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Harry Newton's In Search of The Perfect Investment Newton's In Search Of The Perfect Investment. Technology Investor.

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8:30 AM EST Friday, January 11, 2008: I screwed up. On November 13, I wrote "it was time to go to cash." And I did with much of my equities -- except, dumbly, my Vanguard holdings. For some inane reason I thought Vanguard immune to the stockmarket downturn I was predicting (correctly as it turned out). On November 14, my Vanguard portfolio looked like this:

I had invested $1.6 million and was up $268,000. Last night (and after yesterday's big 118 point rise in the Dow), my wonderful "profit" had evaporated 55% to $120,604, as shown in this chart:

I just noticed that my cost basis, according to Vanguard, has risen $74,000. I think it's reinvested dividends and taxable gains. I'll call and find out today. Vanguard's online accounting system is arcane at best.

It's time to take Vanguard to cash today. My reason is best summed up in an email I received from reader, Jim Kingsdale, my oil guru, yesterday.

Question: Can the market fall further due to a recession if everyone knows the recession is coming?

My answer: Yes, because the recession could be more severe than the"mild" one everyone expects.

As I've written all this week, we are faced with a financial crisis, the full extent of which we don't know. That makes it different to all other post World War II recent financial crises.

There remains one unknown: the Fed. It's best summed up in the old chestnut: "Don't fight the fed." If the Fed does stuff to stimulate the economy, then the stockmarket will rise. But -- and this is the BIG but -- can the Fed do sufficient to turn this mess around? Can the Fed raise the money the banks and the investment banks need? Can the Fed turn bankers' brains to lending? My answer is NO. I don't even think the Fed has "got the full message" yet.

You need to make up your own mind. Here's today's Bloomberg story on yesterday's Bernanke talk:

Jan. 11 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke signaled he has resolved months of debate over the competing risks of slower growth and faster inflation, and is ready to make deeper interest-rate cuts.

Bernanke yesterday pledged "substantive additional action'' to insure against "downside risks'' to the six-year economic expansion. His remarks in a Washington speech led HSBC Securities USA Inc. and Morgan Stanley to predict the Fed will reduce its benchmark rate by half a percentage point this month, up from their previous forecast of a quarter point.

The central bank faces the most challenging moment of Bernanke's two years in office as both of the Fed's goals are under siege: unemployment is at a two-year high, while prices are also climbing. Until now, the deliberations produced non-committal statements from the Fed, which used "uncertainty'' to describe the outlook in December.

"They have to save the economy and let inflation go,'' said Allen Sinai, chief economist at Decision Economics Inc. in New York. "We are in a recession-like situation right now.''

The shift may have been driven by the Labor Department's Jan. 4 report showing the jobless rate jumped to 5 percent in December, economists said. The figures also showed a decline in private- sector employment.

The speech by Bernanke, 54, was unusual because he made few references to the "committee,'' as he frequently does when discussing options before the Federal Open Market Committee. He said the forecast for 2008 "has worsened'' and risks to growth are "more pronounced,'' effectively rewriting the FOMC statement of Dec. 11.

Two-year Treasury yields fell to the lowest in three years on speculation of further interest-rate cuts. The yield on the two-year note fell 5 basis points to 2.65 percent by 12:00 p.m. in London, according to bond broker Cantor Fitzgerald LP.

"Bernanke chose to finally assume the mantle of leadership,'' said Michael Feroli, an economist at JPMorgan Chase & Co. in New York. "He has generally sought to avoid front- running the committee.''

Brian Sack, a senior economist at Macroeconomic Advisers LLC in Washington who used to work at the Fed, said the shift in Bernanke's language indicated he and his colleagues may have conferred after the Jan. 4 job figures.

"The fact that the policy message seemed to be shifted so aggressively suggests there was some committee-wide communication in recent days.'' Sack said.

The 14-page speech contained one paragraph on inflation. The Fed's preferred price measure, the personal consumption expenditures price index minus food and energy, rose at a 2.6 percent annualized rate for the three months ending November.

"We will see more worrying signs'' of inflation, Martin Feldstein, the Harvard University economist who is head of the National Bureau of Economic Research, told Bloomberg Television in an interview. "It is a serious problem, but yet it isn't the primary problem, which is the weakness of the economy.''

The FOMC has cut the benchmark rate 1 percentage point to 4.25 percent since September to offset the drag from tighter lending conditions and the prolonged housing slump.

In contrast, the European Central Bank has left its key rate at 4 percent and President Jean-Claude Trichet yesterday signaled it may raise borrowing costs to contain inflation even as economic growth slows. The ECB's Governing Council is "prepared to act preemptively'' to prevent risks to price stability from materializing, Trichet said in Frankfurt.

Goldman Sachs Group Inc. economists predicted this week that the Fed will lower its rate to 2.5 percent by year-end. The bank also joined Merrill Lynch & Co. and Morgan Stanley in projecting a recession.

The weakening economy "just makes it more difficult to maintain an active rhetorical or any other focus on inflation,'' said Edward McKelvey, senior U.S. economist at Goldman in New York.

Residential investment has declined for seven consecutive quarters, and Fed officials say it may take at least six more months before housing markets rebound. Delinquency rates on subprime mortgages climbed to 16.3 percent in the third quarter, the highest in at least a decade.

"The demand for housing seems to have weakened further, in part reflecting ongoing problems in mortgage markets,'' Bernanke said.

Payrolls rose by 18,000 last month, with the first decline in private jobs since 2003. The unemployment rate rose to 5 percent, from 4.7 percent the previous month.

The more aggressive response signaled by Bernanke today may come too late to prevent a sharp slowdown, said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey. "If we have a recession coming, then all this does is create a more conducive environment for the economy's convalescence.''

"Should the labor market deteriorate, the risks to consumer spending would rise,'' Bernanke said in his prepared remarks to the Women in Housing and Finance and Exchequer Club.

"This tells you the chairman's mindset has moved,'' said Credit Suisse Group Chief Economist Neal Soss, who changed his forecast yesterday to a half-point rate cut this month. "He acknowledges inflation risk -- it's his job to do so -- but certainly that's not the primary focus.''

Inflation expectations measured by yield differences on 10-year Treasuries and government inflation-indexed bonds have remained between 2.2 percent and 2.4 percent over the past year, a sign that investors have confidence the central bank will maintain price stability in the long-term.

"Any tendency of inflation expectations to become unmoored or for the Fed's inflation-fighting credibility to be eroded could greatly complicate the task of sustaining price stability and reduce the central bank's policy flexibility to counter shortfalls in growth in the future,'' Bernanke said.

What questions tourists have of Australia:
These questions were posted on an Australian Tourism Website and the answers are the actual responses by the website officials (allegedly).. First, a map of Australia. Australia is as large as the continental US. but has only 20 million people. Kings Cross is the Times Square of Sydney, only Kings Cross is seedier.

Now, it's time to have your questions about Australia answered:

Q: I have never seen it rain on TV, how do the plants grow? (UK).
A: We import all plants fully grown and then just sit around watching them die.

Q: Will I be able to see kangaroos in the street? (USA)
A: Depends how much you've been drinking.

Q: I want to walk from Perth to Sydney - can I follow the railroad tracks? (Sweden)
A: Sure, it's only three thousand miles. Take lots of water.

Q: Are there any ATMs (cash machines) in Australia ? Can you send me a list of them in Brisbane , Cairns ,Townsville and Hervey Bay? (UK)
A: What did your last slave die of?

Q: Can you give me some information about hippo racing in Australia? (USA)
A: A-fri-ca is the big triangle shaped continent south of Europe. Aus-tra-lia is that big island in the middle of the Pacific which does not ... oh forget it. Sure, the hippo racing is every Tuesday night in Kings Cross. Come naked.

Q: Which direction is North in Australia? (USA)
A: Face south and then turn 180 degrees. Contact us when you get here and we'll send the rest of the directions.

Q: Can I bring cutlery into Australia? (UK)
A: Why? Just use your fingers like we do.

Q: Can I wear high heels in Australia ? (UK)
A: You are a British politician, right?

Q: Are there supermarkets in Sydney and is milk available all year round? (Germany)
A: No, we are a peaceful civilization of vegan hunter/gatherers. Milk is illegal.

Q: Please send a list of all doctors in Australia who can dispense rattlesnake serum. (USA)
A: Rattlesnakes live in A-meri-ca which is where YOU come from. All Australian snakes are perfectly harmless, can be safely handled and make good pets.

Q: I have a question about a famous animal in Australia , but I forget its name. It's a kind of bear and lives in trees. (USA)
A: It's called a Drop Bear. They are so called because they drop out of gum trees and eat the brains of anyone walking underneath them. You can scare them off by spraying yourself with human urine before you go out walking.

Q: I have developed a new product that is the fountain of youth. Can you tell me where I can sell it in Australia? (USA)
A: Anywhere significant numbers of Americans gather.

Q: Can you tell me the regions in Tasmania where the female population is smaller than the male population? (Italy)
A: Yes, gay night clubs.

Q: Do you celebrate Christmas in Australia ? (France)
A: Yes, but only at Christmas.

Q: I was in Australia in 1969 on R+R, and I want to contact the girl I dated while I was staying in Kings Cross. Can you help? (USA)
A: Yes, and you will still have to pay her by the hour..

Q: Will I be able to speak English most places I go in Australia? (USA)
A: Yes, but you'll have to learn it first..

This column is about my personal search for the perfect investment. I don't give investment advice. For that you have to be registered with regulatory authorities, which I am not. I am a reporter and an investor. I make my daily column -- Monday through Friday -- freely available for three reasons: Writing is good for sorting things out in my brain. Second, the column is research for a book I'm writing called "In Search of the Perfect Investment." Third, I encourage my readers to send me their ideas, concerns and experiences. That way we can all learn together. My email address is . You can't click on my email address. You have to re-type it . This protects me from software scanning the Internet for email addresses to spam. I have no role in choosing the Google ads on this site. Thus I cannot endorse, though some look interesting. If you click on a link, Google may send me money. Please note I'm not suggesting you do. That money, if there is any, may help pay Michael's business school tuition. Read more about Google AdSense, click here and here.

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