The most basic way to trade the short side of the market is to sell stocks short. While selling stocks short is in some ways just the opposite of buying stocks, there are some important differences. In order to sell a stock short, there must be shares of the stock available to your broker for you to borrow. When traders sell stock short, they essentially borrow stock from their broker and sell the stock in the market. Because the trader has sold something he or she does not own, eventually the trader will need to buy back the stock he or she sold.

The short seller believes that when the time comes to buy back the stock, that stock will be at a much lower price than it was originally sold for. This enables the short seller to buy back the stock at a cheaper price, return it to his or her broker, and pocket the difference as a profit.

For example, a trader wants to short stock Research in Motion (NasdaqGS:RIMM – News). The trader borrows 100 shares of the stock from his broker and then sells it for the going price of $120 a share. RIMM does move lower as the trader expected, say to $90 a share. The trader would then buy the same amount of RIMM that he or she originally borrowed–100 shares–on the open market, and then returns the stock to his or her broker.

The trader sold 100 shares for $120, gaining $12,000. The trader then bought back or “covered the short” by buying 100 shares at $90 ($9,000). The difference between the amount earned by selling the shares and the amount it cost the trader to buy the shares back after they moved lower is the profit of the short trade, in this case $3,000.

If the stock does not move lower and, instead, moves higher, then the trader selling the stock short will still have to “cover” or buy back the stock he or she borrowed. But the trader will be doing so at a loss.

For example, if RIMM advanced by 10 points instead of falling by 30 in the example above, the trader would have had to buy or cover his or her short position at $130. Having made $12,000 from the initial sale and then spent $13,000 buying the stock back when ABC went the wrong way, the trader would realize a loss of $1,000.

In order to sell a stock short, the trader typically must have a margin account set up with his or her broker. Because of the risks involved in selling an asset that the trader does not own–and the possibility that the stock will be at a significantly higher price when the time comes to cover or buy the stock back–a margin account is required to ensure that the trader has sufficient capital in order to buyback a position went against him or her.

The margin amount, which is set by the broker, serves as a sort of collateral in the event that the trade goes badly. This collateral may be in the form of cash or securities such as stocks. If the losses from the short sale trade grow larger than the amount held in margin, then the trader will get a “margin call” from his or her broker, requiring the trader to either liquidate the position immediately or provide additional capital. Additionally, the trader will have to pay interest on the margin–at least, to the degree it is used. The margin is essentially money borrowed from the broker, the interest paid in this sense is no different that the interest a trader might pay on a loan from a bank.

For many years, selling stock short was complicated by what was called the “uptick rule”. This rule meant that traders could only sell a stock short if and when it’s last trade was higher than the previous trade price (creating an “uptick”). This rule had been in force for decades, but was recently eliminated by the Securities and Exchange Commission effective July 2007. This has made it much easier for traders to sell stocks short.

Another phenomenon that traders looking to sell stocks short should be aware of is called the “short squeeze.” A “short squeeze” occurs when a large number of traders who are short a stock begin covering or buying back the stock at the same time. This rush to cover can have a dramatically bullish impact on a stock, particularly one that has been heavily sold short. Being caught with a short position in a stock when a “short squeeze” occurs is one of the risks in selling stocks short that trader need to be aware of.

Data on Earnings, Retail Sales, Inflation May Bring Street Closer to Answer on Recession

This week’s flood of readings on inflation, retail sales and earnings is just what a data-hungry Wall Street has been anxious for.

But it could be a case of the old saying, be careful what you ask for, because you might actually get it. Evidence that consumers and companies are cash-strapped could mean the economy is on a fast track toward recession — or already in the midst of one.

“I think we’re going to look back on fourth-quarter earnings and instead of thinking the recession is coming, if there is one, it already started,” said JPMorgan equities analyst Thomas J. Lee.

Stocks floundered last week, bouncing higher and lower as investors grasped for direction ahead of the upcoming earnings deluge. Last week brought a pledge from Federal Reserve Chairman Ben Bernanke that he was prepared to lower interest rates if needed, and news that Bank of America Corp. was buying the embattled mortgage lender Countrywide Financial Corp.

But the two pieces of encouraging news gave stocks only a temporary lift, as upcoming economic data and earnings releases hung over investors’ heads.

The Dow Jones industrial average was down 1.51 percent for the week, the Standard & Poor’s 500 index was down 0.75 percent, and the Nasdaq composite index was down 2.58 percent.

This week, investors will pore over fourth-quarter results from a stream of banks — Citigroup Inc., JPMorgan Chase & Co., Merrill Lynch, Wells Fargo & Co. and Washington Mutual Inc., to name a few — and other big names such as Intel Corp., International Business Machines and General Electric Co.

The fourth-quarter numbers, already expected to be disappointing, will be less important than the outlooks the companies give, as investors try to gauge when earnings will rebound. The financial sector will be under particular scrutiny, being the industry that dragged down the rest of the market in 2007, as will technology, which was the Wall Street darling last year.

Meanwhile, the government will release its monthly readings on retail sales, producer prices, consumer prices and home construction; the Federal Reserve comes out with its Beige Book on economic conditions in various parts of the country; and Fed officials will deliver speeches ahead of their Jan. 29-30 meeting on interest rates.

The market believes the week’s data, in sum, will point to a weakening economy but also moderating inflation — a formula for more rate cuts, which may not save the country from recession altogether but could help it bounce back more quickly.

Economists surveyed by Thomson Financial last Friday anticipate that the Commerce Department will report Tuesday that December retail sales were close to flat with November, given last week’s wretched readings from individual retailers.

The economists also predict the Commerce Department will report Thursday that housing starts and building permits fell in December from the prior month.

The market sees the Labor Department’s readings on producer prices and consumer prices rising by a smaller amount in December than they did in November. Higher-than-expected readings could reignite jitters that the Fed, though likely to reduce rates at the end of the month, may choose to limit its rate-lowering campaign.

With the state of the economy in question, Wall Street is likely to remain on edge throughout the next few weeks of earnings. It’s possible, though, that the stock market — sometimes seen as a bellwether for the economy and not the other way around — may have already completed the bulk of its sell-off.

Lee pointed out that a survey this week by the American Association of Individual Investors showed that bearish investors outnumbered bullish investors by nearly 30 percent. Over the past 1,100 weeks (about 21 years) a reading above 26 percent has happened 15 times, he said — and each time, the S&P 500 was up in six months and in a year.

The Dow, the S&P and the Nasdaq all tumbled during the fourth quarter and are down several percentage points so far for 2008.

Soaring gold prices have gold bugs a-twitter. But how likely are many of these gold stocks to be higher one year from now?

PowerRatings are not just a way of knowing which stocks to buy. Investors can look at the opposite end of the spectrum, the low-rated stocks with PowerRatings of 1, 2, or 3 to see which stocks to avoid.

While a number of gold stocks have done very well since August — stocks like Barrick Gold (NYSE:ABX – News) and Agnico-Eagle Mines (NYSE:AEM – News) — there are a number of gold stocks that are not likely to perform as well. Because some of these stocks may look cheap on a dollar basis, there is a danger that some investors bullish on the prospects for gold will treat stocks like these as if they were lottery tickets rather than taking the time to invest in the better stocks in the group — preferably when those better stocks go on sale and their mostly average PowerRatings increase.

Our research, looking at simulated trades between 1995 and 2006, tells us that the lowest PowerRating stocks, the stocks with PowerRatings of 1, 2, and 3, tend to underperform the average stock — sometimes dramatically so. Consider this: a stock with an average PowerRating like Goldcorp (NYSE:GG – News) with a PowerRating of 5 has tended to be higher one year later 56.2% of the time. A stock with a PowerRating of 2, on the other hand, was higher one year later less than 42% of the time.

A 1-rated stock was even less reliable as an investment. Stocks with PowerRatings of 1 were higher one year later less than 35% of the time.

So if you are looking to buy a gold stock because of the excellent performance of many of the stocks in that group, be sure you are thinking about what you believe the stock will do going forward, not based on what the stock has already done. Investors tend to be more bullish when stocks are at their highs rather than at their lows. This is why using PowerRatings helps, by keeping investors from chasing after high-flying stocks and instead, buying on weakness.

These four gold stocks represent the kind of weakness you do not want to buy. They may be riding the coat-tails of the general move higher in gold stocks. But when the gold stocks correct, these low PowerRatings stocks are not likely to take it nearly as well as their peers.

Seabridge Gold (NYSE:SA – News) PowerRating 2. See chart below.

Golden Star Resources (NYSE:GSS – News) PowerRating 2.

Novagold Resources (NYSE:NG – News) PowerRating 1

Gammon Lake Resources (NYSE:GRS – News) PowerRating 1. See chart below.

In our previous article on the market’s most overvalued stocks, we focused on expensive real estate stocks, mostly real estate investment trusts and other financial-services firms. Hopefully some of you were able to push the sell button in time, because it’s been a rough couple of months in that space. For this installment, we focus on overvalued, low-quality and risky stocks that have outperformed the market (the S&P 500 in this case). We define low-quality companies as those which Morningstar analysts have deemed “no-moat”; that is, they likely don’t earn their cost of capital through an economic cycle, usually because they lack sustainable competitive advantages. We define risky companies as having a wide spectrum of potential outcomes, making it more difficult to determine the proper valuation of their stocks.

Here are the other parameters to this screen (click here to see the screen
http://news.morningstar.com/articlenet/article.aspx?id=223163). To avoid borderline overvalued stocks, we looked for companies that were trading at greater than 1.4 times our fair value estimates. We eliminated foreign stocks to reduce extraneous variables and set the minimum market capitalization to $3 billion to appeal to a wider group of investors. Finally, we excluded companies in the air transport industry. This decision wasn’t for a lack of candidates–airlines dominated the results of this screen prior to being excluded. However, in a recent stock strategist article (High Oil Prices Pack a Double Whammy for These Airlines) one of my colleagues, Marisa Thompson, already did a great job of highlighting some of the pressures this industry faces.

Below are snippets taken from the Analyst Reports for four firms I chose from the screen, spelling out the downside risks. For a more well-rounded perspective, we highly recommend reading each report in its entirety.

Four Overvalued Stocks

CF Industries Holdings, Inc. (NYSE:CF – News)Industry: Chemicals
Price to Fair Value Estimate: 229%
From the Analyst Report: “While the near-term outlook is certainly bright for CF, we have serious concerns regarding the sustainability of current market conditions. First, the tremendous profits being reaped by domestic producers are sure to attract additional supply to this market, which has fairly low barriers to entry. Also, natural-gas costs are a looming concern, because they can represent between 60% to 80% of the firm’s total costs. Any shift in what has been a relatively benign cost environment since Katrina could quickly send profits tumbling. Finally, any decline in international shipping rates could quickly increase the attractiveness of imported product and force domestic producers to reduce their operating rates.”

Warner Chilcott Limited (NasdaqGS:WCRX – News)Industry: Drugs
Price to Fair Value Estimate: 146%
From the Analyst Report: “Warner Chilcott is subject to near-term generic competition, as six of its top eight products will lose patent protection in the next four years. The company no longer promotes women’s health products femhrt, Estrostep, or Sarafem, each of which loses patent protection by 2010. Barr (NYSE:BRL – News) launched a generic version of oral contraceptive Ovcon 35 in 2006. The company plans to extend the life of dermatology products Dovonex and Doryx through new formulations or marketing. However, some sales will be lost as antibiotic Doryx offers no patent protection, and the patents for Dovonex lotion and ointment expire in 2007.”

Shaw Group (NYSE:SGR – News)Industry: Metal Products
Price to Fair Value Estimate: 145%
From the Analyst Report: “Despite its attractive growth opportunities, Shaw remains highly susceptible to the cyclicality that plagues its end markets. The company has been able to generate shareholder value during market upturns. Yet more often than not, the working-capital intensity of the engineering and construction business has prevented Shaw from earning a return in excess of its cost of capital. This recurring trend illustrates the difficulty the firm has encountered in trying to create long-term shareholder value.”

Invitrogen Corporation (NasdaqGS:IVGN – News)Industry: Biotechnology
Price to Fair Value Estimate: 142%
From the Analyst Report: “…Invitrogen operates without an economic moat and competes with other firms selling a large number of similar products. For instance, Qiagen (NasdaqGS:QGEN – News), Applied Biosystems, a unit of Applera (NYSE:ABI – News), and Invitrogen all sell kits to amplify DNA, which gives each firm little opportunity to raise prices. In addition, there are almost no barriers to entry in the industry and startup firms routinely develop new technologies that challenge existing ones. As a result, Invitrogen must constantly innovate to keep its product-line fresh and differentiated. However, even if Invitrogen develops a technological advantage, it will likely prove short-lived, as competitors with equal or greater resources spend heavily to catch up.”

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The last day of 2007 was a disappointment for the bulls on Wall Street. The Dow finished Monday down 100 points and the Nasdaq lost 22 points. The cast of characters at CNBC’s “Fast Money” changed a bit, but the commentary was as strong as ever. A preview for 2008 took the stage front and center.

The Fast Money lineup for December 31st was made up of the following, Brian Schaeffer, Managing Director of Van Der Moolen Capital Markets, Carter Worth, Oppenheimer Chief Market Technician, Jon Najarian (Pete’s Brother) founder of Optionmonster.com and Guy Adami.

What’s up for 2008?

Guy Adami likes Unilver (UL – Cramer’s Take – Stockpickr) going into 2008. Jon Najarian recommends the Consumer Discretionary SPDR (XLY – Cramer’s Take – Stockpickr – Rating) because he thinks consumer spending will return in 2008. Carter Worth thinks that the stock market will have a “black” beginning for the New Year.

Brian Schaeffer explained that he is a long term optimist, but a short term pessimist going into 2008. Schaeffer mentioned he is bullish on healthcare stocks like Intuitive Surgical (ISRG – Cramer’s Take – Stockpickr – Rating) and Tennent Healthcare (TNC – Cramer’s Take – Stockpickr – Rating). Adami thinks the valuation on ISRG is a little rich at current levels.

(Check out this portfolio pick for 2008 on Stockpickr.com POA 2008 Portfolio.)

2008 Predictions

The “Fast Money” traders offered up 5 major market predictions for 2008. Adami’s prediction is that Pfizer (PFE – Cramer’s Take – Stockpickr – Rating) will embark on a major takeover in biotech and trade higher. He feels Pfizer has no pipeline but they do have lots of cash to do a takeover. Schaeffer agrees with Adami and he thinks that big cap pharmaceuticals will be the place to be in 2008. Schaeffer’s prediction is that health care stocks will rise on valuation. He likes the valuations and good yields for the sector going into 2008.

Worth’s prediction is that China and India will continue to have strong economies, but the stocks will trade lower. He believes the stock market for China and India are bubbles and will begin to top out and end lower in 2008. Najarian doesn’t buy into Worth’s prediction. Najarian’s prediction is that Wall Street stocks will climb out of the credit-crunch. He thinks the financial sector will have less turmoil in 2008. Dylan Ratigan’s prediction was three words: China, solar and fun.

Oil Prediction

Addison Armstrong Director of Market Research for Tradition Energy joined the “Fast Money” crew to discuss his take on oil for 2008. Armstrong expects oil prices to trade lower to the $75 level in 2008 because of a weaker economic environment. He thinks slowing demand from China and India will help to take crude oil lower. Adami agrees with Armstrong and feels $75-$80 is the right price for crude. Najarian thinks oil will sell off, but it will not stay at the $75 level for long.

Oil put in its best year for returns in 5 years and gold saw its best year since 1979. Worth says stick with the gold, oil and soft commodities trade.
CKE Restaurants CEO Interview

Andy Puzder the CEO of CKE Restaurants (CKE – Cramer’s Take – Stockpickr) joined the “Fast Money” crew to discuss his take on the prospects for his company. Puzder compared CKE’s 99 cent burger to comparable priced burgers from Wendy’s and McDonald’s. The size of CKE’s burger wasn’t even comparable to its competitor’s offerings. Puzder explained CKE is also doing very well with their premium coffee. Schaeffer mentioned he will be a buyer of the stock. Adami thinks CKE needs to get out a better message to Wall Street.

Word on the Street

Merrill Lynch (MER – Cramer’s Take – Stockpickr) is reportedly in talks to sell a big stake to a Chinese or Middle-Eastern fund. Najarian thinks the financials are the cheapest sector in the market. Adami likes Goldman Sachs Group (GS – Cramer’s Take – Stockpickr) because it continues to buyback stock. Worth explained that a lot of the earnings power for the investment banks isn’t going to materialize going forward. He would avoid the financial sector and the asset managers. Najarian mentioned that a loss in M&A and investment banking fees can be made up by the trading desks for the brokerages.

U.S. existing home sales rose, but median home prices fell 3.3% Adami recommended looking into KB Home (KBH – Cramer’s Take – Stockpickr) ahead of earnings for a trade. He thinks if KB Home says anything remotely positive the stock will see a short covering rally.

Kirk Kerkorian’s Tracinda announced it has purchased a 35% stake in Delta Petroleum (DPTR – Cramer’s Take – Stockpickr). Najarian explained the deal was tipped off by the options activity in the December options. He also mentioned he wouldn’t shadow Kerkorian by buying other stocks in the sector.

Dick Parsons stepped down as the CEO for Time Warner (TWX – Cramer’s Take – Stockpickr) Monday. Jeff Bewkes will step in to replace Parsons. Adami tells investors that Time Warner is a buy for 2008. Schaeffer likes the media stocks, especially Walt Disney (DIS – Cramer’s Take – Stockpickr).

Options Backwardation Trade

Jon Najarian sees a trading opportunity based off of options backwardation for the 1st week of January. Backwardation is where the implied volatility is higher for the front month options. Najarian explained that an unusual premium is being put on the options for Echelon Corporation (ELON – Cramer’s Take – Stockpickr) and Hang Seng (HSI – Cramer’s Take – Stockpickr). This unusual premium for the front month contracts suggest to Najarian that a sharp rally is in the cards for ELON and HIS.

Happy 52-Week High Deere & Company (DE – Cramer’s Take – Stockpickr)
Pops & Drops

Pops – Loews (LTR – Cramer’s Take – Stockpickr) traded up 2% after Barron’s said the stock could rise 20% with a spin-off of its cigarette division. Adami declares Loews is cheap and he likes it.

Countrywide Financial (CFC – Cramer’s Take – Stockpickr) traded up 2%. Schaeffer would be a seller on this rally.

Legg Mason (LM – Cramer’s Take – Stockpickr) traded up 3% after the firm lowered its exposure to SIV’s (structured investment vehicles). Worth still says don’t buy LM.

MasterCard (MA – Cramer’s Take – Stockpickr) traded up 2%. Adami remains bullish on MasterCard.

Drops – Crocs (CROX – Cramer’s Take – Stockpickr) fell 3% on no news. Schaeffer doesn’t like the stock or product. He wouldn’t be a buyer on this drop.

Las Vegas Sands (LVS – Cramer’s Take – Stockpickr) fell 3%. Najarian recommends buying LVS on a further dip.

Nucor (NUE – Cramer’s Take – Stockpickr) fell 3% as U.S. auto makers are looking to use lighter materials. Adami mentioned that Nucor is the best run steel company and a potential takeover target.
Face2Face

Viewers of the show would like to have their questions answered.

Samantha from New York wants to know, “Apple (AAPL – Cramer’s Take – Stockpickr) is over $200 barrier this year. Is it too rich for 2008?” Schaeffer thinks the price of Apple stock is getting ridiculous. He recommends taking profits at $200 and maybe buying some put options. Worth also thinks Apple is overpriced. Najarian likes Apple and has a $230 price target on the stock.

Dan from New York asks, “Exports are booming and the dollar remains weak. Do you think the strong economic boom outside the US is enough to starve off a recession?” Najarian doesn’t think the US will go into a recession and he sees the dollar strengthening in 2008. Adami likes Hewlett-Packard (HPQ – Cramer’s Take – Stockpickr) for a play on global demand.
Final Trade

The crew says goodbye to 2007 with their best trade ideas.

* Schaeffer recommended Nordstrom (JWN – Cramer’s Take – Stockpickr).
* Worth picked Altria (MO – Cramer’s Take – Stockpickr).
* Najarian wants more Starbucks (SBUX – Cramer’s Take – Stockpickr).

Intuitive Surgical, Millicom International, Baidu.com Help Lift Nasdaq 100 During 4th Quarter

The Nasdaq 100 index finished slightly higher in the fourth quarter, boosted by gains from Intuitive Surgical Inc., Millicom International Cellular SA, and Baidu.com Inc.

The index, which includes 100 of the largest nonfinancial securities listed on the Nasdaq Stock Market, rose 0.76 percent during the past 13 weeks.

On Monday, the index fell 22.12 points to 2,084.93. The broader Nasdaq composite fell 22.18 points to 2,652.28.

Intuitive Surgical Inc., which makes robotic surgical tools, gained 41.4 percent during the period.

Last month, an analyst forecast robust growth on strong international sales of the company’s da Vinci surgical system, particularly in ear, nose and throat surgeries.

On Monday, shares of Intuitive Surgical declined $2.14 to end at $323.

Millicom International Cellular, a Luxembourg-based telecommunications company, advanced 40.1 percent during the quarter. The stock rose 38 cents to end at $117.94 on Monday.

And Chinese Internet company Baidu.com Inc. rose 37.7 percent during the period. On Monday, the stock lost $9.07, or 2.3 percent, to close at $389.90.

On the losing side, low-cost cell phone service provider Leap Wireless International Inc. declined 43.1 percent during the quarter.

Leap’s shares have declined in recent months, given poor subscriber numbers and worries that the company is exposed to customers with poor credit. On Monday, shares advanced 34 cents to close at $46.64.

Telecommunications company NII Holdings Inc. lost 42.1 percent during the past 13 weeks, and rose 73 cents to close at $48.32 on Monday.

And SanDisk Corp. declined 39.1 percent during the quarter, at which time the flash memory maker said it filed three patent-related lawsuits against 25 flash memory product and memory player makers. On Monday, shares declined 37 cents to close at $33.17, after setting a 52-week low of $32.74 during intraday trading.

Aggressive investing could help you retire early, but taking on too much risk could backfire.

Question: I’m 46 and have about $350,000 set aside in my workplace retirement savings plan in what I would call a moderately aggressive mix of stock and bonds funds.

I contribute the maximum every year to this plan, and my wife and I also contribute to Roth IRAs (although not the max).

Since there’s a mandatory retirement age of 57 at my job, I’m wondering whether I should “bite the bullet” and invest in an even more aggressive mix to maximize my investment earnings over the next 11 years. I think I’m on the right path, but I’d love to have the “warm and fuzzy” feeling of knowing things will look rosy for me when I turn 57. – Michael S.

Answer: It sounds to me as if you’re already on the right path.

But as I pointed out in a recent column, early retirement is a tough act to pull off. And I’d hate to see you mess things up now by adopting too aggressive a stance with your investments.

An investing strategy isn’t like the sound control on an iPod, something you can ratchet up at will and automatically generate more volume (or a larger nest egg account balance).

The simple fact is that higher investment returns go hand in hand with higher volatility. And even if you’re okay with the idea of your retirement account balances bouncing up and down a lot more in the short-term, higher volatility also translates to a wider range of possible outcomes in the long-term.

So while being more aggressive does give you a shot at having a much larger nest egg by age 57, taking on too much risk could also backfire and leave you with a much smaller nest egg than you anticipated.

You don’t say how your retirement savings are actually split up between stocks and bonds, so I don’t know what your idea of “moderately aggressive” is. That makes it hard for me say how much leeway you have in shifting your strategy from where it stands now.

But I can tell you that, generally, someone your age should have somewhere between 75 percent and 80 percent of his or her retirement savings invested in a broadly diversified group of stock funds, and the remainder in bonds.

For more details on how that mix might look and what sorts of stock and bonds funds it should include, I suggest you take a look at the target-retirement funds section at T. Rowe Price and Vanguard. Just choose a fund with a date that roughly corresponds to the year you think you’d like to retire.

You can certainly tweak your mix even more toward stocks than these funds do in hopes of earning higher returns and bulking up your retirement accounts.

But just remember that if you go too far, your nest egg could take a big hit if the markets turn against you. That could be especially problematic if your accounts suffer a big setback just before you plan to retire.

It’s also important to remember that a retirement investing strategy isn’t something you set in a vacuum. So before you start fiddling with your asset mix, you’ll want to review your overall retirement plan.

You can do that by taking these three steps: First, do a retirement reality check. Here, the idea is to get a reasonable evaluation of whether retirement at age 57 is a realistic option for you given how much you and your wife have already saved and how much you’re still socking away.

You can get a quick estimate of whether you’ll be able to make an early exit by checking out our “Can You Retire Early?” calculator, which tells you roughly how much money you need to have set aside today to have a good shot at retiring by age 60. But this is really more of a back-of-the-envelope approximation.

To get a more accurate assessment, you need to go to a calculator that allows you to plug in more of your financial information (retirement account balances and such) as well as details such as how much income you’ll need in retirement and the various sources (Social Security, a pension, withdrawals from retirement accounts) that might provide it.

Two such tools that allow you to do this sort analysis are our Retirement Planner and Fidelity’s myPlan Retirement Quick Check. Both are free, although you must register at Fidelity’s site to use its tool.

If you’re uneasy doing this sort of thing on your own, or you simply want a pro’s opinion, you can always seek an adviser’s help. (More on getting an adviser’s help.)

Second, have a plan B in mind. Despite your best efforts, you might not have the financial wherewithal to fully retire in your 50s. So if you really have no choice but to leave your current job at age 57, it’s a good idea to think ahead about what you might do if you can’t afford to retire.

One possibility is to continue working full-time with a different employer or even launch an entirely new career. Either option can be challenge when you’re in your 50s, but both are doable. This Money Magazine special report lists the best jobs for people over 50. There also are specific tips to boost your odds of landing those jobs.

On the other hand, if your nest egg and other resources will come close to providing the income you’ll require in retirement, you may need only a small paycheck to bridge the gap.

In that case, you may want to consider part-time or occasional work. You can get a sense of what types of part-time and temporary jobs are available to retirees today, as well as how much they pay and what sorts of benefits they provide, by checking out a recent feature on working in retirement I wrote on for Money’s November “Retire Rich” cover package.

Third, keep monitoring your progress. A lot can change in the decade or so you have until you plan to retire. Indeed, if you think of all that’s happened just in the past year alone in the housing, credit and stock markets, it’s clear that things can change dramatically over even far shorter periods.

So regardless of what the reality check you perform now tells you, you’ll want to review your status at least every couple of years to make sure you’re still advancing toward your goal.

If you are, that’s great. Stay the course. If you’re not, you may need to think seriously about upping the amount you save (whether that means maxing out those Roths or, if you’re already doing that, also saving in taxable accounts) or perhaps tweaking your investment strategy or doing both. (Again, though, beware of making radical changes in your investment plan.)

As you get within five or so years of your planned retirement date, you’ll want to begin seriously examining how much income you can count on from different sources.

For an estimate of how much you might receive from Social Security, you can check out the benefit calculators on the Social Security site.

If you qualify for a traditional check-a-month pension from your employer, your HR department should be able to give you details on how much you’ll collect.

And to get an idea of how much annual income you might be able to draw from your retirement nest egg without running through your savings too soon, you can run several scenarios with different withdrawal rates and investing strategies on the Retirement Income Calculator at the T. Rowe Price site.

Of course, re-assessing your investing strategy and taking the three steps I’ve outlined here can’t guarantee that you’ll come away with a “warm and fuzzy” feeling about your early retirement prospects.

But doing so will give you a realistic sense of where you stand today and, more important, let you know what you must do during the remainder of your career to assure yourself a comfortable and secure retirement, whenever you wind up taking it.

Retirees are being lured by Ponzi schemes, unsuitable annuities and over-hyped investment returns.

Ed and Ruthann Wolfe just wanted a safe place for their retirement savings. During his 32 years at the Rubbermaid plant in Wooster, Ohio, Ed had amassed more than $320,000 in his 401(k), all of it invested in low-risk Fidelity mutual funds.

After Newell bought Rubbermaid in 1999, early-retirement offers were made to more than 180 employees at the Wooster plant, including Ed, then 55. At the same time, many of his colleagues began attending investing seminars hosted by a Merrill Lynch broker, who was telling investors they could earn more money if they retired than if they stayed on the job. “There was a buzz going around the shop about how good this could be,” recalls Ed. “We thought we couldn’t afford not to do it.”

The Wolfes turned over their entire $320,000 in retirement savings to the broker, with instructions to keep their money in low-risk investments because they needed to start making withdrawals right away. So they weren’t concerned when the stock market tumbled in 2001.

Then they began hearing from friends whose investments had declined in value. Ruthann called the broker and was shocked to find out that they’d have to stop withdrawing money or go broke. Their retirement stash, which the broker had invested in high-risk Internet and tech companies, had plunged to less than $100,000. “I felt it could be the end of the world,” says Ed, who went back to work driving trucks for two and a half years.

Cases similar to that of Rubbermaid’s retirees have been cropping up across the country. “In the past two years, we’ve had about 100 formal disciplinary actions involving seniors,” says Mary Schapiro, chief executive of the Financial Industry Regulatory Authority, which oversees U.S. securities firms.

In one high-profile case settled last summer, NASD (Finra’s predecessor) fined Citigroup Global Markets $3 million and ordered the company to pay $12.2 million to more than 200 former employees of BellSouth. The regulators said Citigroup failed to adequately supervise a team of brokers based in Charlotte, N.C., who used misleading sales materials — promising 12% annual returns — during dozens of seminars for BellSouth employees from 1994 to 2002. Instead, more than $12 million in former employees’ accounts evaporated during the bear market. “These are people who were persuaded to take retirement early — who didn’t have to and probably shouldn’t have — based on these misrepresentations,” says James Shorris, of Finra’s enforcement division. Citigroup says it is “working on all fronts to prevent a similar situation from occurring again.”

Baby-boomers nearing retirement, and their parents, make irresistible targets for this kind of scam. “When you’re looking at $16 trillion in retirement accounts changing hands in the next 15 to 20 years, that’s a big market share for anybody,” says Alabama Securities Commission director Joseph Borg. In a sweep of “free lunch” financial seminars, the Securities and Exchange Commission found unethical business practices in nearly half. In addition to promises of over-the-top investment returns, the most common scams include Ponzi schemes and sales of unsuitable annuities.

Retirees are vulnerable because they’re looking for ways to stretch their income. Plus, many seniors are afraid to ask questions, consult with their children or complain to regulators. “A lot of people think they’ll lose their independence if they admit they were taken advantage of,” says Barry Lanier, chief of the bureau of investigations for the Florida Department of Financial Services. When Finra surveyed senior investors last year, only 56% of the victims who admitted to being defrauded said they had reported the incident.

The money that seniors have amassed is “usually irreplaceable,” says Jacob Zamansky, a securities lawyer in New York City. “They can’t afford to lose the principal, so they generally need to be conservative. Anything that doesn’t meet that investment objective should be viewed very suspiciously.”

Ed Wolfe hired Zamansky in 2002. A year later, after his case went to arbitration, he was awarded $310,000, including legal expenses. About 75 of his Rubbermaid colleagues also received settlements from Merrill Lynch. “Financially, we’re pretty much back on track,” says Wolfe. “But mentally, I’ll never be the same.”

Ignore the Hype

Be suspicious of any sales pitch that promises unrealistic returns. “Anytime you’re talking about average returns of greater than 12%, you’re not in the ballpark,” says Jim Eccleston, a securities lawyer in Chicago. In the BellSouth case, not only were investors led to believe they could earn about 12% per year, they were also told they could afford to withdraw 9% of their funds annually for 30 years.

Before doing business with a broker, check his or her background using Finra’s BrokerCheck tool. Look for disciplinary actions taken against the broker, as well as red flags — for example, the broker has frequently changed firms.

If the adviser is a certified financial planner, check his or her credentials with the CFP Board of Standards. Also consult the Senior Investor Resource Center and the SEC’s senior investor page.

Just checking whether the broker has a securities license can keep you out of serious trouble. “Maybe one in ten of our cases involve a licensed stockbroker,” says Colorado securities commissioner Fred Joseph. Many of the most notorious purveyors of bogus investments never held a license.

In Wolfe’s case, keeping good records made a big difference in the outcome. So keep a copy of any mailings you receive from a broker or handouts you get at a sales presentation. Take notes during your conversations. Talk with the broker about your investment goals and ask him or her to summarize your discussion in writing, recommends Tom Grzymala, a certified financial planner and expert witness in securities cases. “I want to see the account information about what type of investor you are,” he says.

Losing money in the stock market doesn’t necessarily mean there’s been wrongdoing or that a crime has been committed, says Tracy Stoneman, a Colorado securities lawyer and author of Brokerage Fraud: What Wall Street Doesn’t Want You to Know. Securities law looks at whether the broker made investments that were suitable for you. To determine that, a broker needs to know your goals, risk tolerance, tax status and whether you need ready access to your money, says Schapiro.

In return, you should ask the broker to rate an investment’s risk on a scale of 1 to 10 and to put the answer in writing. If the investment starts to lose value, ask for a written explanation. “Put the brokerage firm on notice that the losses make you uncomfortable,” says Stoneman. Writing down your concerns and faxing them to the broker and his supervisor “is a wonderful protection tool,” she says.

If you continue to have problems, don’t hesitate to complain to the brokerage firm and your state securities regulator (find contact information at www.nasaa.org). But even the SEC and Finra generally can’t recover your losses. For that, contact a securities lawyer (www.piaba.org) to take your case to arbitration.

Beware of Ponzi Schemes

Charles Ponzi was an immigrant who swindled 40,000 Americans out of $140 million (in today’s dollars) between 1919 and 1920. Promising to double investors’ money in 90 days, he paid off early investors with the money he collected from new investors, all the time living high on the hog. Ponzi may be dead, but his spiritual descendants live on. Just ask Nicholas Garofalo. In the mid 1990s he started investing with Peter Dawson, a financial adviser who had grown up near his community of Holbrook, N.Y. Over a number of years, Garofalo, 68, gave Dawson more than $300,000, including stock he’d accumulated while working at AT&T for more than 30 years and money from his savings accounts.

Many of Garofalo’s Long Island friends and family members also entrusted their money to Dawson — sometimes remortgaging their homes, at Dawson’s suggestion, to raise cash. At first, Garofalo received account statements that appeared to be from well-known mutual fund companies, and he didn’t suspect that anything was amiss. But in about 2003, the statements stopped coming and Dawson became more difficult to reach.

When investors finally contacted regulators and securities lawyers, they accused Dawson of running a Ponzi scheme. Dawson is now in jail awaiting trial, charged with grand larceny and scheming to defraud, but the money appears to be long gone. “Right now I have $15,000 to my name,” says Garofalo. “I had to remortgage my house, and some of my relatives are trying to help me out.” To avoid falling prey to a Ponzi scheme, establish an account at an independent institution (typically a brokerage) to hold your money. Never write a check directly to an adviser — only to the custodial institution, which must send you quarterly statements. And meet with your adviser at least once a year to review your account.

Be Cautious With Annuities

One night in 2005, Virginia LaValley called her son, Ken, and told him she had just made a new investment that was paying 7% annually. “I don’t know a whole lot about investing,” Ken admits. Still, he thought that his mother, then 75, was mentally sharp enough to make her own decisions. But when co-workers told Ken that earning a guaranteed 7% was unrealistic, he figured “something wasn’t right.”

When Ken started to investigate, he found that his mother had been duped into buying unsuitable annuity products — the most common complaint insurance regulators handle. Florida’s Department of Financial Services has 51 open investigations involving variable annuities, plus 105 investigations into equity-indexed annuities, a complicated product that ties payoffs to stock-market indexes while guaranteeing a minimum return.

Annuities themselves aren’t necessarily bad. In fact, an immediate-payout annuity can provide lifetime income for seniors. But deferred annuities, such as variable and equity-indexed products (which are usually used for long-term retirement savings), can cause big problems if they’re sold to people who need immediate access to their money. Many of these annuities levy a surrender charge if you try to withdraw your money within the first seven to ten years.

But seniors are tempting targets for the hard sell. Agents often get commissions of 4% to 7% for selling variable annuities, and 5% to 12% for equity-indexed products. An agent who convinces a retiree to roll over a $200,000 IRA into an annuity can earn as much as $24,000.

Commissions seem to have been the motive in the case of Virginia LaValley, who lives in Boynton Beach, Fla. The agent persuaded her to trade in almost $40,000 in annuities — which had a minimum return of 3% and no longer had a surrender period — in order to buy new equity-indexed annuities with a 2% minimum return and a brand-new surrender period of 15 years. Virginia would have paid a penalty if she had tried to withdraw the money before age 91, and she would have owed a whopping 19% surrender charge if she had taken out money within the first year.

To complicate matters, Ken began noticing signs of dementia in his mother. Always impeccable about keeping records, Virginia hadn’t balanced her checkbook in months. Mounds of junk mail were heaped on her dining-room table, and she felt obligated to answer it all, sending more than 500 small checks to charities and sweepstakes in 2005.

On the advice of a reputable financial adviser his mother had consulted in the past, Ken contacted a lawyer. Working with the insurance company that issued the annuity, American Investors, they got Virginia’s money back after providing medical records that proved she was suffering from dementia when she bought the annuity.

When Florida’s Department of Financial Services investigated, officials discovered that the same salesperson had duped a number of people in their seventies and eighties into buying high-commission equity-indexed annuities with surrender periods that sometimes stretched past age 100. The state took away the agent’s license and fined him $40,000, but many of the families are still trying to get their money back.

Build Your Case

Be skeptical of any claims made at a free-lunch seminar, a common sales tactic to get seniors into a one-on-one meeting. And don’t trust a salesperson just because he or she has a professional designation that focuses on seniors. Such credentials sometimes require little more than paying a fee and passing an easy take-home test. (Look up the requirements for professional designations at Finra.org.)

Ask specifically about annuity surrender charges and how much money you can withdraw each year. Also ask about interest guarantees. Some annuities offer a bonus in the first year, after which the minimum guarantee drops to 2% or 3% — much less than you’d earn on a bank certificate of deposit. Equity-indexed annuities have returns based on Standard & Poor’s 500-stock index, but they pay out only a portion of the gains.

Take notes and ask for a written summary of everything you discuss with the salesperson. Just requesting paperwork could discourage an agent in search of an easy mark.

If you find that you or your parents were sold an unsuitable annuity, contact the insurance company. If you can provide evidence of mental incapacity, it may be easy to get your money back.

Don’t hesitate to call your state’s securities department or state insurance department. “You can always weed out bad agents by telling them you’d like to call us and put us on speakerphone,” says Cindy Hermes, who spent years in the consumer-assistance division of the Kansas Department of Insurance. If the agent balks, walk away.

FTC Clears Google’s $3.1 Billion Purchase of DoubleClick; Deal Still Faces Scrutiny in Europe

With U.S. antitrust clearance for its DoubleClick purchase, Google’s focus now turns to European regulators, who are expected to be more critical of the top search engine linking up with a market leader in online advertising.

The proposed $3.1 billion transaction, which is strongly opposed by privacy advocates, cannot be completed without approval from the European Commission, whose review deadline is April 2.

The Federal Trade Commission said that the deal won’t significantly lessen competition in the online advertising market, rebuffing complaints from Microsoft Corp. and AT&T Inc. that it would give Google a dominant position.

“The FTC’s strong support sends a clear message: this acquisition poses no risk to competition and will benefit consumers,” Eric Schmidt, Google Inc.’s chief executive, said. “We hope that the European Commission will soon reach the same conclusion.”

The European Commission declined to comment on the FTC’s decision, spokesman Jonathan Todd said.

The FTC’s approval of the deal without conditions could push European regulators to take a tougher line, says Rebecca Arbogast, an analyst at Stifel Nicolaus.

For example, they could restrict the ability of the two companies to share the market data they collect or require the combined company to sell off certain assets, analysts have said.

But Arbogast believes Europe will ultimately approve the deal, noting that Google could benefit from the fact that Microsoft has had significant antitrust problems in the EU.

“With enemies like Microsoft, you don’t need friends when you’re in Europe,” Arbogast said.

In addition to selling text ads on its own Web site, Google acts as an intermediary, selling ads through its AdSense network to thousands of online publishers, from small Web sites such as AsktheBuilder.com to large media companies like the New York Times Co.

DoubleClick Inc., meanwhile, helps publishers place and track display ads. Oppenheimer & Co. says DoubleClick, with 40 percent market share, is the leader in display advertising technology and services.

Microsoft and other critics argue the deal would enable Google to dominate two aspects of the Internet advertising market — ad sales and ad-serving tools.

The FTC said in a report on its investigation that both the online ad sales and ad-serving markets have numerous competitors, several of which have been bolstered by recent acquisitions.

Those include Microsoft’s $6 billion purchase of DoubleClick rival aQuantive, the acquisition of online advertising provider Tacoda by Time Warner Inc.’s AOL, and Yahoo Inc.’s purchase of Internet advertising exchange Right Media Inc. for $680 million.

Other competitors include ValueClick Inc. and 24/7 Real Media, which was purchased by London-based advertising giant WPP Group PLC for $649 million in May, the FTC said.

Privacy advocates say the combined company will have access to a huge amount of data on individual Web-surfing habits. The FTC said it lacked the legal authority to block the deal on any grounds except on antitrust matters.

However, in an apparent nod to these concerns, the FTC on Thursday proposed a set of privacy guidelines for the online advertising industry, describing them as something that “clearly transcend” the Google-DoubleClick deal. It remains to be seen how such guidelines would be enforced.

Privacy advocates were not assuaged.

The FTC “sidestepped its responsibility today when it approved the merger of two companies whose new, extended data-collection reach will give it unprecedented access to track our every move throughout the digital landscape,” Jeffrey Chester, executive director of the Center for Digital Democracy, said. The CDD and the Electronic Privacy Information Center fought the deal on privacy grounds.

The five-member commission voted 4-1 in favor of the deal. Commissioner Pamela Jones Harbour dissented “because I make alternate predictions about where this market is heading, and the transformative role the combined Google/DoubleClick will play if the proposed acquisition is consummated.”

Online ad spending is projected to reach $21.4 billion this year, according to research group eMarketer, surpassing the $20.5 billion radio advertising market for the first time. EMarketer expects online ad spending to nearly double to $42 billion in 2011.

Shares of Google added $6.00 to $683.37 in midday trading.
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Stocks Fluctuate After Economic Reports Point to Slowing Economy; Oracle Results Lift Nasdaq

Stocks fluctuated Thursday as downbeat economic reports added to investor concerns but a strong earnings report from Oracle buoyed technology issues.

In a midday report, the Philadelphia Federal Reserve said its index of regional business conditions showed a reading of a negative 5.7, down sharply from a positive 8.2 in November.

Further weighing on investors, a gauge of future business activity fell last month to its lowest level in more than two years. The Conference Board said its index of leading indicators, which looks three to six months ahead, dropped 0.4 percent in November. The reading suggests the economy could weaken this winter and possibly into the spring amid tight credit and continued troubles in the housing sector.

Corporate results offered investors a mixed picture.

Oracle Corp. said late Wednesday that its profit in the most recent quarter jumped 35 percent — well above the increase analysts’ had expected — amid higher sales of licenses for new products.

But Bear Stearns Cos. on Thursday reported its first-ever quarterly loss. Still, it didn’t confirm investors’ worst fears about the scope of troubles in the financial sector.

The report from Bear Stearns came a day after Morgan Stanley said an investment arm of the Chinese government had agreed to invest $5 billion in the company. The news calmed some fears that Wall Street’s major players would face severe liquidity crunches as banks worldwide continue to refrain from lending to each other amid concerns about souring debt tied to mortgages.

Doug Roberts, chief investment strategist at Channel Capital Research, contends the ability of banks like Morgan Stanley and earlier Citigroup Inc. to arrange cash infusions from well-healed foreign governments appeared to quiet some of Wall Street’s unease.

“The Morgan Stanley announcement combined with the Citigroup announcement establishes this kind of a backstop on the financials. It’s not a firm thing, but it kind of gives the shorts some room for pause,” he said, referring to short-sellers. Short sellers profit by accurately predicting when stocks will fall.

He also said Oracle’s results indicate that some companies will still be able post growth figures even as tight credit markets make it harder for other companies to raise capital.

In midafternoon trading, the Dow Jones industrial average rose 19.67, or 0.15 percent, to 13,226.94.

Broader stock indicators rose. The Standard & Poor’s 500 index rose 4.09, 0.28 percent, to 1,457.09, and the tech-heavy Nasdaq composite index increased 29.68, or 1.14 percent, to 2,630.69 helped by Oracle.

Despite the gains by the major indexes, declining issues outnumbered advancers by about 9 to 7 on the New York Stock Exchange, where volume came to 859.9 million shares.

Bond prices rose following the economic data. The yield on the 10-year Treasury note, which moves opposite its price, fell to 4.01 percent from 4.03 percent late Wednesday.

The dollar rose against other most major currencies, while gold prices fell.

The stock market’s relatively quiet session follows several up-and-down weeks that have left investors trying to gauge how well the economy will fare. Some economists are predicting a recession could result from troubles including bad mortgage debt, rising inflation and a possible slowdown in consumer spending.

While Wall Street heads toward holiday-shortened weeks that often bring little action, stocks could still see volatility, particularly given the expiration of options contracts Friday. Known as “quadruple witching,” it marks the expiration of contracts for stock index futures, stock index options, stock options and single stock futures.

In corporate news, Bear Stearns fell 39 cents to $90.21 after its report that turmoil in the credit market reduced the investment bank’s portfolio by $1.2 billion in the fourth quarter, leading to a hefty loss.

Oracle rose $1.53, or 7.4 percent, to $22.29 after its report.

Meanwhile, FedEx Corp. fell 80 cents to $93.83 after posting a 6 percent decline in quarterly earnings amid high fuel costs and a U.S. economic slowdown. The company also issued a forecast that fell below expectations.

The Russell 2000 index of smaller companies rose 2.07, or 0.27 percent, to 758.16.

Overseas, Japan’s Nikkei stock average rose 0.01 percent, and Hong Kong’s Hang Seng index slipped 0.05 percent. Britain’s FTSE 100 rose 0.97 percent, Germany’s DAX index rose 0.41 percent and France’s CAC-40 rose 0.26 percent.

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