Welcome to the MONEYLETTER Hotline for January 9, 2008

The market is in a correction. This does not tell you anything new, but it does sum up in a word what has been happening to the stock market. The stock market has had a shock, and maybe today's rally indicates that the effects of the shock are wearing off. The shock occurred last Friday when the payroll report for December was released. The report showed a trivial increase in employment, and a jump in the unemployment rate to 5.0%.

Since then Wall Street has been in a dither, and talk of recession is commonplace. Both the dithering and the recession talk are justified. But neither should come as a surprise. Basically we have looked for very slow growth, and if we then cross the line of recession, that fact does not change the market outlook. Recession or not, we are in for six months of flat earnings growth for U.S. firms. If that were all, we would say that the market would be struggling for the next six months.

But that is not all. There is the Fed. The Fed will be lowering rates from time to time during the first half of the year. The combination of flat earnings and lower rates will keep stock prices from moving too far down from current levels. The combination may well move prices up. As the market realizes that the Fed medicine is working we will see a turnaround in the market. Until then, pessimism will prevail. It will take patience to hang in over the next month or so. But we have built reserves as some protection against any volatility ahead.

There is no change in our recommended allocations.

New Fund Ratings – For domestic stock funds, three funds are now rated Buy: Neuberger Berman Manhattan, Brandywine Advisors, and Brandywine Blue. Marsico 21st Century is now rated Hold. Five funds are now rated Sell: Sit Small Cap Growth, Fidelity Large Cap Stock, Old Mutual Emerging Growth, Vanguard Midcap Growth, and Undiscovered Managers Behavioral Growth. For international stock funds, S&P Latin America 40 (ETF) is now rated Buy. Two funds are now rated Hold: Emerging Markets 50 ADR (ETF) and T. Rowe Price Latin America.

Fidelity Large Cap Stock is in the Fidelity Conservative Portfolio. We will replace the fund with Fidelity Fund. Vanguard Midcap Growth is in all three Vanguard portfolios. We will replace the fund with Vanguard Convertible Securities in all three portfolios.

The Economy – Not all is gloom. The services sector is growing according to the latest nonmanufacturing monthly survey. This is a big chunk of the economy. Very important for the Fed, inflation expectations have dipped slightly. The economy badly needs help from the Fed, and it will get it. We see the Fed cutting rates by ½ percent later this month, if not before.

The Stock Market – We continue to favor international funds. Among them we favor emerging market funds and Asian funds. All funds have been hit by this year’s indiscriminate selling, but international funds have held up better.

The Bond Market --

The Select Portfolio – Quant Emerging Markets Fund is now a recommended Sell. It is to be replaced by CGM Focus.

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