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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, Monday, January 7, 2008: The Dow has now seen its worst 3-day start to a New Year since 1932 and the S&P 500 has seen its worst start to the New Year since 2000. The catalysts for this misery are

1. Talk of recession. There are learned observers who think we're already in one.

2. Last Friday's awful jobs report and news of rising unemployment.

3. The ongoing credit crunch, which is now depriving legitimate businesses of the credit they need for funding inventory and expansion.

4. Continuing cockroaches in housing. We know more will appear, hurting banks and finance companies and damaging companies that make things for houses -- from doors to windows. Uncertainty is painful.

5. As the economy slows, everyone is affected -- including commercial real estate which now has more difficulty filling its buildings with tenants -- like banks. (I've never understood why we need so many bank branches.)

Misery in the economy doesn't correlate strongly with misery in the stockmarket. Two things we know about the market.

1. There's huge liquidity on the sidelines. I have money. My readers have money. I know because I recommended back in November we get largely out of this market.

2. The stockmarket always has a tendency to overshoot.

This chart is instructive. For the past six months, it's been bouncing violently around -- but staying within a range.

Look at this chart. There are sufficient people who believe these charts. It looks like a triple bottom. If we bust through support with volume, this market is in big trouble, many chartists believe.

This is a difficult market to predict. The mantra remains, "When in doubt, stay out."

But that said, there are stocks to short. I don't like home builders. I recommended selling Toll Brothers way above where it is now. And that short is making me money. I bet Toll and some of the others will fall further.

Bloomberg carried a chart showing winners and losers for 2007. I bet some of these big gainers from 2007 will be among the big losers of 2008.

Bryon Wien's forecasts for 2008.
Byron Wien was until recently Morgan Stanley's senior investment strategist. He's now with Pequot Capital. He's a respected guru. Since 1986, he had published his annual list of surprises to expect in the coming year.

He got about half of his 2007 predictions right.

Bryon Wien, brainy, not beautiful

He foresaw the surge in agricultural prices, the Fed refraining from reducing interest rates in the spring, and Latin America putting in a good performance. He furthermore predicted gold bullion at $800 and oil at $80 -- perhaps too conservative but nevertheless in the right ballpark.

Wien was, however, quite wrong with his prediction of a year-end yield of 5.5% for the US 10-year Treasury Note, as the actual figure turned out to be significantly lower at 4.04%.

Wien believes his ten surprises for 2008 have at least a 50% chance of occurring at some point during the year. His 2008 list:

1. In spite of Federal Reserve easing, and other policy measures, the United States economy suffers its first recession since 2001 as housing starts stay soft and banks are reluctant to lend to anyone where a whiff of risk is apparent. Federal funds drop below 3%. The unemployment rate moves definitively above 5% and consumer spending is lackluster.

2. Standard and Poor’s 500 earnings decline year-over-year and the index drops another 10%. Energy and materials stocks hold up relatively well in what is viewed as a correction rather than a bear market. Market conditions start to improve during the summer.

3. The dollar strengthens in the first half reaching $1.35 against the euro and weakens in the second exceeding $1.50. The European Central Bank begins an accommodative monetary policy. Foreign investors flock in to buy cheap assets in the US early in the year but the dollar declines later as several countries holding large reserves diversify into other assets.

4. Inflation rises above 5% on the Consumer Price Index as higher commodity prices and oil finally begin to have an impact in spite of modest wage increases. The 10-year US Treasury yield rises to 5%. Stagflation becomes a frequent presidential campaign and Op-Ed discussion topic.

5. The price of oil goes down early in the year and up later, sinking to $80 a barrel in the first half as western economies slow and inventories are drawn down, and rising to $115 in the second. Established wells continue to decline in production while China, India and the Middle East increase their consumption.

6. Agricultural commodities remain strong. Corn rises to $6 a bushel and cotton to $0.85 a pound. Gold reaches $1,000 an ounce as disillusionment with paper currencies spreads across Asia.

7. The recession in the United States slows the Chinese economy modestly but its stockmarket declines sharply. Investors recognize that paying biotechnology stock multiples for highly cyclical companies doesn’t make sense. The Chinese revalue the renminbi by another 10% to control inflation and as a gesture to foreign governments participating in the Olympic Games who complain that Chinese terms of trade are unfair. Several long distance runners refuse to compete in certain Olympic events because of continuing air pollution problems.

8. The new Russian President Dmitry Medvedev, under the tutelage of Vladimir Putin, becomes more assertive in world affairs. He insists that Russian oil and gas be paid for in rubles and demands a Russian seat at major world conferences. Russia and Brazil stock markets lead the BRICs. The Gulf Cooperation Council markets begin to attract interest among emerging market investors.

9. Infrastructure improvement becomes an important election theme for both parties and construction and engineering stocks rally in anticipation of huge programs beginning after the new President’s inauguration. Water becomes a critical problem worldwide and desalination stocks soar.

10. Barack Obama becomes the 44th President in a landslide victory over Mitt Romney. With conditions in Iraq improving, the weak economy becomes the determining issue in voters’ minds.

Subprime lending guidelines explained
A man is getting into the shower just as his wife is finishing up her shower, when the doorbell rings. The wife quickly wraps herself in a towel and runs downstairs. When she opens the door, there stands Bob, the next-door neighbor.

Before she says a word, Bob says, "I'll give you $800 to drop that towel."

After thinking for a moment, the woman drops her towel and stands naked in front of Bob. After a few seconds, Bob hands her $800 and leaves. The woman wraps back up in the towel and goes back upstairs.

When she gets to the bathroom, her husband asks, "Who was that?"

"It was Bob our next door neighbor," she replies.

"Great," the husband says, "did he say anything about the $800 he owes me?"

Moral of this story:
If you share critical information pertaining to credit with your shareholders, you may be in a position to prevent avoidable exposure.

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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