In writing this essay last year, I pretty well bet the farm that the power of the Presidential Election Cycle would make 2007 a "very good, but not spectacular" year for the stock market. Well, 2007 definitely was not a spectacular year for stock prices and there's some doubt that it was even very good. It wasn't as good as I had hoped for, but it still gave us a lot of opportunities to make good profits and that's what really counts. So what about 2008?

In a nutshell, I don't think 2008 is going to be all that good for stock prices. The market has been acting tired for several months now and the general perception is that the economy and earnings growth are slowing down. Worse yet, the fear of inflation is increasing and investors don't believe that Dr. Bernanke is lowering interest rates fast enough to prevent a recession. Now I know these perceptions may not necessarily be true, but where's the spark going to come from to push stock prices higher?

Even though 2008 is the fourth year of the election cycle and fourth years have been very good years for stock prices, I'm not expecting much for next year. President Bush is a lame duck president and has very little ability to influence much of anything in a positive way. So how bad will the stock market get in 2008?

Well, I don't think it's going to be that bad. For one thing, the economy is still growing, albeit at a slower pace. And earnings are still going higher year-over-year. This is the key. The market is going to remain in a bullish scenario as long as earnings are going up. If stock prices go down while earnings are going up, there will be more bargains to feast upon. These feasts will spark the rallies needed to push the market higher. So I'm not worried if the market's not going to be so hot in 2008. I'm prepared to go bargain hunting in The Year Ahead.

SMOOTH COMFORT.
Stocks with high Comfort Index (CI) ratings have the best looking chart patterns in our database. One wonders how these stocks can just keep going higher and higher. Invariably, they are driven by powerful earnings performance. Mr. John Campbell will show us how to turn this performance into profits in this week's "Strategy of the Week." Visit the VectorVest University to see John's presentation on "Smooth Comfort."

Goldman Sachs dazzled Wall Street once again on Tuesday by reporting better-than-expected earnings while their investment banking brethren fell on their faces. How did they do it? We will never know for sure, but they have their ways.

Goldman Sachs is clearly the class act on Wall Street and have hired nothing but the best and the brightest down through the years. In order to do so, Goldman pays its employees very well, very well indeed. How's an average of $661,490 per employee sound to you? About 60% of this compensation, or $396,894, comes from bonuses. Does this seem a little extreme to you? Well it does to me and I think I'm fairly reasonable when it comes to matters of compensation. I don't rant and rave about excessive executive pay like the "do nothings" in the media do, but there are limits to my generosity.

These limits are defined by what the shareholders get in return. For example, Goldman's stock closed last year at $199.35 per share. It went as low as $164.90 and as high as $247.92 per share this year, and is trading currently at $209.60, up $6.93 for the day and $10.25 for the year. Wow, is a 5% annual gain worth $12.1 billion in bonuses? I don't think so, but what about its dividend? Surely, it must be very generous.

Uga, uga. Uga, boo, boo uga. It's only a crummy $1.40 a share, giving a yield of less than 1%. I would have thought that a company that can pay the equivalent of $30.48 per share in bonuses to its employees would do better than that for its shareholders. Even if Goldman paid $1.40 per share each quarter, the dividend yield would still be less than 3% and, I'd bet, the stock price would be higher.

Sure, Goldman is using some of its bounty to buy back shares of its stock, but that helps compensate employees who are shareholders as much as it does non-employee shareholders. And it's not chump change either. The number of shares decreased from 428 million to 397 million over the past twelve months. At $200 per share, the 31 million shares cost about $6.2 billion, about half of what Goldman spent on bonuses. Goldman also plans to buy another 30 million shares in the near future. This is great, but it doesn't have the visibility of a more generous dividend payment.

Yes, Goldman is a great company and one of its strengths is helping clients increase shareholder value. I'd say it needs to eat its own cooking. VectorVest values Goldman at $310.51 per share, so why is it floundering at $200 a share? My guess is that its shareholders are not getting a fair share of The Gold in Goldman.

AGGRESSIVE REBOUNDERS.
Jumping into a market bottom is an act of aggression but it's one of the best ways to make a lot of money. That's why we work so hard to make it easy. Mr. Gordon White will show us how easy and profitable it can be in this week's "Strategy of the Week." Visit the VectorVest University to see Gordon's presentation on Aggressive Rebounders.

I've been reading and hearing so much negative stuff on where the economy and the market are heading that I thought it would be worth letting you know that there still are some bulls out there.

About 10 days ago, Ms. Abbey Joseph Cohen, a stellar analyst and forecaster, appeared on Ms. Maria Bartiromo's show on CNBC. Maria asked Ms. Cohen about her prediction of the S&P500 closing above 1600 this year and, realizing that it wasn't going to happen, Ms. Cohen said she had made that prediction a year ago. She does expect it to close well above 1600 in 2008, however. While admitting that the first six months of 2008 could be slow, she expects the economy to improve in the second half and gave a number of reasons why. Ms. Cohen didn't try to overstate her case, but she is worth paying attention to.

Mr. Don Hays, another stellar forecaster, was interviewed by Ms. Sandra Ward, Senior Editor of Barron's magazine, (12/03/07). Although he was cautious in mid-October, he currently is 100% bullish. Here are some of the things he tracks:

Investor psychology was a key factor in turning him bullish. It was too high in mid-October, but had gotten too negative in late November and the market was oversold.

Insider trading was also giving bullish signals. He said Corporate insiders are buying at the highest rate of anytime in the past four years and that's bullish.

He then turned to monetary conditions. He likes to look at a yield curve defined by the 90 day T-bill and the 10-year T-note. Right now, he said, it's about perfect with the T-bill at about 3% and the T-note at about 4%. The ratio of 1.33 will ensure that the economy will be humming along a year from now. He too sees a weak economy in the first half of next year.

He is critical when he talks about Bernanke. He says Bernanke, like Greenspan, is still fighting inflation and "inflation will not be a problem until you get this huge (worldwide) glut of labor absorbed. He says the dollar is weak because of restrictive (monetary) policies and a dumb Federal Reserve. He says the Fed should cut rates to between 3-1/4% to 3-3/4% and count on productivity and technology to keep inflation down.

He then looks at the relationship between the yield of the 10-year T-note and the S&P 500 earnings yield. This tells him that stocks are about 42% - 43% undervalued. (VectorVest has been saying this for the last two years.) The market has been this cheap only five other times in 28 years. He also asserts that profit margins will not be coming down because our companies farm out low-margin businesses overseas and keep the high-margin businesses over here. S&P 500 earnings are expected to grow 11% next year.

Ms. Cohen and Mr. Hays are both long-term veterans in the stock market forecasting business, so I give their views a lot of weight. But I am also disturbed by the Fed's incompetence. Stock prices would have gone up this week had it not been for the clumsy way the Fed announced the rate cut and the cash auction program. They couldn't have screwed things up more if they had planned to. Nevertheless, it was good to get the views of Two Old Bulls.

INFLATION.
It was interesting to read Mr. Hays views on inflation and then encounter the PPI and the CPI reports this week showing the worst inflation numbers in more than two years. One might think that the 3.2% y-o-y gain in the PPI and 4.6% y-o-y gains in the CPI are bad, but I've been wondering why these kinds of numbers haven't shown up earlier.

Many people believe that the inflation numbers reported by the Labor Department are biased to the low side. For example, Mr. Rudolph-Riad Younes was quoted in the December 10, 2007 issue of Barron's as saying that the 1980s decision to remove house prices from the CPI calculation and replace them with equivalent rents cut about 4% to 6% from the annual inflation rate. In other words, the CPI inflation rate under the old system would be 9.6% instead of the 4.6% now being reported.

MORE MONEY MACHINE.
If you're interested in learning how to buy low and sell high, sit in on this week's "Strategy of the Week" presentation on the VectorVest University. You'll love it.

If you're not making money with VectorVest, you have to read this essay. I'm going to describe a simple investment procedure that is virtually certain to result in profits. There are no tricks, no gimmicks and no brain benders, just a simple procedure that anyone can follow.

Let's assume you're looking at the VectorVest Home Page on any given day. Here's what to do:

1. CHECK THE COLOR GUARD. If the Daily Color Guard shows Green and/or Yellow lights and the Primary Wave is Up, it's OK to buy high VST, 'B' rated stocks. Do not buy any stocks if any Red lights are shown. Read the "Prudent" section of the Strategy shown on the Home Page for further guidance.

2. SELECT HIGH VST-VECTOR, 'B' RATED STOCKS. The top five VST stocks are shown on the Home Page. You may access Stock Viewer for more selections if you wish. Read my essay of 12/03/04, "VectorVest Simple," for tips on cherry-picking top VST-Vector stocks.

3. ENTER THE TRADES. To start out with, I suggest you buy at least ten stocks and buy your stock selections only when the market is moving up and the stock is also moving up. I usually check to see what my selections are doing shortly after the market opens, but I'll generally wait until 10:30 EST before making my trades. Incidentally, you may buy your stocks all on the same day or you could spread your purchases out over several days. It doesn't make much difference.

4. USE PORTFOLIO MANAGER. Portfolio Manager makes it easy to track your gains and losses and to decide how and when to sell a stock.
I usually use a 10% Stop-Loss to exit a position. Remember to replace the stocks you sell according to the steps shown above.

5. GO INTO CASH WHEN WE GET A C/DN SIGNAL. Stay in cash until the Primary Wave turns to Up. Go to Step 1.

To get an idea of how well this procedure works, you may go to the beginning of any upwave over the last ten years and perform Quick Tests from any day during the upwave to the C/Dn signal. Of course the gains are largest if the Quick Tests are run from the beginning of an upwave. That's why we work so hard to prepare you for an impending upwave like we did on November 23rd. The top ten VST stocks are up 8.92% from 11/28/07, the day the Primary turned up, to yesterday's close an annualized rate of return of 407%. We had nine winners and one loser.

It's easy to see why this procedure works so well: you're picking rising stocks in rising markets. So take the time to learn all about it. It can make money for you, over and over again. That's why I call it The VectorVest Money Machine.

P.S. Please visit the VectorVest University to see Mr. Glenn Tompkins' impressive illustration of this week's "Strategy of the Week." It's called, "How to Use the Money Machine."