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8:30 AM Wednesday, January 5, 2005: The stockmarket turned sharply lower yesterday for two apparent reasons.

First, some people believed that much money would magically flow into the market in the new year because that money had been sitting idly on the "sidelines." It didn't happen.

Second, the Fed released the minutes of its December 14 meeting, which said nothing you didn't already know, anything that could concern you, or anything to surprise you. I've quoted a fair bit from the Fed's statement because it's good to see what the Fed thinks of the economy. I marked the interesting bits in bold.

"...The information received at this meeting suggested that the economy expanded at a moderate pace over the third quarter and into the current quarter. Consumer spending was solid, and investment spending remained strong. Manufacturing production increased at a modest pace, and employment gains in October and November indicated that the labor market continued to improve gradually. Core inflation measures remained subdued, albeit running at a slightly higher pace than last year, owing, in part, to the indirect effects of higher energy prices.

Gains in employment were moderate in November after a surge in October. Job growth was fairly widespread, with the exception of slightly weak seasonal hiring in the retail sector. Construction employment grew rapidly in November even after the outsized gains in October due to hurricane-related repair work. In contrast, employment in manufacturing edged lower. ...

Consumer spending appeared to be expanding at a more moderate pace in the fourth quarter, after growing at a robust rate in the third quarter. ...

Activity in housing markets, buoyed by mortgage rates only modestly above their recent lows, remained strong in October. Starts of both single-family and multifamily homes increased and were above their third-quarter levels. Home sales remained at near-record levels. ...

The U.S. international trade deficit widened in October, primarily because of a surge in merchandise imports. Economic activity in most of the major foreign industrial countries slowed in the third quarter, and data for the fourth quarter pointed to continued subpar growth.

Consumer prices jumped in October, as hurricane damage contributed to higher prices for food and energy. For the twelve months ending in October, consumer prices rose considerably faster than they did in the year-earlier period. ...

The FOMC’s decision in November to raise the intended federal funds rate 25 basis points and its attendant public statement were apparently anticipated by the market, so that the reaction was muted. Subsequently, higher-than-expected inflation data, remarks by the Chairman that were viewed as pointing to future rate increases, and the depreciation of the dollar all led market participants to price in a somewhat steeper path for future policy. ...

In the staff forecast prepared for this meeting, the economy was seen as likely to expand at a moderate pace, supported by accommodative monetary policy and financial conditions. ... Measures of total consumer price inflation were expected to decline from current levels reflecting the direct effect of the downturn in energy prices. By contrast, core inflation was seen in the staff forecast as remaining stable. The upward pressure on inflation from a slight step-down in structural productivity growth and a narrowing margin of resource slack was expected to be about counterbalanced by diminishing pressure from the pass-through of the earlier rise in energy prices and decline in the dollar. ...

A number of participants cited the recent depreciation of the dollar on foreign exchange markets, elevated energy costs, and the possibility of a slowing in underlying productivity growth as factors tending to boost the upside risks to their inflation outlook, though, on net, they saw the risks to stable underlying inflation as still balanced.

In their discussion of important sectors of the economy, participants noted that increasing equity and home prices had boosted household net worth, leaving consumers well positioned to maintain a brisk pace of spending. ...

In their discussion of the outlook for prices, a number of participants cited developments that could pose upside inflation risks. ... Despite these concerns, participants generally expected that inflation would remain low in the foreseeable future. ..."

In short, nothing to be concerned about. Just because the economy is doing OK doesn't mean the market will. In fact, things seem to have changed in the market. Many stocks have turned sharply downwards in the past few days, suggesting recent strong rises may be "all over" for now. This suggests two things:

1. Caution before putting more money into this market. Perhaps it will tumble a little further, so we'll get in cheaper.
2. Some attention to shorting stocks. I shorted AT&T (T) last year and did well. I've written that I've had my eye on it again. It rose in the last quarter of 2004 on takeover rumors. But no one's crazy enough to take that disaster over. And nothing has changed to make the AT&T disaster less of a disaster. So, yesterday I shorted it again. I got in at $18.50. Hopefully, it will hit $15 before I consider getting out.

Here are a few charts to show you what's happened to recent "hot" stocks recently:

I was in Barnes and Noble last night and ran across this book. I'm recommending it, if only because of the logic in his Foreword. O'Neil was a stock broker, whom you know formed Investors Business Daily.

In the book O'Neil writes, "After the 1973-74 bear market, we conducted a study for one institutional investment client that showed institutional research firms were heavily biased toward buy and hold advice. During that difficult and drawn-out bear market, we found that buy and hold recommendations outnumbered sell recommendations four to one. During the recent 2000-2002 bear market, the worst since 1929, investors found that Wall Street analysts had fifty different ways to say "buy" while they remained mute with respect to sell recommendations. ... The evidence strongly suggests that there are few investors, even professionals, who know how to sell and will actually take decisive action to sell when they should. This implies that, for most investors, selling short is even more difficult."

Chapters in the book in the book include: How and When to Sell Stocks Short, The Anatomy of a Short Sale, and Models of the Greatest Short Sales. The book is heavily graphical. There are dozens of pages of stock price and volume graphs -- with squiggles and arrows all over the charts, purporting to show how to figure out when and why. This is the only book on short selling. It's worth reading. I like O'Neil.

Some stocks remain "hot." I'm not contradicting everything I've just written. But a handful of stocks remain "hot," including Northfield Laboratories (NFLD), Stem Cells (STEM), Medicore (MDKI), Dialysis Corporation (DCAI), Worldgate Communications (WGAT), FX Energy (FXEN) and Tramford International (TRDF). Play at your own risk. I'm not recommending these, simply pointing them out.

Google Alerts, a neat idea: Want to know what's happening to your favorite company, your favorite person, your favorite news item? Sign up to Google Alerts. As Google finds news on your area, it will send you an email. And it's all free. Click here.

This column is NOT about politics. But two quotes from my weekend reading helped explained a few things for me:

+ ''It is a certain fact that not all Muslims are terrorists, but it is equally certain, and exceptionally painful, that almost all terrorists are Muslims. 'What a pathetic record. . . . We cannot tolerate in our midst those who abduct journalists, murder civilians, explode buses; we cannot accept them as related to us, whatever the sufferings they claim to justify their criminal deeds. These are the people who have smeared Islam and stained its image.'' written by Abdel Rahman al-Rashed who is general manager of the Al-Arabiya satellite news channel.

+ BAGHDAD, Iraq, Dec. 30 (AP) - Three militant groups warned Iraqis on Thursday against voting in the election scheduled for Jan. 30, saying that people taking part in the "dirty farce" risked attack. The militant group Ansar al-Sunna and two other insurgent groups issued a statement warning that democracy was un-Islamic. "Democracy is a Greek word meaning the rule of the people, which means that the people do what they see fit," the statement said. "This concept is considered apostasy and defies the belief in one God -- Muslims' doctrine." Ansar al-Sunna had earlier posted a manifesto on its Web site saying democracy amounted to idolizing human beings. The joint statement on Thursday reiterated the threat that "anyone who accepts to take part in this dirty farce will not be safe."

The Week of Portfolio Rebalancing. First, thank everyone for sending me your favorite mutual funds and ETFs. Keep them coming. I need to research them, including the ones mentioned yesterday.

New insurance policy:
Q: Did you hear about the new auto insurance policy for Jewish mothers?
A: It is known as the "My Fault" policy.

It's a New Year, so we're getting a little older:
Reporters interviewing a 104 year-old woman: "And what do you think is the best thing about being 104?" the reporter asked.

She simply replied, "No peer pressure."

Getting older, part 2:
Just before the funeral services, the undertaker came up to the very elderly widow and asked, "How old was your husband?"

"98," she replied. "Two years older than me."

"So you're 96," the undertaker commented.

She responded, "Hardly worth going home is it?"

Harry Newton

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. Thus I cannot endorse any, though some look mighty interesting. If you click on a link, Google may send me money. That money will help pay Claire's law school tuition. Read more about Google AdSense, click here and here.
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