Truth or dare for your financial adviser

Put your prospective planner's frankness to the test with these four tough questions.

By The Mole, Money Magazine's undercover financial planner

(Money Magazine) -- Conventional wisdom says you should pick a financial adviser you connect with, and one who has good references and no problems with regulators. Sure, that's a good way to start, but it won't tell you if he or she is likely to chase market trends or put a desire for fees ahead of your best interests. The questions below will give you insight into any planner's style and candor.

1. What was your largest mistake over the past 10 years?

Be wary of self-serving or trivial examples, such as "I'm too dedicated to my clients." I'd rather hear my adviser say that she used to underweight international stocks or even tried to time the market and failed. The key is that she's willing to admit to real errors and can tell you what she learned from them. After all, nobody's perfect. If Warren Buffett can own up to past mistakes, so can your adviser.

2. Do your financial incentives always line up with my best interests?

Knowing what you'll pay for a planner's services isn't enough. All payment models - yes, even hourly fees - create inherent conflicts between advisers and clients, and your adviser should be up front about that too. For example, a planner who charges based on a percentage of assets should let you know that he has an economic incentive to capture all of the money you have to invest.

3. How have your clients' portfolios performed over the past 10 years?

Your adviser will likely tell you she outperformed the market, and she may even be willing to provide performance data as proof. But that only tells you she's trying to time the markets, which will add to your fees and lower returns over the long haul. A much better answer: Your adviser's explanation of how she provided focus and discipline to allow clients to earn market returns.

4. If I wanted to buy a couple of broad index funds or ETFs, which would you recommend?

This is a particularly important question, as it will give you a glimpse into the adviser's priorities and show where your interests fit in. An expensive index fund has no chance of outperforming the lower-cost equivalent index fund. So if he suggests an S&P 500 or total index fund that has an expense ratio of 0.5% or more, you know your interests aren't coming first.

Bear market: Don't get spooked

Human beings tend to get emotional in a down market. But those that can endure the pain, will reap the benefits.

By The Mole, Money Magazine's undercover financial planner

NEW YORK (Money) -- Question: I'm seeing my account values take a daily dive and I've lost all of my gains from the past year, and then some. I'm hearing recession predictions and I'm wondering if I should cut my losses and get out of the market now. Do you think this is the beginning of a bear market?

The Mole's Answer: Don't panic! The bad news is I have absolutely no idea what the market will do in the short-term, nor does anyone else. The good news is that I'm 100 percent confident that:

• The market is a great long-term investment.
• The ups and downs of the market impact our financial futures a whole lot less than our reactions to it.

Unfortunately, we seem unalterably programmed to buy high and sell low. And even though history shows us time and again the error of this, we keep doing the same thing and expecting a different result.

The market is now down about 10 percent for the year and more than 15 percent from its high in October of last year. Sensationalistic headlines read something like "worst start ever for the stock market," and "as January goes, so goes the year." Such anxiety-inducing hype makes it virtually impossible for us to ignore the doom and gloom and just stay the course, but that's exactly what you should do.

Behaving badly

The current crisis du jour in the market, like almost all of them, has its roots in how we invest. It was incredibly easy three months ago to say that we have a high tolerance for risk. We had just seen our U.S. stock portfolio nearly double and our international stock portfolio nearly triple. With such a whopping gain, one would think we would surely be able to handle a small 15 percent pullback, right?

The truth is that most of us are fair weather investors. Our tendency to be risk tolerant in good times, and risk averse in bad times, causes us to feel a bit bullet-proof. The result is getting into stocks when the market is up, and doing the traditional "panic and sell" when it turns downward.

It may be hard for many of us to remember back to October of 2002 when stocks bottomed out, having fallen by nearly half since 2000. To jog your memory, go back to an article written by Jason Zweig, at the bottom of the bear market: Are you wired for wealth? Jason gave us a glimpse into our minds and explained why most of us were panicking and selling at the exact wrong time.

How to be an investor

It's easy to consider yourself an investor in good times, but it's the down markets that separate the real investors from the speculators. An investor understands that, after five straight up years in the market, a pullback is just part of the game. It's okay to feel the pain as long as you don't let it drive you to panic. As much as I hate to admit it, I look at my own portfolio daily for some reason I'll never be able to explain. I feel your pain, but I know my instinct to sell is dead wrong.

An investor needs to understand and have faith in the fact that capitalism works. Not to mention the fact that in the history of the U.S. stock market, it has only lost value a couple of times over a ten year period. Because rebalancing is a critical part of one's investing, now is the time to reallocate more toward equities, as long as one had a proper asset allocation strategy in the first place. After all, it's better to buy things on sale, isn't it?

My Advice: If you can't sleep at night wondering how much more stocks will fall, then the stock market was never right for you in the first place. Moving in and out of the market is likely to give you a low return.

On the other hand, if you can accept that bear markets are a necessary part of stock market investing, then look at this as a buying opportunity. If the market goes down further, it's an even better buying opportunity.

In the words of Warren Buffett, "Be fearful when others are greedy and greedy when others are fearful." That may be easier said than done, but it's good advice.

Rocky market, smart strategies

Indexing and dollar-cost averaging are always sound approaches to long-term investing, but right now they're especially timely.

By Michael Sivy, Money Magazine editor at large

NEW YORK (Money) -- Volatility. That's the one thing that seems predictable in today's stock market. Share prices are swinging up and down more violently than they have anytime in the past five years. And that seems likely to continue.

Most bear markets are the result of economic recessions. As investors begin to anticipate weaker corporate profits, they pay less for stocks. Once it looks as though the downturn is almost over, however, investors become more enthusiastic and stock prices typically rebound. This whole process can take up to a year.

The current bear market, however, is the product of an unexpected economic shock - gigantic losses at banks because of irresponsible subprime loans. That's an important distinction because it makes market moves more sudden and unpredictable.

We still don't know how big all the loan losses will be or how long they will go on. We don't know what the Federal Reserve will do at its meeting this week or later this year. We don't know what the next round of economic growth figures will bring, or the trend in unemployment.

So you should be prepared for high volatility for an indefinite period of time.

What does this mean for your investing strategy? Professionals who have to try to beat the market on a quarterly basis face daunting challenges. But investors with a time horizon of a decade or longer just need to make sure that they are not diverted from a sensible investing plan.

Dollar-cost averaging should be the cornerstone of any such plan, especially now. It is the practice of investing money at regular intervals and it has two advantages.

First, you limit the risk of putting all your money in when the market is at a high. And the more volatile the market is, the more important it is to spread out your contributions, so that some go in when stocks are cheap.

The second advantage is that contributions of a fixed size will buy more shares when prices are down and fewer when prices are up. The greater the price swings, the lower your average buy price.

Investors normally use dollar-cost averaging with index funds, because that's an easy way to contribute small amounts of money at frequent intervals - every month, for instance - and get broad diversification.

The other advantage of index funds is that they typically have very low annual management fees, especially if you pick an index fund at a large company such as Fidelity or Vanguard.

Writing in a financial journal in December, Princeton economics professor Burton Malkiel cited two mistakes that investors often make. One is to overestimate their ability to predict the future. The other is to overestimate how much they can control outcomes.

In fact, it's wiser to stick with a plan that pays off whatever the future holds. Moreover, there is one thing you really can control, which is the level of your annual expenses. So choosing a very low-cost index fund is one of the few things you can do that will surely improve your long-term results.

The most common index funds, which are also likely to have the lowest fees, are those that try to track the S&P 500. These funds hold primarily blue chips and are very broadly diversified among different industries.

S&P 500 index funds are also particularly timely now because the index tilts toward growth investments. And blue-chip growth stocks are undervalued by up to 20 percent, while value stocks are fairly priced. That means that the most convenient index is also focused on the most attractive part of the market.

So don't allow current economic turmoil to throw you off balance. If you have an orderly plan for building your retirement savings, stay on track.

And if you're younger and you haven't begun investing yet, this is a great time to get started. Open an account for an S&P 500 index fund and start contributing regularly every month or every quarter. You'll be helping to develop an important savings habit.

One thing you do know is that the market is depressed right now. And whether it turns up soon or goes a little lower, if you begin dollar-cost averaging now, you'll be getting in on the ground floor.

Get Rich Quick or Lose Money Quick?

by Henry Hebeler

Recently I got one of those invitations to attend a get-rich-quick seminar. Included were two free tickets valued at over $100 each. The seminar promised to provide life-altering financial strategies. It had been a while since I attended one of these seminars, so I decided to go.

The meeting was held in a lavish setting: an expensive hotel ballroom lit with fancy chandeliers. The room was equipped with a PowerPoint display on a huge screen. Attendees began to fill the room, directed by lots of assistants who gave out colorful brochures. Precisely on time, the speaker walked up to the podium and took command. I'll call him Slick (not his real name, of course, but it fits).

Slick described himself as a self-made, very wealthy man who made a lot of money in a company buyout, real estate and then the stock market. He had retired very young, got tired of living the easy life and then decided to help others learn how to be successful investors. He was an excellent pitch man who sought audience participation, some of which I suspect came straight from shills planted in the audience.

Get rich now

The prospect of getting rich effortlessly has great allure, but the promoters are the ones making the easy money.

Resist the temptation to be a sucker

1. Make a killing in real estate
2. Make a mint in the stock market
3. Make for the exit -- fast

Make a killing in real estate
Slick devoted about an hour to the topic of how to make money from properties on the brink of foreclosure. He described situations where widows and less fortunate people got behind in their mortgage or tax payments and were therefore ready to settle for pennies on the dollar days before the scheduled date of a foreclosure auction.

Although all of these "opportunities" are a matter of public record, the government is slow to produce the data. Slick said that by working with his firm, you could get more timely information plus professional help when the time came to go to the door of the desperate seller. A legitimate real estate agent would accompany you and do all the talking. You would stand at the agent's side as the prospective buyer.

As Slick pointed out, this is a benefit to all parties: The seller gets a clear record without a bankruptcy, the mortgage holder gets a good fraction of the debt back, the real estate agent gets a commission and you get a valuable piece of property that you can turn over for a nice profit.

So far, Slick divulged nothing new. He admitted that others promoted the same techniques as proffered in many books and seminars, but his firm offered expert advice, training, a Web site with materials that made rapid response possible and use of professional real estate firms that would help close the deals.
Getting money for investments would be no problem. Slick said we could borrow money from our 401(k) plans and later pay it back with interest that would increase the savings value. He didn't mention that many plans don't allow you to make additional contributions until your loan is repaid, which would cause you to miss out on your employer's matching contributions. Nor did he detail the very stringent rules on 401(k) loans or the fact that the money you borrowed would be taxed twice: once on the after-tax money to repay the loan and then again when you withdraw it at retirement.

Slick then suggested an alternative financing method -- that investors could get adjustable-rate mortgages, or ARMs, and enjoy low rates with little risk since these properties would only be held for the short term. But you'd have to have lived in a cave for the past year to be oblivious to the pitfalls of ARMs. They are partly to blame for the meltdown in real estate and involve a high level of risk, as many homeowners can attest, especially in a real estate market that has virtually ground to a halt.

Undaunted by current market conditions, Slick promised that the real estate payoffs would be huge. Some offered a guaranteed 25 percent return, he exclaimed. Some even averaged a 50 percent return. He showed that a few thousand dollars would compound to millions over 15 years.

I don't doubt his math and I'm sure opportunities exist like those he described. There are a few people who have amassed fortunes in real estate. But is this easy, are the opportunities for great gains plentiful and can this be done with little or no risk? No.

Make a mint in the stock market
Then Slick turned to the subject of the stock market. That 50 percent return on real estate paled in comparison to what you could make in the stock market if you could take advantage of technical analysis, puts, calls and options.

"Volatility is simply opportunity," Slick told the audience. "It's not risk."

He went on to say that we had a great advantage over professional traders because we can trade faster. (This was news to me.) The best strategy, Slick said, was to buy and sell, not hold. He gave an example of a series of buy and sell tactics, combined with charting, that he had used with a stock. He made well over 50 percent in just six months, he said.

Near the end Slick repeated that he was doing this only to help other people learn how to get rich. This free lecture would be followed by an opportunity to attend any of a number of follow-up courses -- each of which cost thousands of dollars. These courses cover a number of aspects of real estate investments and such things as foreign trade and options trading.

To Slick's credit, he did not apply a lot of pressure on everyone to sign up for the courses. He knew he had planted seeds of 25 percent-plus returns, and that these would germinate in the minds of many of the attendees in the audience.

Make for the exit -- fast
Some time ago, in spite of my admonitions, some of my friends attended expensive courses put on by a promoter of similar concepts. They too heard the same pitches about real estate and stock trading. They were taken by the opportunity to make lots of money with little work. They paid thousands of dollars for courses, CDs, Web site use and books. The promoter made millions from his courses and publications, but lost money on his firm's own investments. He is now facing jail time for tax evasion, and his clients and employees are now sadder but very much wiser.

The shame of this is that these get-rich-quick seminars likely attract more clients than seminars given by legitimate, hard-working financial planners who charge low fees and recommend low-cost portfolios consistent with their clients' goals and risk tolerance levels. Sure, some advisers hawk insurance products and investments that help them profit more than their clients. But their greed pales in comparison to that of firms promoting schemes that offer guaranteed extraordinary returns at little or no risk.

The get-rich-quick hucksters can probably find actual investors who can testify about their huge gains at these seminars. But the odds of the average person consistently achieving extraordinary results are low. It's true that lots of money can be made in real estate deals, but lots of money can be lost, too. I have friends on both sides of that fence, and my own real estate results have been very mixed.

As far as stock market trading goes, if such accomplishments were common and consistent among the average investor, then certainly mutual fund managers would be able to easily beat their benchmarks and hedge funds would never get in trouble. But this is not the case. Far more mutual funds lag the indexes than beat them. Hedge funds have their problems, too. Consider the collapse of Long-Term Capital Management, spearheaded by some of the brightest people in the finance business. And plenty of hedge funds recently found themselves on the wrong side of the housing bubble bet.

Unlike much of the audience, I walked out without signing up for the next level of instruction. An old joke popped into my head that asks, "How do you make a million dollars?" The answer: "You start with 2 million."

Copyrighted, Bankrate.com. All rights reserved.

Avoiding Panic Helps Long-Term Investors

by Tim Paradis

Investor Urgency Builds As Market Swoons but Answer Is the Same: Don't Panic

Don't panic.

That advice could probably serve as a stand-in for "hello" at many brokerages these days. With Wall Street stumbling -- particularly since the beginning of the year -- uneasy investors are calling on financial advisers with an urgency not seen since the start of the decade.

Like last time, when the economy was reeling from the flameout of technology stocks and the Sept. 11 terrorist attacks, long-term investors who can resist giving in and selling out will likely emerge the strongest.

But as before, the latest stock market pullback has unnerved individual investors, many of whom are ferrying money from equities into bonds and cash. In the week ended Jan. 15, when many analysts were predicting an imminent cut in interest rates, assets in money market funds ballooned by $15.96 billion to a high of $3.17 trillion, according to iMoneyNet.

And investors pulled an estimated $18.2 billion from mutual funds last week, according to TrimTabs Investment Research. So far this year, investors have shifted about $41.4 billion out of these investments.

While those who removed money out of the market after the dismal numbers seen in recent weeks might be happy, they could be left smarting if they try to time the market but miss a rebound.

"If you have a three- to five-year time horizon and longer I would say there is very little you should really do," said Dave Stepherson, senior portfolio managers at Hardesty Capital Management in Baltimore. "These knee-jerk sell decisions are extremely unhealthy at these points. In fact, you should be doing the opposite," he said.

He said he tells nervous clients to pay attention to the markets, but so that they can detect opportunities in solid investments that have sold off, not to simply react to daily ups and downs.

The Dow Jones industrial average is down nearly 10 percent just this year, and well off its October highs. The same is true for the broader Standard & Poor's 500 index -- the benchmark that many mutual funds track and are measured against. The S&P has lost more than 10 percent for the year and the technology-heavy Nasdaq composite index has fallen more than 13 percent since 2008 began.

Investors -- faced with wrenching pullbacks in the value of investments like 401(k) plans -- have watched with alarm.

Ken Jackson, 68, of Hillside, N.J., rolled his eyes at the thought of receiving his next financial statement, which is due any day now. As a mortgage consultant, he watches the stock market closely, but said he doesn't let its peaks and valleys dictate his personal spending or handling of his investments.

"I'm pretty much a steady spender. I don't worry too much about what's going on in the market," referring to his day-to-day spending.

Jackson said he remains confident enough in a market correction that he'd reprise a bet he made with a friend about 5 years ago, when the Dow sank below 9,000 points. He wagered a helping of chocolate ice cream that the index would bounce back above 10,000 points within months.

"I won," he said.

Plenty of others remained nervous. By midday Tuesday, E-Trade Financial Corp. said it saw a 25 percent spike in volume at its U.S. call centers over what the online brokerage would have normally expected. More investors were logged into its U.S. Web site examining their accounts Tuesday than at any point in the five years it has kept tabs.

Even market titans famous for their investing acumen find it difficult to correctly time the market, observers note. Billionaire investor Warren Buffett owes his success not to predicting Wall Street's tides but to sticking with long-term investment prospects.

"We buy things are cheap and we sell things that are dear," Stepherson said. "We are advising our clients that this is what they should be doing -- not necessarily jumping into the deep end of the swimming pool but wading in."

"How much opportunity cost is there if you try to time it and you're wrong? The opportunity cost far outweighs the possibility of getting it right," he said.

Michael Barron, chief executive of Knott Capital in Exton, Pa., said he sidestepped the worst of the stock market's recent convulsions by avoiding investments in hard-hit sectors like finance. But he said even investors who find themselves holding unpopular investments can re-examine the risks to their investments and then methodically shift into a more balanced long-term strategy.

He still looks askew at some of the stocks that have been beaten down and that some on Wall Street are saying could be ripe for bargain-seekers.

"It's not time to bottom fish in financials," Barron said. "I would look at my overall portfolio: Is my portfolio positioned correctly? Which sectors have the best risk-reward relationships? Given the large amounts of uncertainty and volatility in the marketplace they are usually more defensive sectors like consumer staples and health care."

Some investors have concerns but aren't blinking yet.

Connie Rink, 64, said she put her faith in her stockbroker when she received her last financial statement, a dreary account of her investments in stocks and real estate.

"If it gets scary, she'll call me," Rink said. "I'm expecting a call anytime."

Rink, a widow, put her house in Jacksonville, Fla., on the market more than a year ago and has yet to find a buyer. She's also trying to figure out how she'll live on one-third less income when she retires in a few years from her job as an activities director at a middle school for the arts.

For now, though, Rink said previous financial planning and a willingness to ride out the tough times has afforded her extravagances such as a trip to New York City with her family.

"I've gone through recessions before," she said, watching her grandchildren glide past at the ice skating rink at Rockefeller Center. "This just doesn't feel like a real, full-blown recession to me."

AP Business Writer Jackie Farwell contributed to this report.

Copyrighted, The Associated Press. All rights reserved. The information contained in the AP News report may not be published, broadcast, rewritten, or redistributed without the prior written authority of The Associated Press.

The Market Braces for the Boomers

by Alan Murray

Will the baby boomers' retirement cause the stock market to go bust?

That question, studied and debated for more than a decade, is no longer hypothetical. Kathleen Casey-Kirschling, the former New Jersey teacher who was born one second after midnight on January 1, 1946, became eligible for Social Security benefits this New Year's day, making her the first splash of a demographic tsunami. Over the next three decades, nearly 80 million boomers will join her.

To some prognosticators, the prospect of this swollen generation stepping down is a fright -- many times worse than the stock market's tumble last week. If the baby boomers stop working, they ask, who will produce the goods and services to keep the economy growing? If they stop earning, who will pay taxes to fund their Social Security and Medicare checks? And if they sell off stocks and bonds to finance their golden years, who will buy?

The answers to those questions remain covered in fog. Only this is absolutely clear: The generation that was first raised by Dr. Spock, first mesmerized by television and first serenaded by the Beatles is about to redefine retirement, just as it has every other stage of American life.

Threat to Stocks

At the core of concerns about the baby boomers' retirement is something economists call the "life-cycle hypothesis" of economic behavior: Most people tend to save little when young, build up savings during middle age, and then spend those savings in retirement.

That leads some savvy analysts to fret that the boomers' retirement will be marked by widespread selling of stocks and bonds. Jeremy Siegel, a professor at the University of Pennsylvania's Wharton School, has said his computer model shows that, absent help from overseas investors -- buying he does expect to cushion the blow -- the boomers' retirement could cause stock prices to fall 40% to 50%.

"We have never witnessed anything like this," Dr. Siegel says of the huge exodus from the work force and its potential market effects.

But don't short the stock market just yet. There are reasons to think the future won't be so dire.

To begin with, a boomer-driven sell-off is unlikely to begin in the next decade or so. Many boomers are just reaching their peak earning years, and, for a while at least, their increased savings will offset any securities sales by others like Ms. Casey-Kirschling who opt for early retirement.

Moreover, while the baby boomers' rapid ramping up of savings helped fuel the soaring stock market of the '80s and '90s, the data suggests the "dissaving" after retirement happens much more slowly -- less a hill than a gently sloping plateau.

Assist From Abroad

Then there's the fact that the U.S. is, increasingly, an integrated part of a global economy. Even if boomers want to sell, Dr. Siegel argues, there will be plenty of younger and newly wealthy people in China, India and other emergent countries who will be ready to buy all the securities that the boomers want to dump.

"We can sell our assets to the rest of the world," Dr. Siegel says, "and they can ship us their goods." To some extent, of course, that's already happening.

Complicating the picture is the problem of how to pay for the government benefits that boomers are entitled to in retirement. The Congressional Budget Office projects that Social Security spending, absent changes, will grow from about 4% to 6% of the U.S. economy in the next 25 years, while Medicare and Medicaid will grow from 4% to 8%. By 2050, programs for the elderly are likely to eat up as big a share of the economy as the entire government does today -- forcing working Americans to face a possible 50% increase in their taxes.

David Walker, the U.S. comptroller general, thinks failure to come to grips with that fundamental fiscal problem could hold the seeds of the U.S.'s demise. "The Roman Republic fell for many reasons," he has said, "but three reasons are worth remembering: declining moral and political civility at home, an overconfident and overextended military in foreign lands, and fiscal irresponsibility by the central government."

Still, while demography may be destiny, that destiny is not unalterable. There are several economic developments that could lessen the burden of the boomers' sunset years.

One is more rapid growth in productivity. Once the boomers retire, the U.S. will have only two workers for every one person in retirement -- compared with four today. But if those workers are more productive than their predecessors -- perhaps because of better technology -- they can earn enough to finance the boomers' retirement and maintain the nation's wealth. The prospects for technology and productivity rescuing the day, however, have dimmed in the past year, as the government's measures of productivity growth have slowed.

Importing Workers

Another possibility is immigration. The U.S. can allow in more, younger workers from overseas. While that may be economically attractive, however, it's politically deadly -- as candidates are learning in this year's presidential campaign.

Finally, there is the possibility that baby boomers learn that work doesn't end at 62 or 65 or 66, but rather at 70, 75 or even 80. When Social Security was created, the average American had no reason to expect to live to the age of 65. Today, thanks to improvements in health care, he or she has every reason to expect to live to 75 or 80 or beyond. If so, shouldn't we remain productive members of the work force for longer?

If the answer to that question is yes, it would go a long way toward ensuring that grim economic and market forecasts for the baby boomers' final years never come to pass.

Five Rules For Investing In Equities

A lot of investors go about their investments in an illogical way. They are given a tip from their broker on basis of some rumor or news. They impulsively buy the scrip and afterwards wonder why they bought the stock.

Such Behavior is foolish and must be avoided. The moment you receive a tip on a stock, confirm the news on Reuters or other business websites. The news, if any, will be on these sites; be it dividend payoffs, announcements, earnings, corporate move to buy another company, fight of top management or any other news.

Broadly one should abide by following guidelines:-

1. Business of Company

Buy stocks of only those businesses that you understand. Once you have bought a stock, keep watch on quarterly results of that company and also keep watch on the general trend in the sector of that stock.

2. Study the past performance

All companies present particulars of their fiscal operation in their yearly reports. Study their past performance and then invest.

3. Know the promoters

The Management team and promoters of a company are key people who bring growth to a business. Invest in companies that have good promoters, experienced management, and where promoters hold more than 40% of the shares.

4. Future outlook of the company

Although a company could have done well in the past, it is not necessary that it will carry on performing well in the time to come. Keep a close watch on sector trend and market trend. You can know this by reading views of financial experts.

5. Stock price

The share price of each company fluctuates continuously on the stock markets with investors buying and selling the shares. The cost at which a person is conformable to buy or sell a share of a company is the perceived value of the share of the company taking into consideration the company's present business and future business growth. Besides this, investor sentiment plays a large role in pricing of stocks. It is important that prior to buying a stock, you evaluate whether the price of that share at which it is available for purchase, is adequately valued i.e. it is not over-priced. Similarly, when you sell, you need to be sure that you are not selling dirt cheap. To help you evaluate this, you may apply a popular ratio called the Price/Earning ratio (P/E ratio). The P/E ratio is based on the following formula:

P/E ratio = Market price of the share/Earning per share (EPS)*

*EPS = Profit After Tax (PAT)/ Total number of shares issued by the company

{"/" means divided by}

You can find information on the EPS, PAT and total number of shares issued by the company from its annual report. Once you have bought a stock after doing sufficient research, then you must not sell the stock in hurry if it falls by 5-10%.

Top tips: Spotting opportunity in a down market

By Gerri Willis, CNN

We've been hearing how bad the economy is and how a recession is looming. But before you start hiding your money in your mattress, remember there are opportunities in a down market.

1. Silver Lining for Homebuyers

While it's true housing values have come down - dramatically in many places. And likely home prices are heading lower. So, if you're in the market to buy, now is the time to start the process. Start to look at markets you're interested and gauge your local real estate market.

The other good news is for first time home buyers looking for a traditional mortgage. Both the 30- and 15-year fixed-rate mortgages are at their lowest levels since July 2005, according to Freddie Mac.

Even if you're not buying a home, there's good news. Rent prices aren't really moving up much at all. According to data from CNNMoney.com and Rentometer.com, the median rent check barely moved at all. In some cities like Washington, Phoenix and Miami, rents actually fell dramatically.

2. Know your history

We know how scary it can be if you have a 401(k) or you're holding mutual funds and you've been watching the market tank. But don't try to time the market. It's a losing bet. History shows that stocks pick up during a recession. Bottom line: The stock market is a forward-looking indicator. If you're a long-term investor, you will be able to ride out the bumps.

3. Get the most for your money

Generally when the Fed is in a rate cutting mode - as it seems to be recently - interest rates on CDs go down. But that's not happening. The subprime issue is getting in the way of typical pricing.

But you could benefit. Short term CD interest rates, and we're talking 3- or 6-month CDs, are yielding the same or even higher interest rates than 1-year or even 5-year CDs. That's because banks are trying to raise some money through the CD market.

If you don't want to keep you money tied up for a few months, you can also consider high-yield money market accounts. Some Internet banks are offering rates close to 5 percent. If you want to check out some of the highest CDs and money market rates, go to bankrate.com.

4. Stock sale

Stocks are cheap right now. And the easiest way to get into the market is through index funds or exchange traded funds - or ETFs. Check out Vanguard or Fidelity for low-cost options.

Some people are very excited about the Magellan Fund reopening to investors. This was a members-only mutual fund for a decade. This fund is up almost 19 percent in 2007 and that beats out the S&P 500 by 13 percent.

But that said, you should really do your homework before investing in any fund. Talk to your financial advisor and also check out Morningstar.com.

Recession or Not, Investors Have Choices

By Tim Paradis, AP Business Writer

While Wall Street Debates Likelihood of Recession, Investors Shouldn't Wait to Place Bets NEW YORK (AP) -- While Wall Street debates whether the U.S. is headed for recession, investors don't have to wait for an answer -- they can take steps to limit their risks beyond simply defensive moves like rushing into bonds or converting investments to cash.

A slowing economy requires investors to become more selective and take a long-term view while also looking for stocks and other investments that might fare better in a sputtering economy.

Companies involved in agriculture, fertilizer and commodities are poised to do well because of increasing demand from fast-growing economies including China and India, said Todd Salamone, vice president of research at Schaeffer's Investment Research in Cincinnati.

"Despite all the talk about recession, despite all the slow growth -- these are the sectors that have bucked the trend," he said.

Salamone noted that while these stocks already have had a good run, they're still worth betting on because they're less likely to suffer under the vagaries of the U.S. economy than, say, the retail, housing and airline sectors.

Although Salamone sees the wisdom in buying when a sector has been beaten down and making contrarian moves to scoop up bargains, he believes that investors should remain cautious about the financial sector. Financial services companies from investment banks to mortgage writers have been hard hit by souring mortgage loans and have seen their stock prices fall sharply.

"Over the next three to 12 months, anyway, we'd say it might be too early," he said of financial stocks. "Five to 10 years out they might be great plays but over the next year or so we just think it's too early. There's too much uncertainty, there's too much bottom-fishing in that area."

Hard as it might be, setting aside emotion and looking toward long-term goals can help investors focus on sectors that show solid growth prospects.

Gordon Ceresino, vice chairman of Federated Investors' MDT Advisers, contends that employing an investment strategy that extends over at least seven years can help investors look past the day-to-day swells and swoons of the stock market and help them resist the temptation to sell their holdings when Wall Street gets rocky.

"They get too caught in the emotion and they will tend to zig when they should have zagged," said Ceresino, referring to professionals and everyday investors alike.

"I'm not going to make a move because someone scared me this morning and said 'The world is coming to an end,'" said Ceresino. "You need to stay with your fundamentals and not get emotional."

Investors who just can't get past their nervousness about the market can still move into areas of safety like government-backed bonds. Market-watchers urge investors to be mindful, however, of the hazards of reacting too quickly -- someone who pulls too much money out of stocks may miss out on the start of a Wall Street rally. Indeed, investors are still debating whether the economy is already in a recession or only a mild slowdown.

Ceresino said that trying to pick when to exit and re-enter the market is a daunting challenge for any investor, even a professional.

"The person that thinks they can lock in their current portfolio returns by going to cash and then time themselves back in -- what you end up doing is you end up destroying your ability to meet your long-term goal."

Rethinking the Recession

by Ben Stein

Are we in a recession? No one knows. Indeed, it's literally impossible to know.

A recession is six consecutive months of negative economic growth. At most, December 2007 would be our first month, so we wouldn't know until sometime in June 2008 if, by the end of May 2008, we'd been in a decline for six straight months. So no matter what anyone tells you, we can't know if we're in a recession yet.

Mea Culpa

The December retail sales figures were poor. Obviously, housing is weak. Autos look to be softening (good time to buy a Cadillac). Even most commodities are off their peak.

More important than any of these to us economists, however, are two factors. First, because of repeatedly being stung by losses in real estate lending, lenders are reluctant to lend, which is causing a slowdown in economic activity. Second, money supply growth has been sluggish for the last several months. This is often a signal of a weakening economy.

I want to be honest here (and everywhere): This slowdown is happening faster and harder than I thought it would. I was too optimistic. My optimism was based on a belief that the Federal Reserve would act more aggressively than it has in fighting the slowdown. It didn't, and we're paying the price.

Let's hope that Ben Bernanke, the chair of the Federal Reserve Board, has learned his lesson. Hopefully, he'll now plunge in with both feet to get a lot of liquidity into the system, and reassure lenders that he'll backstop them and not let them fail. He's now perceived as weak, and he'll have to act aggressively to get the ball rolling again. But he can do it.

Retro Recessions

For now, however, assume that he's doing too little too late, and that we'll have a recession. Here, then, are a few salient facts about postwar recessions, which I've discussed before.

There have been 10 recessions in the last 63 years. The average length of these downturns has been about 10 months. The average decline in economic activity from peak to trough was about 2.5 percent. No decline has been worse than about 3.7 percent.

In the past 25 years, there have only been 2 recessions, which is an extremely good record. The two recessions -- in the early 1990s and the 2000-2001 correction -- have been extremely brief. The really severe recessions of the postwar era have been engineered by the Fed to fight inflation -- in the early 1970s and early '80s.

When the Fed is fighting to promote expansion and not to rein it in, recessions tend to be brief. Real consumption doesn't fall for more than a few months in such cycles. It would be almost unheard of for there to be a year-on-year fall in retail sales from 2007-2008 if the Fed is actively liquefying the economy.

Unemployment always rises in recessions. The degree of the rise is usually modest, generally only about 2 percentage points, although some -- like the one engineered by the Fed in the early Reagan years -- have gone as high as 4 points. The average length of involuntary unemployment during recessions is about six weeks.

Slacker Overboard

There is some good news in here.

Even in a recession, more than 90 percent of workers who want to work will be employed. Even in a recession, most businesses will make a profit. Even in a recession in this era, more than 10 million men and women will need cars and trucks. Many millions will need new homes. Tens of millions will need retirement investment products and life insurance. In the United States, even in a recession, there are plenty of people with money to spend.

Those who tend to their work, who get to the office or showroom or shop early, stay late, work hard, stay on the phones dialing for deals (as my pal, Barron Thomas, puts it), will make money. Those who stay sharp and make a point of befriending their clients will make money. Yes, some extra effort will be needed, but it'll pay off. There's still money to be made, even when the economy itself has slowed down.

It's the guy or gal who puts in extra effort who stays ahead and even prospers when the economy is in a slowdown. The easygoing, laid-back time-servers get tossed overboard.

Stay Hungry (Not Literally)

There's another key truth about recessions: They always end, and the economy always goes on to a new plateau. It may take a while, but the stock market always moves on to a new high.

So stay hungry. Work harder. Dig deeper. Keep investing in broad indexes. You'll come out all right on the other side.

Why White Men Prefer Asian Women

Hi guys, something to take your mind off the volatile market.... :)

By
Fred Reed

There is near me an Asian sushi-beer-and-dinner establishment that I´ll call the Asia Spot. The region is urban, so the clientele is a mix of some of just about everything, but the waitresses are all Asian, principally Japanese, Indonesian, Vietnamese, and Thai. The Spot is a neighborhood bar. A large after-work crowd, many of them regulars, gather at happy hour. The social dynamics are curious. It would be an exaggeration to say, as someone did, that the black guys come to pick up white women, and the white men come to get away from them – but it would be an exaggeration of an underlying truth. The waitresses are a large part of the Spot´s appeal.

A common subject of conversation among male customers is how very attractive these women are when compared to American women. It is not a thought safe to utter in mixed company. It is a very common thought. American women know it.

Why are the Asians attractive? What, to huge numbers of men, makes almost any Asian more appealing than almost any American? The question is much discussed by men at the Spot. (I should say here that when I say “women,” I mean the majority of women, the mainstream, the center of gravity. Yes, there are exceptions and degrees.)

American women of my acquaintance offer several explanations, all of them wrong. For example, they say that Asian women are sexually easy. No. American women are sexually easy. The waitresses at the Spot are not available. They date, but they cannot be picked up.

Another explanation popular among American women is that men want submissive women, which Asians are believed to be. Again, no. For one thing, submissive people are bland and boring. In any event the waitresses aren´t submissive. Many compete successfully in tough professions. Among Asian waitresses I know I count an electrical engineer who does wide-area networks, and a woman with a masters in biochemistry who, upon finding that research required a Ph.D and didn´t pay, went back to school and became a dentist. Both of these wait tables to help out in the family restaurant.

At the Spot I know a woman waitressing her way through a degree in computer security, a bright Japanese college graduate making a career in the restaurant business, and the manager of the Spot – not a light-weight job. Submissiveness has nothing to do with their attractiveness.

Why, then, are they so very appealing?

To begin with, look at the American women in the Spot. Perhaps a third of them are stylishly dressed. The rest of the gringas run from undistinguished to dumpster-casual: baggy jeans, oversize shirts -- often male shirts -- with the tails out. They seem to affect a sort of homeless chic, actually to want to look bad, and do it with more than a touch of androgyny. A high proportion are at least somewhat overweight. (So are the men, but that´s another subject.) The Asians, without exception, are sleek, well-groomed, and dressed with an understated sexiness that never pushes trashy.

Further, the Asians are what were once called “ladies,” a thought repellant to feminists but very so refreshing to men. Listen to the American women at neighboring tables, and you will frequently hear phrases like, “He´s a f---ing piece of poo.” In what appears to be a determined attempt to be men, they have adopted the mode of discourse of a male locker room and made it their normal language. The Asians, classier, better students of men, do not have foul mouths. They presumably know about body parts and bathroom functions, but do not believe that a woman raises her stature by referring to them constantly in mixed company.

Men at the Spot, I have noticed, instantly understand that colloquial commentary is not wanted, and don´t engage in it: In the presence of the civilized, men adopt the standards of civilization. Men also tend to think of women as women think of themselves. The Asians, without displaying vanity, clearly think well of themselves. And ought to.

All in all, they give the impression that they do not want to be one of the guys. They want to be one of the girls. Here we come to the core of their appeal. Let me elaborate.

The default position of American women is what men refer to as “the chip,” a veiled truculence, mixed with a not-very-veiled hostility toward men and a shaky sense of sexual identity. The result is a touchiness reminiscent of hungover ferrets. There is a bandsaw edge to them, a watching for any slight so that they can show that they aren´t going to take it. They are poised to lash out in aggressive defense of their manhood.

As best as I can tell, they don´t like being women. Here is the entire problem in five words.

The Asians at the Spot show every indication that they do like being women. They do not seem to have anything to prove. Being happy with what they are allows them to be comfortable with what they are not – men. They are not competing to be what they can´t be with people who can´t be anything else. They don´t have to establish their masculinity because they don´t want it. They do not assume, as American women tend to, that femaleness is a diseased condition to be treated by male clothes, gutter language, and bad temper.

I´ve spent many dozens of hours chatting with the gals at the Spot, and never seen a sign of the chip. For a man, the experience is wonderful beyond description – smart, pretty, classy women, who are women, and are not the enemy. As long as American women carry the chip, the Asian gals will eat them alive in the dating market.

Note that the espousal of hostile obnoxiousness as a guiding philosophy appears to be an almost uniquely American horror. It certainly isn´t requisite to independence or self-respect. I recently met a quite attractive blonde who, among other things, was smart, a long-haul motorcyclist, a student of the martial arts out of sheer athletic enjoyment of it, and an excellent marksman. She was also heterosexual, feminine, delightful company, and had no trace of “the chip.” I was astonished. How was this possible, I wondered?

She was Canadian.

Six Ways Stores Trick You Into Spending More

by Jeffrey Strain

It's one of life's ironies that retailers try to lure you into their stores with low prices, only to do everything in their power to make sure you spend more than you intended once you're inside.

It's important to understand these methods so you don't fall for them.

Double Discounts: Retailers know that most people aren't good at math, and they take advantage of this. More and more are using double discounts to earn more money while making customers think they are getting a better deal than they actually are.

For example, if you are given a choice of buying a $100 item at 45% off, or buying the same item at 20% off with 30% additional taken off at the register, which would you choose? Most people simply add the 20% and 30% and assume that they are getting 50% off the item.

When you do the math, however, it doesn't work out that way. Taking 45% off of $100 means the item sells for $55. But if 20% off $100 is $80; taking 30% off that $80 leaves you with an additional $24 discount, for a price of $56, or a dollar more.

A 2007 study published in the Journal of Consumer Research indicates that shoppers are likely to feel the double discount is a better value.

Fight Back: Do the math before buying. If you can't do the calculations in your head, purchase an inexpensive calculator and carry it around when you go shopping. If you see an item that comes with a double discount, the store may be attempting to make you believe you are getting a better price than you are.

Pricing items at $9.99 vs. $10: Studies have found that when prices end in 9, consumers end up spending more money. While this might seem strange, there are various theories as to why this happens. Most note that when people process information, the first number they read has a stronger impression than the following numbers. So $9.99 seems much lower than $10.

Another theory is that pricing items this way makes it more difficult to calculate and compare unit prices. For example, if a 200-ounce package of an item is $3 and a 400-ounce package of the same item is $5, it's fairly easy to calculate that the 400-ounce package is a better value.

But when the same items are priced $2.99 and $4.99, respectively, they may appear to be the approximately same price, since the first numbers are what register and two is half of four.

Fight Back: Instead of looking at the first number, make a conscious effort to round everything up when doing your calculations. This is another reason to take a calculator when you shop: it can help you work out the true price if you have trouble doing calculations in your head.

Three for $9.99: Stores will often offer multiple items for a single price, such as three for $9.99. Most people assume that they need to purchase three of the items to get this "special" price so they buy more than they really need.

The truth is that unless the items are marked at higher individual prices or the label says something like "must purchase quantity stated to get discount," you can buy a single item for $3.33.

Fight Back: Get in the habit of purchasing only the amount you really need.

Buy One, Get One Free: This is another promotion that can mislead you into thinking you're getting a good deal. It's often difficult to tell whether you would pay half as much for purchasing a single unit or, for that matter, whether the price of a single unit has been inflated to take into account the extra item being "given away."

Many times the "buy one, get one free" offers are not better than the regular price of purchasing two items.

Fight Back: Before purchasing a buy-one-get-one-free item, find out what the regular price of that item is. Then do the math to see if you're really getting a bargain.

"Sale" doesn't mean a discount price: Retailers play on the assumptions you make. Consumers are trained that "sale" means a good price and these items are usually advertised in big, bright lettering at the end of store aisles. The problem is that what the stores call a "sale" may not give you a very good price. (Check out The Grocery Store Game (Janine Bolan), page 28, for other tips of this ilk.) So the casual passerby will see the item is "on sale" and buy the product assuming it's a good price, when it isn't necessarily so.

Fight Back: Don't assume things on the end of an aisle or that are marked as "on sale" are actually a good price. Make a grocery price book so you know a good price and always compare the prices with other similar items.

Putting things at eye level: When you walk down the aisles of the store, notice what items are at eye level. They will be the ones that are the most profitable for the store, which usually means the most expensive ones. This is because stores know you are much more likely to see and choose something at eye level than something on the top or bottom shelf.

Fight Back: When shopping, be sure to look high and low before deciding which product to purchase. You'll often find what you're looking for at a lower price on another shelf.

Stores are quite sophisticated when it comes to getting you to part with your money. If you understand how they are trying to manipulate you, you are less likely to fall into these traps and hold onto more of your hard-earned money.

Copyrighted, TheStreet.Com. All rights reserved.

The Millionaire's Real Secrets

by John Rosevear

Have you read (or seen) The Secret? Yes, that Secret, the one that promises unlimited gains from the application of something called the "Law of Attraction." The book quotes assorted luminaries, including a "channeled" spirit being and a few people with mysterious degrees in "metaphysics" from heretofore unheralded institutions of higher learning.

The Secret is available in book and DVD versions. I recently watched the video at the behest of a friend, and my impression was that despite the very slick presentation, dubious "experts," and New-Agey-magical-thinking context, there's actually some useful perspective in there.

As you might have heard, the gist of The Secret is that much of what goes on in the universe is governed by that "Law of Attraction." This "law" states that, on an emotional level, like attracts like. In other words, if you really feel successful on a deep-down level, you will be successful, because the universe will respond to your successful feelings with success-enabling opportunities. (The corollary to this is that if you feel like a failure, you'll fail, says the "law," because the universe will give you what you seem to be wanting.)

Whether you credit the metaphysical explanation or not, there's some truth in the message. Believing in success is certainly a precondition for actually succeeding in any endeavor. But that's hardly the whole formula.

Finding the magic
It's easier said than done, of course, but if you want to retool yourself for massive financial success, the keys include:

• Believe it's possible. Half of doing anything out of the ordinary -- whether it's becoming a millionaire, learning to be an expert skier, or just getting promoted to vice president -- is believing that it's possible. That may sound like motivational-guru claptrap, but it's true -- if you think that something is impossible, then for you, it probably will be. Becoming an expert skier is just a matter of learning to turn smoothly and getting lots of experience with different conditions. Becoming a millionaire is just a matter of increasing your savings rate. Both of these things are easier said than done, but they're both possible. People less smart and capable than you and I do both every year -- we can, too.

• Burn your boats. Various ancient Greek commanders and the conquistador Hernando Cortes supposedly made a practice of burning their own armies' boats after landing on the coast of a hostile land. With no way to retreat, their armies had to succeed -- or die trying. Whether these stories are true or not, raising the cost of failure is a time-honored way of motivating oneself for success.

• Associate with those who are already successful. Find people who have already done what you want to do. Get to know them, and spend time with them if you can. This reinforces that your goal is possible (which helps with the belief point), gives you models for success and sources of advice and insight, and helps with the boat-burning -- you don't want to embarrass yourself by failing in front of your successful new acquaintances, right? Again, this is often easier said than done -- if you're currently broke and your goal is to become a billionaire, you may find the club a bit inaccessible -- but let your creativity lead you. And if your goal is related to investment or financial success, you need look no further than the Fool's message boards for a friendly group of peers and role models.

The above are all parts of the formula laid out in Napoleon Hill's excellent classic, Think and Grow Rich, a book that should be on your must-read list if you haven't encountered it already (and a book, I suspect, from which The Secret drew a lot of its inspiration).

But there's one more point that is often missed by people propounding wealth formulas, even though it should be the most basic formula of all: If you want to accumulate wealth, spend less than you earn. Sure, picking through beaten-down stocks like homebuilders Builders FirstSource and Toll Brothers might help you find a gem that will drive your portfolio to spectacular new heights. Or you might end up buying in at the perfect bottom on financials like First Marblehead and Washington Mutual. Yet to accumulate wealth, first and foremost, your income has to exceed your outflow.

After all, you need money to buy that gem in the first place, right? Yet one look at consumer debt levels in America shows how few people have really taken this one to heart. No amount of visualizing or new friends will help you accumulate wealth if you spend it all as it comes in.

Your stocks: Riding out a recession

The outlook isn't as bad as many investors fear, and there are ways to keep your investing plan on track. Money Magazine's Michael Sivy has a plan for defensive investing.

By Michael Sivy, Money Magazine editor at large

January 16 2008: 10:56 AM EST

NEW YORK (Money) -- At this point, the conventional wisdom is that the U.S. economy entered a recession in December, even though the actual evidence that a downturn has begun is quite limited.

We won't really have crucial data until preliminary fourth-quarter GDP growth is reported later this month.

It's likely, though, that the U.S. economy will be weak through the first half of 2008 - and possibly for most of the year.

So the natural question is: How much further do stocks have to fall? Are the potential losses so big that investors should be making lots of changes to their portfolios?

It's certainly sensible to be somewhat defensive, whether there's a full-fledged recession or simply a slowdown.

Diversification is less important in a bull market when a rising tide lifts nearly all boats. But when stocks are falling, some groups really get pummeled while others hold up surprisingly well.

Right now, the worst performers are companies in industries that depend on financing. That includes not only banks, but also stocks in the housing sector and makers of cars and other big-ticket consumer items.

But assuming you're well-diversified, there's a good case for staying the course and not selling a lot of stocks or massively reshuffling your holdings. If anything, you should be tracking stocks that you might want to buy later this year at bargain prices.

Here's the basic case for just hunkering down to ride out the current slowdown:

Most recessions are fairly short Of the 10 recessions since World War II, only two lasted more than a year. Those two - in the mid-1970s and the early '80s - were crushing and did merit substantial portfolio readjustments.

But more often, recessions only disrupt investment strategies temporarily.

The stock market isn't the economy Growth may be way below average all this year, and unemployment may continue to rise. But the stock market anticipates future trends, and share prices typically start to recover six months or so before the economy rebounds. That means share prices could be rallying by mid-year.

Valuation matters more than growth Really big losses occur when stocks are hugely overvalued, as they were in the late 1990s. The recession that followed lasted only eight months, but share prices fell for more than two years. Last year, however, stocks were only modestly overvalued. And share prices could probably get through a mild recession without falling a whole lot more than they already have.

The worst news should be out soon It may seem as though banks and financial services companies just keep reporting bigger and bigger losses. But after audited fourth-quarter results are announced - which should happen over the next six weeks - most of the really bad news should be out. After that, there will actually be the possibility of positive surprises, if banks have written off too many loans and some prove to be recoverable.

The economy is increasingly global Companies get 30 percent of their profits from outside the U.S. That's up from 20 percent only a decade ago. And some multinationals earn more than half their money abroad, especially in the technology sector. So a big chunk of the stock market will have some support if U.S. consumer spending dips.

It rarely pays to fight the Fed The one stock-market indicator that really works is Federal Reserve policy. Typically, the Fed doesn't slash interest rates until a recession is well under way. But when there's a banking crisis like the present one, the Fed cuts interest rates early and often. That's happening now and should fuel a robust recovery starting within the next 12 months.

Of course, there's the possibility that something worse is going to happen, and defensive investing is always smart in bad times. But your one big advantage as an individual investor with long-term financial goals is that you don't have to worry about quarterly performance.

Rather than struggling for a profit in the next three months, your goal should be to maximize your average return over decades. You don't do that by dumping stocks when the market is down or by trying to bail out and then jump back in at a lower price. You do it by staying fully invested and looking for opportunities to add bargains to your portfolio.

So limit your risk by diversifying as broadly as you can and perhaps trimming a few stocks that look overpriced. But otherwise stick to your investing plan. If you have cash beyond what you regularly put away, consider adding some multinationals to your holdings, especially if they're trading at price/earnings ratios that are less than 20 times earnings for the past four quarters. Beyond that, all you can do is wait for the market to rebound - as it eventually will.

A key reason why we think a recession is unlikely

Source: Deutsche Bank, Bloomberg

December 27 for Friday December 28, 2007

Monetary policy was not particularly tight at any point in this economic cycle.

Generally, recessions begin when the Fed over-tightens monetary policy in an attempt to dampen inflation pressures. While the Fed ultimately lifted interest rates by a substantial 425 bps in the current cycle, this was from record low levels. Real interest rates arguably never went into restrictive territory, and since the Fed was so quick to cut interest rates (-100 bps in the last three months) the probability of recession decreases substantially.

In the current cycle, the real fed funds rate, defined as the level of the nominal fed funds rate minus the year-over-year change in the core CPI, peaked at 3.0% in June 2007. In the 2001 recession, the real fed funds rate peaked at 4.0%; and in the recession before that, 1990-1991, it peaked at 5.3%. The average real fed funds rate at the start of a recession is 5.0%, which is 200 bps above where the fed funds rate peaked in the current cycle. A lower peak in real fed funds combined with aggressive easing since then should eventually help steady the financial markets and economy.

We expect another 50 bps in rate cuts as an insurance move to assure a second half 2008 acceleration. We project the unemployment rate to edge up slightly in the next few months and
headline inflation to decelerate as energy prices stabilize/decline in response to slower growth--accordingly, inflation expectations should drift lower.

If economic growth was accelerating significantly, we would be more worried about inflation. However, the reacceleration should be modest at best, since most of the pick-up in domestic demand will likely be back-loaded into H2 2008.

After all, the traditional channel through which lower interest rates lift growth, namely housing, is a channel that is likely to be of limited use in the near term since the housing sector continues to work through a massive supply imbalance which may be relatively immune to lower interest rates.

Consequently, the possibility of a longer and more extended period of declining home prices
cannot be ruled out and with that increased downside growth risks.

What you can do about... Inflation

By Larry Haverkamp (Doc Money)

OH no! Inflation is coming. And lots of it. Check out the trend: Inflation in 2005 was 0.5 per cent. It doubled to 1 per cent in 2006. This year, it will be about 2 per cent. Last month, the Government forecast 2008 inflation to be 2 to 3 per cent. Now, the official forecast is 3.5 to 4.5 per cent. What is going on? We haven't seen inflation this high since 1980 and 1981 when it hit 8.5 and 8.2 per cent. The all-time record was back in 1973 and 1974 when prices rose 20 and 22 per cent. For hyper-inflation, check out Zimbabwe, Africa. Its annual inflation rate is 9,000 per cent. An expat there complained that the price he paid for his home 10 years ago will buy only one bunch of bananas today.

THE BAD NEWS

There are two reasons why inflation could come roaring back: demand and supply. Demand: Li Xinru lives with his wife and son on a small farm in China. Last month, the family bought their first car. Of course, the car uses petrol which adds to the world's demand for oil. While it doesn't add much, there are millions of Li Xinrus out there. We only see the final effects: A surge of oil exports going to China, India and other developing countries. Supply: The problem is the earth. It is too small. It is unable to support all of us and no one wants to leave. Our planet's natural resources will eventually decline to zero. And it may happen sooner than you think. Take oil. Matthew Simmons' book, Twilight In The Desert, details why Saudi oil reserves are probably less than what they report. The extraction rate may also be too aggressive. It can cause wells to be permanently capped with as much as 60 per cent of the oil still in the ground. How long until the last well runs dry is anyone's guess. No Opec nation has ever permitted an independent audit of its oil fields. It isn't just oil. All natural resources are being used up. It results in sky-high prices for oil, tin, zinc, palladium, nickel, iron ore, gold and natural gas. Can anything save us? Ethanol - made from corn - is the leading substitute for oil. But now, scientists at Cornell University in the US have shown that ethanol production actually uses more energy than it creates. It leaves us with no good long-run solutions. About all we can do is to ration what remains, with resources going to the highest bidder.

THE GOOD NEWS

The short-run offers more hope. Our strong dollar helps a lot to lower the price of imports, which holds down inflation. But you can do more: Set your own inflation rate in seven easy steps.

Step 1: Inflation is the increase in the consumer price index (CPI). It is a weighted average of 5,170 goods sold at 3,000 outlets in Singapore. But watch out. It is only an average and Mark Twain has shown how averages can be misleading. Each of us is unique so we can create our own personal inflation rate. To keep it low, buy only the cheap stuff. For example, inflation ticks up when luxury watch prices rise. That inflation is easy to avoid: Simply leave the $10,000 watches for the rich tourists. A $100 Casio keeps time as accurately as a Rolex costing 100 times more. The same goes for holiday travel. Make day trips to Sentosa and save big.

Step 2: A home is a big part of our monthly budget. In fact, housing makes up 20 per cent of the CPI. But if you already own a home, as do 90 per cent of Singaporeans, then inflation doesn't hurt. In fact, it helps by increasing the value of your home, which is likely to be your biggest asset.

Step 3: Inflation boosts interest rates and that raises mortgage costs. You can solve it by borrowing long-term now, while rates are low. The best deal is a 30-year HDB mortgage at 2.6 per cent interest.

Step 4: For lending, do the opposite. Don't get locked into investments that pay only 1 to 2 per cent. Inflation is going to push those rates much higher. Especially avoid whole-life and endowment policies, including education policies. They lock you into guaranteed returns of only 1 or 2 per cent for up to 25 years.

Step 5: Go easy on unit trusts and stock investments. Studies show they do not perform well in periods of high inflation.

Step 6: In contrast, commodities and property do well in inflationary times.

Step 7: Money market funds are a safe investment. Best of all, they have no lock-in period. So the return will increase instantly when inflation pushes interest rates higher.

Market upside without the risk

Beware of annuities promising high returns at low risk. Most clients would do better investing on their own.

By The Mole, Money Magazine's undercover financial planner

(Money Magazine) -- Question: In "The truth about can't-lose funds," you did a good job of making fixed-indexed annuities (FIAs) look totally worthless.

I provide FIAs to my clients, and I think several of your comments are not based in fact. FIAs are not appropriate for everyone but they do have their place. An FIA will not make you rich, but it is not intended to do so.

What is your recommendation for the client that wants market participation without risk?

The Mole's answer: You are referring to my November 8 column about an insurance product called an equity-indexed annuity, a type of fixed income annuity that promises upside stock market participation without any downside risk.

I am not against all fixed-income annuities, but I am against equity-indexed annuities because the premise of these products is essentially to try to cheat capitalism.

I agree with you that equity-indexed annuities are not appropriate for everyone. In fact, I've never found them to be appropriate for any of my clients.

When you look under the covers of this type of annuity, you usually find two things:

• Complex terms and formulas that make it hard for the consumer to understand how payments are calculated.
• A clause that unilaterally lets the insurance company change the payment terms of the agreement.

Further, since the insurance company is invested mostly in bond-type instruments, the returns will be similar to those of bonds, which are generally much lower than stock returns. Returns are further reduced by commissions, marketing and operating costs, and insurance company profits.

Bottom-lining it, these types of annuities are good for those who sell them, but not so good for the consumers who buy them.

What do I tell the client who wants market participation without risk? Well, plain and simple, you can't have it both ways. But capitalism says that if you take a smart risk with your money, you should expect a long-term real profit.

So I try to assess my clients' willingness and need for risk, and help them to take smarter ones. One way of taking a smart risk is by keeping costs low. That's why the type of annuity that pays handsome commissions to the planner that sells it doesn't fit in with my clients' goals.

I do, however, have a solution for someone wanting to maximize their participation and minimize their risk. Let's use a $10,000 investment as an example and spread it out over two low-cost investments.

• The client puts $5,744 into a 10-year CD paying 5.70 percent annually. In ten years, this CD will mature with a $10,000 balance.
• The client puts the other $4,256 in a total stock market index fund with fees as low as .07 percent annually.

The first part of the investment ensures that the consumer is guaranteed their money back and that guarantee happens to be backed by an agency of the U.S. Government (FDIC) rather than a private insurance company. The second part reaps the benefits of the stock market.

Even if the stock market stays flat, which is statistically very unlikely over a 10-year period, you still get back $10,000 from the CD, plus the $4,256 investment, which averages out to a 3.6 percent annual return. A much more realistic 9 percent average annual stock market return yields a combined 7.2 percent average annual return for the entire build-it-yourself product.

The higher returns are attributed to rock bottom costs. You also get the lower tax rates from long-term capital gains, and you can even defer the CD interest payments by putting your CD in your IRA account.

Now you may be asking, if this strategy is superior to buying an equity-indexed annuity, why isn't it more popular? The fact that no one has the economic incentive to sell it is exactly why it's so rare. The book "Freakonomics" explains the consequences of economic incentives, not the least of which is that the-do-it-yourself strategy doesn't pay people to sell it or bear the high costs of marketing glitz.

In my view, it's critical to know the client before designing an appropriate portfolio, so it's hard to confirm that a single investment is good for a client. It is far easier, however, to recognize a product is not good for a client since there are usually low cost alternatives that better meet client risk and return goals.

I suspect you and I will have to agree to disagree on this one and you will continue selling these annuities and I will continue to recommend against them. I sure appreciate your letter. I have received many letters from those that sell annuities, and allow me to say that yours was one of the few that could be printed.

Odds Are Growing for Economic Recession

By Jeannine Aversa, AP Economics Writer

Subprime Mortgage Meltdown, Unemployment, Wall Street Losses Threaten to Trigger Recession WASHINGTON (AP) -- The unemployment rate leaps to a two-year high, record numbers of people are forced from their homes and Wall Street nose-dives again. Such is the fallout from a housing meltdown that threatens to slingshot the country into a recession.

The big economic question these days is whether the weakening economy will survive the strains or collapse under them.

The odds have grown that the economy will slip into a recession. At the beginning of last year, many economists put that chance at less than 1-in-3; now an increasing number says it has climbed to around 50-50. Goldman Sachs, the biggest investment bank on Wall Street even thinks a recession is inevitable this year.

Hopeful it can be avoided, President Bush and the Democrat-controlled Congress are exploring economic rescue measures, including possible tax rebates. Federal Reserve Chairman Ben Bernanke pledged to lower interest rates as needed.

The idea is to induce people to boost spending, especially on big-ticket items such as homes and cars, and revitalize economic activity.

"The recession gorilla is there. The question is can the Federal Reserve do enough to avert a recession?" asked Brian Bethune, economist at Global Insight. "We think the odds are close to 50 percent that there will be a recession. It is high -- no question about it."

Much hope rides on the Fed. By dropping rates, it can act quickly -- faster than Congress or the White House could agree on and deliver an economic boost.

"The Federal Reserve is not currently forecasting a recession," Bernanke said last week. "We are forecasting slow growth."

Bernanke signaled that a rate cut would come this month. Many economists believe a key rate, now at 4.25 percent, could fall by as much as one-half of a percentage point. Such a cut would lower the rates that are charged to millions of consumers and businesses for many different types of loans.

Analysts predict the Fed will keep doing that in the months ahead as part of a campaign that started in September, when the central bank cut rates for the first time in four years.

Trying to put the fragile economy back on firm footing is the biggest challenge for Bernanke since taking over the Fed nearly two years ago. His job requires a deft reading of the economy's vital signs and keen insights into what makes people and businesses tick. It is their behavior that shapes the economy. And it is in turbulent times that the Fed chief needs to bolster public and investor confidence.

Still, Wall Street is on edge. The Dow Jones industrials plunged nearly 250 points on Friday. Also, consumer confidence tumbled in early January.

Bill Cheney, chief economist at John Hancock Financial Services, puts the odds of a recession as high as 40 percent. "There are a lot of headwinds and the economy probably has enough momentum to get through, but when things get rough, there are a lot of ways things could go wrong," Cheney said.

The fear is that people will clamp down on the spending and businesses will put a lid on hiring and capital investment, sending the economy into a tailspin.

By one rough rule of thumb, a recession occurs when there are two consecutive quarters -- six straight months -- when the economy shrinks.

The National Bureau of Economic Research, the recognized arbiters for dating recessions, uses a more complicated formula. It takes into account such things as employment and income growth. By that measure, the last recession was in 2001, starting in March and ending in November.

Tax rebates aimed at stimulating the economy were part of Bush's $1.35 trillion in tax cuts in 2001. They were credited with helping to make the recession short and mild.

The current housing slump, made worse by a credit crunch, is weighing heavily on economic activity.

Upcoming reports are expected to show the economy grew at a feeble pace of just 1.5 percent or less in the final three months of last year and will be weak in the first part of 2008. Consumers, whose spending is indispensable to a healthy economy, are expected to have tightened their belts.

High energy prices, weaker home values that make people feel less wealthy, and a deteriorating jobs market all figure into more caution on the part of consumers.

The unemployment rate jumped to 5 percent in December from 4.7 percent, fanning recession fears. It was the biggest one-month gain since October 2001, during a time of massive layoffs in the travel industry after the Sept. 11 attacks.

Lawrence Summers, one of President Clinton's treasury secretaries, said the odds of a recession this year went up after the dismal employment report. He advocates temporary tax cuts and emergency spending. "It is now conventional opinion and many fear that there will be a serious recession," Summers wrote recently in the Financial Times.

Martin Feldstein, who was President Reagan's top economic adviser, and former Federal Reserve Chairman Alan Greenspan have urged greater government intervention. Greenspan recently said the economy is "getting close to stall speed," and Feldstein has said his best guess is that the economy "has not turned down and it is still expanding, but very weakly."

Stephen Roach is forecasting a recession

The Financial Times this week ran a column by Stephen Roach of Morgan Stanley, who spelled out why assumptions of "easy asset appreciation" are the root folly of the stock market and real estate bubbles. He also offered a forecast of sorts, best summed up by this sentence:

"It is going to be a very painful process to break the addiction to asset-led behavior."

By way of contrast, there's no "painful process" ahead that I can infer from Fed Chairman Bernanke's latest remarks, which included: "The Federal Reserve is not currently forecasting a recession. We are forecasting slow growth."

As for why Stephen Roach is forecasting a recession, he can speak for himself:

As home prices move into a protracted period of decline, consumers will finally recognise the perils of bubble-distorted saving strategies. Financially battered households will respond by rebuilding income-based saving balances. That means the consumption share of gross domestic product will fall and the US economy will most likely tumble into recession.

Mind you, the key word in the quote above is "protracted" -- home prices already declined some six percent in the 20 major metropolitan areas of the U.S. in 2007. In other words, millions of people are not simply failing to see the appreciation they expected; in fact, their asset prices are in decline.

Successful investing is hard, and good investment opportunities are hard to come by. Walk away quickly from anyone who says otherwise.

Bulls, Bears, and Baristas

by Mick Weinstein

It's looking ugly out there. The Dow recorded its worst first five days of any new year and the S&P 500 has fallen over 6 percent in the past month. And despite Fed Chief Bernanke's market-sparking suggestion yesterday that sharp rate cuts are on the way, sentiment grows that we're facing a recession.

Bargaining with the Bear

John Lincoln points to the combination of five factors -- slowing corporate profit growth, the prolonged housing slump, a continued credit crunch, and slowing consumption and manufacturing -- that suggests this bull market is coming to an end. "I don't know if this will be a 'grizzly' (vicious) bear market or a 'knut' (light) bear market," says Lincoln, but "regardless of the severity, one must be prepared for the downturn that will no doubt feel like it's the end of the world."

John Mauldin, advisor to the hedge-fund stars, believes the recession is already here, but that it's going to be a mild one. The recovery period, however, will be "prolonged and slow," and will start in the third quarter of this year.

Yet Markham Lee argues that the very concept of recession is more a political designation than a financial or mathematical reality: "...the reporting of economic growth, the declaration of recessions, etc., are more about confidence than about the real impact on our household budgets, investments, and businesses." Lee's advice? Ignore recession talk and focus on your own economic reality -- i.e., budget well and diversify your investment portfolio.

If dealing with a recession means being realistic, then Wall Street veteran Barry Ritholtz helps process that reality. Using Elisabeth Kubler-Ross' five stages of grief, Ritholtz believes we've already passed through Denial and Anger and have arrived at the Bargaining stage. With growing expectations of a 50-basis-point interest rate cut, investors are bargaining for steady stocks if the Fed cuts aggressively. But steps 4 and 5, Depression and Acceptance, have yet to occur, which means "we have some downside work to do before this is all over."

Bullish on Bullishness

Looking at the dropping stocks and the widening corporate bond spreads, bond professional Accrued Interest notes the unusual situation that "the stock and bond markets don't agree about where we're going next." He thinks the economy will be weak in 2008 and corporate defaults will keep rising, and while he's not advising selling off stock portfolios, the numbers "certainly don't inspire a lot of confidence."

Jim Kingsdale, head of Energy Investment Strategies, expects further "strum und drang" in the American stock market, sensing "that this is a time to stay away from virtually all markets." Bespoke Investment Group agrees, commenting that the continued fall of the Nasdaq is news that the bulls simply don't "want to hear."

But there are some thoughtful bulls out there to consider as well. Trader Babak believes a correction is in sight, telling

investors and traders that they "are reacting with complacency but fear." Greg Feirman is thinking along the same lines, waiting for stocks to bounce, though not by much -- "about 50 points on the S&P."

Fund manager Daniel Carroll concurs, and believes the market sell-off is "presenting great opportunities to make lots of money... In five years, my most likely regret will be that I conceded and got scared, and failed to capitalize on some unbelievable sales. The challenge is deciding how aggressive I can afford to get." For now, Carroll's looking at ways to increase his exposure and "take advantage of these fire-sale prices."

Starbucks' CEO Shuffle and Baristas at Mickey D's

Starbucks stock, a top performer over the past decade, has fallen 23 percent over the past three months. This week, Howard Schultz announced his return as CEO of the company, and Schultz's first challenge will be to stave off the new gourmet coffee product from a going-upscale McDonald's. As Sharon Zackfia said in the Wall Street Journal, "This is [Shultz's] baby. If anyone's going to figure out how to make this train get back on the rails, even in these tough economic times, it's going to be Howard."

Greg Feirman echoed that sentiment, calling all the hype "bullish for Starbucks' business," as Schultz has the "motivation and will do his best to right the ship." But Feirman also thinks this is "only the beginning of any potential turnaround. Starbucks has already gone a long ways down the wrong path and it is going to take time to repair the business and... reputation."

In reviewing Zackfia's analysis, Turley Muller agrees that the coffee brewer is actually "well insulated" from consumer spending downturns because caffeine is highly addictive, "closer to a staple than a discretionary good."

Moreover, says Muller, the challenge from Mickey D's "will only mildly impact growth in the sense of potential future new customers, and will not steal current SBUX customers. MCD is just taking advantage of their high foot traffic already in place."

But Todd Sullivan believes McDonald's continued growth, as well as its recent announcement to provide free Wi-Fi in its UK stores, "offer[s] people another cheaper alternative to the pricey Starbucks."

Adds Sullivan: "When you consider that I can get one [coffee] at McDonald's for $2, or, make it myself for about 60 cents, then the $5 purchase will just not be made. Judging from recent results at Starbucks, there are ton of folks out there that feel the same way." He believes there isn't anything to stop the fall of Starbucks shares, but that the java brewer "may give us a value play soon enough."

Finally, Wall Street Journal blogger David Gaffen thinks Starbucks stock is benefiting from a "post-Schultz bounce." For traders, the 10 percent rise "may be enough -- it represents a shift in momentum. A switch from decaf to espresso, as it were."

Investment Idea: Capitalize on Beijing Olympics

Ctrip.com, a Chinese online travel planning and booking site, is the equivalent of America's Orbitz and Expedia. The company's stock is traded on the Nasdaq in the U.S. as an American Depository Receipt, with ticker CTRP.

Hedge fund manager Zachary Scheidt is bullish on the stock -- he believes CTRP is unique from its foreign equivalents due to its essentially "monopoly status." With roughly 57 percent market share of the Chinese online travel market, and the expectation that the online travel market itself in China is expected to grow at a 37 percent rate through 2010, "CTRP is set up nicely to benefit from these trends" as well as upcoming Olympics and the "general willingness of the global population to visit China." Scheidt doesn't think it's reasonable to call this stock a value play because it truly is trading at a high multiple, but a "diversified account would benefit from a strong competitive position such as CTRP."

Shane Farley couldn't agree more, and recommends taking positions in Ctrip with the Beijing Olympics approaching, a certain catalyst for domestic revenue growth.

Read more on the Ctrip's unique competitive position from Trader Thoughts, who says given the online travel company's earnings prospects of 35 percent growth in Q4,"investors would be fair in expecting another blowout quarter from Ctrip... CTRP is the perfect long-term play on the emerging Chinese middle-class and their rising purchasing power."

7 economic warning signs

Could a small shock push the economy over the edge?

By Rex Nutting, MarketWatch

WASHINGTON (MarketWatch) -- Everyone knows the U.S. economy is teetering on the edge of recession in the next year, but no one knows if it will tip. Will troubles in the housing market and financial markets spill over enough to halt the economy's growth?

Or will the strength of consumer spending and export manufacturing keep the economy above water?

The U.S. economy is now in the danger zone," wrote Nariman Behravesh, chief economist for Global Insight. "Even a small shock will push the economy over the edge."

Behravesh is not alone. The Blue Chip consensus forecast of 51 economists sees a 40% chance of a recession in 2008, with growth of just 2.1% between now and the beginning of 2009.

Anyone can make predictions. But instead of giving you a bunch of he-said, she-said predictions, MarketWatch thought it would be more useful to help you to watch the economy's vital signs to see which way it'll go.

Here are seven warning signs to watch in the next few months.

1) Credit markets

What to look for: Libor, interest rate spreads.

The spread between the London Interbank Overnight Rate, or Libor, and an ultrasafe 3-month Treasury bill has recently been 75 basis points, but is usually about 10. If the spread returns to normal, the danger from the credit squeeze could be over and the economy might escape without too many scratches.

The biggest unknown in the economy right now is the condition of short-term credit markets that big businesses rely on for their immediate funding needs. Some of those markets are functioning well, but others are clogged up. Some firms, especially those in the mortgage business, can't sell commercial paper at any price. Other companies can't get funding from banks because banks are hoarding their reserves.

The basic problem is fear. After years of accepting almost any kind of collateral, lenders have turned super cautious. Anything that sniffs of exposure to subprime lending is shunned. And because of the way the subprime mortgages were leveraged up and hidden away in special investment vehicles and collateralized debt obligations, the toxic waste could be almost anywhere. Even in Aunt Bea's pension.

The Federal Reserve and other central banks have been trying to Roto-Rooter the system, flushing it with cash too cheap to pass up. The Libor rate should show how successful they are.

2) Capital spending

What to watch for: Investments in core equipment. Profits.

If companies can't borrow money, they'll turn increasingly to their own internal funds from profits to finance expansion projects. The good news is that many companies are sitting on loads of retained earnings and have the capacity to invest, but many others will feel the squeeze as profit growth slows in 2008.

Even if companies have the means to invest, will they have the will? Is it a good time to expand capacity when the U.S. and global economies are slowing? Sure, if you're looking far enough ahead and want to be ready for the next boom. But many managers will opt to cut costs in the short-run and hold off on new plans. That will create a ripple effect as those who produce capital equipment cut back on their own expansion plans.

3) Oil prices

What to look for: Crude oil futures prices. Core inflation rates.

If there's anything worse than recession, it's stagflation, a condition that combines slow growth and rising prices. As well as determining whether inflation remains steady and manageable or explodes out of control, the price of oil could be a major factor in how fast the global economy grows.

The good news so far: Core inflation remains moderate. But inflation hawks on the Fed and in the private sector worry that an inflationary psychology could be taking hold that could push all prices higher.

On the growth side of the equation, the good news is that the global economy has been able to adjust to $80 a barrel oil without killing growth. What we don't know is whether the global economy can thrive under the double whammy of higher energy prices and slower American growth. Would China's growth stumble?

4) Exports

What to look for: Exports, the value of the dollar, global growth rates

If there's one bright spot in the U.S. economy, it's the growth of exports. With the dollar weakening, U.S. producers are once again gaining market share in the global market place. Slowly, the U.S. economy is transforming from a nation that builds too many homes to a nation that makes tradable goods.

The transformation is long overdue, and should help reduce the huge current account deficit. It could be the major driver of growth in the next year.

But export growth is dependent on two variables: Growth rates in America's trading partners, and the value of the dollar.

5) Housing

What to watch for: The number of homes on the markets, housing starts.

Housing has been the big drag on the economy for several years and will probably be so again in 2008.

"We think the housing shock is about half over," wrote Ethan Harris, U.S. economist for Lehman Bros. Foreclosures will probably quadruple to about 1 million in 2008 and 2009, keeping the supply of homes high and putting downward pressure on prices, Harris said.

Home builders have been trying to slash their inventory of unsold homes, but haven't made much progress because sales are falling as fast as new construction is. The official inventory statistics understate how bad it really is for builders because they don't account for canceled sales.

Few observers expect any growth from housing in the next year, although some expect the bottom to come by midyear, while others don't hold out any hope for 2008 at all. If the inventory of homes on the market falls enough, the housing market could stop being such a negative.

6) Consumer spending

What to watch: Consumer expenditures, job and wage growth, and household net wealth

The sharp drop in housing hasn't cut into consumer spending yet, but that could change if home prices keep falling, as many expect. Typically, consumer spending is driven by job growth, which keeps wages rising. Job growth has already slowed to the weakest pace in three years and most economists expect it to slow further in 2008.

As a result, consumer spending could be the weakest in 17 years, according to the Blue Chip consensus.

The wild card for the consumer is home prices. The most pessimistic forecasts call for a cumulative 20% decline in home values and even the most optimistic forecasters don't see any upside for real estate values. There's a big debate over how much the lost wealth will cut into consumer spending.

"House prices are unlikely to plunge," wrote Josh Feinman, chief economist for Deutsche Asset Management in the Americas. "The impact of cooling house prices on consumer spending should be relatively modest."

While some argue that consumers won't be affected by paper losses, Lehman Bros.' Harris argues that it's the growth rate in home values, not the level, that determine the growth of consumption. Rising home values were a real boost to consumption over the past five years and that stimulus has now been removed, cutting about 2 percentage points from the growth rate of consumption.

7) Washington to the rescue?

What to watch: The federal funds rate. Tax and spending legislation.

Timely and targeted actions by government could turn what would be a deep and lasting slump into a minor inconvenience. The Fed is taking the prospect of recession very seriously, having cut the fed funds rate by a full percentage point already.

Some observers think the Fed may be shooting blanks, because consumers have been burnt by taking on too much debt and can't take on much more, even if interest rates plunge. The skeptics think the only effective countercyclical policy could be on the fiscal side.

But the election year won't be favorable for fiscal stimulus, because the two parties have been able to find much common ground, especially on taxes and spending. More government spending is off the table, and a tax cut is unlikely unless Washington can rediscover the lost art of compromise.

Surviving job-market bumps

Whether you're in a weak industry or not, here are tips to stay ahead

By Andrea Coombes, MarketWatch

SAN FRANCISCO (MarketWatch) -- Economists say the job-market is likely to slow in the year ahead. Should you be worried? Not really, said Cincinnati-based career consultant and author Andrea Kay, who operates AndreaKay.com.

The first thing workers should remember, Kay said, is that statistics don't necessarily reflect their own situation. "Don't jump [to another job] just because statistics are saying nobody is hiring."

At the same time, workers always should be prepared for things to change, even if their current position and job-market outlook appear rosy.

"Nothing lasts forever," Kay said. "It'll change because of whatever's going on in the market, because of economic factors, because of some event in the world, because of something you cannot predict."

Given that uncertainty, now is the time to think about preparing for your next job. The first step "is to know why you matter," Kay said. "If something were to change in your industry or your company, you need to know why you have value."

That means keeping notes detailing the moments when you make a concrete difference to your company. Ask yourself, "What new idea did I come up with, what relationship did I save, what process or procedure did I come up with, what thing did I develop that made the company increase customers or increase Internet traffic?" Kay said.

Track those moments. "These are things that you can take with you, and that you can transfer to another industry that might be aligned with the one you're in," she said. "A lot of people hardly ever think about this stuff, they're too busy doing their jobs. My advice is you better be tracking this stuff," she said.

"It sounds like a lot of work and it is, but there's a lot at risk" in not doing it, Kay said.

In the event of a job loss, "most people will be frantic. Even though the warning signs were there, they don't do the basics. But don't freak out, don't panic, just get your ducks in a row. Most people aren't doing that. You'll be ahead of the majority if you do that."

Job seekers' help line

For people currently seeking a job, a temporary advice line available later this month might be just the ticket. Challenger, Gray & Christmas, the Chicago-based outplacement firm, offers advice free over the phone for two days each year. Job seekers can call in for help from the firm's job-search counselors.

"It's open to anybody who is looking for a job and is having difficulties and questions about how to do it," said John Challenger, the company's chief executive. "We get calls from all over the country, the whole gamut, from autoworkers to self-employed to mortgage bankers and lenders and sales people."

Note that the hotline does not offer specific job leads. "People shouldn't call thinking we can put them into a job. It's an advice line about the job search," he said.

"We spend our year working with people who are out of work, helping them find jobs. We've been doing that for a long time. We know the kinds of situations people face and what to do about them. But we're not a placement agency and don't have jobs to offer them," Challenger said. Also, Challenger does not seek new clients via the hotline -- the company only works with people who are placed with them by an employer.

The counselors at Challenger, who have helped nearly 40,000 job-seeking callers since the holiday call-in began in 1985, will be available Dec. 26 and Dec. 27, from 9 a.m. to 5 p.m. Central time. The call-in number is 312-332-5790. That is a toll number if you are not local to the area.

Rethink your title

Another tip to stay on top of the job market, Kay said: Don't let your title box you in.

"Quit looking at yourself as a title and start seeing yourself as a package of skills and knowledge ...who you know, what you know," she said.

"If you are a mortgage banker and mortgage banking jobs are not doing a lot of hiring in that field, then you feel stuck. You say, well I'm a mortgage banker and they're not hiring much, what can I do? It limits your own thinking about yourself," she said. Focusing on skills, knowledge and contacts will help you see beyond your title, possibly to other industries.

Also, "always be in learning mode," Kay said.

That means knowing what's going on in your industry, but also learning other skills that may help you get ahead.

For instance, "project management might be a skill that you incorporate into what you do. Just always be thinking about, 'What do I need to know to be up-to-date?'"

If you're considering another field, consider taking a course or two in that area rather than enrolling in a full-time program. "This whole idea of continued learning is an absolute must," she said.

"It's funny, because it's the whole mindset of learning and stretching your brain cells and exposing yourself to new information that will allow you to start seeing new connections in what you do," Kay said.

"It helps you to be creative, to see how to apply what you know into another discipline."

Recession dead ahead?

With a government report showing the weakest job gains since 2003, some analysts are calling out a bleak forecast. But the negative news may just be enough to force the Fed into action.

By Elizabeth Strott

After the worst monthly jobs report in four years, people are starting to use the R-word again.

"These jobs data are the strongest evidence so far that the economic expansion is grinding to a halt," Peter Morici, professor at the University of Maryland School of Business and former chief economist at the U.S. International Trade Commission, wrote in a note to clients Friday morning.

"Slow jobs growth, along with the shortages of mortgage and business credit, declining home prices and residential construction, and falling industrial production, indicate the risk of a recession for 2008 is high," he continued.

The Labor Department reported Friday that nonfarm payrolls rose by a mere 18,000 in December 2007, far fewer than economists had expected, and the weakest month-to-month change since August 2003.

The consensus estimate was for a gain of 58,000 jobs last month, although analysts' estimates had ranged broadly, with some as high as 85,000 new jobs.

Meanwhile, the unemployment rate jumped to 5.0%, up from the 4.7% in November, and up from 4.4% in December 2006. Average hourly earnings rose 7 cents, or 0.4%, slightly higher than the expected 0.2% increase.

"This tells you that the strains from credit problems and so forth that have been developing the last six months are starting to bite, and they're biting in a way that now finally draws consumption into question," Neal Soss, chief economist at Credit Suisse Group, told Bloomberg News.

Fed action required?

Stocks tumbled on the news Friday, but many investors and analysts saw a silver lining: that the Federal Reserve will now be forced to move decisively.

Morici expects the Fed to "aggressively cut interest rates to combat the U.S. slowdown."

Phil Orlando, chief equity strategist for Federated Investors, says he expects the Federal Reserve to cut interest rates at the next Federal Open Market Committee meeting on Jan. 30 and then again in February -- outside of a scheduled FOMC meeting.

"All of the economic news is negative," Orlando told CNBC. "This ensures that the Fed has got to get engaged more aggressively than they have been."

And that, he says, is good news: "The fact that the Fed is engaged, we think is going to be a positive over the course of the balance of the year for stocks."

Not so fast . . .

According to the federal funds futures trading on Friday afternoon, most people think that the Fed will cut the federal funds rate by a quarter of a point to 4%, and there is only a 34% chance that the Fed will cut any lower.

But investors shouldn't start counting their chickens.

Morici warns that "the Federal Reserve is in crisis, because its mix of policies addresses an old-style recession, one premised on inadequate consumer demand but solid financial institutions.

The coming recession, he says, will be different: "This recession has its origins in questionable banking practices and a breakdown of investor trust in the integrity of Wall Street's most venerable banks and investment houses."

Will you lose your job in 2008?

Unemployment is expected to rise this year, and hiring could be slower in almost all occupations, economists say. Here are the industries that probably will suffer the most.

By MarketWatch

Though the job market isn't in tatters, there are plenty of loose threads, and they're likely to unravel further this year into full-fledged holes in some industries.

One problem, economists say, is that the job market will continue to feel fallout from the subprime mess despite about 153,105 job cuts announced last year at financial-services companies -- about three times the announced cuts each of the previous two years, according to Challenger, Gray & Christmas, a Chicago outplacement firm.

That's not all. Many economists predict a slowing economy ahead, and that means "there will be an almost across-the-board slowdown in employment growth," said Michael Montgomery, a principal with Global Insight, an economic forecasting firm in Lexington, Mass.

That means slower hiring, not necessarily rampant layoffs. And the degree to which slower hiring or even layoffs affect an individual worker will depend on many factors.

Still, plenty of economists see the overall labor-market outlook this year as tougher than last year's. In 2008, "unemployment will almost certainly creep above 5%," said Jared Bernstein, a senior economist with the Economic Policy Institute.

"While that is pretty low in historical terms, it's high enough that it's going to pinch some folks," he said. The jobless rate rose last month to 5%, a two-year high, according to the U.S. Labor Department.

Which jobs?

Workers in some industries will be harder hit than others, said John Challenger, the chief executive of Challenger, Gray & Christmas.

"Bankers, lenders, Realtors, construction companies, even home retail and materials manufacturers -- the people who make roofs or doorknobs -- are probably the kinds of companies or industries that will see the heaviest job cuts," he said.

Also likely to get pinched further this year: residential title companies; mortgage brokers; insurance carriers, if focused on mortgage or home insurance; real-estate agents, brokers and others at investment banks and securities brokerages; home-materials manufacturers; home-improvement stores; and furniture retailers.

Workers involved in the securitization process may see fewer jobs, too. "That was the rage for years and years, securitizing these different products, whether houses or cars or credit cards," but that's on the wane, said Alan Johnson, the managing director of Johnson Associates, a New York compensation consulting firm.

Even architects and engineers might see a weaker job market. "We're seeing a bit of a slowing in commercial construction, and architects and engineers have been doing quite well in recent years. That's already begun to slow down," said Sophia Koropeckyj, an economist with Moody's Economy.com in West Chester, Pa.

The manufacturing sector continues to lose jobs. And though the weak dollar helps U.S. exports, that hasn't translated into more jobs.

"I suspect that at best we'll be losing jobs there at a slower rate," Bernstein said. "It's a highly productive sector. We may well be able to meet our export demands without adding much more employment."

Automakers and related auto-parts suppliers and dealers may also see more layoffs. Auto sales have averaged more than 17 million for a number of years, but Koropeckyj said she expects that to drop below 16 million for the next few years.

"That will force the domestic auto industry to cut back even more, and that will sweep up the whole array of various auto suppliers, too," she said.

Waiting for better days

Certainly, some job seekers will have a tougher time than others, and job-search timing may play a part. The economy created about 111,000 jobs on average per month last year, and that's expected to drop to an average 85,000 a month this year, Koropeckyj said. December's figure, however, was far lower than that: 18,000 jobs, the weakest job growth since August 2003.

The worst of 2008's job market will be concentrated in the first half of the year, when employment growth is predicted to average 72,000 new jobs per month, Koropeckyj said, versus 98,000 a month in the second half.

Through it all, health care is expected to remain a job-market stalwart. Educators are also in demand. Over the next decade, "there are a large number of teachers who are nearing retirement and who will have to be replaced at all levels of education," said Jon Sargent, an economist with the federal Bureau of Labor Statistics.

Industry watchers offer mixed outlooks for technology: It's been relatively strong of late and may not drop off too much, though there often can be "churn and volatility," Challenger said.

The consumer question

Another possible weak spot: retail. Consumers hit by high gas and food prices, and the effect of lower home values on their net worths, may pull back on spending. That could affect hiring at various retail jobs.

But the U.S. consumer is often surprisingly resilient. "You can never bet against him or her, but most of us believe consumption is going to trail off significantly in this and coming quarters," said Bernstein, of the Economic Policy Institute.

One reason: "Wage growth has not kept pace with inflation in the last few months. Once you buy the groceries and fill up the tank, there's a lot less left for other purchases," Bernstein said. "Demand for labor is derived in part from consumer demand."

To the degree that consumers' and corporations' pocketbooks are pinched, nonprofit organizations could also get hit. "Nonprofits may be seeing fewer contributions and would have less ability" to add jobs, Koropeckyj said.

Financial services' effects

The subprime-mortgage mess "has enormous knock-off impact," Johnson, of Johnson Associates, said.

"If you don't do deals, you don't need a lawyer. You don't need a printer. You don't need a late-night car service picking stuff up," Johnson said. "You have people like accountants, consultants, lawyers, all kinds of professionals that service financial-service firms, from caterers to limo drivers," affected by the industry slowdown.

Meanwhile, some states will see weaker job markets than others, Bernstein said, pointing to California and Florida because of their softer housing markets and to Michigan and Ohio because of concerns about manufacturing jobs. New York City will be hard hit by the subprime mess, Johnson said.

Looking ahead over the next decade, the bureau says cashiers (other than gambling), stock clerks, telemarketers and computer programmers are among the 30 occupations likely to see the largest employment decreases.

Retirement planning: Start out strong

To make their long-term dreams come true, Jodi and David Lewis, ages 26 and 27, need to be as serious about savings as they are about their careers.

By Yuval Rosenberg, Money Magazine contributing writer

January 9 2008: 1:58 PM EST

(Money Magazine) -- When you're young, the most important thing you can do financially is get off to a good start. Jodi and David Lewis have certainly done that - at least when it comes to their jobs.

Jodi, a development director for a nonprofit, was the youngest person ever elected to the Piedmont, Okla. city council.

David is a regional manager for a staffing company, has written a book on leadership and was recently named one of the area's "Achievers under 40" to watch.

And though he lost a 2004 run for state representative, David says he'd like another try at politics someday.

But for this to happen, the Lewises have to shore up their finances. That's because a career in public service could cut David's income by more than half.

Meanwhile, like other couples their age, the Lewises are thinking about starting a family soon - and hope to retire young.

"We've got four or five different irons in the fire," says David. "It's going to take some financial freedom to make everything possible."

Where they are now

On paper the couple's finances appear to be on the fast track, at least relative to those of other workers their age.

Combined, these high achievers earn $135,000 a year. They own a $130,000 home, as well as a rental property valued at $100,000.

But like other twentysomethings, the Lewises have done their fair share of spending - especially since getting married in October 2006.

"We took three vacations, updated the wardrobe, did a home improvement project," David says.

This explains why they have only a modest $11,000 emergency fund. And they still owe $25,000 in school and car loans and $5,000 on their credit cards.

But David and Jodi say they're now ready to ratchet up their savings.

What they should do

Their first investment goal - and the foundation of a safe financial plan - is to build up their emergency fund, says Tulsa financial planner Adam Leavitt.

He suggests using half their excess cash flow - the Lewises have $2,400 left over every month after paying their bills - to boost their rainy-day fund to more than $20,000.

The couple should also use David's bonus and outside income as an author to retire debt. Paying off high-interest credit cards is especially smart in an uncertain market, when it's unclear what you can expect from stocks.

To supplement her small retirement account, Jodi should also open a Roth IRA, contributing the $5,000 maximum for 2008, Leavitt says.

And he suggests opening a taxable investment account with money left over, which the couple have already done.

David and Jodi can also improve their investments. David owns a jumble of 17 funds in his $35,000 401(k). Leavitt suggests a simpler mix of seven, anchored by blue-chip choices like Vanguard Growth Index (VIGRX) and Vanguard Value Index (VIVAX).

And even though the Lewises know all too well the risks involved in a shaky market - after seeing a $5,000 investment Jodi made in Williams Communications at age 19 shrink to 87 cents, the couple need to stay aggressive.

Leavitt says 90 percent of their investments should be in equities, with the remaining 10 percent in bonds.

And within their stock portfolio, he recommends boosting international exposure from around 25 percent to 35 percent through low-cost options in David's 401(k) like DFA International Value I (DFIVX).

By ramping up their savings and investments, the couple should be able to start a family soon, pursue their career ambitions and even retire early. But the key is to get started quickly.

"Doing it now," Jodi acknowledges, "makes a world of difference."

Recession may already be here

Economists shift from wondering if there will be a recession to asking if the U.S. economy has already shifted into reverse.

By Chris Isidore, CNNMoney.com senior writer

January 10 2008: 4:57 AM EST

NEW YORK (CNNMoney.com) -- The question for many economists is not if the U.S. economy will fall into a recession. It's whether it already has.

The formal recognition of a start of a recession probably wouldn't come for at least six months if not more than a year, as official judges from the National Bureau of Economic Research (NBER) pour through various economic readings.

But top economists from two of the major Wall Street firms - Merrill Lynch and Goldman Sachs - say recession is likely already here.

The tipping point for both economists was the report released last Friday that showed a sharp jump in the unemployment rate in December, coupled with little growth.

"Friday's employment report strongly suggests that an official recession has arrived," wrote David Rosenberg, North American economist for Merrill, in a note this week entitled "Recession a reality."

He wrote that history points to a recession when the average length of the work week fell in back-to-back quarters, as it did in the third and fourth quarters of 2007. And he said at no time in the past 60 years has there been a half-percentage point climb in the unemployment rate from the low point without a recession following. The latest unemployment reading stands at 5.0 percent, up from 4.4 percent in March.

The traditional sign of a recession is two or more quarters when economic activity declines rather than grows. That hasn't happened - the final reading of growth in the third quarter came in at a healthy 4.9 percent.

The NBER's calculation of when a recession starts and when it ends is far more refined than the two-quarters-of-economic-decline test. It looks at a number of factors, such as employment, real personal income and manufacturing, and comes up with a date pegged to a specific month, rather than a quarter. For example, it judged that the most recent recession ran from March 2001 to November 2001.

There's wide agreement among economists that growth in the fourth quarter fell sharply from third quarter levels, although most still forecast slim growth in the period. But many are forecasting a better-than-even chance that some quarters in 2008 will show declines.

Goldman's senior U.S. economist Jan Hatzius is one of those saying a 2008 recession is likely, with roughly a two-in-three chance. Hatzius is worried about the three-month average for unemployment, which has jumped more than one-third of a percentage point from its low.

"Whenever you've tripped the one-third-percentage point barrier, it's an [recession] indicator that's ten out of ten," he said.

Hatzius is expecting the recession will be fairly mild, lasting only 6 months, with the economy declining by no more than 1 percent in any quarter.

Recession cures - plans to goose growth

But that is based on his assumption that the Federal Reserve cuts rates deeply and quickly, to 2.5 percent from its current 4.25 percent. He also believes that given election-year pressures, there's likely to be some form of tax cut or rebate to try stimulate the economy.

"If the data is every bit as bad as we're expecting and the Fed for some reason refuses to respond, you could see a more severe recession," Hatzius said.

Hatzius also said he believes that the downturn in housing is nowhere near being played out. Hatzius is forecasting that home prices end up plunging 20 to 25 percent below peak levels. And he said that a further sharp decline in housing prices will hit both consumer spending and credit markets, which are two more reasons he's forecasting a recession.

Cautious optimism

Of course, there are still economists who believe that the economy is more likely to avoid a recession than sink into one. But even they admit to being more concerned than they were a few weeks ago.

"Our own recession-warning model currently indicates that the odds of a recession occurring in the next six months are slightly greater than 50 percent," said the monthly economic outlook from Wachovia. "That said, we still believe the economy will avoid an outright downturn, as a good part of December's weakness appears to be tied to special factors." It cited severe winter storms in much of the country as one of the issues distorting the latest readings.

Even some other economists who believe a recession is likely, such as Harvard University's Martin Feldstein, the president of the NBER, don't believe the economy has already started to shrink.

"Of course these numbers can be revised, but as long as we have positive numbers for employment growth - very weak but still positive - and for industrial production, when the business-cycle dating committee looks at the evidence, they wouldn't say we're currently in a recession," he said.

Feldstein, one of the fathers of the Bush administration tax cuts passed early in his tenure, is advocating tax cuts and further Fed cuts to respond to the current weakness, even if the economy doesn't slip into recession.

Economist Bob Brusca said that while he thinks there is now a better than even chance that there will be a recession, that doesn't mean the Fed can start slashing rates because of the continued threat of inflation.

"A lot has yet to happen if recession is to kick in," Brusca said. "It may yet happen. But for policy that is not the issue. Policy needs to react to circumstances and that refers to both the inflation and growth profiles."

Other economists point out it's almost irrelevant as to whether the economy fell into a recession in December, or does so a few months from now.

Bernard Baumohl, executive director of the Economic Outlook Group, said that even if the economy avoids a recession, it will do so with very slow growth in 2008. He said it's almost immaterial from that perspective if there is a recession or not.

"It'll have the same painful effect on businesses and households," Baumohl said.

In case of emergency, slash rates: Some are calling for the Fed to cut interest rates sooner rather than later to fight off recession.

Recession S.O.S. - goosing growth: Lawmakers are considering a host of options to stimulate the economy, and some may mean more for your bottom line.

Bush tax cut guru: Recession now likely: Martin Feldstein argues tax cuts and more Fed rate cuts necessary to address looming recession.

So One Job Isn't Enough for You?

by Tara Weiss

Sometimes you've got to show the higher-ups you can do the job before they give it to you.

Forward-thinking employees know that and are taking on additional responsibility to prove they should get promoted or switch departments altogether. Yes, it takes additional planning--and lots of extra hours at the office--but the effort can pay off.

"It's like having a business plan for yourself," says Janet G. Lenz, an assistant professor and career counselor in Florida State University's career center.

Take Greg Topalian. He started working at Reed Exhibitions 10 years ago as a salesman, and now he's a senior vice president at the Norwalk, Conn., trade-show operator. His steady climb up the corporate ladder is a direct result of asking himself what it takes to get to the next level.

"This wasn't about how I could steal my boss' job," says Topalian. "It was more, 'What skills does he have that I don't?' When I started as a salesman I realized my sales director does things I don't, so I'd offer to help. I'd say, 'How can I make your life easier? Can you show me?'"

Prior to getting his current job, he served as group vice president at Reed. Once he had that job under control, he analyzed what it meant to be a senior vice president. One of the job's main aspects is thinking globally. Topalian demonstrated that mode of thinking by creating a training model for all exhibitors on how to get the most out of their trade shows.

"It made our most senior management feel that I clearly grasp the nature of the senior vice president role," says Topalian.

And that's what all hiring managers want. As Karen Rohce, vice president of human resources at Sun Microsystems, puts it: "Experience is the best classroom."

To get it, employees need to set up a supportive structure. First, explain to your boss that you greatly enjoy your job, but you want to take on new responsibilities. (It helps if you scout new projects or find a mentor to give you added tasks.) Employees should assure their supervisor that their current work won't suffer and that these new responsibilities will make them a "value-added staffer."

Once you find a mentor or supervisor to work with, set up the parameters of the additional projects, including its length of time, along with ways to measure success. Also, get feedback from your "part-time" boss. Was he or she happy with your work and are there skill sets you need to strengthen? It also helps to have your two managers communicate. Ask your part-time boss to send your regular manager periodic updates on your work. This is a great way to remind your supervisor that you're working two jobs.

The biggest challenge is getting burnt out by the additional hours spent at the office. Avoid that by taking on small projects until you feel comfortable with the new workload and unfamiliar skills. But the bottom line is, if you want to make it to the next level, you'll need to work more. "There are times when you'll be doing a 10-plus hour day to get to the next level," says Topalian. "That's a reality."

You can alleviate some of the workload by encouraging your subordinates to do the same thing. "They're able to take on your lower-end work, which is high-end to them," says Topalian "There's a synergy there that's very important."

Some companies already have this built in to their training and development structure. At IBM, employees can test out different areas or their ability to do another job by taking a stretch assignment. These can be a few months or up to a year, and part- or full-time. If the employee likes his or her new post so much that they decide to switch positions, well, that's just fine. "We view it as a win-win if it happens," says Diana Bing, director of employee development at IBM. "We want them to stay with the company."

Mike Repede thought he wanted to leave his position as a manager in IBM systems and technology and work as an instructor for new hires. Once a month, he left his Rochester, Minn., office and flew to IBM's Armonk, N.Y., training facility to lead classes. His co-workers in Minnesota picked up any work that needed to get finished while he was gone and were quite supportive of his endeavor.

But while Repede enjoyed the job, he quickly realized that it wasn't right for him. "I had to take the stretch assignment in order to realize that," says Repede. "It was the experiential learning that made the impact."

Copyrighted, Forbes.com. All rights reserved.

U.S. recession "not a sure thing": Feldstein

WASHINGTON - The probability of the U.S. economy sliding into a recession is now over 50 percent, but it is not a sure thing, National Bureau of Economic Research President Martin Feldstein said on Thursday.

"A recession in my judgment is more likely than not, but it's not a sure thing," Feldstein told a forum hosted by the Hamilton Project, an economic research group headed by former Treasury Secretary Robert Rubin.

NBER is the organization that determines when the business cycle enters recessions and recoveries.

Goldman Sachs sees recession in 2008

NEW YORK (Reuters) - Goldman Sachs on Wednesday said it expects the U.S. economy to drop into recession this year, prompting the Federal Reserve to slash benchmark lending rates to 2.5 percent by the third quarter.

In a note to clients, Goldman said real gross domestic product would contract by 1 percent on an annualized basis in both the second and third quarters. For all of 2008, the investment bank said GDP would rise by 0.8 percent.

The unemployment rate will rise to 6.5 percent in 2009 from the current 5 percent, it said.

The weakening economy will force the Fed to lower policy rates by an additional 1.75 percentage points from the current 4.25 percent. Starting in September, the Fed cut rates at the last three meetings of the Federal Open Market Committee, reducing the target rate on loans between banks by 1 percentage point from 5.25 percent.

Goldman strongly advises fund managers to overweight health care, consumer staples, energy and utilities. They are significantly underweight consumer discretionary, financials, industrials, materials and information technology.

The three most significant changes to their sector recommendations are the reduction in the financial sector weighting by 300 basis points to 14 percent, the information technology weighting by 400 basis points to 15 percent, and the increase in their health care weighting by 300 basis points to 17 percent, the firm said.

Their reduced allocation to financials reflects weak fundamentals and their declining weight in the S&P 500. The reduction in information technology reflects that the group has been the second-worst performing sector in both the six months leading up to a recession and during the first phase of a recession, Goldman said.

The health care weighting change reflects strong performance of the group during the six months leading up to and during the first phase of a recession in addition to an attractive valuation, Goldman said.

On Monday, Merrill Lynch economist David Rosenberg said the jump in U.S. unemployment in December confirmed that the economy was entering a recession.

(Reporting by Daniel Burns and Nick Olivari; Editing by Tom Hals)

Get ready for a bumpy ride

1010 words
9 January 2008
Business Times Singapore
English
(c) 2008 Singapore Press Holdings Limited

But financial advisors say the uncertainty should clear by the second half and markets should recover, writes GENEVIEVE CUA

STRAP on your seat belts and brace yourselves for a bumpy ride in the first half of 2008, say financial advisers. Client portfolios at a number of firms are being repositioned to preserve value, a marked shift after four to five years of robust equity gains.

Still, the uncertainty should clear by the second half and markets should recover, they say. The key now is to keep your cool, scout for value and deploy your money in stages.

Uncertainty over the pace of US and global growth, credit issues and the full impact of sub-prime write-downs continue to roil markets, and Asia has not been spared.

Since the start of January, global equity MSCI indices have been awash in red, a stark contrast to the strong returns of the past year.

Among the more optimistic is Albert Lam, IPP Financial Advisers investment director. The signposts of a prolonged recession, he says, are absent. These are: serious policy errors by central banks, real rates shifting far above economic growth rates, ridiculous stock valuations, and a collapse in economic growth.

'Even if the US went into a recession, it will be mild,' he says. 'For that reason, our long-term view is that the bull market is intact. But in the short term, due to news flow, markets will be volatile.'

The news relates mainly to questions over the extent of losses arising from sub-prime exposures; as well as US economic news.

For moderate risk clients, IPP has scaled up the exposure to growth funds from 25 to 33 per cent, and moved some of the fixed-income allocation into cash. IPP counts among the largest homegrown advisory firms with $870 million in assets under advisory.

Joseph Chong of New Independent says investors will need to take on a 'value mindset'.

'If there is a recession in the US, I think it will be shallow. Markets may see some upside in the first quarter.

'Our favoured region is Europe from a valuation standpoint. We like Asian growth but not Asian valuations. China and India are looking quite expensive.'

In 2007, the emerging markets and Asia were the top performers, trouncing mature markets resoundingly. Based on Lipper data, China equity funds delivered average returns of 47 per cent, for example, and India equity 55 per cent. The broader-based Asia ex-Japan region returned 27 per cent, compared with just 5.3 per cent for the average global equity fund.

Says Mr Chong: 'For investors who have a high risk appetite, this is the time to take risk.'
He points to the UBS/Gallup Index of Investor Optimism Poll as a contrarian indicator. It fell sharply in November to 44, less than half the January 2007 level of 103. It has declined steadily since May and has now reached its lowest point since September 2005.

'When the index is negative it coincides with a low point of markets. When the index is very positive, it's not a good sign as markets are about to turn down.'

At Providend, its model balanced portfolio has turned defensive. Chief investment officer Daryl Liew says a tactical shift is being made away from higher-risk markets towards sectors like healthcare and uncorrelated assets. 'The outlook in the first six months isn't too good. We see there is more potential for markets to correct than to go up . . . But we're quite positive about the second half. This slowdown will be temporary.'

Providend's moderate risk portfolio generated a return of over 8 per cent in 2007, and an annualised return of 10.4 per cent since 2003. The equity allocation was recently scaled down to 25 per cent, from about 40 per cent at mid-2007.

Also sounding a cautious note is Javelin Wealth Management chief executive Stephen Davies. 'We have been reducing our exposure to equities generally, and adding to gold and commodities . . . Investors have to be prepared for the possibility that 2008 may see negative equity returns.'
The firm's moderate risk portfolio is currently about 47 per cent invested in equities, 6-7 per cent in gold and about 5 per cent in commodities. The portfolio generated a return of 11.5 per cent last year, amid volatility of about 7 per cent.

'We're more positive about Asia and emerging markets, but recognising that the mythical decoupling (from the US) isn't going to happen. And it's probably not going to happen for the foreseeable future.

'We like these markets; we're inclined to pick them up at lower levels, but they're going to struggle just as much, if not more so, than developed markets.'

In a December report, Merrill Lynch chief investment strategist Richard Bernstein said the upward trend in volatility will continue in 2008, spreading to a broader range of asset classes. Volatility, he suggests, may not slacken until 2009.

He says 2008 should perhaps be dubbed the year of a 'global slowdown' instead of global growth. 'Disappointments seem likely in some emerging markets in which valuations appear increasingly extreme in the light of credit conditions.'

His suggested strategies for 2008 include high-quality bonds; large-cap stocks in the US or smaller-cap stocks outside the US; defensive sectors in the US or domestic demand sectors outside the US. He also suggests a more conservative mix of developed and emerging markets, as well as cash and high quality dividend strategies.

He tells investors to avoid 'value traps' - stocks whose valuations appear inexpensive but lack earnings momentum.

So what should investors do? Mr Lam of IPP advises drip-feed investing to take advantage of lower asset prices. 'If you have money, you could enter the market in tranches. Take advantage of the volatility but not putting all your eggs in one basket.

'By the end of the year, things will clear up and money will flow back into markets.'

Sub-prime woes won't hit Asia-Pac growth: World Bank

Anthony Rowley In Tokyo
702 words
9 January 2008
Business Times Singapore
English
(c) 2008 Singapore Press Holdings Limited

Developing countries robust enough to pull advanced economies along

EAST Asia and Pacific economies will be hardly deflected from their growth path this year by fallout from the US sub-prime mortgage crisis, the World Bank says in its latest Global Economic Prospects report published today.

It also maintains an upbeat tone about prospects for the global economy, arguing that developing country growth in Asia and elsewhere is robust enough to pull advanced economies along. This optimism echoes that expressed by the Organisation for Economic Cooperation and Development (OECD) last month in its latest Economic Outlook, and in the World Bank's East Asia and Pacific Update last November.

But the bank does acknowledge growing risks, such as that of a sudden collapse of the dollar or even the failure of a 'key' financial system. So far, the sub-prime crisis and related financial market distress have taken only a slight toll on the world economy, the latest report says.
Global growth slowed 'modestly' last year to 3.6 per cent from 3.9 per cent in 2006 and should decline gently again this year, to 3.3 per cent, it argues. 'World output should pick up in 2009, expanding by 3.6 per cent as the US economy regains momentum.'

GDP in East Asia and the Pacific is expected to grow about 10 per cent in 2007, with China set to grow by more than 11 per cent. Growth for the region should ease to 9.7 per cent in 2008 and 9.6 per cent by 2009.

'Effects from turmoil in world financial centres may be small in most economies in the region. Except in China, direct exposure of financial institutions in the region to mortgage-based securities or the sub-prime crisis is limited,' says the report.

Growth in South Asia edged down slightly in 2007 to 8.4 per cent, with industrial production and GDP growth driven by strong domestic demand. 'An expansion of credit, rising incomes, and strong worker remittances are buoying private consumption.'

Meanwhile, 'improvements in business sentiment along with rising corporate profits are providing a further boost', the World Bank says. Growth in Latin America should also ease only slightly this year while output is predicted to expand in 2008 in the Middle East and much of Africa, owing to high oil prices and to strong domestic demand.

'Overall, we expect developing country growth to moderate only somewhat over the next two years,' commented Uri Dadush, director of the World Bank's development prospects group.
'Strong import demand across the developing countries is helping to sustain global growth,' said Hans Timmer, manager of the global trends team in the development prospects group. 'As a result, and given a cheaper US dollar, American exports are expanding rapidly. This is helping to shrink the US current account deficit and contributing to a decline in global imbalances.'

The World Bank admits, however, that 'a much sharper US slowdown is a real risk that could weaken mid-term prospects in developing countries'. A US recession, or an excessive easing of US monetary policy could contribute to further sharp declines in the dollar, it notes.

'A weaker dollar would benefit developing countries with dollar debt but impose losses on those holding dollar-denominated assets. It would hurt the competitiveness of firms exporting to the US.

However, 'the main impact of a precipitous decline in the dollar would likely stem from the increased uncertainty and financial market volatility it would provoke'. Recent financial turbulence has shown how 'sudden and pervasive adjustments in financial markets can be', the report says.

'Because the dynamics of financial behaviour are inherently difficult to control, and new securitised instruments have made identifying the location or magnitude of underlying risk difficult, the possibility of a breakdown in a key financial institution or system cannot be fully discounted.'

To date, the report adds, 'strong fundamentals in developing countries have helped mitigate the slowdown in the US but in the case of a major disruption, adverse effects in emerging markets are unlikely to be avoided, which at some point would exacerbate the US slowdown'.

Asia's Self-Inflicted Wounds May End the Fun: William Pesek

Commentary by William Pesek

Jan. 9 (Bloomberg) -- As economists buzz about a Japanese recession, officials in Tokyo are racing to assign blame.

An unfolding global slowdown is the most mentioned excuse. Fallout from the U.S. subprime debacle is a close second. Surging oil prices also are being held up as an ominous force imperiling Japanese prosperity.

Yet if the second-biggest economy contracts this year, it will have only itself to blame. The list of self-inflicted wounds includes clumsy policies that over the last 12 months slammed Japan's construction and consumer-lending industries and a pension scandal that dented household confidence.

Those missteps, as damaging as they were, pale in comparison with the biggest failing: Complacency. Officials in Tokyo have done little to make this recovery self-reinforcing, leaving Japan highly vulnerable to slowing global growth. Japan is hardly alone in shooting its economy in the foot.

Ten years after the Asian crisis, for example, the region remains too reliant on exports for growth. From Seoul to Bangkok, Asia is awash in instances of policy failures that may imperil the region's ability to withstand a global recession. Take the generals who ousted Thai Prime Minister Thaksin Shinawatra in a September 2006 coup and then spooked investors with unsteady policies.

In South Korea, attempts to restrain surging property prices and redistribute national wealth drove away foreign investment. Squandering Growth Malaysia isn't using today's good times to tweak a 37-year- old affirmative action policy that gives preferential treatment to ethnic Malays and hobbles the economy's competitiveness. The Philippines isn't doing enough to attack corruption, Indonesia isn't upgrading infrastructure and Taiwan's leaders are mired in political squabbling.

China put off slowing its economy to avoid overheating and has been slow to address a worsening pollution problem. India hasn't reduced its staggering bureaucracy or altered its restrictive labor laws. These are but a few examples of how Asia hasn't used strong growth in recent years to remove the headwinds holding back living standards. Policy makers will regret not acting more boldly as the U.S. loses speed.

The U.S. doesn't get a pass from responsibility. A decade ago, it lectured Asia on strengthening financial systems and becoming more transparent. Troubles in credit markets exposed cracks in American-style capitalism, sending contagion Asia's way. Yet for all its efforts to shore up its economies, Asia hasn't prepared for this day. While the region has come a long way since the late 1990s, it has much further to go. Japan Inc. Returns Japan's woes will come as a disappointment to investors expecting big things from the longest post-war recovery.

While global growth gets most of the credit, the upgrades championed by Junichiro Koizumi, prime minister from 2001-2006, helped turn things around. As growth returned, though, reform fatigue set in and Koizumi's drive to get the government out of the economy and boost Japan's competitiveness lost momentum. The one-year tenure of Koizumi's successor, Shinzo Abe, accelerated the return of Japan Inc. By the time Abe resigned amid scandals and general incompetence, the old practice of cross-shareholdings between companies and takeover defenses were back in vogue.

Many of the needed reforms have been sidelined, from boosting productivity and importing foreign labor to increasing entrepreneurship. The same is true of efforts to scrap Japan's dependence on near-zero interest rates, massive public borrowing and a weak currency. Current Prime Minister Yasuo Fukuda is too preoccupied with halting the drop in the ruling-Liberal Democratic Party's popularity to tend to the economy. Few Options A return to the crisis days of the late 1990s is unlikely.

Japan's banking system is stable and companies have done considerable restructuring. Still, Japan has yet to defeat deflation at a time when options are limited. ``Unlike the three major business-cycle downturns that preceded this one, neither fiscal nor monetary policy are available to soften or shorten the decline,'' says Carl Weinberg, chief economist at High Frequency Economics Ltd. in Valhalla, New York. Crude oil prices near $100 per barrel pose an additional challenge. `

`The nature of the latest threat to the cycle is particularly problematic for the Bank of Japan, as it faces the risk of input cost-driven inflation, while real demand is under downward pressure,'' says Richard Jerram, chief Japan economist at Macquarie Securities Ltd. in Tokyo. Leaky Roofs Japan failed to use five years of decent growth to rein in a public debt the government says will reach 147 percent of gross domestic product by March 2009.

BOJ Governor Toshihiko Fukui failed to normalize monetary policy. Japan's benchmark lending rate is 0.5 percent, by far the lowest among major economies. That might be fine if consumers were responding to growth as hoped. The key to making Japan's recovery self-reinforcing is getting households to spend more.

Elected officials are offering households little confidence that their economy won't be eclipsed by China and India in the decades ahead. Nor are workers convinced that companies will share more of their profits. Wages slid 0.2 percent in October from a year earlier. Such failings will become more obvious if the storm on Asia's periphery closes in.

That would have Asia wishing it had fixed its leaky roof when the sun was shining.

Alpha female: How not to lose your job in 2008

By Anneke de Boer

Work hard, network hard, and don’t complain about your bonus.

Happy New Year! It’s 2008 and hopefully we can put all of the turmoil of 2007 behind us. Or can we? Although many have made it through the redundancy rounds unscathed, the business environment and recruiting situation in 2008 could also be tricky. So what can you do to make sure that you don’t lose your job in 2008?

Work hard and do a good job. If you are in a revenue generating area, generate revenue. This should go without saying, but sometimes people feel that they have made it through the bad period and can now relax. Don’t relax. The 2008 business environment is far from certain and if you aren’t performing well you are giving the firm an easy excuse to get rid of you.

Be seen to be doing a good job. It isn’t enough just to sit at your desk and do a good job – you need to make management aware of what you are doing. This may mean that you end up working harder since you have to do your normal job and you have to publicise your success. You’ll have to figure out how best to do this in your working environment without alienating those that you work with or annoying your boss.

Be a team player. If you are a 'star' performer with the revenue to back up your position, but are difficult to work with, you are still probably safe. But, if you are in the majority and are a 'normal' performer, you may need all the friends you can get when times get tough. Being a good corporate citizen should mean that you are favoured if it comes to that close decision. And it makes for a nicer working environment.

Don’t complain about your 2007 bonus. Senior management has had a horrible time during the autumn of 2007 – first they had to figure out whom to fire and then they had to figure out how much (or how little) to pay the remaining staff. At many firms (ex GS) the bonus pools probably shrank during the decision process, so they had to figure out whose bonus to cut even further. The last thing that they want to hear from you is that you are unhappy. From their perspective, you have a job, you might have gotten somewhat of a bonus, and you should be grateful. Keep in mind your boss probably didn’t get that much of a bonus either.

Network, both internally and externally. Building a network of people around you who know who you are and what you do should be part of your job. It is surprising what you can learn and how much business can get done through informal channels. It isn’t a waste of time to network, but again may mean that you have to work harder since it is an 'extra' thing to do. Think of it not only as benefiting your current job but also as an insurance policy – if you do get let go, you’ll already have a network in place to start looking for your next job.

Anneke de Boer is a former managing director of Morgan Stanley’s fixed income business in London. She retired in 2006.

Want to Be a Millionaire?

by Motley Fool Staff

t's tough to make money with investments. As Fool contributor Selena Maranjian pointed out in an article last month, you have to consider inflation, taxes, and investment costs, all of which drag down your returns.

For instance, say you expect stocks to earn 10% per year. Once you subtract 3% for inflation, 2% for investment costs, and another 2% for taxes, all you've got left is 3% per year.

And numbers are even worse for bonds or money market funds.

Perhaps these assumptions are a tad pessimistic, but the general point remains valid: You can't count on 20% returns year in and year out, as investors got used to during the 1990s. As such, it's critical to have a backup plan for achieving your financial goals. For guidance on what such a plan might look like, let's see what we can learn from people who have already achieved a substantial degree of wealth: millionaires.

Characteristics of millionaires
According to a fascinating book I highly recommend, The Millionaire Next Door (published in 1996, so the statistics are dated, but the conclusions are not), here are some characteristics of millionaires that might surprise you:

• "More than 80% are ordinary people who have accumulated their wealth in one generation. They did it slowly, steadily, without signing a multimillion-dollar contract with the Yankees ..."
• Fewer than 20% inherited more than 10% of their wealth, and more than half never received a penny of inheritance.
• They "wear inexpensive suits and drive American-made cars. Only a minority ... drive the current-model-year automobile."
• About half have lived in their current home for 20 years or more.
• 80% are college grads, and 38% have advanced degrees (which reminds me of the bumper sticker: "If you think education is expensive, try ignorance").
• 20% are retired. Of those still working, about two-thirds are self-employed -- mostly entrepreneurs, but also self-employed professionals, such as doctors and accountants.
• On average, they invest nearly 20% of their household realized income each year.

OK, so most millionaires aren't rock stars or scions of wealthy families, but surely they have high incomes, right? Think again. Their median annual income was a mere $131,000. So how did they become millionaires? The answer is so simple it sounds trite: "They live well below their means."

In short, the book explains most millionaires are "FRUGAL, FRUGAL, FRUGAL ... Being frugal is the cornerstone of wealth-building ... The affluent tend to answer "yes" to three questions: 1) Were your parents very frugal? 2) Are you frugal? 3) Is your spouse more frugal than you are?"

Yet we've become more a nation of consumption than of frugality. Freely available credit has made it easy for Americans to take on debt to live above their means. Consider:

• Consumer credit -- which includes most types of debt other than mortgage loans -- stands at nearly $2.5 trillion, versus $800 billion in the early 1990s and just $350 billion in the early 1980s.
• Debt service as a percentage of disposable income was around 11% in the mid-1990s, but has now risen to more than 14%, despite (or perhaps because of) the fact that interest rates have plunged to multidecade lows. This means the average American family is spending one-seventh of its disposable income simply paying the cost of its debts.
• It shouldn't be surprising, then, that the net national savings rate has remained below 1% since 2005, and has turned negative during some months.

These unsustainable trends have alarming implications for the U.S. economy, as consumer spending accounts for roughly two-thirds of the nation's economic activity, as well as for the retirement prospects of most Americans.

Are you wealthy?
The Millionaire Next Door has a simple test to calculate what your net worth should be right now:

"Multiply your age times your realized pre-tax annual household income from all sources except inheritances. Divide by 10. This, less any inherited wealth, is what your net worth should be."

So, if you're 40 years old and earn $95,000 in salary and $5,000 from investments pre-tax, then your net worth should be $400,000 (40 times 100,000 divided by 10). If this test shows you're an "under accumulator of wealth," then you might want to think hard about making some changes.

Money-saving tips
Assuming that your boss would take a dim view of a demand to immediately increase your salary, and given that job-hopping in this economic climate is unlikely to lead to higher pay, the key lever for increasing your savings is to cut expenses. There are two ways to do this: Consume less or pay less for what you consume. Let me share a few tips on paying less. (This is by no means a comprehensive list; there are countless websites and books dedicated to money-saving ideas.):

• If your mortgage is more than a couple of years old, look into refinancing to take advantage of mortgage rates that remain near all-time lows.
• Pay off high-interest debt such as credit cards, or at least shift the balance to teaser rates on new cards until you can do so.
• Buy generic rather than branded products. I'll admit that I have my brand loyalties, but in general, why pay for big advertising budgets and fat profit margins? To save 20%, 40%, or even 60%, I'm willing to give a generic product a try -- and more often than not, I find that I'm pleasantly surprised.
• Buy on eBay. No, I'm not your stereotypical eBay junkie, buying and selling trinkets and collectibles; nor do I have the patience for auctions. Instead, I buy a range of products, almost always new (or at least factory refurbished) and at fixed prices. I've purchased lots of things there, including a printer, toner cartridges, a kids' game, a Sony PlayStation (not for me, unfortunately!), a video camera, and an inflatable air mattress. I always shop around and estimate I save 20%, on average, by buying on eBay. There's some risk of unscrupulous sellers, but if you buy only from highly rated sellers, you should be OK. I've never had a problem.
• Shop at Costco. I agree with Berkshire Hathaway vice chairman and Costco board member Charlie Munger, who once said, "Costco is God's gift to consumers." It has lower gross margins than competitors like Wal-Mart and Home Depot, minimizing markups, and it can generally buy for less by carrying only a limited number of products.
• If you travel quite a bit, the Web offers amazing bargains. I stopped using a travel agent years ago and instead use Orbitz, Expedia, and Travelocity regularly. But my favorite travel site is Hotwire, which is like priceline, but without the annoying auction process. For example, I once took a trip to Las Vegas and needed a hotel on short notice. Hotwire offered me a room at a five-star hotel on the Strip for $99/night, but -- here's the catch -- I didn't know which one. But for $99, I didn't care! (The Venetian was over the top, by the way.)

Conclusion
The key to accumulating wealth is to consistently spend less than you earn over time. How obvious and simple in concept -- yet difficult in practice!

Copyrighted, The Motley Fool. All rights reserved.

Recession in the US 'has arrived'

The feared recession in the US economy has already arrived, according to a report from Merrill Lynch.

It said that Friday's employment report, which sent shares tumbling worldwide, confirmed that the US is in the first month of a recession.

Its view is controversial, with banks such as Lehman Brothers disagreeing.
An official ruling on whether the US in recession is made by the National Bureau of Economic Research, but this decision may not come for two years.

The NBER defines a recession as "a significant decline in economic activity spread across the economy, lasting more than a few months".

It bases its assessment on final figures on employment, personal income, industrial production and sales activity in the manufacturing and retail sectors.

Merrill Lynch said that the figures showing the jobless rate hitting 5% in December were the final piece in that puzzle.

"According to our analysis, this isn't even a forecast any more but is a present day reality," the report said.

It added that the current consensus view on Wall Street that there is a good chance of avoiding a recession is "in denial".

It also objected to the use of euphemistic terms for the state of the economy.

"To say that the backdrop is 'recession like' is akin to an obstetrician telling a woman that she is 'sort of pregnant'," the report said.

2008 outlook: Fasten your seatbelts

Market strategists expect a volatile year for stocks and that the housing market will swoon. Sound familiar?

NEW YORK (CNNMoney.com) -- Wall Street's top forecasters have some good news and bad news for 2008. Many think stocks will head higher but that unemployment will rise and the overall economy will slow.

In other words, 2008 is going to look an awful lot like 2007. Despite falling housing prices and the subprime mortgage meltdown igniting fears about a broader economic slowdown, stocks are still on track to finish higher in 2007.

For 2008, experts said investors need to be prepared for more woes in the slumping housing market and a slight rise in unemployment.

"2008 will be a sluggish year," Abby Joseph Cohen, Goldman Sachs' chief U.S. investment strategist, told CNNMoney.com. She said many investors are concerned about what could be weak earnings growth in 2008.

"Portfolio managers sense that 2008 will be a very difficult year for corporate profits," she said.

But Cohen believes that stocks could finish 2008 in the plus column as investors anticipate better news in the latter part of the year.

"We believe that the worst time is right now. The worst numbers will be at the end of 2007 and in the first half 2008. We expect an improvement in the second half," she said.

Cohen isn't the only strategist who feels this way. Research firm Thomson Financial pointed out in a recent report that Wall Street analysts expect profits for the S&P 500 to increase in just the single-digits in the first two quarters of 2008 but that overall earnings for the year will be up nearly 15 percent.

With this in mind, Cohen expects the Dow Jones industrial average to end the new year around 14,750, a gain of more than 10 percent from current levels, and that the S&P 500 will close at 1,675, up nearly 14 percent.

Analysts at Thomson Financial are predicting a more modest rise for the market, however. The firm believes the S&P 500 will end at 1,580, a gain of 7 percent.

Still, how can stocks have a good year if so many market strategists are predicting a rough year for the economy?

In a recent report, Cohen wrote that the market is relatively cheap when compared to previous periods of comparable inflation and that stocks are priced for the worst case scenario, i.e. a recession.

But Cohen thinks the economy will not slip into a recession. And one big reason for her optimism is that she thinks the Federal Reserve is likely to keep lowering interest rates in order to make sure the economy doesn't grind to a halt.

Investors like interest rate cuts since they tend to lead to more borrowing by consumers and businesses, which in turn helps to boost economic activity and corporate profits.

"Recent speeches and policy actions suggest that the Federal Reserve is paying close attention...to the smooth functioning of markets and recession avoidance," Cohen wrote.

The Fed cut interest rates three times in the second half of 2007, lowering the key federal funds rate from 5.25 percent in August to 4.25 percent by the end of December.

Economists at Lehman Brothers wrote in a report that they expect the Fed to cut rates several more times in 2008, perhaps to as low as 3.25 percent. The Lehman economists suggested that the economy "may bend but not break" in the new year.

But much of 2008 could be rough. Though the economy is expected to begin to rebound later in the year, economists believe that the slumping housing markets and credit crunch will continue throughout at least the first half of 2008.

Standard and Poor's predicts that the housing market will not finally bottom until October.

Home prices are expected to fall 11 percent over the course of 2008, according to Standard & Poor's.

As the housing market continues to slump, economic growth is expected to slow in 2008. This year, gross domestic product, or GDP, was aided by a strong third quarter, and analysts believe that at 2007's end, the economy will have grown 2.2 percent from the close of the fourth quarter in 2006.

At the end of 2008, however, Lehman Brothers predicts 1.8 percent overall growth, and Merrill Lynch believes that GDP growth in 2008 economy will be only 1.4 percent. Thomson Financial more optimistically expects GDP to grow between 2 percent and 2.5 percent over 2008.

Many analysts point out that although the economy and housing market will struggle in the new year, this may not necessarily result in recession.

But other economists warn that there is still a high risk of recession. "We are at the brink of a recession," Standard and Poor's senior economist Beth Ann Bovino told CNNMoney.com. "We are certainly concerned about the 2008 economy."

Standard and Poor's thinks there is a 40 percent chance of a recession in 2008.

And as the economy slides in 2008, unemployment is expected to increase as well. Standard & Poor's is predicting an unemployment rate of 5.2 percent by the end of 2008, up from the current rate of 4.7 percent. Goldman Sachs expects the unemployment rate to be between 5.5 percent and 5.8 percent.

Nonetheless, Goldman Sachs' Cohen thinks consumer spending and confidence will pick up in the second half of 2008, despite the rise in unemployment.

And analysts at Thomson Financial wrote that they also think the consumer will stay afloat. The firm is forecasting monthly same-store sales growth of about 2 percent to 5 percent throughout the year.

So even though the financial headlines for 2008, particularly the ones about the housing market, may be as scary as the ones from 2007, many investors and consumers could do reasonably well. Just like in 2007.

Asian Markets Strong in 2007

By Thomas Hogue, AP Business Writer

Asian Markets Strong in 2007; Next Year Clouded by Energy, Inflation and US Woes

BANGKOK, Thailand (AP) -- Asian stock markets had a strong, if volatile, year with China leading the pack as investors bet on the region's continued growth prospects.

Several exchanges notched gains of more than 20 percent and among Asia's major markets, only Japan and New Zealand ended the year with losses.

But the outlook for 2008 remained clouded by soaring oil prices, accelerating inflation in both China and India, and above all, the health of the U.S. economy.

"More will be revealed after one or two months of data on the U.S. side to see what's the state of the U.S. economy, especially the consumer spending," said Song Seng Wun, chief executive of CIMB-GK Research Pte. Ltd. in Singapore.

"If (the U.S. economy) can hold, then we should be reasonably intact," Song said.

The Shanghai Composite Index climbed 96.7 percent on the year, the world's best performing major bourse for 2007. Japan's Nikkei 225 fell 11.1 percent and the benchmark NZX-50 in New Zealand fell 0.3 percent.

Elsewhere, Jakarta's JSX index gained 52.1 percent, the Bombay Stock Exchange's Sensex index rose 47.1 percent and Hong Kong's blue chip Hang Seng rose 39.3 percent.

Other large gains were made in South Korea and Malaysia, where the benchmark indices rose almost a third since the last trading day of 2006. The main indices in Singapore and Australia gained 16.6 percent and 11.8 percent, respectively, for the year.

Most benchmarks recovered from midyear dips that followed a wave of defaults on risky loans made in the U.S. housing market. Banks, including powerhouses Citigroup Inc., Merrill Lynch & Co. and JPMorgan Chase & Co., invested heavily in mortgage-backed securities and lost billions.

As the subprime damage spread to Europe and Asia, banks around the globe became more wary about lending money, which sparked concerns about slowing business investment and growth.

On Friday, a report from Goldman Sachs said mortgage-related writedowns at U.S. banks may deepen, helping to send several markets lower on their last trading day of 2007 and fostering broad pessimism about the U.S. economy next year.

In addition, oil prices that looked as if they had given up on their chase for the $100 mark are now back above $96 a barrel, raising new concerns about their impact on growth.

Oil prices and the unfolding credit crisis in the United States have extensive ramifications in Asia, which depends on exports to the world's largest economy for growth. The U.S. is the world's largest consumer of oil. In addition to cutting the buying power the American consumer, rising energy costs can cut into industrial demand.

"We will remain hostaged by what's happening overseas, particularly in the U.S. economy ... and also oil prices," said Astro del Castillo, managing director of Manila-based brokerage First Grade Holdings.

"Those are the two major factors that will influence not only the (Philippine) market but also most economies as well," he said.

Asian markets were roiled in their last two days of trading for the year by the assassination of Pakistani opposition leader Benazir Bhutto.

Pakistani stocks suffered their biggest one-day loss ever Monday. The Karachi Stock Exchange's benchmark 100-share index plunged 694.92 points, or 4.7 percent, to 14,077.16.

The KSE 100 index still finished the year 40 percent higher than at the end of 2006.

Analysts continue to be cautiously optimistic about Asian economies, primarily based on the performance of economic engines running full-tilt in China and India.

Once worry about the credit crisis and its impact on the U.S. and global economies dissipates, many analysts say funds will resume their flow to Asian stock markets.

"Most Asian markets are still moving higher as can be seen by our economic performance. Hopefully (fund managers) will be attracted by such," said del Castillo.

The outlook for the broader region next year appears promising, agreed Park So-yeon, a strategist at Korea Investment & Securities Co. in Seoul.

The Kospi -- South Korea's main stock benchmark -- was unlikely to match this year's performance in 2008, though sectors with China exposure were likely to remain strong, she said. Continued demand for commodities in China and India is likely to fuel growth, she said.

"The Asian business cycle is very good. China and Indian demand is very good."

Associated Press Writers Gillian Wong in Singapore and Teresa Cerojano in Manila, and AP Business Writer Kelly Olsen in Seoul, contributed to this report.