FALLS CHURCH, Va.–Let me start by saying that my working assumption is that markets will end the year higher. This view is based on the forecast that the US will avoid recession–at least in the short term.

Ample liquidity in the marketplace will force institutional managers to put money to work as year’s end approaches and they try to hit their targets. (See Silk, Oct. 10, 2007, Buy the Dips .)

Yesterday, I sent out two new short recommendations you can use to further hedge your long positions. (See Silk, Nov. 13, 2007, Flash Alert: Hedging the Portfolios). Enter the trades, or at least invest in the long-standing Silk hedge recommendations. See the Silk Portfolio page.

Paradoxically, the best-case scenario would be to lose money on the new trades (i.e., you’d be stopped out from the short positions). That means the bull market will have resumed and our long positions will have advanced.

For those of you who entered the China Life Insurance Company (NYSE: LFC) trade, you should’ve been able to short around 85 per share yesterday. If you were able to get this price, your stop-loss should be at 97.75.

Some of you have asked how a short sale works, so I’ve added the mechanics of shorting a stock at the end of this issue. See The Ins and Outs of Short Selling.

Hedging has always been a good strategy, especially during uncertain times. As with our permanent hedges, the new shorts should be viewed in the context of a long-only portfolio, not as stand-alone recommendations. I’ll update the trades in an upcoming issue.

If you have no prior short-selling experience, this is not the time to start. Don’t follow the recommendations included in the Nov. 13 Flash Alert until you’re more familiar with the technique. In the meantime, buying gold and US Treasuries will help you hedge your portfolio.

Fresh Money Buys List Mechanics

I provide a list of Fresh Money Buys, a guide to fund allocation for new as well as long-term readers, at the end of each issue. My aim is to comprehensively communicate my preferred countries, sectors, and stocks so you can allocate money accordingly. This is a useful tool, especially if you’re interested in investing in more than a couple stocks.

I try to find a balance between momentum and value-oriented markets and sectors. At this time, Singapore, South Korea and Hong Kong remain the top three, in order. If you pick one stock from each of these three markets using my recommendations in Fresh Money Buys, buy the following:

• Singapore–Banking–United Overseas Bank (SG: UOB, OTC: UOVEY)
• South Korea–Electric Power–Korea Electric Power (Korea: 015760, NYSE: KEP)
• Hong Kong–Banking–BOCHK (HK: 2388, OTC: BHKLY)

Continue like this all the way down the list, or buy more than one stock in each country, in which case you should follow the order of the sectors in the parentheses after each country.

This list is only a suggestion; you can pick stocks according to your personal preference in risk tolerance, investment horizon and the like.

Company Updates

Philippine Long Distance Telephone (Philippines: TEL, NYSE: PHI, PLDT) reported a 13 percent year-over-year increase in third quarter earnings. The major growth engine was, once again, its high-margin wireless business, which added 1.2 million new subscribers. The total subscriber base is now up to 28.3 million. Broadband growth also remained strong, adding 79,000 new subscribers to surpass the 500,000 mark.

PLDT remains a good way to gain exposure to the Philippines because it’s a relatively defensive consumer play. The company is benefiting from strong growth in domestic demand, a result of efforts to make its services more accessible through wider retail distribution coupled with rising domestic incomes and consumption. Buy Philippine Long Distance Telephone.

Singapore Telecom’s (SG: ST, OTC: SGAPY) recent quarterly results were nothing out of the ordinary. SingTel reported steady growth as earnings per share grew by 22 percent. I expect the company to continue delivering on the earnings and growth front as its expansion strategy remains one of the best in the business.

SingTel is the easiest way to gain exposure to quite a few of Asia’s growing economies because it owns stakes in telecom companies all over the region. Its main investments in Asia (apart from Australia, where it also operates in fixed lines) are mobile operators, including Telkomsel in Indonesia (35 percent), Bharti in India (31 percent), AIS in Thailand (21 percent), Globe in the Philippines (45 percent), Pacific Telecom in Bangladesh (45 percent) and Warid Telecom in Pakistan (30 percent).

Singapore Telecom remains a buy.

Fresh Money Buys

Because the investment process is constant, if you’d like to add to your positions in portfolio recommendations or allocate new funds in a diversified way, focus on the following markets (consult the Portfolio for details), in order (for both countries and sectors):

• Singapore (banking, telecommunications, industrial)
• South Korea (electric power, banking)
• Hong Kong (banking, real estate, infrastructure, publishing)
• India (pharmaceuticals)
• China (consumer, coal, power, oil, water, e-commerce)
• Russia (telecommunications, energy)
• The Philippines (Telecommunications, Real Estate)
• Malaysia (ETF)
• Taiwan (technology, telecommunications)
• Europe (pharmaceuticals, industrials, communications equipment)
• Japan (banking, industrials)
• Macau (gaming)

The Ins and Outs of Short Selling

Short selling, or shorting, is a way of profiting from declines in a stock. The best way to illustrate is with an example.

You want to short Stock X. At the time of the recommendation, the stock traded at $34 per share. Assuming you want to short 200 shares of the stock, the value of the transaction would be $6,800.

To short the stock, you first need to borrow shares from your broker. Your broker loans you 200 shares of Stock X; you immediately sell this stock on the open market for $34 per share, receiving $6,800 for that sale.

But since you borrowed 200 shares of Stock X, you still owe this to your broker and will need to return the shares to pay off your debt. In other words, you’re shorting the stock. After a few weeks pass, you’re ready to close out your short, a process known as buying to cover. At this time, two basic scenarios are possible:

• Stock X falls in value. If Stock X is trading at $29 a share, for example, you can go out into the open market and buy 200 shares for just $5,800. The 200 shares you purchased will satisfy the loan from your broker. Since you sold the shares for $6,800 and bought them back for $5,800, you profited $1,000, minus commissions.
• Stock X rises in value. If the stock rises to $39 a share, you’ll need to pay $7,800 to buy back the 200 shares. Therefore, you’ll have lost $1,000.

As you can see from this example, short selling is a way of profiting from the decline in a stock. The mechanics of the process I’ve outlined above are totally seamless and behind-the-scenes.

With most online brokers, there’s an option on your trading screen that says “Sell Short” or simply “Short.” Another option labeled “Buy to Cover” allows you to close out a short. The broker automatically handles all of the share lending.

Here are a few points worth noting about shorts:

• To short stocks, you’ll need to open a margin account with your broker. This doesn’t take much time and usually involves filling out just a few simple forms. A margin account will allow you to borrow money to trade; you’ll have to pay interest on that loan.
• If you’re shorting a dividend-paying stock, you’ll have to pay the dividends in lieu of the company. In most cases, the broker will handle this automatically.
• Setting stops for shorts is just as important as it is with longs. Technically, the downside in a short is unlimited. Stocks can rise to infinity but only fall to 0. Stops allow you to limit losses and protect gains.
• Some traders prefer to hold income-paying securities in a cash account and open a separate margin account for shorting. The reason for this is because in a margin account other traders can actually borrow your shares; when you borrow shares from your broker to short a stock, they actually come out of other traders’ accounts.
  
  You’ll never know the shares were borrowed. However, when other traders borrow your shares, you receive dividend payments from the short-seller, not the company. These payments aren’t taxed at the special dividend tax rate.