includes any additional custodial or service fees. The advisory fees for Vega Equity* accounts are calculated as follows: management fee of 0.375% is charged quarterly in advance, based on the closing balance on the last date of the previous quarter; and performance fee is charged annually in arrears, equal to the 10% of annual investment gain above all relevant watermarks and hurdle rates for the account. Vega's schedule of advisory fees vary based on product and type of client and is contained in Form ADV-II. Additional information regarding the policies for calculating and reporting returns is available upon request.
The indices used for comparison are Standard & Poor's 500 Index, which is comprised of 500 selected common stocks most of which are listed on the NYSE; Dow Jones Industrial Average (DJIA) Index, which is a price-weighted average of 30 blue-chip stocks and NASDAQ Composite (NASDAQ) Index, which is a broad-based capitalization-weighted index of all NASDAQ (National Market & Small-Cap) stocks. Vega Equity* Inception Date is 07/01/2003.Vega Equity* program is only available to qualified investors. Performance for Vega Equity* program for year 2003 is based on pro-forma results for months January through June of 2003. Pro-forma results may not be indicative of actual performance in client's accounts.