'Tis the Season for Scams

By Catherine Holahan

Ah, the holidays -- that most wonderful time of year when the Web is aflutter with e-mailed season's greetings, online shopping offers and cyber criminals. The scams run the gamut, from fraudulent e-mails purporting to be alerts about online transactions to scam gift offers. "There is always an effort by the criminal underground to separate victims from their money this time of year," says Paul Ferguson, an advanced threat researcher with Trend Micro, a security software provider.

Cybercriminals know it's easier to get people to fall for scams related to online shopping when they have shopping on the brain. It also doesn't hurt that the legitimate act of online shopping often involves visits to comparison-shopping sites and strange discount sites. So it's little surprise that some of those destinations turn out to be fake. "People are particularly vulnerable this time of year because they are looking for bargains," says Bill Loesch, chief technical officer and co-founder of GuardID, the maker of a device, similar to a USB memory stick, that stores account information and verifies the identity of financial sites.

The rising popularity of online shopping makes for a target-rich environment. Consumers have spent about $25 billion online since Nov. 1, according to a Dec. 20 comScore (NasdaqGM:SCOR - News) study. That's a 19% increase from last year. Security firms expect a similar increase in the amount of online fraud, bringing the total amount lost online to $3.6 billion this year, according to a November survey by CyberSource (NasdaqGM:CYBS - News), an electronic payment and risk management firm.

So what can consumers do to protect themselves from unwittingly buying someone else's holiday gifts this season? For starters, they can keep an eye out for the following common holiday scams:

Phishing

You've probably heard the one about the Nigerian bank manager who needs your "confidential" help opening a U.S. account to transfer millions in oil-related profits. But those "dear friend" e-mails are fairly primitive compared with some of the devious phishing techniques criminals have come up with to trick consumers into handing over account information.

In fact, phishing attacks have become more successful in recent years. According to a survey by research firm Gartner, released Dec. 17, more than 3.6 million adults lost money as a result of phishing in the 12 months ending in August, 2007. That's up from 2.3 million people in 2006.

One reason for the increase is the ingenuity of the scams themselves, which can look identical to legitimate notices from financial institutions such as Citibank (NYSE:C - News) and PayPal, the leading online payment service from eBay (NasdaqGS:EBAY - News). Many of these e-mails open with warnings of imminent account cancellations or detection of fraudulent activity, which can make consumers more likely to click a link in hopes of rectifying the problem.

But the link typically directs to a fraudulent copycat site or downloads malware -- software that scoops up account and other information -- onto the computer, says Shane Keats, a research analyst with McAfee (NYSE:MFE - News), a security software provider. "At some point this season you will get an e-mail saying that your auction account has been hacked and you must respond now," says Keats. "Don't panic. It is not real. The auction sites and the banks don't send that information by e-mail."

For instance, phishing e-mails purporting to be from PayPal often begin with "Dear PayPal user" or "Dear PayPal member." On its Web site, PayPal says it uses first and last names of customers when sending them e-mails; anything without the full name is a scam. PayPal also has an e-mail address, spoof@paypal.com, where users can report notices they suspect are fraudulent.

The key to avoiding these scams is to avoid clicking on such e-mail links altogether. For consumers who do open such links, Keats says that if the URL is unusually long or consists of all numbers, it likely isn't legitimate. Misspellings on the site and grammatical errors are also giveaways.

Even sites without such obvious mistakes can be fraudulent. "Honestly, it is very hard to tell," says Keats. Not surprisingly, he and other experts from security outfits say the best way to avoid such sites is to download their security software. Many security companies, including McAfee, offer basic security software, or at least limited-time trials, for free online.

Gift-Card Scams

Gift cards are a wildly popular way for many retailers to take advantage of the desire to purchase a present rather than buy an item someone will only want to return. In recent years, they have also become a favorite means for criminals to launder money, says David Gilles, director of the anti-money laundering group of Deloitte Financial Advisory Services.

Here's how it works: A criminal uses cash earned by illicit means to buys a number of stored-value cards, such as phone cards or gift cards, to condense the funds and make it easier to hide the source of income. He can then use the cards for transactions under the guise of redeeming a gift from some legally employed friend. More often than not, however, the criminal sells the cards to other people, often at a slight loss. This allows criminals to obtain a more legitimate source of funds, such as a personal check or online bank transfer, which can be used to open a bank account. Consumers who buy the cards, often through online auction sites, believe they are getting a deal.

Online gift-card buyers also risk purchasing cards that someone else has access to. Thieves can rip off the gift-card number while it sits in a store display and when the proper owner uses the compromised card, the funds have often already been spent. One way around this is to avoid buying gift cards off the rack where other people clearly may have had access to them. Gift cards for major retailers are typically not on display.

Fraudulent Charities

It seems particularly heartless for criminals to take advantage of the increased generosity many exhibit during the holidays. But if criminals had big hearts, they wouldn't be trying to steal your money, right? "What you will see is stuff (such as e-mails) from your favorite charity, or a charity that you may not have even heard of but it sounds very compelling," says McAfee's Keats. The e-mails typically link to a fraudulent charity site where visitors can submit their account information or credit-card numbers in order to give funds.

"Win a Free Gift" Sites

Keats calls these sites "breakage" sites. There actually may be a prize at the end, such as a free iPod, but 99% of consumers will close their Web browser before they ever get close to the prize. Owners of such sites make sure that they have included enough hurdles to jump through, such as signing up to receive weekly astrology e-mails or a free trial magazine subscription, to frustrate most consumers.

While not technically a scam -- there is, after all, a prize at the end -- such sites are designed to ensure that users provide their personal information to spammers and other unknown sources for little chance of a payoff.

Keylogging Programs

Programs that monitor the letters and numbers that people type into Web sites are a particular threat during the holidays. Typically, such programs are unwittingly downloaded by PC users who visit virus-ridden Web sites, open an infected e-mail attachment, or even click on a compromised ad with an embedded virus. Web surfers are not necessarily any more likely to download such programs during the holidays, but they are more likely to be entering financial information into myriad shopping sites. "It's not what you catch today, it's what you caught in September that can hurt you now," says David Perry, Trend Micro's global director of security education.

The best advice to avoid many of these scams, of course, is to exercise common sense. "The Web is the same as real life," says Keats. "If it sounds too good to be true, it is."

Six Moves for a Prosperous New Year

by Kimberly Lankford
Thursday, December 27, 2007provided by

What should I be doing now to get my finances on track for 2008?

Now is the perfect time to get your financial house in order. You may be flush with cash from holiday gifts and a raise or bonus at work. Or you may be dreading the credit-card bill that arrives in a few weeks, reminding you how much you spent for the holidays. Either way, a few key steps can help you pocket more cash in 2008. Here's what you can do now so you can spend a lot less time worrying about your finances throughout the year:

1. Take advantage of higher IRA limits
You'll be able to save an extra $1,000 in your IRA in 2008, when the contribution limits rise to $5,000 (you can contribute $6,000 for the year if you're 50 or older in 2008). Make it easy by signing up to have your contributions deducted from your bank account every month -- $416 per month will get you to the $5,000 maximum by the end of the year.

Have some extra cash now? You still have until April 15, 2008, to make your $4,000 IRA contribution for 2007 -- where a holiday gift or year-end bonus can grow substantially through the years.

2. Stretch your raise even further.
If you'll be making more money in 2008, use some of it to boost your 401(k) contribution. You won't notice the difference if you make the change before you get used to having the extra money.

You can contribute up to $15,500 to a 401(k) for the year (or $20,500 if you're 50 or older). And since the contributions are pre-tax, making the maximum contribution will lower your paycheck by only $11,625, if you're in the 25% tax bracket.

Even adding just a few hundred dollars can make a big difference over time. Contributing an extra $200 per month for 25 years can boost your account by $190,000, if your investments return 8% per year. You'll only see $150 less in each paycheck if you're in the 25% bracket. Plus, you could get free money if your employer matches your contributions. For example, a 50-cent-per-dollar match is like getting an extra 50% return on your money.

3. Focus on high-interest debt
Paying off a credit card with an 18% interest rate can save you hundreds of dollars in interest. Make it your first debt priority in the New Year.

Consider this: If you have a $5,000 credit-card balance with an 18% interest rate and make only the minimum payment each month (4% of your debt, which starts at $200 the first month), it would take 12.5 years to pay off the balance and cost $2,916 in interest. Increasing your monthly payments to $500 would pay off the debt in less than a year and save you more than $2,000 in interest costs. Better yet, use a big chunk of any holiday money or year-end bonus to pay off the bill in full -- so you won't owe any more interest on the balance at all.

4. Start gathering your tax records now
You wouldn't want to miss out on valuable deductions because you're scrambling around at the last minute. See Track Down Your Tax Records for an idea of what documents and receipts you'll need, and start sorting them into folders.

5. Put your bills and savings on autopilot
Want to make sure your finances stay on track all year long? Set 'em and forget 'em. Sign up for online bill paying and automate as many payments as possible, so you don't have to think about it during the year. You'll be less likely to miss payments that could result in late fees, higher interest rates and cause your credit score to take a hit.

Treating your saving and investing as a fixed expense each month -- and arranging to pay that "bill" automatically -- is another great way to stay on track.

6. Protect your assets
Just in case disaster strikes in 2008, make sure you're covered. Check to ensure you have enough homeowners insurance, add extra coverage if you receive valuable gifts for the holidays, and run around your house with a camera to update your home inventory.

Meanwhile, see if you can lower your premiums by boosting your auto and homeowners insurance deductibles to at least $1,000, which can cut your costs by up to 15% on each policy and make you less likely to file a small claim that could get you dropped by your insurer.

A crucial part to preparing for an emergency is a stash of cash. Keep at least three- to six-months' worth of expenses in a liquid account so you don't end up in debt if you have unexpected bills.

Copyrighted, Kiplinger Washington Editors, Inc.

Thirty-Five Minutes to Riches

Find out your credit score

Time it takes: 7 minutes

Know how lenders see you. Take seven minutes to download a

Raise your credit score

Time it takes: 8 minutes

It takes time to recover from major credit lapses, but you can do two things fast that will improve your credit score. Both will lower the size of your outstanding debt as a percentage of your total borrowing power.

1. Pay down a balance. 2. Call your issuer and ask for a higher credit limit. And don't spend it.

Triple the return on savings

Time it takes: 10 minutes

Do you have cash going nowhere in a checking or savings account? Bank money-market accounts typically pay less than 1%. You can open a savings account with HSBC Direct that recently paid 5.05%. No minimum balance is required.

With your driver's license and Social Security number handy, visit hsbcdirect.com and click on Sign Me Up. You'll be walked through screens to enter personal information. Want to fund your account immediately? Have a check with your bank account number and routing code handy to authorize an electronic transfer.

Stop junk mail

Time it takes: 5 minutes

Call 888-5OPTOUT to remove your name from credit issuers' mailing lists. The result of that five-minute talk with a computer? Fewer temptations and a mailbox filled with letters, not offers for pre-approved cards.

Most important, you'll cut the risk of an identity thief raiding your mailbox or garbage can and applying for credit in your name. Stolen paper mail accounts for 9% of identity fraud cases, according to Javelin Strategy & Research.

Note: Because we're talking credit bureaus, you'll have to provide your Social Security number. It's okay.

Freeze your credit

Time it takes: 25 minutes

Doing this prevents anyone from issuing credit in your name. (You, of course, can temporarily lift the freeze when you need a loan.) Nearly 30 states allow freezes even if you haven't been an ID theft victim. In some states you'll pay about $30 to place or remove-temporarily or permanently- the freeze. Go to consumersunion.org/securityfreeze.htm for instructions.

Haggle down your credit rate

Time it takes: 8 minutes

Dial your issuer and ask for a lower rate. If your credit score tops 720, do not be satisfied until your rate is less than 10%, says Curtis Arnold of CardRatings.com. Your biggest weapon: Make it clear that you'll stop using the card if the issuer refuses. Our reporter, helped by the fact that she's been a good customer for seven years, got the rate on her Discover card cut by four percentage points.

Upgrade to a better card

Time it takes: 30 minutes

Rewards, rates and fees change often. So search CardTrak.com to make sure you have the best deal. Among the lowest-rate cards on the site recently: Simmons First National Bank in Arkansas (800-636-5151) offers a fixed rate as low as 7.25% with no annual fee to consumers who have excellent credit.

Add to your 401(k)

Time it takes: 3 minutes

You signed up for your plan right after you found the office vending machines. Now do more: Raise your contribution by a point. Save 10% of a $50,000 salary in your 401(k) and you'll have $1.4 million in 35 years, assuming 8% returns and 4% annual raises. Ramp that up to 11% and you'll earn around $140,000 more.

Call your plan or visit your 401(k)'s website. At 401(k)s administered by Fidelity, for example, raising your contribution takes all of three minutes.

Manage like a pro

Time it takes: 4 minutes

If you have a diversified portfolio, a run-up in one asset class can throw your mix out of line, increasing risk and eroding returns. An unrebalanced $10,000 portfolio of 80% stocks and 20% bonds would have grown to $21,620 over the past 10 years.

If you'd rebalanced annually, you'd have $22,213, or $593 more - and taken less risk to get there. Retooling a 401(k) is easy: With a big plan administrator like Fidelity or Hewitt, rebalancing online takes minutes. In a taxable account, simply direct new money into the lagging fund categories.

Buy a forever portfolio

Time it takes: 25 minutes

Putting together a complete fund portfolio was once a time consuming chore. Nowadays target-date funds, which adjust the stock and bond allocation to smooth returns as you near a "target" retirement year, do it for you in minutes. Many 401(k)s offer them.

For direct investments, use the low-cost options from Vanguard (800-851-4999) or T. Rowe Price (800-638-5660). At vanguard.com, click on the tab labeled Research Funds and Stocks. Find the fund that corresponds to your planned retirement year, then download and look over the prospectus. Next click on the Buy This Fund link and follow the instructions. Have your checkbook ready to deposit funds electronically.

free credit report at annualcreditreport.com. (For year-round monitoring, get a report from one of the three major credit bureaus every four months.) If you spot an error, notify the bureau (online, by phone or by mail) and the creditor (call and also send a letter). You won't find your credit score here, so when you request a report from Equifax, pay $7.95 for your FICO score, the most commonly used score. The range is 300 to 850 - 700 and above is good.

Find promising funds

Time it takes: 5 minutes

You can cut through the 8,000 or so mutual funds out there by sticking to the MONEY 70. Or run a screen for similar funds at morningstar.com (click on the Funds tab and go to the Mutual Fund Screener link). Pick a category, and then limit expenses to less than the category average. Next screen for funds whose managers have five years of tenure or more - greater experience is linked to better performance. Cut funds that failed to beat their five- or 10-year category averages.

Track your returns

Time it takes: 35 minutes

It's a pain to figure out how your investments are doing, especially if your money is scattered among several accounts. Spend 35 minutes setting up the portfolio tracker at portfolio.morningstar.com (you must first register at the site) so that you can start calculating your own rate of return. For a Web tool that can be clunky, Morningstar's tracker is particularly well designed and easy to use. You will, however, have to update it when you reinvest dividends or buy more shares.

Find out if you're paid enough

Time it takes: 15 minutes

Before you can make your case for a raise, you need something to measure yourself against. Salary.com offers Salary Wizard for free. Plug in your title and zip code and you'll get the median pay in your area for comparable positions. Or spend 10 minutes filling out a questionnaire with more variables, such as the size of your employer, and get 12 pages of data by buying a Personal Salary Report for $29.95 to $79.95 (the price varies by title).

Run a retirement plan

Time it takes: 5 minutes

On the road to riches, the key question is whether you're on track for financial independence. So pull out your retirement and investment account statements, plus projections for any pensions. Running that simple math can be surprisingly valuable: Researchers have found that people who plan for retirement have a higher net worth than those who do nothing.

Estimate your life insurance

Time it takes: 35 minutes

How much coverage is enough? For a fast ballpark estimate, multiply your annual income by five. With 35 minutes you can use the detailed calculator from the Life and Health Insurance Foundation for Education (life line.org). You'll be asked for your assets and debts, plus answers to tough questions like how long your family would need income after your death. If you find you need more coverage, get a quote on a term policy in five minutes at accuquote.com.

Learn your tax bracket

Time it takes: 20 minutes

Knowing what rate you pay on the last dollar you earn can help you to, among other things, pick a taxable vs. a municipal bond fund. Pull out your most recent 1040 and look for taxable income (line 43 in 2006). Adjust for any big changes in your income or the deductions you expect to take this year, then find where you fit in at irs.gov (search for "2007 federal tax rate schedule").

To choose between a muni and a taxable fund, divide the muni's yield by 100% minus your tax rate. If that number is higher than the taxable yield, go tax-free.

Escape late fees

Time it takes: 6 minutes

Why mess with checks and trips to the post office? Why risk a late payment when, according to Consumer Action, 85% of credit-card issuers impose penalty rates that average 24.5% if you're late on one or two bills? Pay bills online at your bank. First register at the site. Then gather your bills. Many bank sites have a pull-down menu of merchants; select yours and enter your account number. Or plug in the name, address and account number manually.

Write bounce-proof checks

Time it takes: 9 minutes

The median fee for bouncing a check recently hit $27.50, according to Bankrate.com. Call your bank or visit its website to sign up for overdraft protection. With that service, the bank will cover your check with money from a linked savings account. It may cost you $10, but that's less than half the charge for insufficient funds - not to mention what the payee demands.

Get bank alerts

Time it takes: 4 minutes.

Avoid bounced checks and spot ID theft early by having your bank notify you when your balance falls below a certain level or when there's unusual activity in your account. Citibank, for example, offers alerts via e-mail or text message. To activate them, log into your online account and select Account Info and then E-mail and Wireless Alerts. You can add up to two e-mail addresses and a mobile-phone number for alerts. Use the menu of options to designate what updates you want.

Pay less in auto insurance

Time it takes: 7 minutes

Simply raising your deductible can save you up to 30%. With an old car, drop your collision and comprehensive coverage when the car is worth less than 10 times what you pay for the insurance. Or shop for a lower premium at insweb.com, an easy-to-navigate comparison site. You'll be guided through five screens of information such as driving history, car make and model. A few minutes later the site will give you the lowest quote from its database (which doesn't include all the biggest insurers). Agents will also e-mail or call you with quotes from other insurers.

Double-check your taxes

Time it takes: 35 minutes

Next April remember this: Before you seal the envelope or tap the key that whisks your return to the IRS, spend 35 minutes looking for easy-to-spot errors. Overlook a dependent (the one at college may count) and you could owe an extra $1,000 in taxes. Transpose your Social Security number and your refund may never arrive. Did you sign your return?

Keep more of your paycheck

Time it takes: 30 minutes

A generous tax refund means you are overpaying the government. To have fewer dollars plucked from your paycheck, claim more exemptions on your W-4 form (to see if you can, use the withholding calculator at irs.gov). Print out a W-4 at the IRS site or from your company's intranet. With last year's tax return, a pay stub and a calculator handy, filling out the worksheet on page 2 takes about half an hour.

Get a tax break for day care

Time it takes: 35 minutes

Make this the fall that you finally sign up for a flexible spending account for healthcare and dependent-care expenses. Your boss takes pretax dollars from your paycheck; you tap the account for contact lenses, day care and the like.

Pay less for your cell

Time it takes: 1 minute

Know what your employer hates? Raises. What he likes? Perks that cost him nothing. At some firms, employees qualify for cell-phone discounts of up to 20%. To see if you get a Verizon discount, go to verizonwireless.com/getdiscount and plug in your e-mail address; for AT&T, go to wireless.att.com/home.

Cut drug costs

Time it takes: 16 minutes

Many employers use a pharmacy benefit manager (PBM) such as Medco or Caremark to administer prescription drug coverage. Call your PBM or go to its website (have your prescription drug coverage card handy) to check mailorder prices and sign up.

No more waiting rooms

Time it takes: 15 minutes

Can't get in and out of the doctor's office in 35 minutes? You can see a physician's assistant or a nurse practitioner in about 15 minutes, or so, says MinuteClinic, one of the largest of the chains of walk-in medical centers cropping up in pharmacies or stores such as Target or Wal-Mart. That's fine for basic ailments like earaches, strep throat and pinkeye. Your insurance may not be accepted, which could leave you footing the entire $59 ear-infection fee. But you can stop by at lunch and not miss hours, or even a day, of work.

Burn more calories

Time it takes: 30 minutes

Nibbling an extra 100 calories a day will pack on 10 pounds in a year. Doing moderate exercise for 30 minutes a day will prevent that gain - and save you money. Obese Americans spend 26% more out of pocket on health care than normal-weight workers, according to a study in Health Affairs. They also take nearly twice as many prescriptions and earn $1.42 less per hour.

Be like Buffett

Time it takes: 35 minutes

It takes seven seconds on a high-speed Internet connection to download Berkshire Hathaway's annual report (available at berkshirehathaway.com/reports.html). Reading Buffett's letter to shareholders might take a full 35 minutes. The wisdom therein could put your investing head on straight for 35 years.

Save for college

Time it takes: 35 minutes

A state 529 college savings plan is the best way to invest for your kid's higher education. With one check, you can buy a diversified portfolio that becomes more conservative as your child nears school. See Money Magazine's guide to 529s in every state (link below).

Stick with your local 529 if it's a Money pick. But if your homegrown options are fee-laden and offer no local tax breaks, go with the Utah Educational Savings Plan (800-418-2551; uesp.org). Click on the Forms tab and download the program description and "form 100." Figure on 15 minutes to read, 19 minutes to fill out the agreement, one minute to fax.

Automate your savings

Time it takes: 10 minutes

If a $10,000 minimum investment is keeping you out of mutual funds, you have a quick work-around. Lots of funds let you in for much less if you agree to have your investment automatically taken out of your bank account. With T. Rowe Price's automatic asset builder (troweprice.com), you can invest in T. Rowe Price Blue Chip Growth (TRBCX), T. Rowe Price New Era (PRNEX) and many other exemplary funds with just $50 a month.

Get credit, even in a crunch

Time it takes: 15 minutes

Apply for a home equity line of credit. Don't tap it now unless you must (average rates are 8.75%). But in an emergency - say, when you've lost your job - you may find it tougher to qualify. Start by calling your bank, but go to bankrate.com to compare its offer with those from other nearby lenders.

Read your mortgage

Time it takes: 30 minutes

Only now are many borrowers with risky loans finding that they misunderstood the terms. First pull out the one-page Truth in Lending Disclosure your lender gave you: The APR on it is the best estimate of what you are paying. Lower rates mentioned in other loan documents are likely come-on offers. If your rate is variable, scan the adjustable-rate disclosures section of your mortgage for the date it changes and the highest it can go. Examine every page for the words "prepayment penalty."

Stop overpaying on your mortgage

Time it takes: 9 minutes

If you carry private mortgage insurance but now have 20% equity in your home, see whether you can cancel. Your mortgage servicer (the phone number is listed on your bill) usually must oblige if your down payment and principal payments exceed 20% of your home's original value. Many will do so if rising prices have pushed your equity to 20%.

In this case, canceling will take longer: Most mortgage companies require an appraisal, which costs around $300. But at homegain.com, realestateabc.com or zillow.com you can get an idea of whether your home value has risen enough to justify a call.

Create an insurance record

Time it takes: 29 minutes for a 2,200 sq ft home

Walk around your house with a camera. Shoot closeups of your jewelry, artwork and other valuables. If disaster strikes, this proof of what you owned will speed your claim and help you get a better settlement. Keep copies of the video or photos in your safedeposit box or elsewhere outside your home.

Curb impulse buys

Time it takes: 10 minutes

By one estimate, two-thirds of all purchases are unplanned. To keep impulse shopping in check, ask the clerk to hold your wished for item, then take a 10-minute stroll. Next ask yourself whether you truly need this sweater/video game/golf club and how you'll pay for it.

Spend consciously

Time it takes: 35 minutes

At the grocery store, you're up against tempting displays and smells in every aisle. To avoid being ambushed, you need to follow a strict plan. Take 35 minutes to make a shopping list that follows the layout of the store (no straying) and calls for stocking up on sales items. To see the specials at stores nearby, enter your zip code atmygrocerydeals.com.

Slash recurring charges

Time it takes: 10 minutes

It seemed like a good idea - for just $16.99 a month, you could rent three DVDs at a time as often as you wanted. But how often is that really? Scan your credit-card statement for those automatic monthly charges you normally just pay. Ask yourself whether you're getting your money's worth. How often do you go to the $75-a month gym? How about that cheese-of-the-month club? Cancel what you're not using.

Boost your mileage

Time it takes: 7 minutes

About half of car owners don't test the air pressure on their car tires often enough, according to the Rubber Manufacturers Association. The recommendation: Do it once a month or before any long trip. The payoff: Properly inflated tires improve your fuel economy by 3.3%. You can buy a pencil tire gauge for less than $10. Check the pressure when your tires are cold. If they need air, head to a gas station within a mile of home.

Find it cheaper online

Time it takes: 30 minutes

Before you buy anything on the Web (or at a mall), spend a few minutes at a comparison shopping site. Shopping.com and Shopzilla.com both scour the Net for bargains at a large number of online stores, but their results can vary. Looking to buy a Garmin GPS for your car? Shopping.com found one from a top retailer for $357.95; Shopzilla's find was $212.54.

Demand a lower cable bill

Time it takes: 15 minutes

Okay, it's not as simple as that - but almost. Call and complain that your bill is too high; repeat your message calmly ("This just isn't worth it to me anymore"). Make sure to casually use the words "satellite dish" (as in "I wonder how that compares with a satellite dish") or maybe "phone company." This strategy translated into a $20 monthly discount (for a year) in our test.

Save on drinking water

Time it takes: 4 minutes

At $1.50 a pop for a gallon of bottled water at the supermarket, the desire for healthy hydration adds up. By purchasing a water filter, you can cut your family's water costs to 19¢ a gallon. Order a Brita Riviera pitcher at amazon.com for $27. Replacement filters good for two months are $9 each.

Six 35-second solutions:

Time it takes: 35 seconds

1. Say no to a new store credit card.

With rates typically above 20%, interest can wipe out that initial 10% discount. The new credit application will hurt your credit score, and you'll have yet another temptation to spend.

2. Check yes to reinvesting your dividends.

If you'd put $10,000 in an S&P 500 index fund in 1997 and reinvested dividends all along, you'd have $22,446 at the end of 2006. If you didn't, you'd end with just $19,147.

3. Say no to an extended warranty.

It'll cost you $30 to $200, and with electronics so reliable nowadays, you're unlikely to need it. Besides, if your computer breaks in two years, you'll want the new model, not a replacement.

4. Fill your tank with regular.

Premium gas is about 8% more expensive, and no matter what the manufacturer says, cars don't need pricier gas to run smoothly and resist wear.

5. Swipe your debit rather than credit card.

If your purchase will further fatten your balance on a high-rate credit card, you're better off paying with the money that's in your bank account. If asked, say "credit" rather than "debit" and your debit card will be processed over the credit-card network. You'll have more liability protection and less chance of paying a fee.

6. Delete any e-mail asking for account information or your social security number.

It may be a scam. No reputable financial services firm will ask.

Recession-Proof Your Portfolio

by Annie Sorich

There's lots of talk of a recession these days, making many investors nervous. What exactly is a recession? The technical definition is two quarters (six months) of negative gross domestic product growth. (GDP is the total market value of the new goods and services produced during a specified time span.) More simply, a recession describes a shrinking economy rather than a growing one.

Although a downturn in market performance isn't necessarily a recession, the two can go hand in hand, as the last two recessions in 1990 and 2001 suggest. Currently there's not a consensus on whether the U.S. is in a recession, heading for a recession, or simply slowing down a bit, but it never hurts to be ready. Below are a few important steps to take when the economy turns sour.

Buy, Don't Sell

We all know the old adage "Buy low, sell high." Yet that's the opposite of what some people do when the economic climate looks gloomy. The start of a recession is not the time to liquidate your investments. Depending on your time horizon, you most likely have enough time to ride out short-term stock price drops that might happen during a recession. If you're in your 30s and saving for retirement, a few market bumps will be ironed out in the long run. Still, it's important to construct your portfolio with your time horizon and risk tolerance in mind, which can help you sleep easy if the market does start to tumble.

A recessionary environment could even be a time to increase your contributions to your portfolio. Some mutual fund managers, particularly those who are attentive to valuation, have told us they've found bargains amid the market's recent volatility. For example, the team at Longleaf Partners, which is closed, recently urged investors to consider adding more to their holdings because they're finding a lot to buy right now. By continuously contributing to your portfolio, you'll participate in purchasing those deals.

Stay the Course with Dollar-Cost Averaging

With uncertainty in the air, it can be tough to stay disciplined about investing. Therefore it's a good idea to set accounts on autopilot in order to avoid the temptation of hoarding cash under your mattress. Most investors in 401(k) plans make contributions on a regular basis; you might also consider doing so with your other accounts. Dollar-cost averaging, or investing a set amount of money at regular intervals, can also help bolster your savings when the economy starts growing again. For example, say you invest $500 a month in a mutual fund. The fund's shares are worth $10 apiece initially, meaning you can purchase 50 shares a month. If the underlying assets appreciate a total of 20%, and now the fund's NAV is at $12, you purchase fewer than 42 shares that month. But if the fund's NAV drops 20% to $8 a share, your $500 will purchase almost 63 shares. Therefore, consistent dollar-cost averaging can result in a lower overall price you pay for shares; it will also ensure that you don't lose your resolve to invest amid market turbulence.

Saving Matters

Unemployment can skyrocket when economic growth slows. Losing your job is a huge financial blow. Regardless of what the economy is doing, you should prepare for the worst by saving three- to six-months' worth of living expenses in an emergency fund. It's best to store the money in a very liquid account like a money market fund, which isn't usually subject to price drops and generally pays more interest than a regular checking or savings account. Click here to learn more about emergency funds.

Check Your Diversification

Still worried? Take some time to make sure your portfolio is well-diversified. A good place to start is Morningstar's Instant X-Ray tool. There you can see your portfolio's exposure to different asset classes, sectors, and world regions. In a recessionary environment, it's a good rule of thumb to make sure your portfolio includes exposure to companies that should thrive in a depressed environment, such as health care and consumer staples. People need to buy food and take their medicine regardless of what the economy is doing. Exposure to foreign stocks could also be a good defense if the U.S. is the primary economy hit by a slowdown. On the flip side, you'll want to make sure your portfolio doesn't have too much allocated to cyclical sectors such as industrial materials, media, and consumer services. For more information on solid core funds, read this article.

Likewise, make sure your fixed-income allocation is skewed more toward high-quality bonds rather than their junkier counterparts. When the economy hits the skids, prices on bonds of lower credit quality can precipitously drop, and make a serious dent in your savings. Yet those funds holding bonds with the highest credit quality can benefit from investors looking for a safer haven. You can investigate the overall credit quality of your bond holdings using Instant X-Ray by clicking on the Bond Style tab in the drop-down menu.

Bursting the Economic-Fear Bubble

by Ben Stein

"It's all relative." You've probably heard this before, and it's true of everything except right and wrong.

But it's especially true of economics, and it's doubly true of all the recent scare-talk about the economy.

Simply put, the media and the short-sellers on Wall Street are trying to scare us into having a recession. Since the nice people who read this have some interest in facts and figures, here are a few reasons why things aren't so bad.

Heavy Labor

First, the housing correction.

Now, it's true that we're having a very large housing correction. It may be the sharpest fall-off in housing starts as a percentage of the prior peak that there's ever been in the postwar era.

But housing is only about 5 percent of the economy at most. If it falls by half or a third, that's a big drop. In an economy like ours, though, where there was a severe labor shortage before the housing correction, the labor shortfall can be readily absorbed by other sectors, and it is.

Real unemployment has barely budged since the housing correction began more than a year ago. It will probably rise, but exports are shooting up so fast because of the weak dollar that overall unemployment may not rise by much at all. (It's currently at 4.7 percent of all workers, but barely 2 percent of full-time breadwinners.)

House of Cards

Second, there's the subprime "meltdown," as the papers like to call it.

This is a genuine problem. Unwary buyers were sold mortgages they couldn't pay for, and are now in trouble despite the president's new mortgage-rate-increase moratorium. And extremely unscrupulous people sold immense bundles of precarious mortgages to institutional buyers who didn't know what they were buying. In some sad cases, the investment banks that sold the mortgage bundles were selling similar instruments short even as they sold the bundles to the innocent.

That's a major moral problem, and the magnitude of loss because of defaults on the mortgages seems immense. There may have been roughly $80 billion in losses so far (before liquidation of the collateral, which will greatly reduce the losses). There may be another $150 billion of losses out there, and maybe even another $200 billion.

Those numbers seem immense, and to you and me they are. But in the context of the U.S. economy, they're not large enough to do major damage unless the Federal Reserve Board makes serious mistakes. The total bank credit in this country as of October 2007 was about $9 trillion. That doesn't count credit from other sources such as bond issuance or foreign investment, which could easily bring the total to $30 trillion or more.

A loss of $50 billion, while immense to you or me or even Bill Gates, is barely one-half of 1 percent of bank credit in the United States. It's hardly more than one-tenth of 1 percent of total available credit. Even if the loss rose to $250 billion, it wouldn't even be 1 percent of available credit. And, again, this number will be greatly reduced upon sale of the collateral and recovery by the lenders.

Crude Speculation

Next, there's the price of oil, and how it'll drive us all into an early grave.

It's true that the price of oil has risen stupendously in the last six years, and especially in the last two. But the cost of oil is less than 3 percent of the average family's budget. Even if it rises by 30 percent from its already lofty levels, the cost to the average family would be painful -- but not lethal. (And, of course, in Texas, Oklahoma, and Alaska, it's a bonanza.)

Plus, the surge in wealth of the oil-exporting sheikdoms is largely recycled into investments here. This offsets the effects of the losses from subprime and other risky investments.

Currency Events

Finally, there's the fear of the falling dollar and what it will do to us.

Frankly, aside from the rising cost of oil (the other side of the equation of the falling dollar), the typical family buys little from abroad. Most of what we buy are services, such as government, medical, utilities, and amusements, and then food, and these are almost all produced domestically (unless you're a champagne or other wine snob).

The stock market isn't affected because American corporations' earnings are denominated in dollars, so it really doesn't matter how many dollars it takes to buy a Euro. Moreover, perhaps 40 percent of U.S. large-cap earnings come from overseas operations. These come in as Euros, pounds, or yen, and add up to far more dollars for U.S. corporations as the dollar falls.

A Sadder, Wiser Future

I don't want to be Pollyanna here. There are real problems with our economy, primarily inequality and a looming retirement crisis for baby boomers. But facts are facts, and life is about "how many" as well as "how."

The truth is that we passed through a far worse crisis in the tech collapse of 2000-2002, when roughly one-sixth of the nation's wealth was erased. Now, with the mortgage crisis and other problems, we're not even talking about a loss of one-tenth of 1 percent.

There's a lot to ruin in a nation. We'll get through this just fine. The road may be bumpy for a year or two, but we'll come up roses in a short time and will be ready to smile -- sadder but wiser.

Understanding Bear Markets

What is a bear market and what causes it?

By definition, a bear market is when the stock market falls for a prolonged period of time, usually by twenty percent or more. It is the opposite of a bull market. This sharp decline in stock prices is normally due to a decrease in corporate profits, or a correction of overvaluation (i.e., stocks were too expensive and fell to more reasonable levels). Investors who are scared by these lower earnings or lofty valuations sell their stock, causing the price to drop. This causes other investors to worry about losing the money they've invested, so they sell as well; the vicious cycle begins. One of the best examples of a prolonged bear market is that of 1980's when stocks went sideways for well over a decade. Experiences such as these are generally what scare would-be investors away from investing. Ironically, this keeps the bear market alive; because no few buyers are purchasing investments, the selling continues.

How does a bear market affect my investments?

Generally, a bear market will cause the securities you already own to drop in price. The decline in their value may be sudden, or it may be prolonged over the course of time, but the end result is the same: the quoted value of your holdings is lower. This leads to two fundamental principles: 1.) A bear market is only bad if you plan on selling your stock or need your money immediately. 2.) Falling stock prices and depressed markets are the friend of the long-term, value investor. In other words, if you invest with the intent to hold your investments for decades, a bear market is a great opportunity to buy. It always amazes me that the "experts" advocate selling after the market has fallen. The time to sell was before your stocks lost value. If they know everything about your money, why they didn't warn you the crash was coming in the first place?

What do I do with my money in a bear market?

The first thing you need to do is to look for companies and funds that are going to be fine ten or twenty years down the road. If the market crashed tomorrow and caused capitaland's stock price to fall 30%, people are still going to buy razors. The basics of the business haven't changed. This brings us to our third principle: 3.) You must learn to separate the stock price from the underlying business. They have very little to do with each other over the short-term. When you understand this, you will see falling stock markets like a clearance sale at your favorite furniture store; load up on it while you can, because history has borne out that prices will eventually return to more reasonable levels.

My Passive Income Generation Links (See above)

Hello all,

Hope everyone have enjoyed the finance articles on my blog so far. And hope they have provided you some guidance in this volatile market.

Just hope to bring everyone's attention away from the financial market for a while, back to the internet.

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Merry Christmas and Happy New Year to all! May everyone be happy and wealthy in 2008 :)

Feeling the Crunch

by Ben Stein

If I were to choose a cartoon to represent the financial events of 2007, it would be the familiar one of Lucy promising Charlie Brown that this time, definitely this time, despite all the lies in the past, she would hold the football firmly in place while he practiced placekicking. Then, of course, she snatches it away and he goes flying onto his backside.

In the case of 2007 and investors, Lucy is, as always, Wall Street. The football is collateralized mortgage obligations, and the placekicking dupe is you and me. But the smart observer is the guy or gal or who knows this crisis won't go on forever, and the time to buy stocks, mutual funds, and ETFs is when everyone is worried -- not when they're chirrupy and happy.

What Went Wrong

Let's start at the beginning.

It's not even six years after the catastrophe of the high-tech fraud and stock collapse, and, after endless professions that Wall Street would stick to the highest levels of probity and honesty, it's back to the same old tricks. The trick is -- as always -- to sell "securities" that are not at all secure and are worth far less than the con men on Wall Street say they are.

This time around, the "securities" were immense pools of mortgages issued often with minimal or no credit checks on the borrowers, often on the collateral of homes that were worth less than the loans. Very often, the borrowers had little or no equity in the house, so that as soon as the real estate market went into a cyclical correction of extra-large size (to correspond with the real estate boom that was also of uniquely large size), the borrowers simply left the keys in the mailbox and went back to renting.

In many cases, the borrowers were themselves deceived about the terms of the loans and the likelihood that they could refinance their way out of any problems that occurred.

Crunching the Numbers

No one, and I mean no one, knows how large the losses have been as the buyers of the mortgage pools have seen their investment dry up and blow away. By my rough calculation, with help from the president's Council of Economic Advisers, about 6 trillion dollars of new mortgages were issued between 2005 and mid-2007. Of this, about 20 percent might have been subprime. That makes $1.2 trillion.

Of that, about a third might default (many more from the last period of the lending binge, when standards simply vanished), which would indicate losses of about $380 billion. Of that, about 60 percent will be recovered when the houses are seized in foreclosure and, after the legal fees are paid, sold to shrewd buyers. That leads to a net loss to pension funds, municipalities, labor unions, hedge funds, and wealthy foreigners of about $150 billion, as a very rough number.

That number may be even greater when upwards of $40 billion in losses on mortgages call Alt-A's -- where the borrowers didn't have poor credit, but the interest rates reset too high for them to afford -- are added. If we also assume that defaults might be even greater on mortgage pools sold since the middle of 2007, the total unrecoverable losses will be about $200 billion to $250 billion. Ouch!

On top of that, there are losses on structured investment vehicles, in which speculators basically borrowed short-term money to buy long-term debt -- always risky -- and possibly some losses on car loans as well, but that's not yet clear. There are also losses to hedge funds, which are loosely regulated pools of investments, but their accounting is generally murky.

Still with me? Because there's light at the end of the tunnel.

The Usual Suspects

But first, here are some amazing facts about this debacle: As far as I know, not one person on Wall Street has been even indicted for, let alone convicted of, fraud. Not one. In fact, the leaders of the major investment banks, banks, and brokerages that sold this worthless stuff -- and kept some of it in-house, leading to immense losses for their firms -- have been retired with immense severance bonuses.

The former head of Merrill Lynch -- who led his firm to near ruin by selling this garbage, and led his clients (whom he had a fiduciary duty to always put first) to disastrous losses -- was given a retirement package of about $160 million. The people at the banks who supervised this meltdown were routinely paid multimillion dollar wages per year.

A Peek Ahead

Here are two even more amazing facts: Despite this massacre -- which went far beyond where I originally thought it would go -- the stock market is still up for the year by a few percentage points, even though financial stocks are by far the largest sector of the S&P. Even more amazing, the economy is so large and so resilient that the losses will not be enough to cause lasting damage to the nation as a whole. (Some individuals, however, will be ruined.)

The losses of $200 billion or so amount to only about 2 percent of bank credit, and far less than the percentage of total credit available domestically and from foreign investors. The Federal Reserve is available at the flip of a switch to replenish the lost liquidity of banks, and new, wealthy foreigners are still lining up to invest in our financial entities.

There will obviously be an economic slowdown, and possibly even a shallow recession. But we're extremely blessed to have good fiscal stewardship from our government and top-flight guidance at the monetary-policy pentagon (the Fed). Unless they make major mistakes, we'll get through this in halfway decent shape.

Get Over It

Still, the lessons for us are keen and cut like a knife. But be brave -- these periods of crisis are inevitably the time to buy, even if you have to wait years for the crisis to sort itself out. It takes guts and counterintuitive thinking, and if you don't have the stomach to do it, no one will blame you.

If you do jump into the pool, be sure to diversify, give yourself guaranteed income from variable annuities and annuities, and stick with proven entities like very largely varied index funds at home and abroad. As you all know, I particularly love the emerging market funds and ETFs for the long haul.

Oh, and the next time Lucy offers to hold that football, kick her instead.

New Year's Career Resolutions You Should Make

by Tara Weiss

It's resolution time again. Instead of making the same old difficult-to-stick-to promises, like losing weight or quitting smoking, use the New Year to take stock of your career.

Addressing career concerns might make you more fulfilled on a daily basis. If you make the resolutions wisely by setting small, achievable goals, you're likely to feel particularly rewarded.

The first step: Consider what your career goals are and examine whether you're on track to meet them. "Are you happy with your job and your career," asks Wendy Enelow, a career consultant in Virginia who has written several books on résumés. "I'm not saying 'Are you making money?' But are you happy? Do you enjoy going to work on Monday mornings?" The time to ask this question is the last week in December or the third week of January -- because nobody wants to go back to work after the holiday break.

If the answer is yes, that's great. But you should still be at least a passive job-seeker. Update your résumé and pay attention to your industry, so you're not totally blind-sided if there's an economic downturn or some other major change in the job market. Also, this makes it easier to fully hop into job-seeking mode if you suddenly need to look for a new position. Have a general sense of who is hiring and what jobs are open.

Career Resolutions to Make for 2008
Rank	Reslution	Description
1	Resurrect Your Résumé	Even if you don't have plans to job hunt, make sure your résumé is up to date. Include recent accomplishments, like the completion of special projects or initiatives you've been a part of. You never know when an opportunity is going to come along.
2	Skill set	What's holding you back? Figure out what the necessary skills are to advance within your industry. Do you need certain computer skills that you don't know? Would learning a foreign language help advance your career? Get the education you need at your local college or university. Sometimes your company will pay the bill. Plus, everything you add to your résumé makes you more marketable inside and outside of your current company.
3	Know your options	Have a sense of which companies in your field are hiring and for what positions they're interviewing for. It's smart to have informal, ongoing conversations with other companies.
4	Network	Join professional associations related to your industry. It's still a "who you know" world out there. Plus, it's a good way to keep an eye out for new opportunities or developments in your field.
5	Keep a written record	Write your short- and long-term professional goals down. Set deadlines and keep them. It's easier to manage your own growth and development when your targets are charted out. Would you like to move into management? Set a timeline and a plan to get into that corner office.

Also, everyone should have a long-term career plan. This will help you figure out where you want to be in the next few years, so you can start thinking about how to get there. What do you have to learn, and who should you meet to fulfill the goal? Also, recognize that things change, and so should your career plan -- it shouldn't be stagnant.

If you're not happy at work, ask yourself: What is it that my job lacks? What is it I actually want to do?

Your dissatisfaction might stem from the fact that your job doesn't allow you to do anything else. Enelow encourages clients to consider where on their priority list work fits in. For some people, work is the top priority; for others, it's third or fourth. If you want to spend more time with family and friends, but your job is all-encompassing, it might be time to rethink your job choice.

Whatever the reason, get in touch with your professional network. Use the New Year as an excuse to touch base via e-mail or by sending a card. Send a less formal note asking how your contacts' holidays were. Then say, "I had time over the holidays to think about my career, and as such, I've confidentially decided to explore new opportunities. I wanted to know if you know of anyone in the industry who I might want to know."

Enelow recommends sending a cover letter and resume to headhunters specifically in your field. "If a recruiter has an immediate opportunity, they will get in touch," she says. "For passive job seekers, it's a way of getting into the system, because recruiters will scan them into their database. They're in the system if an opportunity arises."

Those that are content at work should still consider their next step. Ask for honest feedback from your supervisor, peers and subordinates. This is an ideal way to hear what you're good at and what you need to improve on. "It's called '360 feedback,' and that's where the true results really come," says Stephen Harap, a management and leadership coach at Deloitte and Touche.

Know where you need to improve, because working on your weak points will actually help you get to the next level. "The time to get good at something is before you get that next role," says Harap.

Perhaps you don't know what that next level is. That's when it's time to chat with your supervisor for input. It's as simple as saying, "I'd love to have a conversation about what my career goals are. Am I on the right track?"

This is also a good tactic because you can ask your manager to become a partner in getting a promotion. He or she can suggest the necessarily skill sets and ways to master them, such as the books to read, online training or even classes.

Like any resolution, the key is moderation. After you've assessed your career, select one or two goals to achieve. As you check them off, add new ones.

7 reasons to be bullish now

Last week's rally was only the start of a move up. Here's how leading money managers suggest you can take advantage of the market's bounce back.
By Michael Brush

Last week's impressive rebound in stocks was more than just a head fake. I see seven reasons why the reversal was the start of a bullish move in stocks.

A safe way to play this turnaround is to get broad market exposure, using mutual funds and exchange-traded funds. For more oomph, build positions in companies that have the right characteristics for the slower economic growth ahead. To find those stocks, I picked the brains of several managers who have excellent records at diversified domestic-stock mutual funds.

Before we go there, here's why I see better times ahead for stocks:

Reason No. 1: The smart money is positioned for gains.

There are many ways to read the minds of the smart money on Wall Street. Jason Goepfert, who runs a great Web site called SentimenTrader.com that offers a cornucopia of investor-sentiment gauges, likes to look at what commercial traders are up to.

These are the savvy investors who hold huge positions in S&P 500 Index ($INX) futures contracts -- more than 1,000 contracts -- as part of a strategy to hedge risk. (Owners of futures contracts on a stock index have the right to take delivery of the underlying stocks in the future, at a predetermined price.)

People who own index futures as part of a hedging strategy are about as sophisticated as they come on Wall Street, Goepfert believes. Over the past seven years, this elite crowd has normally held sizable short positions in index futures. But these folks recently moved to a net long position in a way not seen in years. Several other smart-money measures indicate they are now about as bullish as they get, by Goepfert's calculations. This tells me the recent lows may have been a bottom for stocks.

Reason No. 2: Joe Six-Pack is in a panic.

Sadly, individual investors typically panic and sell their stocks at the bottom. (And I'm embarrassed to confess that I've done the same thing more than once.)

Now, the average investor is in a state of panic again -- suggesting stocks will go into a sustained uptrend from here. A recent American Association of Individual Investors survey of its members indicated they were in a state of depression about stocks. About 56% of them were bearish at the end of November, the highest level since 2000. The number of bulls was at near-record lows, too.

We also know average investors are extremely gloomy because they are shorting stocks in record amounts. Investors go short by borrowing stocks and selling them, hoping to replace them later at a lower price to pocket the difference. In mid-November, the percentage of New York Stock Exchange short positions held by the public was at 70%. That's the highest since 1943, according to Goepfert.

Reason No. 3: Overall sentiment is extremely negative, too.

To be fair to those average Joes, they aren't the only ones who are bummed out about stocks. To measure the extent to which investors of all stripes hate stocks and favor bonds, Goepfert tracks the relative value of the two asset classes. On Nov. 26, investor preference for bonds over stocks came close to the highest level seen in 40 years. During the past four decades, there were 51 times investors hated stocks so much relative to bonds -- and 42 of those times, the S&P 500 Index was higher a month later, with an average gain of 3.1%.

Reason No. 4: Insiders are downright bullish.

Last week, for the sixth straight week, insider sentiment "remained firmly in bullish territory as buyers outnumbered sellers," according to InsiderScore.com. Buying by insiders, typically executives at the company in question, is a proven bullish indicator.

Reason No. 5: 'Tis the season to buy.

December is historically the best month to be in stocks. Since 1929, it's been an up month for the S&P 500 75% of the time. Each of the five times the S&P 500 lost more than 4% in November -- as it just did -- December was up, by an average of 5.6%.

Reason No. 6: The Fed is not done.

Mary Miller, the director of fixed-income investing at T. Rowe Price, expects the Fed to cut short-term rates by another percentage point over the next several months. Historically, stocks do well in a rate-cutting environment.

Reason No. 7: The economy will be fine.

Sure, the housing and auto sectors are a mess. But they represent only 9% of the economy, though you might not know it because they seem to garner 95% of the attention of the financial media, says James Paulsen, an economist who is the chief investment strategist at Wells Capital Management. The rest of the economy has been growing nicely. Paulsen thinks most economists are too negative, and he doesn't expect a prolonged period of sub-2% economic growth.

Reasons for being more positive: continued healthy wage gains and record household net worth; strong corporate balance sheets that support business-investment spending; lower interest rates; deficit spending by governments that stimulates growth; and a weak dollar that has spurred enough growth in exports to offset housing-sector weakness.

Here are some ways to play the rebound:

Go with tech-stock growth Robert Turner of Turner Investment Partners favors growth stocks in a slower growth environment. This seems counterintuitive, but it makes sense.

As the economy slows, fewer companies can generate superior growth, and that pumps up demand for some stocks because of their scarcity value. Turner is worth listening to because his Turner Concentrated Growth Fund (TTOPX) is up about 29% this year, compared with 4.4% gains for the S&P 500.

To find growth, Turner likes the "three V's" in technology: the rise of Internet video, which benefits Cisco Systems (CSCO, news, msgs); the "virtualization" of servers to increase capacity for companies, a job done by VMware (VMW, news, msgs); and the new Vista operating system, which Turner thinks will continue to help both Intel (INTC, news, msgs) and Microsoft (MSFT, news, msgs). (Microsoft is the publisher of MSN Money.)

Follow the leaders Robert Bacarella manages the Monetta Fund (MONTX) by following the smart money into companies for which investor expectations are improving. He does this by monitoring stocks' price and volume changes, checking company reports for signs of improvement and peeking at the portfolios of his most successful peers. His large-cap growth fund is up 25% this year with this strategy.

One group that stands out now is industrial companies that sell equipment, especially agricultural equipment, and machinery abroad.

Two companies in this group that look attractive are Manitowoc (MTW, news, msgs), which sells cranes, food-service equipment and marine products, and Chicago Bridge & Iron (CBI, news, msgs), a global construction and engineering company with exposure to the energy sector, where growth has been strong.

Broken but fixable One portfolio that Bacarella checks regularly is the Hodges Fund (HDPMX), run by Don Hodges. It's easy to see why: The fund is up 24% annualized over the past five years, or 10.4 percentage points a year better than its peers. Plus his fund's top holdings are updated more frequently than most mutual funds. You can check them at his company's Web site.

Hodges says he likes several well-known companies that have been beaten down in part by tax-loss selling, even though they have powerful long-term franchises. His list: Wal-Mart Stores (WMT, news, msgs), Home Depot (HD, news, msgs), Hershey (HSY, news, msgs) and Citigroup (C, news, msgs).

"At the moment they look uninteresting, but they are great companies that will adjust and do well in time," Hodges says. "Investors have knocked them down to prices where they represent good value and limited downside risk."

Big, international and safe Like Turner, T. Rowe Price fund manager Bob Smith likes large-cap growth companies, in part because they have more room to cut costs but still have enough to invest for growth. He also looks for those that have big exposure to emerging-market economies, where Smith thinks growth will remain strong even if the U.S. economy slows.
Smith ran the T. Rowe Price Growth Stock Fund (PRGFX) for 12 years, and he just took the helm of the T. Rowe Price International Stock Fund (PRITX). His former fund returned 12.9% a year over the past five years.

He points out that emerging-market governments are in better financial health than they have been in for a while. This means they will continue to spend on infrastructure improvements even if the U.S. economy slows. "Companies that are exposed to these markets are going to grow faster than those that aren't," he says.

One play on these themes is General Electric (GE, news, msgs), which gets a lift from the infrastructure build-out in places such as India and China because it sells equipment for power plants, rail systems and alternative-energy systems. There's also strong demand from the Far East for planes using General Electric's aerospace products.

Smith likes Danaher (DHR, news, msgs), an industrial conglomerate that sells water-filtration systems and manufacturing-process-control systems. The company has solid financial strength, which means that "during tough times they can buy other companies at great prices," Smith says. Schlumberger (SLB, news, msgs), down 18% since mid-October, looks like a bargain because its oil-services business should grow by 15% to 25% a year for the next three years, he says.

At the time of publication, Michael Brush owned T. Rowe Price mutual funds.

2008: World Economic Growth Slowing

By Viorel Urma, AP Business Writer

2008: Global Economy to Grow at a Slower Pace, Beset by Credit Crisis and High Oil Prices NEW YORK (AP) -- The world economy, buffeted by the credit crisis gripping financial markets, is expected to keep expanding in 2008 -- albeit at a slower pace -- with little fear of recession. But unlike past economic upswings driven by the U.S., Japan and Western Europe, the main engines of growth this time are predicted to be China, India and other emerging economies.

In its latest World Economic Outlook, the International Monetary Fund projected that global economy would grow by 5.2 percent this year and moderate to 4.8 percent in 2008, compared with last year's 5.4 percent growth. The 2008 forecast was downgraded by nearly one-half percentage point from the summer outlook, reflecting the turbulent conditions in financial markets.

"Risks to the outlook, however, are firmly on the downside, centered around the concern that financial market strains could deepen and trigger a more pronounced global slowdown," the IMF warned. Inflation pressures, volatile oil markets and the strong flows of foreign currency into emerging markets are also threats, it said.

The IMF said the ongoing turbulence in financial markets and a new rise in oil prices have dampened the outlook since its October update. In particular, the U.S. growth outlook has become riskier, IMF First Deputy Managing Director John Lipsky said in an interview posted on the Fund's Web site Dec. 11.

The global oil markets remain very tight, and with spare capacity still limited, supply shocks or heightened geopolitical concerns could lead to oil price spikes that could trigger higher inflation, economists said.

There is room for some cheering, though.

"The good news is that emerging and developing countries weathered the recent financial storm and are providing the basis for strong global growth in 2008," said IMF Chief Economist Simon Johnson.

"For the first time, China and India are making the largest country-level contributions to world growth," he said.

Emerging Asia is forecast to expand 9.2 this year and 8.3 percent in 2008; Africa is to grow 5.7 percent and 6.5 percent, respectively; and the Middle East, supported by high oil prices and robust domestic demand, is projected to expand 5.9 percent in both 2007 and 2008.

The IMF raised its growth forecast for China's sizzling economy this year to 11.5 percent from 11.2 percent, and said Beijing's efforts to cool the boom would be more effective if currency controls were eased. However, it said that easing may not materialize unless the authorities act more decisively and let the yuan's exchange rate rise faster.

Economic growth in the 30 industrialized economies of the Organization for Economic Cooperation and Development -- which include the U.S., Britain, Germany and France -- will slow to 2.3 percent in 2008 from 2.7 percent in 2007, the Paris-based think tank predicted in early December.

"Although near-term growth has been revised down virtually everywhere in the OECD area, the baseline scenario ... is actually not that bad in view of the recent shocks," said Joergen Elmeskov, the acting economic chief of the think tank.

Corporate profits, high employment that boosts income and consumption, and increased global trade have supported the world economy, while it has been hit by financial turmoil, cooling housing markets and rising energy and commodity prices, the OECD said.

The gradual slowing currently envisioned comes as the world economy's biggest player -- the United States -- is facing a considerable loss of speed.

The IMF lowered its forecast for U.S. growth, predicting the economy would expand by just 1.9 percent this year and next, reflecting the impact of the worst housing slump in more than two decades and the effects of the credit crisis.

If the IMF's forecast for 2007 proves correct, it would be the weakest growth the U.S. has logged in six years.

The housing slump would cost the U.S. economy a full percentage point of growth this year or one-third of the typical 3 percent annual rate of increase, economists said.

Although risks of a recession have risen in the United States, the IMF said the more likely outcome would seem to be a more prolonged period of sub par growth.

A November survey by 50 professional forecasters of the Washington-based National Association for Business Economics (NABE) trimmed the estimates for all the major U.S. economic sectors next year, with the exception of net exports and government spending, without predicting a recession.

The panelists didn't see recession as likely, although the economy faces risks from the credit markets, housing and energy prices, said Ellen Hughes-Cromwick, NABE president and chief economist at Ford Motor Company.

Other U.S. economists are less upbeat.

"Slow jobs growth, along with the shortage of business credit, declining home prices, and falling industrial production, indicate the risk of a recession is clearly above 50 percent. Either the economy has already entered a recession or the risk that a recession will begin soon exceeds 50 percent," said Peter Morici, a business professor and former chief economist at the U.S. International Trade Commission.

While overall U.S. economic growth as measured by the gross domestic product roared ahead at a 4.9 percent rate in the third quarter, the fastest pace in four years, GDP is expected to slow to a barely discernible 1.5 percent or even less in the current October-to-December quarter.

Growth at such a slow pace would increase the risks that the world's largest economy could dip into a recession.

To cushion the blow, the Federal Reserve has slashed a key interest rate three times to 4.25 percent -- a nearly two-year low -- most recently on Dec. 11. Fed officials signaled that further cuts were possible if housing and mortgage lending get worse.

On the positive side, the Labor Department reported the unemployment rate stayed at a relatively low 4.7 percent for the third straight month in November -- better than economists were expecting -- and wages grew briskly, encouraging signs that America's employment climate is still holding up in the face of credit and housing problems.

Job and wage growth have been shock absorbers, helping Americans to cope with all the negative forces in the economy.

"This should provide reassurance to those who worry that a recession is imminent," said Carl Tannenbaum, chief economist at LaSalle Bank.

Still, a lingering fear among economists is that consumers will cut back on their spending throwing the economy into a tailspin. Consumer spending accounts for two-thirds of U.S. economic activity.

In other economic predictions:

--The Middle East economies, supported by high oil prices that hit a trading record of $99.29 a barrel on Nov. 21, are projected to expand by 5.9 percent in both 2007 and 2008, with growth accelerating in Iran and Egypt.

--After years of stop-and-start results, many African economies appear to be growing at the fast and steady rates needed to put a dent in the region's poverty and attract global investment, the World Bank said. Overall growth in Sub-Saharan Africa is projected to rise from 5.7 percent in 2006 to 6.1 percent in 2007 and further to 6.8 percent in 2008. The growth acceleration reflects largely the coming onstream of new production facilities in oil-exporting countries such as Angola and Nigeria, according to the IMF.

--In Russia, GDP growth is set to accelerate in 2007 to 7.3 percent before moderating to 6.5 percent in 2008 as oil and metals prices stabilize at their current levels, OECD economists said.

Outlook for 2008: Markets and the Economy

by Jeremy Siegel, Ph.D.

It’s time to dust off the proverbial crystal ball and predict what’s in store for 2008. But before doing so, let’s see how I did with last year’s forecast.

Well, I was pleasantly surprised to see that I got quite a lot right despite missing the subprime crisis. I predicted that the economy was poised for a mid-cycle slowdown, similar to what we experienced in 1995, the year after the Fed had also raised rates. I predicted GDP growth would slow in 2007 to 2½% to 3%, and despite the credit crunch, this estimate was very close. Even if this quarter’s GDP grows by a measly 0.5%, GDP growth for 2007 will be at 2.5%.

For the US stock market, I predicted an 8% gain and greater gains for foreign markets. December still has two weeks to go, and given the recent volatility, the market could end the year anywhere. But as of now, the S&P 500 Index is up 6.3%, while foreign markets have done significantly better. The foreign developed markets, represented by the EAFE Index, have returned 15.6% and the emerging markets continue their torrid pace, chalking up a 42% gain. Last year, I said that if US stocks climbed less than 8% in 2007 it would be due to $3 a gallon gasoline and the dollar falling below $1.45 per euro.

Subprime Crisis

Both barriers were breached, but the main reason for this year’s stock market malaise was the credit crisis, which, despite my bearishness on real estate, I didn’t see coming. I’ve written a fair amount about this crisis on Yahoo! Finance and downplayed its importance to the overall economy. Why? I never expected the fear of debt defaults to so swamp the reality of this problem.

I think the actual number of delinquencies next year will be below what the market predicts, as investors have overreacted to the mortgage crisis. When this happens, it could lead to a nice recovery in financial stocks.

Economic Growth

But the impact of the crisis on the psychology of consumers and business will leave their mark. I predict that GDP will slow in the first half of next year to between 1% and 2%, and rise in the second half, as risk premiums come down and the cost of capital falls. Overall I expect 1.5% to 2.5% GDP growth in 2008 and I believe the economy will avoid a recession.

Stocks and Bonds

I think the stock market will have another winning year in 2008. For every percentage point that stock returns fall below 8% (my prediction) this year, they should exceed 8% next year (meaning, for example, if stocks gain 6% this year, they should finish 2008 up 10%).

And I believe that financial stocks, which have plummeted 18% so far this year, will outperform the S&P 500 Index next year as the credit crisis fades.

Interest Rates

What does all this mean for interest rates? The Fed cut the Fed funds rate to 4.25% on December 11, but it will have to do more in the coming months. I believe that the Fed will get rates down to 3.5%, before ratcheting them upward in the second half of next year.

Treasuries did well in 2007, as interest rates on top-rated securities plunged in light of the credit crisis. But as the risk spreads narrow, money will flow away from government bonds and their interest rates will rise. I recommend investors cash in governments and top rated corporate bonds now – you got a nice ride that you won’t get next year.

Oil

There are always events (or “risks” as Wall Street calls them) that can upend these forecasts and oil is always one of them. Despite some promising political developments in the Mideast, history has taught me to be cautious.

If oil surges past $100 a barrel for whatever reason, we will be in trouble. Three dollar gasoline did not prove to be the tipping point for the consumer in 2007. But with a weak housing market, I believe $4 gasoline would do considerable damage to consumers’ pocketbooks in 2008. And $4 gasoline would happen if oil rose to $120 a barrel or higher.

Politics

Of course, next year is a presidential election. Although the primaries appear up for grabs now with Barack Obama and Mike Huckabee making a good run, I believe that the Democrats and the Republicans will nominate front-runners Hillary Clinton and Rudy Giuliani. After a hard fought battle, Hillary will pull through as the electorate seems ready for a new party to govern from the White House.

Since I predict the Democrats will also keep the House and Senate, a Democratic sweep will send some nervous flutters through Wall Street. But Clinton will prove to be as moderate on economic issues as was her husband. This means that although taxes will rise on dividends and capital gains when the current low rates expire in 2010, the increases will be moderate and Wall Street will be relieved.

I’ll wait until after next year’s election before offering up another set of projections for 2009. In the mean time, have a healthy and prosperous new year!

US recession fears overblown: IMF

Economy Watch
Published December 13, 2007

US recession fears overblown: IMF
But official says US growth outlook has become subject to greater risks

(WASHINGTON) World economic growth may be hobbled by financial market turmoil and the risks to the United States have mounted, said IMF first deputy managing director John Lipsky, but fears of a recession still look overdone.

'Never say never, but the latest indicators do not justify such a conclusion,' Mr Lipsky told an internal IMF publication in an interview posted on its website on Tuesday.

He had been asked whether a US recession was looming, but professed that he was 'cautiously optimistic'.

'Employment growth and wage increases have decelerated, but they both continue to grow. So long as US household income continues to expand, it's reasonable to expect consumption expenditures to increase,' he said.

A credit crunch spurred by the collapse of the US sub-prime mortgage market is expected to slow growth, and last month the IMF signalled it would cut its 2008 world economic growth forecast from the 4.8 per cent predicted in October.

Mr Lipsky did not indicate the scale on which the forecast would be revised. But he reiterated the challenges facing major economies like the United States, Europe and Japan, from tightening credit conditions and mounting energy prices.

'In particular, the US growth outlook, which we had perceived already as likely to be sub par in 2008, has become subject to somewhat greater risks,' he said.

'In Europe and Japan, growth appears to be decelerating after solid advances in the third quarter, and their outlooks would be affected if risks to US growth were to materialise,' Mr Lipsky added.

Emerging markets have been holding up so far but would be unlikely to weather a sustained downturn in the world's largest economies - tensions forcing up currencies like the euro, which Mr Lipsky said now looked overbought.

'Most recently, we find that the euro is by now somewhat on the strong side with regard to our views of medium-term equilibrium,' he said.

The Fund said Germany has staged a 'remarkable and enviable' economic recovery in recent years but faces slowing growth in 2008. It needs to press forward with reforms to improve productivity.

In conclusions from its Article IV consultation with Germany, the IMF said the country's gross domestic product growth will slow to 1.9 per cent in 2008 from 2.5 per cent in 2007, due largely to a slowing US economy.

'Growth will also be dampened, though to a more modest extent, by the stronger euro and higher oil prices,' the IMF said in a statement.

The IMF said the effect of a strong euro on Germany 'should remain modest' if global trade imbalances continue to unwind in an orderly way. But it said a disruptive unwinding of such balances that leads to sharply lower world growth would amplify the consequences of a strong euro.

The IMF said a pause or reversal in Germany's reform agenda could undermine some of its recent economic gains. Stepping up productivity is key to sustaining growth, particularly for services sectors that have absorbed unskilled workers, it added.

There is a shortage of skilled labour in the country as highly trained Germans seek employment abroad for lower tax rates, higher compensation or better opportunities. The IMF said to address this, Germany must focus on improving education and training and encouraging immigration of skilled workers. -- Reuters

Alan Greenspan Says He Sees `Early Symptoms' of Stagflation

By Christopher Wellisz

Dec. 16 (Bloomberg) -- Former Federal Reserve Chairman Alan Greenspan said he sees warning signs of so-called stagflation, a combination of slow economic growth and rising prices.

``We are beginning to get not stagflation, but the early symptoms of it,'' Greenspan said on ABC's ``This Week'' program.

``We had a period of remarkable disinflation'' in the years following the end of the Cold War, when inflation rates declined, Greenspan, 81, said. ``That period is now coming to an end.''

Greenspan cited rising prices of Chinese exports together with declining productivity increases in the U.S. and elsewhere as signs that the era of declining inflation rates may be ending.

U.S. consumer prices rose the most in more than two years last month on record energy costs, a government report last week showed. The consumer price index increased 0.8 percent in November, up from 0.3 percent the previous month. Prices excluding food and energy climbed 0.3 percent.

Inflation seen hanging over 2008 world economy

Thu Dec 13, 2007 2:21pm EST

By Steven C. Johnson

NEW YORK (Reuters) - Inflation is shaping up to be a serious threat to financial markets and the world economy next year and the timing couldn't be worse, money managers at the Reuters Investment 2008 Outlook Summit said.

Even as prices rise, a severe global credit squeeze has prompted major central banks to flood the banking system with more money than at any time since the September 11, 2001, attacks.

With that much money sloshing around, many fear high prices will push the world into a prolonged period of sluggish growth, with the U.S. economy in particular vulnerable to a rerun of 1970s-style stagflation.

"We're trying to deal with two polar opposite problems here," said Robert Kowit, an international bond fund manager with Federated Investors. "I would say (stagflation) is an increasing concern for most investors."

Stagflation, a combination of stagnation and inflation, describes periods of rising prices coupled with stalled growth.

In the 1970s, things got so bad that the United States had trouble finding buyers for its bonds, sparking a dollar crisis that saw asset prices fall and real interest rates spike.

Kowit said a rerun of that scenario is a top concern heading into 2008. Economists predict falling home prices and the credit crunch will more than halve the U.S. growth rate to 1.4 percent in the fourth quarter. Some see recession ahead.

Interest rate cuts from the Federal Reserve have also accelerated the dollar's six-year decline, sending it to a record low against the euro and potentially raising prices for already indebted U.S. consumers.

"When we talk about what a dollar crisis looks like, at least in my experience, it's been accompanied by a stagflationary environment," Kowit said.

A FLOOD OF MONEY

Fighting inflation has grown more complicated since August, when a rash of U.S. subprime mortgage defaults hit investors who had bought those loans. Lenders then cut off credit to customers because investors stopped buying the debt that banks use to finance home loans.

But efforts to get credit flowing again through infusions of capital will make inflation problems even worse, said Jim Grant, editor of Grant's Interest Rate Observer.

A group of major central banks, including the Fed, joined forces this week to make it easier for banks to borrow and lend money. The Fed said it would hold two auctions through a new funding facility of $20 billion each.

"The risk is that by intervening to facilitate transactions to prevent so-called fire sales, the central banks of the world are actually not so surreptitiously inflating the global money supply in order to lift all asset values, including the ones that are most dubious," Grant said.

But some say the dangers of a seized-up credit market are large enough to justify aggressive action from central banks.

Bill Gross, chief investment officer of Pacific Investment Management Co., the world's biggest bond fund known as Pimco, said he expects the Fed to cut benchmark interest rates to 3 percent from their current 4.25 percent.

While that runs the risk of reinflating the sort of asset bubbles in housing and stocks that led to the credit crisis, Gross said it's a risk the central bank has to take.

"I do think the Fed has to pump as much air into the system to put a floor under housing and give the potential for the finance-based economy -- banks, primarily -- to build up their capital," he said.

HOT EMERGING MARKETS

Rising prices are a danger outside the United States as well, especially in booming emerging markets with undervalued currencies and rapid rates of growth.

Grant said Middle East oil exporters are facing "horrific rates of inflation" because their currencies are tied to a weakening dollar.

Inflation in Saudi Arabia in October hit its highest level since at least 1995, with the government raising subsidies to curb discontent over prices and the central bank facing more pressure to cut rates to defend a dollar peg.

In the developed world, central banks in Norway and Switzerland have been forced to hike interest rates this week, while European Central Bank officials have said the bank's 2008 inflation forecast of 2.5 percent may understate upside risks.

China reported that inflation in the 12 months to November shot to an 11-year high, and Grant said officials there exacerbate the problem when they buy up incoming dollars in order to keep the yuan from rising too quickly and undermining Chinese exports.

"The system of printing money with which to buy dollars is entering a time of crisis, and it's an inflationary crisis. That is terrible news for the world," Grant said.

Where to Invest in 2008

By Andrew Tanzer, Senior Associate Editor

From Kiplinger's Personal Finance magazine, January 2008

Profit handsomely from what's happening half a world away.

To paraphrase Dickens, think of 2007 as a tale of two economies. The home-building bust, crumbling housing prices and mounting credit woes sapped the domestic economy. As a result, stocks tied to housing and the U.S. economy sagged. But such businesses as natural-resource producers and capital-goods exporters, which are tethered to the robust global economy, had more bounce in their step, and shares of those companies sizzled.

In 2008, we expect a similarly bifurcated stock market. The U.S. economy and consumer will be subdued, but investors will have plenty of opportunities thrown up by the boom in emerging markets. As bombs continue to explode in the portfolios of U.S. banks, international sales of American goods and services will surge. The fortunes of various industries will diverge widely.

With more uncertainty than usual about the health of the U.S. economy in general and the banking system in particular, expect plenty of big ups and downs from stocks in the year ahead. One plus for stocks is that they are relatively cheap. As a result of the market's flop this past fall, Standard & Poor's 500-stock index traded in mid November at 14 times estimated 2008 earnings. That's a bit below the market's average long-term price-earnings ratio and cheap compared with current interest-rate levels.

The rub is that the market may not be as cheap as it looks. Analysts expect S&P 500 earnings to jump 14% in 2008, says Thomson Financial. But if the economy flirts with recession and if financial companies continue to take massive write-offs on mortgage investments gone sour, growth of that magnitude is a pipe dream.

We think U.S. economic growth will be anemic -- less than 2% -- in the first half of 2008, but it stands a good chance of staying positive. The Federal Reserve's interest-rate cuts in the summer and fall of 2007 will stimulate the economy. Employment has held up (so far) and incomes are growing. Millions of Americans are drowning in too much mortgage and consumer debt, but enough of them are spending to make a recession unlikely (consumer spending accounts for 70% of the total U.S. economy).

Add it all up, and the S&P 500 should return between 5% and 10% over the coming year (on the lower end of the range if profits are soft, on the higher end if they are anywhere near analysts' forecasts). Look for stocks to struggle early in the year in response to negative news about the economy and earnings and to pick up in the second half as investors start anticipating better times in '09.

The overseas factor

Powerful demand from abroad has been puffing up profits of multinational U.S. companies -- from Boeing, Caterpillar and Schlumberger on the industrial side, to Coca-Cola, Colgate-Palmolive and McDonald's on the consumer end. S&P calculates that overseas revenues for the companies in the S&P 500 have jumped from 32% in 2001 to 48% in 2007 (see the chart below). Joseph Quinlan, chief market strategist for Bank of America Capital Management, thinks that as much as 80% of the earnings growth of U.S. companies came from abroad in 2007. "Foreign profit growth was the dominant factor boosting the S&P 500 in 2007," agrees Bank of America economist Lynn Reaser. We fully expect the trend of rising exports to continue in 2008. (For more on the role of exports, see Exports Steer the Economy.)

You can view the economic crosscurrents this way: The housing collapse has been subtracting about one percentage point of gross-domestic-product growth each quarter from the $14-trillion U.S. economy. Net export growth has been generating a point or more of GDP growth, offsetting the ailing domestic economy. Score one point for the potent force of globalization, often denounced at home and abroad.

Once you get over the U.S.Us receding importance as the principal engine of global economic growth, it's easy to spot investment opportunities. Just ask Ken Heebner, a master at creatively riding emerging markets from his perch in Boston (see Heebner's World View). The manager of CGM Focus fund (a member of the Kiplinger 25) thinks the aspirations of residents of developing countries such as China and India will help the U.S. economy avoid slipping into recession in 2008. "If the consumption and demand for industrial goods of 2.5 billion people is surging, that dwarfs fluctuations in what happens in the U.S. and in Europe," he says. "It's very hard for people sitting in the U.S. -- where we've always called the shots economically and globally -- to see that it's different this time."

The dollar's impact

So how should you invest in 2008? We think the sweet spot will be large, growing companies that book substantial business overseas, where economic growth is two to three times higher than in the U.S. The weak greenback bolsters American competitiveness and translates into higher sales and earnings for U.S. companies. "The further away you are from the subprime mess, housing, and industries related to discretionary consumer spending, the better off you'll be,S says Jeff Schappe, chief investment officer at BB&T Asset Management.

To find attractive stocks, study the foreign exposure of sectors in the S&P 500. Stocks of industries with the highest overseas exposure -- energy, materials, technology and consumer staples -- tended to perform best in 2007. The most domestically oriented sectors -- financials and consumer discretionary (home building, autos, apparel, retailing) -- performed poorly. U.S. consumer demand will remain subdued in 2008, so it makes sense to continue favoring businesses leveraged to global growth.

One simple way to size up the situation is to figure out which goods and services are required by burgeoning emerging markets, which now generate the bulk of global economic growth. For instance, China and India are investing massively in infrastructure, such as roads, airports and power plants. Kevin Shacknofsky, co-manager of Alpine Dynamic Dividend fund, says China is constructing electrical grids on the scale of Philadelphia's every year. So he holds infrastructure-building stocks, such as Fluor and General Electric, as well as ABB and Atlas Copco of Europe (ABB and GE are members of the Kiplinger Green 25; see 25 Ways to Invest in a Cleaner World).

Developing nations have an insatiable demand for oil, copper, iron ore, soybeans and other natural resources. Demand for these resources tends to grow briskly when people in poorer nations start migrating into the middle class. "A large swath of humanity in economies that are emerging want the same lifestyle we have," says Robert Arnott, of Research Affiliates. He notes that while prices of dollar-priced commodities such as oil are rising for Americans, the picture looks different from the perspective of foreigners enjoying appreciating currencies. That's why stocks such as energy producer ConocoPhillips, Freeport-McMoRan Copper & Gold and soybean giant Bunge surged in 2007.

Demand for technology is healthy both at home and abroad. U.S. businesses have much sounder balance sheets than consumers and continue to spend on capital equipment, including technology. "Technology will lead the charge," says Bob Turner, of the Turner funds. "There has been a lack of tech spending for seven years, but we're seeing a pickup." Bank of America's Quinlan favors tech outfits with a lot of international exposure, such as Cisco and Microsoft. Besides Cisco, Turner likes data-networking firms, including Ciena and Juniper.

Even managers of small-company stock funds are searching for tech and other enterprises buoyed by global growth (large companies have an average of three times as much direct overseas exposure as small businesses). For example, Jeffrey James, manager of Driehaus Small Cap Growth, has invested in small companies that supply parts and technology to the aerospace, oil-services and agriculture industries, all big exporters. Two stocks he likes are Titan International, which supplies tires to Deere & Co. for its farm equipment, and Oyo Geospace, which develops seismic technology for the oil-and-gas industry. "We're finding the greatest success with U.S. companies that have a large part of their business overseas," he says. "Companies that are completely domestically focused are having a tough time."

Defensive growth stocks

Consumer staples and health care -- both defensive growth sectors for investors -- will enjoy several tailwinds in 2008. Large concerns, such as Procter & Gamble, Coca-Cola, Altria and Johnson & Johnson, generate a growing proportion of their sales and profits abroad and have strong franchises in developing markets. Such high-quality companies have healthy balance sheets and produce robust and consistent cash flows -- which means that, unlike many small companies, they don't depend on access to shaky credit markets for capital.

Steady growers, such as Colgate-Palmolive and Merck, have the products and the financial stamina to sustain growth during a consumer slowdown in the U.S. In fact, the 10% or 11% earnings-growth rates that Merck and Colgate are expected to generate over the next few years will look attractive in a sluggish economy. Investors will be willing to pay a premium for these consistent growers, which implies rising price-earnings ratios and, hence, rising share prices.

Like many market strategists, Stuart Freeman, of A.G. Edwards, thinks 2007 marked the start of a cyclical shift from value stocks (those selling at low prices relative to earnings and other key measures) back to growth stocks. He favors defensive growers, such as PepsiCo and Eli Lilly.

Style shifts tend to move in five-year cycles, says Turner, who thinks shares of growth companies are more attractively priced than traditional value stocks. He likes asset managers, including Charles Schwab and T. Rowe Price, and companies that run financial exchanges, such as Chicago Mercantile Exchange and Nymex.

How do stocks compare with bonds? Strategists such as Freeman and Duncan Richardson, of Eaton Vance, think stocks will beat bonds handily in the coming year. They like to compare the yield on the ten-year Treasury note with the earnings yield of stocks (the inverse of the price-earnings ratio, essentially representing what stocks would yield if companies paid out all of their earnings as dividends). When the earnings yield on stocks is much higher than the Treasury yield -- it's currently 6.4% on S&P 500 stocks, based on 2007 earnings estimates, versus 4.2% for ten-year Treasury notes -- they give the nod to stocks (for our take on fixed-income markets, see For Bond Investors, Better Safe Than Sorry).

So we're moderately optimistic about stocks in 2008, despite fierce headwinds from the housing and credit markets and beleaguered consumers. But expect greater market volatility. Steve Bleiberg, chief investment officer at Legg Mason, notes that higher volatility is normal when economic growth slows and periodic negative data frightens investors. As in 2007, mines blowing up in the mortgage-backed securities market will continue to hit stocks.

Where to invest overseas

There are several ways to tap into large global growth companies. Heebner masterfully plays global growth with his concentrated CGM Focus (symbol CGMFX). We also like Marsico 21st Century (MXXIX), which includes a good helping of stocks of midsize growth companies as well as those of large corporations.

You can access growth abroad through steady overseas funds, such as Artisan International (ARTIX), run by Mark Yockey; Harbor International Growth (HIIGX), steered by Jim Gendelman; and Julius Baer International Equity II (JETAX), managed by Rudolph-Riad Younes and Richard Pell. Or you can hedge your bets with a global fund such as Rob Gensler's T. Rowe Price Global Stock (PRGSX), which may rotate between U.S. and foreign stocks (including those in emerging markets) as Gensler sees fit.

To profit from the economic boom in emerging markets, which will continue to elevate demand for oil, metals and other commodities, consider a natural-resources fund. Two we like are T. Rowe Price New Era (PRNEX), which is heavily invested in commodity stocks, and Fidelity Select Natural Resources (FNARX).

Warren Buffett Predictions for '08 - And Beyond

Warren Buffett became one of the wealthiest people in the world by making predictions and putting money behind those predictions. Every time he buys a stock or a business or some other investment, he's forecasting the future.

Judging by the incredible returns of his holding company Berkshire Hathaway, Buffett and his colleagues are very good at making those predictions.

Of course, it helps when you can give your predictions plenty of time to come true. That's one reason Buffett's favorite holding period for investments in "outstanding businesses with outstanding managements" is "forever." After all, "We don't get paid for activity, just for being right. As to how long we'll wait, we'll wait indefinitely."

With that in mind, here are Warren Buffett Watch's "Eight for '08" .. and beyond.

1. Recessions can't be avoided forever. In the last few days, Buffett told our Becky Quick that if unemployment picks up significantly, the "dominoes" will fall and the U.S. economy will fall into recession in 2008. He's not sure, however, that unemployment will go up next year. In fact, he's surprised that all the weakness we're seeing in housing hasn't affected the jobs market ... yet. Here's what he is sure about: "It is the nature of capitalism to periodically have recessions. People overshoot." (He told Becky she's young enough to expect to see 6 or 7 or them.)

2. We'll survive future recessions just as we've survived past problems. As Buffett told us in August, "We've got a wonderful economy... There's never been anything like that in the history of the world. We live seven times better than the people did a century ago on average... We've had problems all along. If you look at the last century, we had that Great Depression and World War Two, we had the Cold War, we had the atomic bomb, but the country does well."

3. Recessions will create opportunities. "I made by far the best buys I've ever made in my lifetime in 1974. And that was a time of great pessimism and the oil shock and stagflation and all those sort of things. But stocks were cheap."

4. All stocks won't be cheap. Like Ted Williams waiting for the right pitch, a successful investor waits for the right stock at the right price, and it doesn't happen every day. "What’s nice about investing is you don’t have to swing at pitches. You can watch pitches come in one inch above or one inch below your navel, and you don’t have to swing. No umpire is going to call you out." You get in trouble, Buffett says, when you listen to the crowd chanting "Swing, batter, swing!"

5. The crowd will make mistakes. Buffett cites this piece of advice from his mentor Benjamin Graham: "You’re neither right nor wrong because other people agree with you. You’re right because your facts are right and your reasoning is right—and that’s the only thing that makes you right. And if your facts and reasoning are right, you don’t have to worry about anybody else."

6. Investors will mistakenly think falling stock prices are bad. "If they reduce the price of hamburgers at McDonald's today I feel terrific. Now I don't go back and think, gee, I paid a little more yesterday. I think I'm going to be buying them cheaper today. Anything you're going to be buying in the future, you want to have get cheaper."

7. Good times will prompt bad decisions. In his 2000 Letter to Berkshire shareholders, Buffett compared the crowd that buys big when prices are high to Cinderella at the ball. "They know that overstaying the festivities - that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future - will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands."

8. There will be more dancing at another wild party followed by another painful hangover. Looking back at the Internet bubble, Buffett is quoted as saying, "The world went mad. What we learn from history is that people don’t learn from history."

Consumers in HK, S'pore 'less upbeat over stock markets'

Straits Times
English
(c) 2007 Singapore Press Holdings Limited

They are more bullish over jobs and the overall economy: MasterCard survey

A NEW survey has found that Singapore consumers are highly optimistic about the economy but slightly less upbeat about the stock market.

Their counterparts in Hong Kong are also bullish about the economy, but confidence in the stock market has fallen even more sharply there.

The latest MasterCard Worldwide Index of Consumer Confidence survey found that, in the two economies, sentiment towards the stock market had dipped amid caution over wild swings in share prices.

Overall, the index was up: For Singapore, it rose to 83.6 from 83.3 six months ago; for Hong Kong, it rose to 85.9 from 84.7.

Published twice a year, the index is calculated based on percentage response figures, with zero denoting the most pessimistic view and 100 the most optimistic, while 50 would be neutral.
In terms of the stock market, sentiment in Singapore slipped slightly, to 75.4 from 76.6 a year ago. In Hong Kong, it fell more sharply, to 69.3 from 76.7 a year ago.

Five economic factors were measured in the survey: employment, the economy, regular income, the stock market and quality of life.

Conducted in October across 13 Asia-Pacific markets, including China, Indonesia and Vietnam, the survey polled more than 5,000 people in the middle- and upper-income groups.

It found that Singaporeans remained bullish about employment and the economy, but were less sanguine about regular income and the quality of life, due to rising living costs.

People were worried about the goods and services tax, higher food costs and oil prices, said CIMB-GK research head Song Seng Wun. 'If they took the survey today, the index levels might fall further. People react depending on how full or empty their pockets are.'

Vietnam continued to top the region's markets in terms of consumer sentiment. It had the most buoyant view for the six-month period ahead. Next came Hong Kong, China and Singapore.

Participants from South Korea showed the sharpest increases in optimism. The country's score increased by a whopping 15.6 points to 64.1. At the opposite end of the spectrum was Taiwan, which registered the lowest score at a very gloomy 29.7.

Dr Yuwa Hedrick-Wong, MasterCard's economic adviser, noted that while the overall outlook for consumer confidence had improved in most countries, this merely reflected current economic conditions on the ground. 'If you have bonuses doubling, do you think you'd be pessimistic?' he asked.

There could be greater uncertainty going into the year ahead if there are more fund failures, asset downgrades and bank write-offs, leading to a slowdown in consumer spending. If Asia begins to see the cancellation of export orders, this could hurt its corporate earnings, Dr Hedrick- Wong noted.

'For 2008, the critical uncertainty is therefore China, which has become an increasingly important market for exports from the rest of Asia,' he added.

Good comment by a forummer: Puntfast

Markets sold off sharply on Thursday because the DOW +300pts up followed by the swing back down reminded many investors of the Aug volatility.

Many sold simply to avoid volatility rather than on any fundamental reasons. The US economy whether it gets closer to recession but avoid one or goes into a mild recession.

The main danger is inflation which will limit the Fed ability to cut rates. So far core-CPI has been tame. Investors should keep some cash because of opportunities in financials in the US. Banks are not like manufacturing companies, they recover from a bad patch quickly once they writeoff the losses.

This is a classic straightforward play that long term investors should miss. Refer back to the Asian crisis, the Asian banks were in worse shape than the American ones now but within 1 year the stock bounced back. Banks unlike manufacturing companies who get stuck with inventory and cyclical downturns recover much faster.

Once there sufficient visibility on its losses JUST GO AND BUY...don't miss this one when the opportunity comes. As for the HSI, my take is the recent selling is due to hot money pulling out - it goes up fast, falls fast. ...then goes up fast again.

I pick today to do some intra-day trades on the HSI after watching the trades for some time over the week even though today is friday. The worst case for the US is a mild recession. Even in such a scenario US equities should fall about 10-15%, the reason is the market is not overvalued, and investors have repositioned their portforlio for a recession/slowdown.

If you look at stocks in discretionaries vs staples they have moved in completely opposition directions, staples (being more or less defensive necessities PG, Coke, etc) have risen. This tells you the fund managers have position themselves for a slowdown and will not be caught by surprise. Also, stocks that faced slumping industries like home builders, financials have sold off by 30-70% - there is no illusion of a fast recovery among investors.

Unlike 911, or the bursting of dot.com bubble, this recession is one of the most talked about and speculated on, it will not result in a crash ....every piece of news subprime, housing slowdown, credit crunch has been digested and digest again. A slowdown in the US economy will only shave of 2% off China's growth....when helps to moderate China's growth & inflation. I believe the US slowdown itself, will not cause equities to fall too much.

On the other hand if the Fed lose control of inflation, that will be a major problem and they will be force to raise interest rates - that will kill stocks. The Fed move on Tuesday & Wed I believe are the best in the current situation - many short term speculators view it negatively and were disappointed with the Fed for being "behind the curve". I believe they themselves are "behind the curve" in understanding what the Fed is trying to do.

Despite all the volatility, we see basically markets moving very little when the upswings offset the downswings. The volatility is short term and correct themselves because they are generally caused by short term speculation. For Warren Buffett watchers, the genius has been accumulating healthcare stocks and defensive stocks.

He is not selling. The fear of recession, has cause recession to be priced in and for very long term investors like Buffett, it becomes an opportunity. Short term, I will see if I can squeeze in a few intraday long trades on the HSI which basically got bashed down too far down.

Asia economic growth to remain strong in 2008: development bank

MANILA (AFP) - - Economic growth among the developing economies of East Asia will ease to a still robust eight percent next year, but the downside risks are rising, the Asian Development Bank said Thursday.

The forecast is half a percentage point below the bank's 8.5 percent economic growth forecast for emerging East Asia for this year.

The moderating factors are the projected slower expansion of key industrialised nations owing to volatile financial markets and rising oil prices, the Philippines-based lender said in a report.

Risks are tilted more to the downside than before on expectations of a sharper slowdown in the U.S. economy, further tightening of global credit, an abrupt adjustment in exchange rates and a continued rise in oil and commodity prices, says the December issue of the bank's Asia Economic Monitor.

It said gross domestic product (GDP) growth in China, the region's growth engine, would slow to 10.5 percent in 2008 compared to a forecast 11.4 percent this year if government measures to cool the economy begin to take hold.

Growth in the Association of South East Asian Nations (ASEAN) economies is expected to slightly moderate to 6.1 percent in 2008 from a forecast 6.3 percent in 2007, it added.

The report also warned that inflation is rising in many economies and price pressures are likely to remain in 2008.

"Slower growth but rising inflationary pressures despite appreciating currencies pose major challenges for the region's policymakers," said Lee Jong-Wha, head of the bank's Office of Regional Economic Integration.

The report urged economic managers to adopt greater exchange rate flexibility and explore ways to maintain stability among intraregional exchange rates.

Improving investment climate to boost domestic demand, managing capital inflows and strengthening domestic financial systems will also help the region to underpin growth, it added.

So far turmoil in the US subprime mortgage market has not spilled over into emerging East Asian markets and economies as exposure of regional banks to such portfolios remain limited, the report said.

However, the region remains vulnerable as its banking sector expands into new lines of businesses and exposes itself to unknown risks.

The changing structure of capital inflows, with volatile short-term capital accounting for more than 60 percent of total inflows, remains a cause for worry, the report said.

The sharp rise in asset prices is also at risk of corrections if swings in global financial markets spread to the region. Changes in asset prices could impact growth through wealth effects and higher cost of capital.

"Despite the resurgent capital inflows after the August market turmoil, a sharp reversal in investor risk appetite remains a possibility in this climate of heightened uncertainty. This could lead to a broader re-pricing of risk and unwinding of so-called carry trade," Lee said.

Housing to hit growth but economy good: Treasury

JIMBARAN, Indonesia - Weak housing and credit markets are challenging U.S. growth, but the economy is fundamentally sound, senior U.S. Treasury officials said on Tuesday.

In separate remarks in Bali and London, the officials said they expected the weak housing market to penalize growth, but said the United States would avoid recession in 2008.

"The housing market is very difficult right now, it's declined significantly. The credit markets are also very challenging," Treasury Under Secretary for International Affairs David McCormick told Reuters on the sidelines of U.N. climate change talks on the Indonesian island of Bali.

"The underlying economy remains strong, although those challenges I mentioned will certainly penalize our growth in the fourth quarter and the coming course of 2008," McCormick said, adding that the Treasury believes the economy will continue to grow and inflation remains under control.

David Nason, the Treasury's assistant secretary for financial institutions, said in London that the housing market correction was the most serious risk to the U.S. economy.

"Other challenges include financial market dislocations and high energy prices. But our solid economic fundamentals, coupled with the backdrop of a strong global economy, should support continued economic growth in the United States," he said in remarks at the City of London Corporation.

U.S. President George W. Bush last week announced plans to head off a wave of anticipated subprime home loan foreclosures. This has been spurred by declining house prices and a credit crunch that prevents borrowers facing steep increases in their mortgage bills from refinancing at more affordable rates.

"Foreclosure starts have almost doubled in the last year and a half, and signs point to further increases," Nason said, adding that the measures would not assist speculators or bail out lenders.

But he cautioned that the healing process would not be speedy and may suffer setbacks requiring more action.

"It will have the effect of reducing preventable foreclosures. The goal is not to prevent all foreclosures," Nason said of the plan in a question-and-answer session.

REGULATORY REFORM

Nason devoted a good part of his speech to the upcoming overhaul of the U.S. financial regulatory system, which is characterized by a number of overlapping regulatory institutions and practices which the Treasury wants to modernize.

He said the credit crunch had highlighted the need for regulatory reforms.

Treasury will propose "some broad ideas" for a new, improved regulatory structure to adapt to the global nature of the modern financial industry, Nason said, but he gave only vague clues about what was in store.

"This optimal structure will not match our current structure exactly. This will be a newly designed model for the U.S. financial services industry that should meet the needs of today," he said.

The United States relies on various regulatory bodies to oversee the financial services industry, including the Federal Reserve, the Federal Deposit Insurance Corp., the Officer of the Comptroller of the Currency, and the Office of Thrift Supervision.

This contrasts sharply with the super-regulator approach adopted by Britain. U.S. Treasury Secretary Henry Paulson in June launched a review of the U.S. system that is expected to issue recommendations on how to streamline it early next year

Five Ways to Play Your Money in a Slowing Economy

by Marshall Loeb

Do you give yourself free rein when it comes to holiday spending? Have you forgotten the founding fathers' stern visages because you charge everything to your credit card? With the U.S. economy showing signs of slowing and consumer spending skipping behind inflation, it's a good time to reevaluate spending habits and brace for some budgeting.

If you are confused about how to prepare for a likely recession, Paul McClatchy, vice president of financial planning at wealth-planning technology firm eMoney Advisor, has these five tips to offer:

1. Regardless of what the market does, everyone needs an emergency fund. If you don't already have one, set one up with enough money in it that could tide you over for at least three months in case you lose your job, become disabled or have an unexpected urgent expense. If there is only one income earner in your family, you would be wise to stash enough to last you at least six months. Carefully review your budget and see what can be cut if need be.
   
2. Invest in blue-chip and defensive stock funds. If we do hit a recession, the latter may be the best to invest in. Large fund companies offer plenty of choices: Look for large-cap or income-producing funds, which are the most likely to contain stocks that will weather a downturn relatively well. Some firms with defensive stock funds require a minimum investment that can range anywhere from $50 to $3,000. Shop around for those that suit your needs.
   
3. Try to get any debt you may have off the books right away. Credit cards aren't evil, but can become nasty when balances build. Now is a good time to practice restraint. The sad thing with a lot of consumers is that when January rolls around, they drag credit not only from this holiday season, but from the one before it too. Note to credit junkies: if something takes you longer than six months to pay off, maybe you shouldn't have bought it in the first place.
   
4. If you are approaching or are in retirement, consider seeking a financial adviser to recheck your financial plan and get your asset allocation in line. Typically, the older you get, the less rebound time you will have following any downturn. If you are 75 years old, no adviser would say "let's put you a little bit more into stocks," but you may need or want to look into finding an additional source of income, such as a part-time job.
   
5. Remember that the best time to jump into the market is when it plunges. People always look for sales, but for some reason when it comes to stocks they only buy when it surges. If there's any advantage to having a recession, it is that big companies go down in price. That's the time to buy, especially blue-chip stocks.

Inflation in S'pore to taper off as growth slows: economist

Conrad Tan

519 words

11 December 2007

Business Times Singapore

English

(c) 2007 Singapore Press Holdings Limited

He blames energy prices for recent surge in inflation

(SINGAPORE) The recent surge in the pace of inflation here is mostly due to a sharp increase in energy prices and is unlikely to last as economic growth slows next year, a senior economist maintained yesterday.

Meanwhile, Asian economies still have a lot of tools at their disposal to keep their economies afloat even if growth in the US slows down more than expected, said Jan Lambregts, head of research in Asia for Rabobank International.

'In my mind there is no inflation problem' for Singapore, he said. Although inflation has been rising everywhere, 'I'm not pessimistic when it comes to this because the MAS (Monetary Authority of Singapore) already a couple of years ago adopted a tightening stance, so they were very early to the game when it came to fighting inflation,' he said.

'Energy prices are mainly to blame for the recent surge in inflation and I would expect some of that to taper off as growth moderates next year.'

Like several other economists who have in recent weeks published their forecasts for next year, he expects the US economy to avoid a recession, although he predicts it will grow at a much slower pace before recovering in the second half of 2008.

The main reason is that although housing prices there are likely to fall further, he believes that the impact on US consumer spending will not drag the overall economy down as much as some people expect.

'Research shows that consumers' response is asymmetrical. That is, when prices go up, they tend to consume quite a bit more, but when prices go down, they sit on their houses and they don't tend to lower their consumption in a comparable way.'

And while a US slowdown would typically hit small, open economies such as Hong Kong and Singapore hard, the vibrant domestic economy in both cases will cushion the blow, he said.

But the outlook for equities in most markets next year is 'mixed', he said. Although companies' profits and margins are likely to suffer from higher energy and raw material prices, their balance sheets are strong and their stock prices relative to expected profits and cash flows are still reasonable, he said.

Also, with the US Federal Reserve expected to lower interest rates further to revive the slowing US economy, interest rates in Singapore and Hong Kong - where central banks focus on managing their currency exchange rates rather than interest rates - are likely to follow 'and that's traditionally going to help equity markets'.

For Singapore's economy, he expects next year's growth to be 5.3 per cent - lower than an earlier Rabobank forecast and the 6.3 per cent median forecast by private sector economists in an MAS survey published last week, but 'still very decent'.

As a result, he expects the Straits Times Index of blue-chip stocks to reach 4,000 points at the end of next year, about 12-13 per cent above its current level.

Stock picks from a persistent bull

Markets may be in a turmoil, but hedge fund veteran Leon Cooperman still thinks equities are a buy, and shares some of his best picks.
By Katie Benner, writer-reporter

Cooperman believes the market has already priced in the worst economic data.
More from Fortune
Drawn-out Citi search nears end

NEW YORK (Fortune) -- In the days leading up to the August credit crunch, stock prices fell and prognosticators said the bull market had run its course. But Leon Cooperman wrote in an article for Fortune: "I view this market drop as a long overdue correction rather than the end of the bull market."

Several months have passed, along with rounds of bank write-downs, broken M&A deals and haywire stock prices, but the founder and chairman of Omega Advisors, a hedge fund with $6 billion in assets, still believes equities should move higher. In a follow-up interview, he points out that the S&P has gained more than 4% since his story and gives his four reasons to still like equities, including Alcoa (Charts, Fortune 500) and two beaten down REITs. (See the chart for his stock picks.)

Given all that has happened in the stock markets since August, why are you still bullish on stocks? What trends will drive prices higher?

I'm still constructive on stocks for 2008, for now, holding aside the potential effects of the 2008 presidential election. While there is certainly a fair amount to worry about - subprime and housing issues, bank write offs against capital, a slowing econ and slowing earnings - there are several reasons to be bullish on stocks.

First, market valuations are very attractive relative to government bond yields, and the S&P is priced today akin to previous market trough. The market has already discounted an awful lot of the negative news. Second, I expect the U.S. economy can escape recession in 2008. Housing weakness should be partly offset by more significant inventory build-up, and housing's effect on the U.S. economy should moderate in the second half of 2008. Employment data doesn't foreshadow recession either. Leading indicators of the labor market point to positive growth in monthly payrolls. Before a recession, average monthly payrolls drop about 500,000 a month. We're currently growing monthly payrolls by about 100,000 a month.

Third, core consumer inflation and inflation expectations are tame and within the Federal Reserve's comfort zone. With tame inflation and a dislocated market that is still not functioning properly, this should allow the Fed to cut interest rates and inject liquidity into the system. Fourth, earnings and dividends should increase in 2008. Bear markets in the U.S. are usually preceded by an overheating economy, accelerated inflation, tight money and bad valuations. None of these, in our view, are present today.

Market Fluctuations and Subprime Morality

By Ben Stein

Long ago, when asked what the stock market would do, the famous financier J.P. Morgan, said, "It will fluctuate." How right he was, and how clearly we're seeing it recently.

The stock market has been on a wild descent, then a wild ascent, then a wild descent again. What to do, what to do?

Plenty of Liquids

Let me start with an anecdote. A few days ago, I had lunch with an old friend and her husband, who's a mortgage lender and builder of spec homes in Orange County, Calif. Two years ago, the couple thought they were rich. Now they're in a severe liquidity crisis.

The homes they built on spec aren't selling. The carrying costs in interest are eating them alive. Their mortgage business is extremely slow. Most serious of all, they didn't have a big liquidity cushion. They're continuously borrowing money at ever higher costs.

Frankly, I don't know what will happen to them. One alternative is for them to just give the houses they built back to the lenders. Another is bankruptcy. My own suspicion is that they'll sell the houses if they lower the price enough, and next time around they'll be a bit wiser about liquidity.

The Bucket Strategy

I know most of you aren't homebuilders and mortgage lenders, so I'm sure you don't face exactly the same problems my friends do. But as the market "corrects" and as the economy slows (if it does), liquidity is a lovely thing to have.

I've mentioned this many times before. I especially connect it with the fine "buckets of money" strategy of my colleague, Ray Lucia. His advice, somewhat simplified, is to keep a big pot of cash or near-cash so you can ride out slumps in the market for stocks -- or anything else you're in -- and not have to sell at the troughs. Like all of Ray's advice, it's darned good.

I know very well that it's tempting when the market is going up to plow your money into it and assume that it'll just keep going up. I do way too much of that myself. But the sad truth is that the market "will fluctuate," just as Morgan said. So, right now, I recommend that you take steps to build up a pile of liquidity in case we do have a severe stock market crunch or business slowdown.

Unwarranted Stock Jitters

On the other hand, neither now nor any other time that I know of is the time to bail out of stocks. (When I say "stocks," I mean broad indexes of domestic and foreign stocks, not individual stocks, which I find very dicey and hard to pick at any time.)

Indeed, I'm puzzled when I read that advisors are telling ordinary investors to approach the stock market right now with caution. What can that mean? Does it mean that when stock prices are high, you should approach stocks without caution? Does it mean that when stocks are low, you should avoid them?

As the historical record makes extremely clear (and my colleague Phil DeMuth and I have documented thoroughly in our book, "Yes, You Can Time the Market"), you make the best returns on stocks when they're down. So the time to buy stocks is when everyone is warning you against them.

Only do it if you can afford the loss of liquidity and a lot of time, though. It's entirely possible that it will take many months or even a few years for the stock market to calm down about credit jitters. But if history is any predictor, the people who buy and hold in this scary time will be well-paid for their efforts.

Tarnished Parachutes

In the meantime, let me switch gears and talk about moral responsibility. It's now clear that some of the major players on Wall Street were making fortunes bundling junky subprime mortgage instruments and selling this garbage into the financial markets. The heads of some of the major brokerages and investment banks approved of this conduct and reaped the rewards when the market was hot -- i.e., when the market was fooled by what was being sold.

Now some of these people are being fired. But when they leave, they get immense pay and benefits packages that would leave the rest of us speechless if we got them for good conduct.

There's something drastically wrong when a conspiracy of men and women can do this kind of damage to the financial well-being of the nation and get away with it. On a local level, hundreds of thousands of borrowers were sold on mortgages with terms they barely understood. Now some of them will lose their homes. As far as I know, punishment for this sort of misconduct is barely meted out at all.

A Broken Ladder

What's going on? Why aren't laws against fraud being enforced? Why do people get away with fleecing their neighbors down the street -- and their "neighbors" throughout the entire country -- without any sanction? What sort of system allows someone to leave an executive position rich after defrauding people to the tune of billions of dollars?

Where's the legal process here? Where's the basic accountability? Do we believe the ladder of law has no top and no bottom (as the Bob Dylan song goes), or do we simply assume that if a prosecution is complex we'll just let it slide?

Something very wrong is happening.

Recession-Proof Your Finances Before the Downturn

Time to get defensive.

As we head into the new year, a volatile cocktail of economic factors is raising concerns about inflation and a possible recession. They include turmoil in the housing and stock markets, a tightening credit outlook, higher fuel and food prices, a weak dollar, declining consumer sentiment, and a gloomy retail outlook. Here are some strategies to help position your finances ahead of a downturn.

Secure Your Income

Recessions tend to wreak havoc on workers: Overtime dries up, commissions are smaller, bonuses are nonexistent, and job cuts are more frequent. In the first 10 months of this year, for example, the financial services industry announced more than 140,000 job cuts -- surpassing the previous record of nearly 117,000 job cuts set for all of 2001, according to Chicago outplacement firm Challenger, Gray & Christmas.

"We are going to be moving toward a much riskier job market for everyone, especially people at top of the food chain," says Paul Bernard, president of Paul Bernard & Associates, an executive coaching firm in New York. "People need to batten down the hatches, have their résumés ready, and be prepared for the worst."

Bernard advises clients to clearly understand their job expectations, and set priorities. "People need to be strategic and decide the three things to do that are most important," he says. "That's about as many things as you can do extremely well in your job. If you're being asked to do twelve things extremely well, this may not be a job at which you can be successful. Also, position yourself so you are connected to revenue-generating or cost-reduction areas. If it's hard for someone to quantify what they do, their job may be in jeopardy."

Align Your Values

In addition to exceeding expectations, "you have to manage your reputation by networking internally and externally," Bernard adds. He recommends volunteering for high-profile committees, special projects, or business groups that widen your network to other parts of the company and industry.

Moreover, when the going gets tough, the tough may discover it's time to get going -- especially when their principles don't mesh with their employer's. "As times get more difficult, we're going to find out a lot of organizations don't have strategies that make sense," says Bernard.

In a downturn, such companies tend to shoot the messenger bearing bad news, Bernard says, citing a client who was a high-level executive at Merrill Lynch, the investment bank whose chief executive officer, Stan O'Neal, stepped down last month. "Six to eight months ago, he told the CEO that the company was overleveraged," Bernard says. "Stan O'Neal paid him back by firing him. You have to assess whether you're in a culture where your values are aligned with the company's values."

Get Real About Real Estate

Renters looking to own a home may want to schedule some open-house visits for the spring. "If I'm buying, I want to be buying really soon here," says Michael Furois, president of The Planning Associates, a financial planner in Phoenix. "Interest rates are still low. We don't know where the bottom will be, but why wait until the last minute? If you're going to stay in the home for a while, whether you pay $200,000 or $211,000 over the next 30 years is not going to make much of a difference."

Homeowners, meanwhile, may want to postpone that two-story addition. As home prices continue to slide, so does the payback on extreme makeovers. In its 2007 cost-versus-value report, Remodeling magazine found that the biggest bang for the buck will come from minor jobs -- such as exterior siding and window replacements, or a kitchen facelift.

"Part of it is because these projects require a smaller outlay of cash -- $10,000 to $20,000," says Sal Alfano, Remodeling's editorial director. "The projects take a few days to a week or so, and the financing is generally provided by the contractors." Siding replacements and minor kitchen touch-ups returned 83 percent of their cost; window replacements, 79 percent. The worst investment? A home-office remodel, which returned only 57 percent of its cost.

Alfano says the trend is also because of changing product technology. "These projects involve low- or no-maintenance products, such as vinyl siding or windows," he notes. "There's also the energy-efficiency component; people have that on their minds, with rising fuel costs." This winter, heating oil prices are forecast to rise 26 percent and natural gas 11 percent, according to the winter fuels outlook from the U.S. Energy Information Administration.

Pay Down Debt and Build a Cash Cushion

Some 41 percent of households are living from paycheck to paycheck, according to a survey conducted earlier this year by CareerBuilder.com. If you're in this boat, minimize spending and focus on paying off revolving debt.

For every extra dollar you can save, put 75 cents toward debt reduction and 25 cents into your emergency fund. Aim to get at least three month's living expenses in a high-yield bank account; there are more than a dozen institutions currently offering APRs between 4 and 5 percent.

Track every penny you spend, whether you do so with a pencil and paper or financial software. Dr. Roy Baumeister, a social psychologist at Florida State University, has found that the inability to keep track of one's own behavior typically results in a failure of self-control. In addition, when you don't track and prioritize where you want to spend, conflicting goals and standards will undermine your self-control (i.e., you're stressed about layoffs at work so you splurge on dinners and drinks with office mates).

For instance, after a year of tracking my expenses on Mvelopes, an online budgeting system, I was surprised to discovered three areas of overspending: family vacations, clothing, and entertainment, in that order. These are common pitfalls, says Charles Farrell, a financial planner with Northstar Investment Advisors in Denver.

"Vacations and clothing are the biggest two," he says. "I ask people to recite their expenses, and they know what their house, utilities, car, and phone cost. But vacations are a black hole -- they may be spending $4,000 to $5,000 a year, and it's not budgeted for. It's also not normal for clients to have a clothing budget."

Stash Your Cash and Keep Buying

For investors who have portfolios to protect, the first stop is cash flow. "Make sure you have sufficient liquidity to weather the storm, so you don't have to sell a long-term portfolio at the worst possible time," says Gary Ambrose, director of Personal Capital Management, an NFP company, in New York. "I always get nervous when people look at their long-term portfolio and say, 'I can always sell that.'"

Stash cash in certificates of deposit, Ambrose suggests. "Even though they sound stodgy, CDs are a good thing," he says. "They outperform the other alternatives, like bonds, in the short term."

If you have a long time frame, continue dollar-cost-averaging into the market through your 401(k), or another investment vehicle. "The simple advice that nobody follows is to keep buying," says Ambrose. "Most people end up selling [in a downturn]; they try to time the market and they miss the upturn. If you're looking at a long-term strategy, it doesn't matter what's going on in two to five years. What's important is what's going to happen in ten to twenty years."

Go Big (or Wide)

Ambrose suggests moving into larger-capitalization, defensive U.S. stocks, such as consumer staples and healthcare, and considering opportunities in developed countries overseas.

"Larger caps will tend to outperform smaller caps because in any recession people get nervous about small caps," he says. "You can't go wrong with basics and vices -- people will always eat and drink and smoke. Thirdly, if you haven't diversified out of the country, now is as wonderful time to do so. You can buy an exchange traded fund or a good mutual fund that specializes in international investment."

Furois, on the other hand, suggests long-term investors stick to their guns. "You don't want a knee-jerk reaction that will affect your long-term gains based on activity going on today," he says. "I think regardless of any economic situation and circumstances, you have to be properly diversified. If you've made some money over the last couple of years and you're holding onto too much gold or energy, take your money, run, and then properly diversify your portfolio."

Gems of Wisdom from Warren Buffett

Warren Buffett started with US$100 in 1956 and turned it to over US$40 billion fortune for himself. Amongst the world's Richest people, he stands out as the one who make it not by being an entrepreneur but by investing in businesses run by great entrepreneur.

Below I share with you some gems of wisdom from Warren Buffett.

Cheers!


Surround yourself with people you trust and you’ll do fine.

if you could only make 20 investing decisions you would think harder about those decisions and make more money.

You need temperament and discipline not IQ. You need extraordinary discipline. That is the hard thing.


Q: What do you look for in a business leader?
Focus, Mission, and Projected confidence.

Pick good heros (role model). Who your heros are determines who you will be.
Your inner score card matters more than your outer score card.

The time to do it is today. You may not be doing it in 30 years. Seize the day.

Do not do something because you feel the need to do it. Do it because you want to do it.

On How to Invest:
Phil Fisher “Look for one business that you never sell.” That really set in for me. I used some old and some new. Charlie basically got me to take large amounts and really taught me the value of a good business. Buy a wonderful business even at a stiff price.


Q: How do you determine the people who will lead your businesses?

WB: You look for people who are extremely passionate. How do you determine passion?

Does he love the money or does he love the business? He may sign and never work, and then the deal will not work. I look for people who would rather run the business than do anything else in life. That is what is going through my mind. They have to prefer going to work over everything else.

Q: How do you find a good investment?
I love business of investing because all of the knowledge is cumulative.

It was like a treasure hunt literally. I used the Banking and Finance manual.

If you write a pretty good story about a business and you find out the things you like and all the details like a good journalist, you can pick up good investing ideas. Buy $5 bills for one dollar. You cannot look where others look.



I think our currency will be weak for the next ten years. For sure Gold will do well in a shock. People will run to it when they are scared. A nuclear bomb will cause gold to go up. But long term, gold is not where you want to be.


Any area where labor is a large part of costs is hard. I would not own Coca-Cola if labor was a huge cost.


Secret of Warren Buffett’s success? He has a Mastermind Alliance with Charlie Munger. Read what he said and you’ll agree.

WB: 59 years we have worked together. We are mental partners. We have never had an argument and we never will. We do not even talk to each other much any more.
Just knowing what he would say on something without even talking about it is important.

Q: What did you think of the Long Term Capital debacle?

LTCM got killed on the mark-to-market because everyone knew their positions.

To quote Mark Twain, “History doesn’t repeat itself, it rhymes.”

What to Consider to Invest in the year 2008?

As I personally see US$ weakening and global economy slowing down, I would think investments that do well under such scenario are worth considering:

1. Gold (invest some for "insurance" purpose), can invest in Gold ETF, Gold Fund.

2. UK Traded Endowment (smoothening of returns benefit, means the returns you get would not be much affected by volatility of the stock markets). Based on past record, annual returns of 6% to 8% are pretty attractive, also sterling pounds is possible to benefit if US$ weakens.

3. Raise Cash Level. Personally think people should consider building up cash in Opportunity Fund. My current Opportunity Fund is 30% of my total investible fund/assets.

4. Stock markets might be near end of bull market in year 2008. I think one should reduce one's risk by investing less and less money into stocks as markets move higher. (not the other way round).

5. With inflation going up, real assets, such as properties in Singapore should continue to stay firm in year 2008, barring unforeseen circumstances.

6. If and AFTER Financial stocks get beaten down further due to global debt problem, it might be time to start to invest a portion of money in Financial stocks, such as CITIBANK.

7. Invest in yourself. I personally have a "invest in myself fund", whereby every year I spend S$5,000 to S$10,000 on seminars, books, courses to invest in myself. I always find that investment in knowledge gives the best returns (provided one APPLY what one learns). Remember that knowledge is only potential power. Knowledge is only power when APPLIED.

Note: anyone can have a different opinion from mine.
_________________
Cheers!

Dennis Ng

Avoid Possible Scams in Land Banking...

Land Banking can be a good alternative form of investing into Real Estate. I personally have invested into Land Banking after doing my homework and due diligence.

However, before you invest, make sure you do your homework and avoid investing into possible Land Banking Scams. You need to acquire the Financial Literacy to differentiate a Real Deal from a Sham.

Let me give you some examples.

For instance, a foreigner CANNOT own land in India and/or China.

Thus, if someone try to sell you some land in these 2 countries, make sure you don't invest, it is likely to be a scam.

Canada allows foreigners to invest in land though. You can check and verify this yourself. Even Singapore does NOT allow a foreigner to invest in land.

if someone approach you to invest in Land in UK, but the land is in "Green Belt" (land reserved for nature and NOT for any building or construction), please don't invest also for obvious reasons.

However, what shocks me is that there are people in Singapore selling land in Green Belt in UK to investors and investors gladly invest in them.

The moral of this story is it is important to do one's homework before investing. Violating some of these investment principles would lead to one's misery in future.

Below is definition of Green Belt in wikipedia. Agan, if you know friends who invested in Green Belt land in UK, please wake them up as soon as possible. Their investment dream might become a nightmare in future.

Cheers!

Extracts from wikipedia.org on definition of Green Belt:

A green belt or greenbelt is a policy or land use designation used in land use planning to retain areas of largely undeveloped, wild, or agricultural land surrounding or neighbouring urban areas.

In those countries which have them, development in green belt areas is heavily restricted. The stated objectives of green belt policy are to:

protect natural or semi natural environments;
improve air quality within urban areas;

ensure that urban dwellers have access to countryside, with consequent educational and recreational opportunities;

and protect the unique character of rural communities which might otherwise be absorbed by expanding suburbs.

The Greenbelt has many benefits for people :

walking, camping, and biking areas close to the cities and towns.

places for wild plants and animals.

cleaner air and water

The effectiveness of green belts differs depending on location and country. They can often be eroded by urban rural fringe uses and sometimes, development 'jumps' over the green belt area, resulting in the creation of "satellite towns" which, although separated from the city by green belt, function more like suburbs than independent communities.

Green belt policy was pioneered in the United Kingdom in 1956 after pressure from the CPRE and various other organisations. There are fourteen green belt areas, in the UK covering 16,716 km², or 13% of England, and 164 km² of Scotland; for a detailed discussion of these, see Green belt (UK).

Other notable examples are the Ottawa and Golden Horseshoe[1], green belts in Ontario, Canada. The more general term in the U.S. is green space or greenspace, which may be a very small area such as a park.
_________________
Cheers!

Make Money in a Bear Market

The economy looks ugly, and the stock market seems poised to fall off a cliff. My suggestion: Cheer up. For most of you, a bear market is a blessing, not a bane.

I'm not kidding. If you're retired and you live off of your investments, a bear market is really bad news. That's why retirees should have enough in bonds and cash to support themselves through stock-market downturns.

But most of us don't need to dip into our investments to pay the bills for years to come. And if you fit into that category -- someone who is still accumulating money for retirement, to pay for your kid's college education or for any other goal -- a bear market can work wonders for your wealth.

Here's why: When the stock market craters, the money you invest buys more shares of stock. So you're actually building up more equity during a bear market than when the market is soaring.

Take the 2000-2002 bear market. As measured by the broad-based Dow Jones Wilshire 5000 stock index, the market plunged a harrowing 44%. It was a nightmare for retirees. But for those of us still working, it was an opportunity to buy more stocks at cheaper prices. The more you bought while stocks were plunging the better you ultimately did.

The best way to invest during bear markets is to put in a little bit every month. It's also the most emotionally easy way to invest anytime: You invest a fixed amount, say $1,000 from your paycheck, in the stock market every month regardless of how bleak the headlines are. The technique is known as dollar-cost averaging.

Now suppose you started your investment program on March 1, 2000, just weeks before the start of the bear market, and continued every month for 32 months until October 1, 2002, the month the bear market finally ended. By October 31, 2002, the $32,000 you invested would have shrunk to $24,451, according to Morningstar, a decline of 24%.

By contrast, if you had plowed the entire $32,000 into the stock market back on March 1, 2000, you would have been left with only $20,468 by October 31, 2002, losing 36%. (Note that the loss still isn't as big as the 44% decline peak-to-trough because the market hit its precise top and bottom in the middle of those months.)

Stocks rebounded sharply from their lows. For the entire 92-month stretch from March 1, 2000, through October 31, 2007, the Wilshire 5000 returned more than 30% on a cumulative basis (or 3.5% annualized), Morningstar reports. If you had plunked $92,000 into the Wilshire 5000 on March 1, 2000, it would have grown to $120,000.

Supposed you had invested $1,000 a month over the entire 92-month span? Your regular investments would have increased in value to a total of $136,020 -- a gain of 48% (6.5% annualized).

Investing a little every month doesn't work all the time, of course. If the market is in a long-term uptrend, it's best to have every dime invested as long as possible. But in bear markets -- and in volatile markets -- regular monthly investing works like magic.

What to expect in a bear. Living through a bear market is not fun. Since 1926, the average bear market -- typically defined as a drop of 20% or more -- has lasted 1.3 years. As measured by Standard & Poor's 500-stock index, stocks have plummeted an average of 33.5% during those bear markets, according to Jim Stack, president of InvesTech Research, in Whitefish, Mont. And that excludes the 86% decline from 1929 to 1932 that ushered in the Great Depression.

If you have the bad luck to invest precisely on the day of the market's peak, how long does it take to get even? On average, excluding 1929, it has taken 3.3 years after a bull market's peak to get your money back, Stack reports.

None of these returns includes dividends. Given that dividends account for a big part of stock market gains -- more in the past than currently -- the bear markets would be shorter and less painful were dividends included.

Since the 1930s, all but two bear markets have been significantly milder than the average -- with losses generally averaging between 20% and 30% or so and breakeven points of only two years or so.

The exceptions: 1973-74, when the S&P 500 fell 47% and took more than seven years to recover, and 2000-2002, when the S&P fell almost precisely the same amount and again took more than seven years to recover.

My sense is that these horrific bear markets, including the Great Depression, are once-in-a-generation events, and we've had ours for this generation. The exceptionally ugly bear markets start when markets are wildly overpriced -- not, as is the case now, when stocks are trading at reasonable prices in relation to corporate sales, earnings and assets.

But you should always be prepared for a bear market. And if you're planning on spending your money in the next year or two, none of it should be in stocks. But longer-term investors should relax and enjoy bear markets -- as much you can. They really are good for you bottom line.

Shelby Cullom Davis, a renowned investor (and grandfather of Chris Davis, co-manager of the excellent Selected American Shares fund), put it best: "You make most of your money in a bear market. You just don't realize it at the time."

Three Ways to Boost Your Investment Returns

ByMike Woelflein, Special to TheStreet.com

If you read Part One and Part Two of our series on boosting your income, you may be making and hanging on to more money.

The next step is growing the money you've got.

Kicking up your returns by a percentage point or two can brighten your financial outlook, big-time. For example, let's say you invest $500 per month in a 401(k), with a 3% employer match. If your investments generate a 7% average annual return, you'll have $882,049 in 30 years. Juice your returns to 9%, and you'll end up with $1,285,785 -- an increase of more than $400,000.

The extra money could make an enormous difference in your retirement income. A $1.29 million nest egg would allow $51,000 in inflation-adjusted annual withdrawals, assuming you take financial advisers' standard advice and withdraw 4% of your retirement savings each year. (Myriad studies have found that a 4% maximum withdrawal rate gives retirement savings the best chance of lasting at least 30 years.)

By comparison, the $882,000 portfolio would allow annual withdrawals of just $35,000. (You can run your own calculations here.)

"You often hear how a dollar saved today can make a big difference tomorrow," says Rick Shapiro, a managing member of Investment and Financial Counselors in West Hartford, Conn. "That's true for every dollar your portfolio earns, too."

Here's how to maximize your investment returns:

Cut Expenses

Every dollar spent managing your money is a dollar missed, not just from today's balance but from tomorrow's growth -- so cutting costs can have a major impact on your returns.

Say you invest $20,000 in an actively managed, no-load stock fund that earns the stock-market average of 11% per year for 10 years. A 1.5% expense ratio would force you to forgo nearly $8,000 in fees and lost earnings, leaving your investment worth $48,823 after a decade. Lower your expense ratio to 0.25% -- for example, by investing through an index fund -- and your costs would shrink to about $1,400, boosting the value of your investment in 10 years to $55,385.

The Securities and Exchange Commission has a calculator that enables you to compare funds and see how their expense ratios might affect your portfolio over time.

Spice Up Your Portfolio

In general, the more risk you're willing to take, the higher your returns will be over the long run. Goosing your stock allocation even a bit might help you amass a good deal more money over time.

Vanguard has charted 10 different asset allocation models for the period from 1926 through 2006. Here's some of what the company found:

With More Risk, More Reward Average returns for the period 1926-2006
Asset allocation	Average annual return	Best Year	Worst Year
50% stocks, 50% bonds	8.50%	32.30%	-22.50%
60% stocks, 40% bonds	8.90%	36.70%	-26.60%
70% stocks, 30% bonds	9.40%	41.10%	-30.7
80% stocks, 20% bonds	9.80%	45.4	-34.9
100% stocks	10.50%	54.20%	-43.10%
Source: Vanguard

The point isn't that a 100% stock portfolio is for everyone. Indeed, the all-stock portfolio lost 43.1% during its worst year (compared with a loss of just 8.1% for an all-bond portfolio's worst year) -- a collapse most investors in or approaching retirement couldn't afford.

But the more time you have until you need your money, they more time you have to recover from potential losses. History shows that the stock market moves inexorably upward: The S&P 500 has never lost ground over any 20-year period since at least 1926. So if you have decades before you'll need to draw on your savings, short-term downturns shouldn't disrupt your finances one whit -- meaning you can afford to ride them out in pursuit of greater long-term gains. As you approach the time when you'll need to withdraw your funds, you can shift the money you'll need into bonds and cash.

Diversify

Meanwhile, you can increase risk-adjusted returns by holding stocks of various sizes, industries and nationalities, and bonds with a variety of term lengths and credit qualities. Those different types of investments tend to move in different patterns --one might surge while another plunges -- helping you smooth out your portfolio's short-term fluctuations while pursuing long-term growth.

"If you want more return, you're going to have take more risk," Shapiro says. "But you can manage that risk with a fully diversified portfolio. In the long term, nothing is going to keep up with a fully diversified portfolio."

5 Mistakes to Avoid in a Market Trading Below its 200-Day Moving Average

1. Don't Buy Stocks Below their 200-Day Moving Average!

Yes, nearly every stock will eventually bottom. In the meantime, it looked that way when Fannie Mae (NYSE:FNM - News) was trading in the $40's, Freddie Mac (NYSE:FRE - News) was 20 points higher, and Citigroup (NYSE:C - News) was 25% higher. For every falling knife you may catch, you run the risk of getting sliced up along the way. Avoid these stocks, and find the better names to own.

You can find the better stocks above their 200-day moving average on PowerRatings.net. These are not short-term trading stocks, they're solid longer-term stocks. You may also want to look at the PowerRatings Live Blue Chip Portfolio, which was opened on August 1. The market is down nearly 3% since that date, and these blue chip stocks are up over 8% (the portfolio's current holdings include IBM, MMM, GOOG, and JNJ). All these stocks have high PowerRatings and are the types of stocks you should consider in this market environment.

2. Avoid Naked Options

Wow, these premiums look nice today, especially the out of the money puts. Those premiums looked the same in 1987 before the crash. And before the debacle in 1998, and in the technology and internet sector in the summer of 2000 after the first sell-off. Avoid the urge to pick up nickels in front of a steam roller.

3. Avoid the Spit

How do you do this? By keeping the television off. Guest after guest after guest comes on and SPITS their opinion. One spits that the market has bottomed and is going up, and the other spits even harder that it's the end of the world and the markets are going down. These are smart people with good educations, and they certainly know spitting sells!

4. Hedge, if Possible

If you can find stocks that have pulled back sharply that are still above their 200-day MA, you can buy them, and then offset some of the market risk by shorting the Russell 2000 iShares (NYSE:IWM - News). This will be covered in more detail in the TradingMarkets Path to Professional Trading course.

5. It May Be Hard to Believe, but it's Not the End of the World

Let's put things in perspective...This is a painful drawdown - the worst in over five years. But as we all know this is not the end of the world (although a few of the professional spitter's will do their best to have us believing it is). If you are bold enough, you will view this as an opportunity. If you believe we're in a bear market, there will be ample opportunity to profit on the short side. And if you believe the worst is over, there is ample opportunity ahead of you on the long side.

Over the past 20 years the market has had significant sell-offs. 1987 was awful, 1990 hurt, 1994 also hurt, 1998 was very scary (meltdown talk), and 2000-early 2003 was just plain bad. But each lead to new market highs (record highs were hit only five weeks ago!). This sell-off may end in three years, or it may end today. All we know is that the markets have always bounced back...always. And, if history is our guide, they'll eventually bounce back again.

The Credit Crisis: Chicken Little or a Game of Chicken?

By Rachel Barnard, Ph.D.

If the sky isn't falling on financial stocks, it certainly looks that way. Every day there are new reports of companies being exposed to losses in mortgages, subprime credit, or CDOs. Banks are taking charges that run into the billions of dollars. There is no doubt that market conditions are deteriorating rapidly and financials are taking it on the chin.

Fear now dominates the marketplace. Financial-services stocks have fallen by 15% over the past three months, as measured by the S&P Financial Services Index. Investors are running for the hills--or at least for safer havens including cash and gold.Yet at Morningstar, our analysts are recommending an unprecedented number of financial-services stocks, even names that have been badly beaten up such as Countrywide Financial (NYSE:CFC - News), PMI Group (NYSE:PMI - News), and Citigroup (NYSE:C - News). What can we be thinking?

To sum things up, we base our recommendations on numbers and not emotion. We also model how much stress a company can bear before cracking.

To date, paper losses and non-cash charges abound, but the actual cash impact of the credit crisis has been fairly minimal. There is a lot of room yet before the financial industry reaches a breaking point. Could a catastrophic financial crisis be looming? It's always a possibility. But the data we've seen so far suggest that it's a remote one--and hence not something we'd want to base our recommendations on. Our approach has been to model in the worst mortgage-related losses in recorded history (a scenario that isn't even close to fruition yet) but stop short of predicting a financial collapse. We feel this represents the most likely scenario. And though we may have some very bearish assumptions built into our valuations, they are bullish compared with what prevails on Wall Street. So we have been advising investors, as Warren Buffett says, to be greedy when others are fearful.

But investing in times like these is not for the faint of heart. The decline in financial stocks could be nothing more than a Chicken Little rumor that the sky is falling when in fact, the financial markets are built to handle the stress of an occasional credit crisis. Or it could be a real game of chicken, with the health of the U.S. financial system riding on the hope that rational investors don't blink first.

We believe the next few months will be a crucial time for the financial markets. And as we watch the news unfold, we will share with you our latest thinking. We will comment on specific news and talk about the implications for the stocks we cover. We will also talk about our favorite--and our least favorite--stocks in financial services, detailing the risks and rewards for investors.

Investor's Corner: Build Positions By Averaging Up, Not Down

Everybody loves a bargain. But when it comes to stocks, a declining price shouldn't be viewed as an opportunity to buy.

That's because a falling stock is likely to continue to drop. So if you've heard that it's smart to buy additional shares of a stock when it gets rattled, don't listen.

Averaging down, as investors call this approach, has the potential to leave you throwing good money after bad.

A better tactic is to increase a position in a stock that's rising. That's called "averaging up."

This strategy means you break your stock investment into three parts. Start with an initial purchase and make additional share purchases as the stock proves itself by advancing from its breakout.

At each point 15u add, buy smaller amounts of shares. That helps you avoid losses on your entire position if the stock suddenly goes south.

The simplest way to average up is to buy half the position you plan to take in a stock right as it breaks out past a buy point.

Then, buy a smaller amount of shares as the stock rises 2% or 3% from the buy point. Make your third and final purchase when the stock is 5% past the buy point. At each stage, you add fewer shares, which is why this method is also called pyramiding.

Another way to average up is to buy your additional shares when the stock makes bullish price and volume action.

For instance, if you bought a stock as it broke out of a base, wait until it makes a pullback to its 10-week moving average.

Of course, if you add shares to your position as the stock climbs, your average price per share will be higher. While that may go against every frugal bone in your body, it's a good strategy to follow. The consecutively higher purchase prices are evidence that your stock investment is working out.

If you add from a 10-week pullback, make sure the stock is above its buy point 18om the breakout. Otherwise, buying at a lower price would mean you'd be averaging down.

Consider Alcon (NYSE:ACL - News). It broke out of a cup-with-handle base the week ended Feb. 11, 2005.

Say you bought shares as it climbed past its 82.34 buy point 16oint 1), then sat tight as the stock continued to rise in the weeks that followed.

In April, the stock made its first pullback to its 10-week moving average. This gave you the opportunity to buy shares in late March, when it started resuming its climb after rebounding from the 10-week line (point 2) following a bullish reversal on March 21.

A third opportunity to buy shares was April 22 (point 3). Shares gapped up on huge volume.

Alcon found support at its 10-week line several more times as it made its major advance.

However, all good things eventually come to an end. And that's what happened with Alcon. The stock peaked at 148.70 in late November 2005 (point 4). On Dec. 19, 2005, it fell through its 10-week line (point 5) as its daily volume swelled to the heaviest level in nearly five months.

Simplicity and the Trading Brain

Whether they are making or losing money in the market, traders know that trading is first and last a mental game. When your system makes you money, can you stay out of its way so that it can continue to do so? And when your system inevitably suffers drawdowns, can you remain on the sidelines and not act like a belligerent parent at a Little League baseball game?

Richard Dennis, who co-founded the legendary Turtle Trading System with William Eckhardt, once remarked that he believed that he could publish the entire then-secret Turtle Trading methodology in the newspaper and it wouldn't make a difference.

Why? Because most people cannot follow the rules. And this was not because the rules were especially complex. It was because human beings are especially -- and perhaps in some ways, unnecessarily -- complex.

We see the same thing when it comes to other challenges people have, whether it is in dieting and weight loss or quitting smoking. At this point in time, there are few people who do not know how to avoid gaining weight: cut down on the carbs, don't eat late at night, and mix in more lean proteins, fruits and vegetables in your diet.

Yet obesity rates -- at least in the United States -- are as high as they have ever been. So clearly the problem isn't a lack of information, but a lack of will to act on the information that is abundantly available

There is an entire bestiary of psychological demons that traders must combat in order to simply follow the rules, "the recipe" as I recently heard one trader put it. There is fear-driven trading that encourages us to lessen the pain of drawdowns by changing the rules, or by avoiding taking new trades entirely. There is "what the hell" trading where traders figure that they are down so much that there is no alternative other than to load up with as much risk as possible in a Hail Mary effort to catch a break in the final week of the month or the final month of the year.

There is even the "Let it Ride" syndrome of traders who are ahead -- sometimes ahead big -- and figure they can afford to take on additional risk. To these traders, additional gains are a reason to take on additional risk. So they scale their bets -- and their risks -- higher and higher and higher until that risk reaches a point that turns out to be far beyond their ability to endure when those bets prove wrong.

But most of the psychological problems challenging traders, at root, have to do in one way or another with traders being unable to get out of their own way and let their trading systems -- even discretionary systems -- do the work.

One theory about why this is so has to do with the nature of trading. Trading is private, individual, often secretive work. Most of the people in a trader's life -- companions, colleagues, friends and relatives -- have no idea just what their husband/co-worker/sister "the trader" actually does in that office staring at that the screen and all the strange looking lines, colors and numbers. Our behavior as traders has all the essence of an exclusive -- if not elite -- activity. Sure, maybe our real "trading" on a daily basis consists only of checking a few numbers, a few patterns, and typing in a few orders -- maybe an hour a day on average tops. That's including the days when there is simply no trading to be done, no new positions to be taken, no old positions to be exited.

I am deliberately excluding the work of building and testing trading systems in order to make a point about "trading". The fact of the matter is that trading is really a very simple, straightforward activity. Sometimes I think it is this simplicity that trips us up. Surely, we think, there must be "more" to do. Even after all our position-checking and order-making is done, there is often this need to "do" more: more analysis, more ruminating and, worst of all, more trading than is necessary.

Often those who advertise trading systems talk about how easy their systems are to use. "Only fifteen minutes a day!" screams one tout. "Only on hour a week!" shouts another. But our tendency as traders to seek out greater and greater complexity -- even against our best interest -- makes me wonder if the opposite approach would be better: "Try Our Constant Contemplation and Rumination System!" Or "Spend Hours A Day Fretting with Our Easy-to-Ponder Trading Set-ups!"

Whatever inspiration and hard work go into creating trading systems and strategies, it is often the opposite that is required in order to make those systems and strategies actually work. While it is too much to say that trading is "easy," it is very much the case that actual trading need not -- and should not -- be a 24-hour preoccupation. Placing your positions, and hedges as your rules dictate, and then managing your mind as those positions become winners, losers or are exited simply to free up capital for other, better opportunities is simply as complex as your trading ever need be in order to be successful.

Credit crisis: Long road to recovery

It's six months into the credit crunch and investors are still shaken. Businesses and households should get ready to hunker down in '08.

By Grace Wong, CNNMoney.com staff writer

LONDON (CNNMoney.com) -- A new year, a new start. For the credit markets, that's wishful thinking.

Nearly six months since the credit crunch started, the situation is still grim - and there are few encouraging signs, which doesn't bode well for businesses and households next year.

Toxic debt keeps cropping up on bank balance sheets. The housing slump still hasn't found a bottom, and investors remain skittish. Market watchers expect the credit environment to remain challenging into the better part of 2008. That will take a toll on corporate profits and squeeze American consumers, not to mention put a drag on economic growth.

"We're pretty close to a point where the capital markets fail to function properly," said John Addeo, a high-yield fund manager at MFS Investments. "I believe the Fed has the ability and wherewithal to resolve that issue, but what we really need to see is a restoration of confidence in the financial system."

When the mortgage mess triggered a wave of turmoil in the summer, investors had hoped problems would remain relatively contained. Instead, they've seeped into all pockets of the debt market.

The culprit has been the loads of complex debt instruments tied to home loans given to borrowers with poor credit. From collateralized debt obligations (CDOs) to structured investment vehicles (SIVs), this alphabet soup of products has wreaked havoc on financial markets.

Financial firms have taken staggering writedowns, costing the CEOs at Citigroup (Charts, Fortune 500) and Merrill Lynch (Charts, Fortune 500) their jobs. The heavy losses, which are expected to continue into next year, have also forced banks to tighten their lending.

To be sure, pressure has eased in some parts of the debt market. The backlog of financing for corporate buyouts, for instance, has been reduced to about $200 billion from $300 billion right before Labor Day. That's an improvement but still a substantial amount of debt for the market to wade through.

There have been some big deals, including the sale of risky debt tied to the buyouts of TXU, Alltel and First Data. The unraveling of deals like the Cerberus takeover of United Rentals (Charts), which fell apart last month, has also contributed to the decline.

"It's tough to say whether we'll see more issuance. People just don't want to push it while there's still uncertainty," said Sabur Moini, head of credit strategy at investment management firm Payden & Rygel.

There were just 16 loans for private equity buyouts issued worldwide last month, the lowest number since September 2003, according to Thomson Financial. They raised $33.4 billion, with nearly three-fourths of that amount coming from a financing package for the takeover of wireless provider Alltel.

Ducking for cover

The unease of investors may be the biggest obstacle for credit markets next year. Investors have eyed anything tied to mortgages with skepticism, even in markets once considered safe.

The market for commercial paper, a sort of IOU that companies rely on to raise money for short periods of time, froze up in August. The problems facing the market have eased, but outstanding volume remains severely depressed.

"People are still waiting to see who's left holding the bag," Michael Englund, chief economist at Action Economics, said of the nervous tone in the credit markets.

As a result, companies are having a harder time securing money to operate and grow their businesses. Aggravating the problem is the fact that the credit squeeze comes as the fear of recession has shaped into a real threat.

Mortgage and credit card companies are tightening lending standards just when consumers need access to capital. As consumer pull back, corporate revenues are being pressured. "This does not bode well," Addeo said.

A steady stream of rating downgrades on risky mortgage debt has contributed to the fear in the credit markets. Moody's, citing "deteriorating credit and other market conditions," recently downgraded or placed on review about $130 billion of debt issued by SIVs.

Furthermore, there is about $500 billion of adjustable-rate home loans due to reset to a higher interest rate next year, which could trigger another wave of foreclosures, according to Standard & Poor's.

The outlook is not all bleak. In addition to what many consider the resilience of the global economy, sovereign wealth funds have piled up trillions of dollars for investment and have already ridden to the rescue of Wall Street banks like Citi.

The Federal Reserve is expected to keep cutting rates. Goldman Sachs economists expect the central bank's key short-term interest rate to fall to 3 percent by the middle of next year from the current rate of 4.5 percent.

The Treasury Department's move to stem the tide of foreclosures could also help. A bailout plan would not only lessen the pain for some troubled homeowners but also limit the impact of the housing downturn on the broader economy.

"The Fed and the federal government are very attuned to what is going on in subprime" and it looks less likely that this is going to bring down any of the big banks, credit strategist Moini said.

There are hopes that big losses at financial firms will slow to a trickle by the middle of next year. If that happens - and writedowns don't hang over the market - then calm could be restored, said Tim Drayson, international economist at ABN Amro.

But don't expect the road to recovery to be smooth. "Volatility will remain higher than what we've experienced before over the next year or two," Drayson said.