2004 has certainly proven itself to be very unpredictable: US elections, terrorism, war in Iraq, and inflation, or no inflation? That is the question! While crude hit an all-time high at $53.67, the real clues for inflation are found in Starbucks coffee: the raw material in coffee (including coffee beans itself) are rising. Sugar, paper/wood (for the cups and new stores) raw material costs are all rising. The US Federal Reserve has changed its bias to raise interest rates, albeit at a rate slower than expected by the market. Finally, gold prices are north of $400, as well as the other raw materials (aluminum, nickel, and steel).

The economic and political environment is creating a great deal of challenges for investors. We cannot be certain that the stock market recovery that started in 2003 is a new bull market, or just a "dead cat bounce" within a secular bear market. Thus an investor needs to carefully pick out industries based on likely trends over the next 12 - 18 months.

With raw costs going up, I would stay be on the sidelines with consumer discretionary stocks.

Since rates are likely to rise moderately over the next while (I just don't see strong job growth in the US adequate enough to tickle the inflation monster) income trust units and utilities should sector perform at the very least.

I like the Information Technology sector, especially enterprise software stocks (SAP, Microsoft, Cognos) and hardware/semi-conductor stocks that have a huge competitive advantage (Dell and ATI Technologies) over rivals.

The pharmaceutical sector is also in a bearish cycle due to patent expiry concerns and drug recall (see Merck). However, the demographics and political environment are very supportive of a recovery in the sector, so I am bullish for the sector.

Finally, much has changed in my last writing about stock hyping, so I will add the following disclaimer: if you want to make money, you take the risks, and if you lose, don't blame someone who's dispensing free advice!