I had lunch with a friend of mine who I describe as an aggressive speculator when it comes to trading. No pain no gain is his trading motto, which has gotten him in a lot of trouble in the past. Anyhow, we were discussing the strong buying in the markets. He mentioned he was planning to short the DOW as he expected it to fall to 11,600 sometime in 2007. In response, I suggested t o him that he may want to consider buying put options or a bearish call spread rather than shorting. While not totally convinced of this, he asked me why I did not like shorting. It is not that I do not favor shorting as it makes sense in certain situations, but I prefer to have manageable risk.

 Versus short selling, put options require less upfront money and entail far less risk. Let’s take a look at Cisco Systems Inc. (CSCO). To short 100 shares of CSCO at the current price of $27.02 as at November 28, the required initial margin requirement is 50% on the short position, or $4,053 (150% x $27.02 x 100 shares). This is the money you put at risk as shorting involves unlimited risk.

 Alternatively, let’s say you believe Cisco will decline by July 2007. You can buy the in-the-money Cisco July 2007 $27.50 Put option for a premium of about $220 for one contract (equals to 100 shares of Cisco). The $220 is also the maximum risk, whereas, you could lose an unlimited amount via short selling since the price of the stock can rise indefinitely in theory.

 In my view, put options represent a more prudent bearish strategy than short selling. Here’s why:

 A short seller simply borrows a particular stock that he or she does not own and sells it in the market at the prevailing price. For the strategy to pan out, the short stock must drop in price so that the short seller can buy it back at a lower price and replace the borrowed position to the registered holder. The problem is if the short position goes against you in that the stock rises instead of falling.

 For example, say you had decided to short Cisco and placed a short on 100 shares at $27.02. Let’s assume the price of Cisco rallies to $33 by July 2007. At this price, you would have to short cover vis-à-vis repurchasing the 100 shares of Cisco at the much higher $33 in the open market and returning the shares to the holder. You would end up losing over about $598. Compare this to the buyer of the July 2007 put option who would have lost only the $220 premium.

 The reality is short sellers are subject to unlimited risk since a stock price in theory can move up infinitely. The greatest risk is in momentum-driven markets.

 Note that short selling has more downside potential than put options, but the limited risk of put options far outweigh the extreme losses that short selling can generate.

For speculators in equities, there’s no hotter sector of the stock market than China stocks. We’ve been talking about this for quite some time now.

It isn’t so much that there aren’t attractive domestic stocks in which to speculate, only that the growth rates of many China stocks are higher. Further to this, in the mind of an equity speculator, China’s economic coming of age really does satisfy the psychology inherent in risk-capital investing. Speculators want to own the highest growth/return potential, regardless of where the opportunities exist.

Who wants to argue with one- billion consumers intent on working really hard to increase their standard of living? There are hundreds of millions of Chinese residents who want to work hard, find an apartment, buy a car, and reward themselves with luxury goods.

It’s still like the Wild West over there, with regulatory environments changing on a dime. This is why China stocks that are listing on American stock exchanges are so attractive to domestic investors. Who wouldn’t want to participate in the biggest developing market on earth? And you can do so in American dollars.

With this in mind, China Security & Surveillance Technology Inc. (OTCBB/CSCT) is already ticking higher in price since it was first featured in this column.

Domestic investors just love good China stocks. And the growth rates really are impressive. In CSCT’s case, revenues in the third quarter of 2006 grew 247%. Net income grew 205%. It doesn’t even matter if part of this growth is due to acquisitions. The fact that these large numbers are present is contributing to positive investor sentiment.

There is going to come a time when China stocks listed on American stock exchanges experience tough times. This is the nature of the economy and the stock market. It would be a big mistake in my mind, however, for an aggressive equity portfolio in the current environment to ignore the opportunities related to China stocks.

…the Canadian economy, that is. Yesterday, the Canadian Chamber of Commerce came out with similar predictions we’ve been hearing for the past few months–expect GDP to slow down next year! The cause of the slowdown is still the same; that is, the weaker demand for our goods and services from our biggest trade partner–the U.S.

According to the Chamber of Commerce, Canada’s annual growth will drop from 2.8% estimated for 2006 to 2.4% estimated for 2007. The first six months will be particularly slow, but the pace is expected to pick up in the second half. In addition, interest rates are expected to slide in the spring by about 50 basis points, along with new jobs, while the Canadian dollar will continue to flirt with the psychological mark of US$0.90.

According to the report released yesterday, Canada’s short-term economics are suffering first and foremost because of the dramatic slowdown currently gripping the U.S. Approximately 30% of Canada’s GDP is derived from exports to the U.S., which obviously means that any kind of demand slowdown south of the border is bound to make a dent in our GDP.

At least we have the domestic demand to keep pumping our economic growth. Or rather, we had it because domestic demand is also expected to slow down as construction of new homes and job creation declines.

Trade is also bound to take a hit, particularly Canada’s export- sensitive manufacturing industries. They are already having a tough time dealing with a strong Canadian dollar, not to mention cutthroat competition from low cost overseas manufacturers and exorbitantly high costs of raw materials. No wonder that all eyes, ears, and wallets are tuned into the U.S. economy and its expected rebound in the second half of 2007. So, get on with it, friends, you’ve done it before, you can do it again!

Here are the remaining forecasts I’m making for 2007:

Gold: I expect gold to be the number one investment of 2007 as the U.S. dollar continues to fall against other world currencies. I don’t see the euro or yen as being a real alternative to the U.S. dollar; hence I see gold bullion as being the main benefactor of a weak greenback. Quality gold stocks will be the winning story of 2007. Have you put some in your Christmas stocking yet?

U.S. Dollar: As the U.S. economy continues to slow, as the federal deficit continues above $500 U.S. billion a year, the U.S. dollar will continue to fall. Warren Buffett and other investors betting against the U.S. dollar will get their wish in 2007. How far the dollar will fall one cannot be certain. But if the Greenback is in for a crash landing, you can bet the Fed will take their time to lower rates. If you, like I, believe the Greenback is headed lower, you should be looking at foreign denominated stocks. Again, I like stocks listed on the TSX (what I like to call Canada’s equivalent to the NYSE). My favorites on the TSX? Gold and resource stocks.

Oil: The problem in 2007 won’t be oil prices getting out of control. The real question is what currency will OPEC members and other large oil producers want to be paid in? Producers of oil wanting to be paid in something other than U.S. dollars could cause oil prices to rise.

Bonds: I expect bonds to continue to move higher in price as the market bets heavier the Fed will cut rates to help the economy. The only factor that could send the price of U.S. bonds the other way (lower) would be a collapse of the U.S. dollar against other world currencies. And finally…

The Economy: Most economies around the world, except for China, are starting to show what I call growth cracks. In my opinion, 2007 will be a terrible year for the U.S. economy as it deals with its real estate and debt bubbles.

Final note for 2006…

At this time each year our editorial teams signs off for the holiday season. Between now and the beginning of January we’ll be sending you offers for our various investment products at discounted prices… our way of saying thanks to all our loyal PROFIT CONFIDENTIAL followers for their support in 2006. Our regular financial editorials will start back up on January 8, 2007.

We hope we helped make your 2006 more profitable. Or, at the very least, we hope we introduced some thought provoking ideals for you during the year that guided your investment thinking in a safe and profitable direction. We’re looking forward to making 2007 the best financial year ever for you… and we are going to do that by showing you what investments we’d stay away from in 2007 and which ones we’d get into.

From my family to yours, have a wonderful and safe holiday season.