S&P is negative for the year

It is now official that our market is in a correction, and near a bear market. Dow has declined more than 10% since its October peak. Investors often call a 10% pullback a correction and a 20% fall a bear market. Given our current market condition, it is making investing a more difficult task. Let’s start with the overall landscape of the U.S. market. Prices of U.S. Treasury bond soared as investors fled to their relative safety. Banks are suddenly retreating, and consumers who had been loose with their spending are counting their pennies more carefully. What results is the there will be a pullback in the willingness for bank to lend on all fronts. Summarilarily, we have our first correction since 2003, when we invaded Iraq.
Fears that financial institutions will reduce access to loans for businesses and consumers at a time when they most need them are lading some economists to revise their forecasts. Some are warning that a recession now looks like a bigger threat. And oil at $100 a barrel certainly does not help.
So why is the Fed not lowering rates more? Some may ask. Well, if the Fed lowered rates further, it might encourage investors to dump the dollar in favor of higher-yielding currencies, which would contribute to further slumping of the dollar. Also, the Fed is holding onto their forecast that U.S. economy would still grow in the coming year, albeit around 1%.
In the current market, it would be a good idea for investors to look to emerging markets. Two ETFs that I recommend are Austria Index Fund (EWO) and the Netherlands Index (EWN). These funds track the emerging market of the two European nations, both of which are forecasted to outpace U.S. economy. This is a time where being behind during the last few years while Asia has taken off, actually puts these ETFs in a good position to grow. China and India have been red hot, and U.S. also had its glamour while housing market was red hot. Now, it’s these developing nations turn.
If you have little faith in the emerging markets, here is also another play. DBA is an ETF that invests in agricultural products. With the world's population is expected to double by 2050, food is becoming more and more expensive. Ethanol production is also pushing up prices of corn to record numbers. While these benefit countries and sectors of industry that traditionally were never looked at by the market, investors can jump on the wagon by investing in these companies. U.N.'s food program reported that food costs increased by 20% in the last year. That's stuff like corn, wheat, sugar…pretty much stuff in find in your own kitchen. If you don't invest now, with everything around you shooting up in prices, pretty soon you'll find your paycheck shrinking in reality.

Stocks to own

After getting emails from several of you about individual stocks to own, for a volatile 2008, I've came up with a few picks. Before I give those out, I want to hammer in points from a previous article. The point is, you must diversify across the globe, to ensure a gainful 2008. There are way too much risks in the market right now, especially the U.S. So in order to protect yourself, you must not put all your eggs in one basket.

But for those brave souls, here is a play you can consider. Try the defensive stocks. Note the difference between defense stocks, which are more weapons/arms companies like Lockheed, and defensive stocks, such as food stocks. In a volatile market, it serves us well to not be too brave and optimistic. So well known players like Coca-cola, Altria, Colgate-Palmolive, Clorox, and Avon are good investments. They still pump out good earnings, real profits (which is hard to come by nowadays, and are products that consumers must purchase as necessities.

You could even look into bonds, and preferred stocks. Citigroup, in their dire need of cash flow, is issuing a 7.85% preferred stock. Contact your broker for those shares, as they provide great returns, and Citi is extremely unlikely to go bankrupt on you. Good luck!

Think global, diversify

Anyone nearing retirement is old enough to remember the recession of 2001. If you want to keep your nest egg, invest in global value funds now.

While the experts were debating whether the country really was in a recession -- and if so, when it would bottom out and when the recovery would start -- your portfolio was probably losing value.

It's rotten enough to see your nest egg decimated when you have 10, 20 or more years for it to recover.
But millions of Americans on the cusp of retirement experienced the devastating effect of a recession on their portfolios just prior to, or shortly into, their retirements.

Now, six years later, the news is peppered with stories of a slowing economy and talk of a possible recession. If retirement is in your near future, or even if it's years off, consider taking steps to protect your assets against a potential downdraft in the stock market.

The main thing people have to understand is that there is a lot of risk in our market. People get a false sense of security when the market has been up for quite some time that, this time, it's going to be different. There really is risk in the market and unless people have a well-thought-out plan, there's no way they can protect themselves.So the first thing that has to happen is they have to have a written plan; they have to know how market fluctuations will affect them. They have to know what percentage of their money they can afford to lose before they have to get out. Most people don't know where their breaking point is. They don't know how it affects their ability to retire or how it affects their overall plan because they don't have a written plan.

Most people invest for what I call an absolute rate of return, which is looking at how much money can they make without regard to how much risk they are actually taking in order to gain that return. In their plan they should know what kind of risk-adjusted return they need. How much risk do they need to take in order to get to the return that they need to accomplish their written objectives?

There's no question that there's some sort of downturn on the horizon. You can't see a market that goes up for five years in a row like we've seen without some sort of substantial downturn. I think by late 2008 is when the real pain will start.

I believe that any time you're in the position like we are today, that you must have defensive strategies in place to help protect you from a potential market downturn.
It's all about greed. It's all about how much can I make on the upside. Our contention is, it's not how much money you make, it's how much you get to keep that's most important. Bad markets can take a heck of a lot of money away. When you're 40 years old, you've got lots of time to recover. The bulk of our boomers are past 50 and there are no mulligans after that age. The only mulligan you get is to work for 20 more years.

I think we have some room to go before the recession hits and that technology is going to be one of the leaders over the next several months. In any industry, when a new product comes to market there's zero market penetration for that product. It takes quite some time to get from a zero percent market penetration to 10 percent. And then you have a very rapid movement from 10 percent to 90 percent. It takes as long to get from zero percent to 10 percent as it did to get from 10 percent to 90 percent. And then it takes as long to get from 90 percent to 100 percent as it did to get from zero percent to 10 percent. Most of our major technologies that have been driving our economy for the last 16 to 17 years are at about 80 percent market penetration. Once we hit 90 percent market penetration, that technology will cap out and the profits in those companies will begin to fall. But companies are going to fight to get that last 10 percent. I think it will create some euphoria in that arena that will allow technology to make a splash.

I think the area you want to avoid right now is financials. By and large I think the subprime issues and how deeply involved were the banks in loaning to hedge funds -- those are things that are kind of unknowns at this point in time.

I think you also want to avoid the small-cap stocks now.

They tend to perform best in the early part of a bull market and they perform the worst in the latter part of the bull market, and what we have seen lately is that small caps have begun to lag pretty significantly behind large.

And large caps will typically perform best at the latter part of the bull market.

So in this bear market right now, you want to look to diversify your portfoilo. One way to do that is to invest globally, and not just concentrate on one industry.

Are you shorting Financials?

The Federal Reserve's balancing act between weakening growth and rising prices is getting tougher. Fed Chairman Ben Bernanke said that since the Fed reduced short-term interest rates a quarter of a percentage point to 4.5% a week ago, concerns about credit-market strains have intensified while rising oil prices threaten to fuel inflation and put "further restraint on economic activity."

Mr. Bernanke's testimony to the Joint Economic Committee of Congress yesterday echoed the Fed's statement last week that it saw the risks of economic weakness and higher inflation as roughly balanced, a signal it thought no more rate cuts would be needed.

Since then, stocks have sunk on worries about the prospect of bigger mortgage-related write-offs by banks and other financial institutions. That has renewed expectations the Fed will cut rates, perhaps as soon as its Dec. 11 meeting. That expectation has contributed to a weakening of the dollar, which tends to fall when U.S. interest rates decline while foreign rates are steady or rising, and put upward pressure on oil, gold and other commodity prices.

Now the banks might not be able to pay the dividends, as rumors are floating on the Street, investors really are runing away from the Financials. It is a good time to short those stocks, or play the short ETFs.

There seems to be no end in the short run, for Financials to keep sliding. Some analysts think that this is an oversold situation, but I highly doubt that. The market ran up after the subprime disaster back in August all becuase of rate cuts. There were no "real" reasons for the Dow to jump up back over 14000. I mean, what was the driving force? Not the economy, not the write-offs every bank was posting, not inflation, not oil prices, and certainly not the USD currency. So this correction is long overdue, but due. Play it safe, short some Financials.