Dear Fellow Investor,

It seems that everyone is talking about the latest rate cut by the Fed, so let's dig into this story and get it out of the way because we have real investing to do.

Sensing potential economic weakness, the Fed cut both the federal funds rate and the discount rate by 0.5% yesterday. The Fed cut more than the modest 0.25% that many investors were expecting. This puts the funds rate at an even 3.0% and the discount rate is down to 3.5%, marking the lowest interest rate level since 2005.

As you know, this move comes only one week after a three-quarter-point cut on January 22. So what is the Fed trying to accomplish with all of these cuts? The Fed wants to help financial services firms that borrow at short-term interest rates and lend out at long-term interest rates, like banks, make money again. Many of these firms have suffered tremendous losses from originating, packaging and/or buying bad mortgage loans. In addition, the Fed wants companies and individuals to borrow more money and give the economy the shot in the arm that it needs to get back on the growth track.

Now that we know what happened and why, let's talk about the real story here. If you look at the major U.S. market's performance last week, the S&P 500 had its first up week of the year. The index climbed 0.4% and the Dow added 0.9%. This move up is largely credited to the rate cut that came last Tuesday. Thanks Ben, but these cuts are like throwing kerosene on a fire—sure it'll burn white-hot, but it'll also be very short-lived. Almost immediately after cuts like these the desired effect has been priced into the market. This is one reason why I'm going to remain cautious in the coming months and why I urge you not to chase this "rally."

Ultimately, I think that the S&P 500 Index will get trapped in a 10% trading range between 1270 and 1400 in the coming three months—and that's not a place you want to get stuck with an over-weighted portfolio. Smart investors should use this week's rally to lighten up and move money to non-U.S. dollar-denominated assets like gold and foreign securities. Are you holding enough gold in your portfolio? What about foreign assets? Click here to get my specific weighting recommendations in these areas.

If you're still convinced that the Fed's cut is the magic pill the economy needs, here's something else to consider: Though the cuts will help financial firms make money, they will also create incredible downward pressure for the U.S. dollar. Before you start worrying, a weaker U.S. dollar is actually helpful to companies that operate in foreign currencies—just like the ones we look for here at Inside China Dispatch.

What Do We Do Now?

Knowing what is actually going on in the market is a major part of successful portfolio management, but you still have to figure out which stocks to buy and sell. I have some thoughts for you on that front as well.

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For the last few years I've been recommending that Inside China Dispatch members buy Apple (NASDAQ: AAPL). Over that time, Apple shares have offered investors gains of 75%. It has been an incredible run and Apple is a fantastic company, but I believe there are difficult times ahead for it, and now I must recommend that if you own it (or similar companies), you sell your shares.

What it comes down to is that in the current market, things like stock valuation and momentum become very important. Stocks that fail to maintain strong growth momentum will be vulnerable to sharp declines. In the face of slowing U.S. consumer demand for electronics and a weaker company outlook, Apple is at risk of taking a tumble.

I would like to mention that this sell recommendation says nothing about how I feel towards the company as a whole. Steve Jobs has done a tremendous job of bringing new, innovative, "must-have" products to market, and I expect that the company will return to this profitable strategy. However, no matter how much I like the company, I'm not willing to put my money at risk in stocks that face strong market headwinds. To get the complete list of stocks that I recommend investors sell now, join China Strategy today.

Now, while we're on the topic of portfolio management, let's talk about buying. Just because I believe the market will trade in a narrow range for several months doesn't mean that there aren't any stocks worth buying at the moment.

I just recommended a new position in my China Strategy service that I think will add strength and profits to your portfolio even in the volatile market we're facing today. Let's take a quick look at the opportunity:

The Future of Coal

The use of coal is the standard across China. The country is the world's biggest producer and user of coal, which accounts for 61% of its power generation. I expect China to keep the title of world's biggest producer and user of coal in the years to come. China's energy demand grew by a staggering 8% in 2006, nearly four times the 2.4% annual growth rate for the rest of the world. Because of China's vast coal reserves, the fossil fuel was the natural choice for the main source of energy to run Chinese power plants and drive its economy.

In order to fuel its fast-growing economy, China must increase its number of power generators. Every week, the country builds the equivalent of two 500-megawatt coal-fired plants. By 2030, China's coal-fired electricity generation will more than triple. It's going to require a huge amount of coal to fire all of these new power plants, so you can see how important coal is to China's economic development. And we haven't even talked about all of the other industries in China that use coal—the country's sizzling-hot steel industry is also a big coal consumer. By 2020, China will account for 40%—or almost half—of global coal consumption, according to the International Energy Agency estimates. In fact, China's coal prices have increased almost threefold over the past five years.

Although China has a large reserve of coal, its main coal production sites are concentrated in several regions: Shanxi, Shaanxi and Inner Mongolia. However, a shortfall in railway capacity has resulted in a shortage of coal in major faraway cities like Beijing, Shanghai and Guangdong, where economic growth is thriving.

As a result, China became a net importer of coal for the first time in the first quarter of last year. The country imposed a 5% tax on coal exports to help secure domestic supplies. In addition, taxes on coal imports were cut to zero on June 1, 2007. As a result, the imbalance between supply and demand led to higher coal prices. For example, coal prices at Qinhuangdao, China's biggest coal port, have increased 35% from a year ago to a record of 564 yuan or $75 per ton.

Right now, the best way to profit from China's rising energy demand is to own a major Chinese coal producer. That's exactly what I'm recommending today in China Strategy. To get all the details on this company, you must be a China Strategy member. Sign up now and be among the first to read about my newest recommendation.

P.S. You don't want to miss out on this coal opportunity because it will profit from the heavy snow storms that China is experiencing at the moment. Severe weather conditions have made it difficult for Chinese miners to extract coal, and as a result of the limited supply, coal prices are increasing. This is great news for our leading Chinese coal miner. Learn more about this play—and get my precise buy limit—by clicking here. I'm expecting it to hand us profits of at least 30% by the end of the year!