Global Stock Market BLOG - Mike Burnick

Time to Ask Yourself if You Are a Trader or Investor

Yesterday’s market action reminded investors once again that volatility has returned with a vengeance.

Investors pretty much got what they wanted yesterday with another 50-basis point interest rate cut. This comes after the Fed surprised markets last week by slashing rates 75-basis points. The Fed is on pace for its quickest monetary easing campaign since 1990… but investors reacted in a manic-depressive fashion that has become commonplace in recent weeks.

The Dow Jones Industrials rallied more than 200 points right after the Fed’s rate cut announcement yesterday afternoon, but gave it all back and 37 points more by the close. It’s impossible to say whether global markets will fall significantly further in the weeks and months ahead.

I’m extremely skeptical of anyone who tells me they’re “sure” stocks will continue to tumble OR that they’re “certain” a bottom is near. That kind of precision is reserved for engineers or scientists. Investors and traders on the other hand deal in a world of probabilities and possibilities – not certainties.

Step Back From the Market “Noise” and Evaluate Your Investment Goals

The key at times like this is to take a step back and carefully monitor unfolding market action from the relative safety of the sidelines. Now don’t get me wrong: I’m not advocating you should sell everything and go immediately to cash. That’s not a practical strategy for most investors. And as my colleague Eric Roseman has pointed out, it doesn’t make sense to sell now into an already oversold market.

There’s an old story (or perhaps it’s a tall-tale) that still circulates around Wall Street about the legendary J. P. Morgan (the Wall Street banker, not the Wall Street bank). During a bout of early 20th Century market volatility an investor asked Mr. Morgan what he should do, because sharp stock market swings were keeping him awake nights. Morgan is said to have replied: “you should sell down to your sleeping point.”

Depending on whether you’re a short-term trader, or a longer term investor, you must find your own particular comfort zone (your “sleeping point”). 

Are You an Investor…

As an investor, with a “time-horizon” of months to years, you should stay focused on the really big macro trends unfolding in the world. Don’t let short term market “noise” unduly influence you. It’s not about what happens to gold, Hong Kong shares, or the U.S. dollar next week, or next months. It’s about where the world is headed over the next five-years that’s important.

If you told yourself “I’m in this for the long-haul”, but now feel uncomfortable, welcome to the club. Adopting a long-term view in today’s globally integrated financial markets ain’t easy – especially with Cramer (and so many others) ranting and raving at you from the idiot-tube. Turn it off, and double-check your facts instead.

Now is a great time to “check the story” as Fidelity’s Peter Lynch used to say. Re-examine the fundamental reasons why you own the investments you now hold. If the story has changed for the worse – the compelling reasons for buying are no longer there – then perhaps it is time to sell.

In other words, look at each of your current holdings and ask yourself this simple question: “would I make this investment again today?” Be as objective as possible when answering, but if the answer is “no”, then it’s definitely time to move on and raise some cash.

…Or Are You a Trader

Traders by contrast, typically have a shorter-term perspective (time horizon of weeks to months), and should never get “married” to a particular position or story. Good traders are skilled at playing both sides of the market – occasionally at the very same time (this is called hedging).

If you’re a trader, now is the time to pay close attention to the signals the market sends out. You’re focused on sentiment – which drives share prices in the short run – more than by long term fundamentals.

As a trader your risk management is at least as important (perhaps more so) than your timing in correctly identifying a trend. Stop losses, money management, position sizing – this is the critical gear in your traders’ tool-box.

You are playing the probabilities, based on imperfect knowledge and your own interpretation. This realm has no place for “certainties.”  Expect to be wrong, perhaps more than you’re right. But be prepared to quickly admit when you are wrong, cut your losses, and move on to the next best trade with a high “probability” of success.

Which ever camp you find yourself in; "investor" or "trader" it's gut-check time. Make sure your strategy stays on course in this volatile market, and stay alert for the next big move.

The Tail That Wags the Dog in Gold

In yesterday's blog post (Gold Still Glitters While Sentiment Grows to a Bullish Extreme), I pointed out that sentiment in the gold market has grown to a bullish extreme. From a contrary perspective, this should make the gold bulls nervous. So far, the yellow metal is holding up well compared to stocks and some other commodities -- but volatility is on the rise.

Interestingly, one of the reasons for this increased volatility is commodity-backed ETFs that have become a popular alternative to investing in physical gold. A couple weeks ago when gold prices slid 1.5% in a day, investors in the StreetTracks Gold Shares ETF (symbol: GLD) yanked $600 million out of the fund – in turn forcing the fund to sell 21.5 tons of gold! That was the biggest single day liquidation in bullion holdings ever recorded by GLD.

According to a Street.com article detailing the episode, “Gold futures dropped over 3% at one point and reportedly caused order imbalances on the electronic exchanges.” This was at least in part due to the heavy selling in GLD shares.

Is GLD the Tail that’s Wagging the Dog

This brings up the question of just how much influence these physical-commodity backed ETFs have on the underlying asset. Since it was launched in 2004, GLD has accumulated over 630 tons of gold bullion, which is held in trust for shareholders.

That’s so much gold, that the fund is having trouble finding enough room to store all its bullion. In fact, GLD’s current gold holdings are about twice that held by the Bank of England!

This represents a serious “overhang” in the gold market. Over the last few years, buying interest in GLD was widely credited with helping push bullion prices higher. Now GLD may be blamed for amplifying a sell-off in gold, should GLD holders cut and run.

How Many Speculators in GLD Shares?

The virtue of ETFs like GLD is that they trade throughout the market day on a tick by tick basis, and can be sold short virtually at will. In other words, it’s very liquid with few “frictional” costs involved in buying and selling.

Just how much influence does StreetTracks Gold Shares have on the price of the commodity? The answer depends upon how many shares are held by “speculators” – who might sell in a panic at a moment’s notice - versus "long term investors" who are confident enough to hold on through a volatile market correction.

Up until the past few months, there used to be a lot of “long-term investors” in emerging market stocks, but now these markets appear to be in the grip of selling by panicked speculators.

The gold bulls certainly hope their fellow investors take a longer-term view on the yellow metal!

Gold Still Glitters While Sentiment Grows to a Bullish Extreme

Gold has been one of the most glittering asset classes to own so far this year -- as global stock market turmoil, credit market turbulence, and persistent fears of inflation – combine to propel the yellow metal past $900 an ounce.

While other commodities have stumbled a bit in recent weeks, gold continues to surge for several reasons. Mainly, lower global interest rates and higher food and energy prices have investors talking about “stagflation” again. That’s the witch’s brew of stagnant economies, high unemployment and persistent inflation.

But gold has been on such a parabolic rush to the upside in recent months, some investors are beginning to question whether these big gains contain the seeds of large correction ahead. You see sentiment in the global gold trading pits has grown rather one-sided – solidly in the bullish camp – as the price has run higher.

Now Everybody’s Talking About $1,000 Gold

In fact, according to a recent article in the Financial Times, “speculators on the New York gold market hold 10 bets on higher prices for each one held on lower prices.” Investors in Tokyo and Shanghai’s brand-new gold futures market are similarly head-over-heels bullish.

Such an extreme in investor sentiment, that's 10-to-1 in favor of the bulls, typically ends badly in any market no matter how strong the underlying fundamentals.

The gold bulls suddenly have lots of company… but these are most unwelcome guests. The world’s major investment banks have taken a new-found shine to gold.

Firms including UBS, Citigroup, Barclays Capital and the Bank of Nova Scotia have all been pounding the table lately, with gold prices hovering at or above $900 per ounce. Now these investment firms are forecasting $1,000 gold is well within reach – a mere 11% above recent highs.

Where were these guys when gold was in the dog-house at $200 per ounce earlier this decade? At that time, most of Wall Street had thrown in the towel on gold, believing it might never shine again. When my colleague Eric Roseman said years ago that gold would top $1,000 an ounce on its way to perhaps $2,000 before the gold bull market ended – Wall Street laughed at the idea.

Eric’s subscribers are the ones laughing now… all the way to the bank.

Warning: The Majority of Wall Street Opinion is Typically Late to the Party

Now, with gold prices up over 250% since 2002 – the Wall Street crowd has suddenly seen the light and turned overwhelmingly bullish! One analyst recently wrote in a report: “prices could explode to multiples of these levels ($1,000 per ounce) in the event of a full-blown US recession.”

Talk about being late to the party! This is a classic sign that the gold trade is getting overcrowded with bulls. Whenever sentiment in any market or sector gets this one-sided, my natural contrarian instincts push me to the other side of the boat before it capsizes. There are other warning signs on the horizon too.

Gold price volatility has picked up in recent sessions, with wider swings in opposite directions.  This may be a powerful early warning that gold prices are in for a correction too. Stay tuned!

P.S. Check back again tomorrow for more of my thoughts on gold...

China's Car Buyers Want to Ride in Style!

India’s Tata Motors created quite a buzz recently when it unveiled the world’s most inexpensive automobile. The Nano is being billed as the cheapest new car on the planet with a “sticker price” of just $2,500 (excluding most options on the fully equipped model).

The “people’s car”, as it has also been called, is aimed squarely at the “masses” of upwardly mobile emerging market consumers. First time car buyers in most developing nations opt for small, economical economy cars. “That is how carmakers have prospered in emerging markets from Brazil to Thailand” according to a recent Financial Times article.

One very big emerging market, with the most dynamic growth potential in auto sales, is shunning economy cars and taking the high road to riding in style.

In China, consumers are losing their enthusiasm for small cars, even while auto sales are growing at a rapid pace. In fact, China is now the second larges car market in the world – growing 24% per year.

Last year however, “sales of cars with an engine size of one litre or less fell 24%” according to the article. This is in spite of sharply rising gasoline prices, and a tax policy in China that encourages smaller engines.

In fact, researchers at German automaker Volkswagen found the Chinese car buyers are willing to spend twice their annual salary on cars. That’s U.S. style conspicuous consumption at work in this emerging market economy.

There are several reasons for China’s new-found love affair with higher end automobiles. First, the Chinese government has for years maintained subsidies on fuel prices at the pump in China. Trying to keep a lid on inflation, to avoid mass protests from consumers, China’s fuel prices are artificially low by global standards. This of course eases the sticker shock of filling the tank in a big car.

More recently, officials in Beijing have allowed increases in gasoline prices, so this may finally cut into big-car sales. More significant are cultural reasons that support China’s luxury car market. In China, there is a strong “link between cars and social status.” Rising incomes among the upwardly mobile “urban elite” in China’s major cities is putting a lot of discretionary cash in people's hands, who want to buy top-quality goods.

U.S. automaker General Motors (GM) has had success in China, which hasn't been enough to offset its dismal domestic results. In fact, GM sold a record 1.03 million passenger and commercial vehicles in China last year, but growth slowed to just 17% in 2007 from 26.8% the year before. GM is locked in a market-share battle with Volkswagen over auto sales in China, with the German firm holding an 11.6% share, versus 11% for GM.

Perhaps GM should consider shifting its auto sales strategy upscale, by selling less compact cars and pushing more Cadillacs and Corvettes in China.

Listen in on my Emergency Money Summit teleconference... going on right now.

China and Developing Markets Could Emerge as the Big Winners

There was a great article in the Financial Times the other day that I want to point out to you, because it’s well worth your time to read – especially considering the source: George Soros.

For those who may not be familiar with the name, George Soros is one of the few “living legends” in the pantheon of world’s great investors… who actually deserves the title. Soros was the co-founder (with Jim Rogers) of what’s perhaps the most famous hedge fund of all time, the Quantum Fund.

Over a period of more than thirty-years, Quantum returned an astounding return of more than 30% per year. An initial investment of $100,000 placed in the care of Soros and Rogers from the beginning in 1969 would have grown to about $400 million by the year 2000!

Soros' Views Worth Listening To

In this day and age it’s very difficult task just trying to identify one out of the thousands of hedge funds now available that can actually match, much less beat, the S&P 500 Index on a consistent basis. That’s why Soros’ achievement with the Quantum fund is all the more remarkable.

There are a few investment legends who are worth listening too. Soros is one of these. Unfortunately, Soros today has largely moved away from active investing on a day to day basis. He chooses to focus instead on his philanthropic endeavors; and considering the investment returns he generated, why not.

That’s why I took notice when I saw the name George Soros in the byline of an article he penned for the Financial Times. The subject: what else but the global credit crunch. Here is a link to the full article: The worst market crisis in 60 years, and what follows are some of the key highlights.

Credit Super-Boom Goes Bust

According to Soros the current financial crisis, precipitated by the U.S. housing market bubble, “is the result of a “super-boom” in easy credit that has gone on pretty much since the end of WW II. Whenever financial markets ran into trouble, with a recession or some other credit crisis on the horizon, “the financial authorities intervened, injecting liquidity and finding other ways to stimulate the economy.”

Of course this created a dangerous “moral hazard” as investors grew comfortable with the fact that the Fed and other central banks were always there to “bail out” their risky investments. Naturally, this only encouraged even greater credit expansion, and of course Wall Street helped grease the skids, aided by reduced market regulation.

In fact, the financial sector “encouraged consumers to borrow by introducing ever more sophisticated instruments and more generous terms. The authorities aided and abetted the process by intervening whenever the global financial system was at risk. Since 1980, regulations have been progressively relaxed until they have practically disappeared.”

The Fox Ends Up Managing the Financial Hen-House

Where things got out of hand, according to Soros, was when the unregulated Shadow Banking System (as Bill Gross calls it) began creating new products (derivatives, collateralized debt obligations, and other three letter acronyms) that nobody could understand.

“New products became so complicated that the authorities could no longer calculate the risks and started relying on the risk management methods of the banks themselves. Similarly, the rating agencies relied on the information provided by the originators of synthetic products. It was a shocking abdication of responsibility.” What's that old saying about the Fox guarding the hen house?

Or course the blow-up was ineviatable sooner or later – the housing market bust was merely a convenient catalyst – the wrong “bust” at the right time. In its aftermath, Soros sees a “period of contraction” in the credit super-boom. That’s because “The ability of the financial authorities to stimulate the economy is constrained by the unwillingness of the rest of the world to accumulate additional dollar reserves.”

Can the Fed Stimulate its Way Out of This Credit Crunch?

Soros warns that because of the dollar’s weakness and inflation in commodity prices, the Fed may no longer be in a position to pump more hot-air into the credit bubble by aggressively cutting rates. “If federal funds were lowered beyond a certain point, the dollar would come under renewed pressure and long-term bonds would actually go up in yield,” Soros cautions. When this point is reached, “the ability of the Fed to stimulate the economy comes to an end.”

That's when the whole debt-laden financial house of cards comes crashing down -- derivatives and all!This sounds a lot like the doomsday scenario that we have been warning Sovereign Society members about for some time now. I’m happy to see that George Soros has come around to our point of view!

Still, there is a big silver lining in this doom and gloom scenario, according to Soros. A recession in the U.S. and the rest of the developed world may be “inevitable” but Soros believes “China, India and some of the oil-producing countries are in a very strong countertrend.”

In fact, Soros sees a significant shift of power and influence away from the U.S. in particular – and the rest of the developed world (Europe, Japan, etc.) in general. Likewise, he’s expecting this shift to favor emerging markets in the developing world, particularly China.

“The current financial crisis,” Soros concludes, “is less likely to cause a global recession than a radical realignment of the global economy, with a relative decline of the US and the rise of China and other countries in the developing world.”

Now you're playing my tune by George!

Bernanke Blinks… and Now a Bounce?

Faced with plunging markets in Europe and Asia Monday (the NYSE was thankfully closed in observance of the Martin Luther King holiday), helicopter-Ben finally blinked.

The Fed moved unusually between meetings to slash the Fed funds and discount rate by 75 basis points (0.75%) to 3.5% -- reducing the Fed’s benchmark interest rate to the lowest level since 2005. The magic elixir seemed to work (for the moment at least) as the Dow Jones Industrial Average, down as much as 464 points early yesterday morning, bounced back to close down just 128 points, or 1%.

European markets, which were falling steeply for a second straight day, reversed course and closed higher on the Fed's action Tuesday. The rally followed through in Asia early today as markets across the region enjoyed a significant rally, with Hong Kong up 8%. This morning, Wall Street opened lower just the same.

So will Bernanke’s blink finally led to an oversold bounce? I have been expecting a significant retracement of the heavy selling we’ve seen in recent weeks – and the bounce may soon arrive – if so, enjoy it while it lasts.

As the Wall Street Journal said this morning, “The central bank's moves may be too late to stop the U.S. from entering recession, as many economists now forecast, but it may make one milder and shorter.

However, the Journal goes on to point out that “by acting so explicitly in response to market developments -- just a week before a scheduled meeting to decide on rates -- the Fed is running a risk. Investors may view the steps as panicky, undermining the goal of the rate cuts.”

So the Fed moves from “behind the curve” to “panic rate-cut mode” all in one fell swoop.

My expectations for oversold global markets remain the same. I expect a healthy, near-term bounce followed by at least a retest of the recent lows, if not even lower prices ahead. Too much damage has been done to global investor confidence for the Fed’s surprise rate cut to significantly shift market sentiment overnight. As I have pointed out before, a bear market environment such as we are now in, places a very big premium on investment selectivity.

Rather than making “fearless forecasts” (or is it foolish forecasts) of the likely magnitude of the bounce; it’s best on this first rally attempt to make like the school bus driver when approaching a rail-road crossing… Stop, Look, and Listen… to what the markets are saying about the character and strength of the coming “bounce.” Only then should you act accordingly.

It’s Not Too Early to Search for Bargains Amid the Global Market Bust

Asian markets haven’t been spared from the Credit Crunch correction of 2007-08 – in fact several markets in the region have already declined over 20% from last year’s highs – triggering the technical definition of a bear market.

China, Hong Kong, Japan, and even Taiwan have all succumbed to the sell-off in Asia. This is setting up some interesting bargain buying opportunities going forward – particularly in Taiwan. The “other China” had a strong run-up early in 2007 only to collapse since August. Still, Taiwan is also one of the best global value plays (almost as good as Japan) on the planet right now.

Elections Could Provide Key Upside Catalyst

In addition, there’s a great election-year catalyst set to play out in Taiwan that could easily send this market sky-rocketing in 2008.

Just last week, Taiwan held its parliamentary elections, which resulted in a land-slide victory for Kuomintang (KMT) – or Chinese Nationalist party. The party and its chief Presidential candidate are running on a platform of cultivating closer ties with mainland China.

Ironically, it was the Kuomintang, led by General Chiang Kai-Shek that retreated to Taiwan in 1949 after losing China's civil war to the communists.

This event is what established Taiwan as a breakaway province in the first place. Fast forward fifty-nine years – and now it’s the KMT that wants peace with China.

Taiwan’s old government had for decades placed restrictions on Taiwanese investment in mainland China. Direct shipping, air and postal links with the mainland were also strictly limited.

Expect Closer Ties Between the “Two Chinas”

Taiwanese businessmen going to the mainland are forced to travel via other ports such as Hong Kong or Macau. And yet, even with all these roadblocks, Taiwan’s exports to China are booming (see chart above). That's because you just can’t “restrict” the Taiwanese entrepreneurial spirit!

Now, the KMT has pledged to re-open direct transportation links with the mainland and wants to allow greater direct investment and trade with the China.

Obviously this is great news for both countries, but more so for Taiwan. For decades sabers have been periodically rattled about a “forced” military reconciliation of the “two-China’s”. This election paves the way for much closer business ties, which should lead to peaceful political reconciliation down the road.

News of the KMT party’s parliamentary victory sent Taiwan stocks soaring last week. The benchmark Taiex index surged 5% higher in just two-days; the biggest rally in 3 ½ years!

This combination of fundamental value in Taiwan, and a key election-year catalyst that should bring closer investment ties with China, convinces me that Taiwan remains on your short-list of strong BUY candidates in spite of global volatility.

Gathering Storm Clouds in CDS Losses

In my last blog post, I told you how once gridlocked credit markets have now returned to “normal.” Well, as “normal” as can be expected considering the highly leveraged and rather opaque nature of the modern financial system.

Libor rates, the barometer of the credit crunch, have declined significantly in recent weeks. Asset backed commercial paper rates have likewise fallen substantially, and companies have been net issuers of ABCP in recent weeks.

This indicates fair weather has returned to global capital markets. Mortgage loan rates too have fallen below 6%. Mortgage loan applications are surging again – up over 100% in the past two weeks alone – as homeowners struggle to refinance their way out of trouble before existing loan rates reset.

These are all hopeful signs that must be watched carefully in coming weeks and months, but if the trend continues, the worst of the credit crunch market shock may be over. Or is it?

New concerns were raised last week about the ability of financial firms to make good on their “derivative” obligations. Also, there’s growing concern about the solvency of firms that insured billions in subprime bonds amid rampant credit rating downgrades. Could this be the next shoe to drop? Yet another, deeper and darker chapter in the subprime market shock?

The latest issue to worry about is the market for credit default swaps (CDS). A recent article by bond fund manager Bill Gross highlighted the growing risk of a blowup in this derivative market. Credit-default swaps are a kind of insurance policy that financial firms trade (or swap) with each other to protect against the risk that a particular bond may end up defaulting. If the bond itself doesn’t pay principle and interest as an investor expects, the CDS pays off instead. At least that’s the theory.

Big institutional investors and hedge funds are big players in the CDS market, and the market for this particular type of derivative has grown to massive size.

In fact, the amount of CDS derivatives outstanding has doubled every year since 2004 – to a whopping $45.5 trillion today, according to the International Swaps and Derivatives Association. That’s up from just $632 billion in 2001 – a 70-fold increase in just six years.

The trouble is this: the global financial system has already suffered significant stress. Although credit market conditions are now substantially back to “normal” (as I described in my previous post), the damage has been done.

Banks and brokers have already owned-up to subprime losses and asset write-offs of nearly $150 billion since the third-quarter of 2007 (for a firm by firm “hit list” see table above).

There is already evidence that last year’s subprime debacle is spilling over into this year’s junk bond market, credit card and auto loans; and now into commercial real estate too. Yet, the global default rate on high-yield bonds finished 2007 at a 26-year low of just 0.9 percent.

According to forecasts by Moody’s, the default rate will jump more than fivefold to 4.8% by the end of 2008.  This growing default rate is sure to trigger massive losses in credit default swaps going forward.

Bond fund manager Bill Gross notes that, according to estimates from Goldman Sachs, "mortgage related losses of $200-$400 billion alone might lead to a pullback of $2 trillion of aggregate lending. Add to that my $250 billion loss estimate from CDS, as well as prospective losses in commercial real estate and credit cards in 2008 and you have a recipe for a contraction in credit leading to a recession."

Another dropping shoe that could go “thud” in the night!

More Good News on the Credit-Crunch Front: Libor Falls Again, Mortgage Applications Surge

The key barometer for the credit crunch market shock, Libor rates, have returned to normal. Interest rates on asset-backed commercial paper have also returned fallen back to pre-crunch levels. Taken together these readings indicate fair-weather is returning to global credit markets. However, still more storm clouds are gathering on the far horizon.

First the good news; London interbank offered rates (Libor) have finally returned to normal, thanks in no small part to massive liquidity injections in recent weeks by the Fed and the European Central Bank. Recall that at the height of the credit crunch market shock in August, and again in November, banks grew reluctant to lend to one another, preferring to stock up on cash instead.

As a result Libor, the key interest rate at which global banks lend funds to each other went through the roof. Libor typically tracks at a very slight premium over the Fed funds rate. As recounted by a recent article in the Financial Times: “For the first half of 2007, Libor traded consistently at 11 basis points above Fed Funds. Once the credit squeeze started in August, this gap widened.”

“Normality” Returns to Global Credit Markets

In fact, Libor rates shot up nearly 100 basis points (or a full percentage point) above Fed Funds – indicating total gridlock in the interbank lending market. However, “Normality has now returned,” according to the Financial Times.

The spread between Libor and Fed funds is not only back below 11 basis points; but yesterday for the first time in almost four years three-month Libor actually fell below the current 4.25% Fed funds rate.

Also, rates for asset backed commercial paper (ABCP) have steadily declined too, as outstanding commercial paper has expanded again over the past few weeks. Remember that the market for ABCP crashed more than 30% in value in just over a month during the worst of the credit crunch this fall. Now, it appears this market too is returning to “normal”.

There was another positive sign this week that easing credit conditions may help support the sagging housing market.

Refinancing Now May Reduce Defaults Later

Thirty-year fixed mortgage loan rates have dropped below 6%, to the lowest level since 2005. As a result, the Mortgage Bankers Association reported a surge in new mortgage loan applications last week. In fact, applications to refinance existing mortgages more than doubled in the last two-weeks alone. That’s the biggest increase in seven years!

This is good news for struggling American consumers, since a pickup in mortgage refinancing will put more money back into their pockets for spending. It’s even better news for those who face mortgage resets in 2008 and beyond.

Almost $2 trillion worth of U.S. mortgages face payment resets in 2008. That’s a sharp increase of nearly 25% from the $1.6 trillion in resets that already caused so much pain on Main Street and on Wall Street in 2007. If enough homeowners can refinance to lower fixed rates now, it will dramatically reduce the number of mortgage defaults later, and help prevent even more subprime backed securities from going bad.

I’ll be keeping a close eye on those mortgage loan rates at www.bankrate.com; if rates stay below 6% – or better yet fall further in coming months – it would signal even more easing of the credit crunch. At least credit markets appear to be functioning again -- now all we must worry about is the increasing odds of recession and the bear market in stocks caused by last year's market shock. Stay tuned.

Retirement Crisis of 2008

Will Big Commodity Gains Be Sustained in 2008?

The commodity super-cycle has rolled on into the first weeks of the New Year, with new record highs in both gold and crude oil. But is the upside in real assets sustainable in the face of a global growth downshift - and possible U.S. recession?

Copper has surged about 300% over the past five years alone. Since 2001, oil prices have climbed 250%...and gold has also more than doubled. These big gains are due to a fundamental supply/demand imbalance worldwide.

This dynamic isn't going away anytime soon. The emerging world has an upwardly mobile population - over three-billion strong and growing fast. And they're all seeking a higher standard of living. That's the key demand driver.

Growing Demand Will Continue to Exhaust Our Meager Supply

At the same time, natural resources are scarce worldwide thanks to decades of underinvestment in production when commodity prices were in the "dog-house" throughout most of the 1980's and ‘90's.

In commodity markets (unlike stock markets) it takes many years to bring new supply on line. You don't just open a new strip-mine overnight. And it takes years to fully develop a new oil and gas field - assuming major new discoveries can be found at all.

For these key reasons, I see the commodity boom rolling along for many more years, although the easy money has likely been made. Going forward however, selectivity is the key. After such a large run-up in price, many of the “headline commodities” such as gold and oil may be vulnerable to a correction.

In fact, the industrial metals (copper, aluminum, zinc, lead) have already corrected sharply in recent months, due to the global growth scare. For instance, copper prices have fallen about 20% since early October.

Crude oil and gold may also be subjected to some profit taking for the same reasons - concerns over a U.S. led global slowdown. As my colleague Eric Roseman recently put it, "I don't think oil prices accurately reflect a slowing economy."

Still, such a pullback should provide you with another excellent buying opportunity - in certain commodity markets - especially the agricultural commodities.

Still a Few Commodity Bargains Left to Buy

After steadily declining for decades, food costs are on the rise worldwide. In fact, a food price index kept by the International Monetary Fund (IMF) shows that global food costs have doubled just since the beginning of 2005!

In real terms (when adjusted for inflation over the last 30 years) wheat prices and most other agricultural commodities remain "far below the heights" reached in 1974. This means that in spite of big price increases already, the soft commodities still have a lot of room to run higher.

Increased demand for food from the rapidly developing emerging world will continue to put upward pressure on food prices. Another very big swing-factor behind surging grain prices is its use as an alternative energy source.

Ethanol production in the U.S. used 15 million tons of grain (mostly corn) in 2000. Today, ethanol is swallowing up around 85 million tons. In fact, the U.S. now uses more of its corn crop for ethanol, than it exports as food.

Agricultural commodities are much better positioned than others to withstand a short-term correction triggered by recession fears. In fact, a few of the “soft” commodities remain 75% or more below the peak inflation-adjusted prices they reached in the 1970's and early 1980's. That tells me there's still plenty of upside left in agriculture.

Inverse ETFs are Just the Ticket for Troubled Times: Part II

As I mentioned in yesterday’s blog (Inverse ETFs are Just the Ticket for Troubled Times: Part II) these are trying times for stock market investors. Global markets are in the midst of a sharp selloff, led lower by the U.S. In fact, several of the worlds biggest, and fastest growing markets including: China’s Shanghai index, and Japan’s benchmark Topix, have already fallen into “bear market” territory since October – generally defined as a decline of 20% or more.

U.S. stocks bounced on Monday, but it was back to business as usual on the downside yesterday with another session of heavy selling on Wall Street. The convenient excuse, more than the real reason, was Citigroup’s mammoth loss of nearly $10 billion – accompanied by $18 billion in subprime asset write-offs. Not a very cheerful report.

As dismal as Citi’s results were, the real dagger through the market’s heart yesterday came not from the financials… but from the retail sector.

U.S. retail sales posted an outright decline of nearly a half-percent in December, capping the worst year for U.S. retailers since 2002. The numbers were much worse than economists had forecast for what is typically the best retail sales month of the year. This signals a very sharp slowdown in consumer spending right at year-end.

“It looks like the long-awaited consumer slowdown has arrived,” according to a Lehman Brothers economist quoted by Bloomberg.

As I said yesterday, we are also smack-dab in the midst of earnings season now, so you can expect more of these market-shock explosions to rock stocks in coming weeks. Already the S&P 500 Index is down nearly 12% from its October highs – and has plunged more than 5% just since New Year’s Day!

The last time U.S. stocks got off to such a rocky start in January, Jimmy Carter was still in the White House! S&P 500 profit reports over the next several weeks are likely to show a decline of 10% or more in the fourth quarter of ’07.

So if U.S. stocks – and perhaps global markets too – are headed for an inevitable bear market, then how do you protect yourself?

Fortunately, the wide world of exchange traded funds (ETFs) give you many innovative options for your portfolio. There are now ETFs that allow you to invest in physical commodities, without bothering with a futures trading account.

Other ETFs let you invest in global currencies without needing a forex account. And there are ETFs today that cover virtually every corner of the globe, sector of the market, and investment style. You name it – ETFs have got it!

One of the most handy classes of ETF for troubled times however is a new breed of “inverse” ETFs that allow you to hedge your portfolio against the possibility of a bear market – like right now!

Inverse ETFs are designed to perform the opposite (or inverse) of whatever market sector or index they track. For example, the ProShares Short Dow30 ETF (symbol: DOG) (editor’s note: you’ve just gotta love that symbol) is designed to go UP whenever the Dow Jones Industrial Average (DJIA) goes DOWN in value and vice-versa.

What makes these ETFs work like this is a series of futures contracts on the popular indexes that pay-off when the index declines. ProShares was a major innovator in the field of inverse ETFs. In addition to DOG, ProShares has funds that go UP in value when the S&P 500, the SmallCap 600, or the Russell 2000 indexes go DOWN.

In addition to its Short funds, ProShares also has launched Ultra Short ETFs. These give you twice the inverse performance of the index they track. For instance the UltraShort Dow 30 (symbol: DXD) is designed to go UP 10% in value, when the DJIA declines just 5%. So now you’ve got a hedge investment with leverage – but please, handle with care.

Recently, ProShares also launched a series of International Short and Ultra Short ETFs as well. There are funds that track the MSCI Emerging Markets index, Japan, even a popular index of Chinese stocks!

With market volatility on the rise, it pays to have a hedged portfolio. These and other “inverse” ETFs may be just the right ticket for you!

Inverse ETFs are Just the Ticket for Troubled Times: Part I

These are troubled times for the stock market, no doubt about it. The U.S. benchmark S&P 500 Index is down over 5% so far this year, while the Nasdaq slumped 8%, prior to yesterday’s bounce. That’s the worst start to a New Year since 1982!

And it’s not just the U.S., but markets around the globe that have been slumping in recent months. The S&P 500 Index is down over 10% since it hit a record high in early October. The MSCI EAFE Index of global developed markets outside the U.S. has declined about 7% over that same period. Ten-percent of course is the technical threshold for a stock market “correction.”

Just this morning, the nation's biggest bank, Citigroup, posted a fourth-quarter net loss of nearly $10 billion -- the biggest loss in Citi's nearly 200 years of existence! Citi also reported subprime asset write-offs of $18 billion, more than twice what the bank had forecast as recently as November, and cut it's cherished dividend nearly in half.

The upside (if there is any) is that big foreign investors once again stepped up to the plate amid the bad news to invest in Citi. A group of investors including soverign wealth funds in Singapore and Kuwait, the Saudi royal family and former Citigroup CEO Sandy Weill will inject another $14.5 billion into the bank.

Certain global markets including Japan and Taiwan have already experienced a “bear market” in stocks, typically defined as a drop of 20% or more from a high. All this downside market volatility is due to investor fears of the “R” word (as in “recession”… shhh) becoming a harsh reality in 2008.

In fact, recent economic data seems to indicate that the U.S. economy may already be in recession – the housing and manufacturing sectors certainly are. But the debate over whether this is, or whether it isn’t a recession misses the point – because stock markets are already indicating we are in recession.

It's important to have the cart and the horse in the right order. Historically, the U.S. economy has rarely slipped into recession without experiencing a bear market first but, we've had several bear markets WITHOUT the economy falling into recession. In fact, stocks have experienced 12 bear markets since 1962. But the economy has suffered only six recessions. In other words, stocks have "predicted" 12 of the last 6 recessions!

The reason for this apparent disconnect is simple. In the short-term, stock markets are driven more by the psychology of fear and greed - rather than by fundamentals.

In other words, if enough investors fear recession, a bear market can unfold ahead of time, without the economy ever contracting enough to enter recession.

This means that even if we manage to dodge the bullet in 2008 and avoid recession, we may still not escape the clutches of a bear market in stocks. In fact, several “bear markets” are already underway, as mentioned above.

The real question is how do you protect yourself from a potential bear market early in ’08? One of the easiest and quickest ways to hedge your portfolio is to use some of the new “inverse” exchange-traded funds (ETFs).

In tomorrow’s blog post, I’ll review some of the best inverse ETFs for today’s market. Stay tuned!

Brace Yourself: It’s Time for Earnings Season Again

It’s that time on the business calendar, which only happens four times each year, when America’s public companies reveal their quarterly sales and profit results. I expect them to air a lot of dirty laundry this time around – especially from the financials.

Earnings season “officially” began last week, but reports hit their prime starting this week, and continue for the next several. It’s no surprise that we’re in for some disappointments. In fact, results will most likely be even worse than last quarter, when S&P 500 profits fell 8% year over year.

For the fourth quarter of 2007, analysts are forecasting a 9% to 10% over year decline in earnings per share for S&P 500 companies as a group year. What’s most striking though is the remarkably swift and steep decline in expectations. Analysts surveyed back on October 1st, as the fourth-quarter began, forecast 11.5% growth in S&P 500 profits.

If these estimates prove to be on-target, then U.S. corporate profits have “officially” fallen into recession, after two straight quarters of negative earnings growth, even if the U.S. economy has not.

Big Bearish Sentiment Shift

Going from a double-digit positive, to a double-digit negative earnings expectation is quite a bearish swing in market sentiment. As always however, there’s a wide disparity between sectors, with the estimates for some much more dismal that others. Believe it or not, there are a few bright spots too.

First, the “dismalist” of results will of course come from the financial sector. Citigroup reports tomorrow and analysts expect the nation’s biggest bank to post a fourth-quarter loss of $4 billion, according to Bloomberg estimates. In addition, Citi is expected to take “almost $19 billion of writedowns on holdings of mortgage-related securities known as collateralized debt obligations,” according to Bloomberg.

Meanwhile, Merrill Lynch will report a loss of $3.2, plus $11.5 billion in subprime related write-offs. And the hits just keep on coming. According to various analyst estimates, Bank of America is said to face a $5.5 billion in asset write-offs this quarter, and JP Morgan will take a similar hit estimated at $3.4 billon.

According to data from Standard & Poor’s, overall financial sector profits are forecast to plunge nearly 70% in the fourth quarter, from the same period in 2006! “Banks haven't lost this much money, in relative terms, since the Great Depression, said Richard Sylla, a professor of the history of financial institutions and markets at New York University's Stern School of Business.” Dismal indeed!

Some (But Not Much) Silver Lining

It won’t be all doom and gloom this earnings reporting season however. According to data from S&P, the tech and telecom sectors are poised to report profit gains of 23% and 33% respectively.

Meanwhile, energy sector profits are forecast to be up 10% year over year. All other sectors will either post outright losses, or only single-digit profit growth. Basic materials earnings should decline about 10% from a year ago, while consumer discretionary stocks could easily be fall into the red as well.

And it doesn’t get much better in the first-quarter of 2008 either, when profits are expected to grow just 3% to 4%. But watch out for the guidance firms provide on their fourth-quarter conference calls; because even such puny growth expectations may prove to be too high.

How Subprime Junk Got the “Good Housekeeping” Seal of Approval Part II

In yesterday's blog, I detailed how the nation's big-three credit rating agencies: Moody's, S&P and Fitch, played a big role in sustaining the boom in subprime by providing investment-grade ratings on mortgage backed securities.

These high ratings implied that subprime securities were a can’t-miss proposition – riskless investment-grade bonds that apparently “couldn’t fail” – yet carried a higher yield that similarly rated government bonds – it was almost too good to be true. That’s because it wasn’t.

“The idea that the rating agencies are impartial in the world of structured finance is a joke,” says one analyst interviewed for the Bloomberg article. Bond issuers received specific “guidance” from the rating agencies on how best to structure sub-prime securities so as to win the highest rating.

Wall Street firms even received software from the ratings agencies to “show them how to meet the requirements” for an investment-grade rating. Then Wall Street paid these firms for its seal of approval.

Triple-A Rated to Junk Bond Status in Just Eight Months

Billions of dollars worth of sub-prime mortgage backed securities were stamped with Triple-A ratings by Moody’s, S&P and Fitch – the highest possible seal of approval. This gave institutional investors the green-light to pile into these bonds, assuming they were as safe and secure as government bonds.

Of course, that was just an illusion. One sub-prime backed batch of bonds with over $700 million worth of securities “was rated Baa3, an investment-grade rating, by Moody's when issued in 2006. Now, its rated Caa1, seven levels deep into junk-bond territory.”

These bonds, which sold at 100-cents on the dollar less than two years ago, are now priced at 32-cents on the dollar – as nearly one-third of the sub-prime mortgage loans backing the bonds have already defaulted.

Another scary case-study was provided by a recent Wall Street Journal article. In March 2007 Merrill Lynch assembled a $1.5 billion collateralized debt obligation (CDO) much of it backed by subprime mortgage derivatives – not even actual loans.

Yet, over 90% of the securities in this portfolio received credit ratings of "A" or better. In fact, more than one-billion dollars worth were rated AAA. In November 2007 – just eight months later – the entire CDO was downgraded to junk.

AAA Ratings For Sale?

“The essential conflict,” according to former Securities & Exchange Commission chairman Arthur Levitt, “is they are being paid by the people that they rate, they are working with the people they rate.''

In October, the State of Connecticut (home of many hedge funds now sitting on big subprime losses) opened an investigation into the ratings agencies. It has subpoenaed Moody’s, S&P and Fitch to determine their role in the sub-prime debacle.

A few years ago, it was New York State that successfully prosecuted its case against Wall Street’s tainted research. I suspect the next sub-prime shoe to drop will be the share prices of Wall Street’s “big-three” credit ratings agencies. Yet another casualty of the subprime market shock.

How Subprime Junk Got the “Good Housekeeping” Seal of Approval .... Part I

A few years ago, in the wake of the bankruptcies of former blue-chips like Enron and WorldCom (among others) the fallout reached far and wide. Wall Street brokerage firms entered into a multi-billion settlement over their “tainted research.”

Wall Street analysts had been pressured to keep favorable ratings on stocks in the go-go years of the late 1990’s. At the same time these analysts were saying privately (unfortunately for them in emails) that these same buy-rated stocks were “pigs” with share prices “going to zero.”

The collateral damage also reached into the hallowed halls of the big accounting firms, since too many were looking the other way when fraudulent accounting was taking place at Enron and many other such firms.

When such obvious conflicts of interest came to light, the lawsuits quickly piled up. Wall Street brokers, specifically its conflicted research, became another collateral casualty of the dot.com bust.

Another Subprime Casualty Waiting in the Wings

Today, it’s the fallout from the sub-prime housing bust that’s impacting Wall Street, and the collateral damage may soon create another casualty of the credit crunch – Wall Street’s supposedly “independent” credit rating agencies. A recent article in Bloomberg details the whole sordid mess.

Near the peak of the late-great U.S. housing boom, “Wall Street marketed a new type of security backed by high-interest subprime mortgages issued to the least credit- worthy homebuyers.” The Wall Street money machine has never come up short on innovation, churning out exotic new products at the blink of an eye.

Subprime mortgage backed securities were just such a shiny new “product” created by the wizards of finance. But since investors might question the quality of a security called “sub-prime”, Wall Street needed a helping hand to sell its new securities. They need favorable credit ratings.

Big institutional investors such as pension funds, mutual funds, and most state and local government investment funds must follow strict rules that prohibit them “from buying securities that don’t carry investment-grade ratings.” These institutional investors are Wall Street’s bread-and-butter, so an investment-grade rating was essential in selling sub-prime.

Wall Street Lobbies the Big-Three Ratings Agencies

Wall Street get a very BIG helping hand in its windfall of subprime bond sales, thanks to favorable credit ratings provided by “the big three” independent rating agencies: Standard & Poor’s, Moody’s Investor Service, and Fitch Ratings.

These three firms basically own a monopoly on the market for credit ratings assigned to corporate bonds and other securities. This is Wall Street’s version of the Good Housekeeping Seal of Approval. The rating agencies play a key role in new bond issues as the Consumer Reports if you will, rating the quality and claims-paying ability of new securities.

In need of favorable investment-grade credit ratings to peddle subpirme to institutional buyers, Wall Street firms took it upon themselves to lobby the ratings agencies about the virtues of these new securities.

Unfortunately for the investors who bought this junk, the big-three rating agencies were only too willing to oblige Wall Street.

As it turns out, nearly 80% of the sub-prime mortgage backed bonds issued as the housing boom faded in 2005 and 2006 “carried AAA ratings, the same designation given to U.S. Treasury bonds. Blessed by the biggest credit rating companies as safe investments, these instruments offered higher returns than government bonds with the same ratings.”

It looked like the perfect security…at least on paper! As a result, Wall Street sold over one trillion dollars of sub-prime securities in 2005 and 2006 alone – much of this junk carried investment-grade ratings.

Emerging Market IPOs Muscle Aside Both New York and London

If there were any lingering doubts in your mind about the fading supremacy of U.S financial markets, this story should put those doubts to rest.

According to a recent article in the Financial Times, the so-called BRIC countries (Brazil, Russia, India and China accounted for nearly two-fifths of global initial public stock offerings (IPOs) last year – including some of the world’s hottest deals.

In recent years New York and London have been locked in a battle for capital market supremacy when it comes to IPOs. In 2006 the London Stock Exchange nudged out the New York Stock Exchange as global leader in IPO volume – raising more money for fledgling companies just issuing stock for the first time.

Last year, the New York Stock Exchange turned the tables, outpacing London in IPO money raised last year, but only with the help of 33 red-hot Chinese IPOs that raised $7 billion as U.S. listed ADRs in New York.

BRICs Raise More IPO Cash in 2007 than Markets in Europe or Japan

But in 2007, “each of the four BRICs raised more money through IPOs that four G7 members -- Canada, France, Italy and Japan” according to the Financial Times. In fact, BRICs accounted for 39% of all the money raised in global IPOs last year up from just 32% of the worldwide total in 2006.

And we’re not just talking about hot Chinese IPOs listing in New York or London either. Increasingly, BRIC companies are shunning the bright lights of the big city exchanges in favor of listing at home.

In fact, 25% of all BRIC IPO money in 2007 was raised within the friendly confines of their own home country – on local stock exchanges. If you include Hong Kong in this total (not technically considered a BRIC but with very strong financial ties to China), fully 38% of all new IPO money was raised by the BRICs.

Brazil Takes Top Honors in IPO Financing

The biggest IPO success story of 2007 was Brazil, where local companies raised $32 billion in 66 IPOs – all of it listed at home on the local Bovespa. This includes the successful IPO of Brazil’s Bovespa exchange itself.

To put this in perspective, $32 billion is twice as much as UK companies raised on the London Stock Exchange last year. As the Financial Times article concluded, “the financial world’s centre of gravity is shifting.”

Indeed it is – specifically the world’s financial “centre of gravity” continues to shift… toward emerging markets.

The Credit Crunch Eases from a Critical Condition as ABCP Shows Signs of Life

The global credit crunch certainly remains foremost on investors’ minds in the New Year. That negative sentiment carry-over from 2007 can be most readily seen in the 1.7% drop in the Dow Industrials on the first trading day of the New Year – its worst first-day percentage loss in 25 years!

But perhaps stock investors will soon have reason to cheer. According to a story carried today by Bloomberg there is reason to believe the credit-crunch may be easing. According to Federal Reserve data released today, U.S. corporations are now able to tap into the market for asset backed commercial paper (ABCP) once again.

You may recall that the market for ABCP, much of it backed by residential mortgage loans, virtually shut down as the credit-crunch intensified in August, sending commercial paper borrowing rates through the roof. In fact, this market experienced an outright crash in value worse than the October 1987 stock market crash.

The market value of outstanding paper plunged over 30% in just a few months. This sent global credit markets into a state of total gridlock, putting investors on edge for months.

However, according to Bloomberg, “Commercial paper backed by mortgages, credit-card loans and other assets rose $26.3 billion to a seasonally adjusted $773.8 billion for the week ended Jan. 2.” That’s the first increase in ABCP issuance after 20-straight weeks of decline. More significantly the $26 billion in fresh credit is the biggest increase in at least seven years!

What’s more, the yield, or rate of interest charged on this New Year commercial paper fell 116 basis points (1.16%) to just 4.63% (see graph above). That’s the largest weekly decline in ABCP rates in at least ten years – a clear-cut sign that “investors became more willing to hold the debt.”

In other words the frozen market for short-term commercial lending is at last thawing out – credit markets are finally beginning to stabilize.

To be sure, there’s more work to be done to ease this crunch and return to “normal”. Structured investment vehicles (SIVs) are still stuck holding the bag on billions in sub-prime asset backed commercial paper.

Many of these SIVs will need to be unwound in an orderly manner; but we’re already beginning to see progress. The Bloomberg article points out that “Citigroup Inc., HSBC Holdings Plc and other banks agreed to bail out their funds. Banks have taken $278 billion of SIV assets onto their books,” according to a report from Swiss bank UBS.

“SIVs will likely be forced to retire another $125 billion of medium-term notes with maturities up to 18 months and $50 billion of asset-backed commercial paper,” according to the same report.

So financial markets aren’t off the hook just yet, but it’s a BIG step in the right direction. Stay tuned!

The Sum of All Investor Fears for 2008... Same as 2007

Easily the biggest financial story of 2007 still lingers as investor’s biggest concern in 2008… the sub-prime credit crunch and its impact on the banking sector – that is both the “real” AND the “shadow” banking systems!

In the past two weeks plans for a U.S. Treasury sponsored bail-out fund (aka the “super-SIV”) were officially buried, thanks to lack of participation. Citigroup, the super SIVs biggest proponent quietly decided to take $49 billion worth of off-balance-sheet investments in structured investment vehicles back onto its own balance sheet.

In addition Citi says it will guarantee $58 billion in additional debt from SIVs it manages in order to avoid a forced sale of these securities at less-than-attractive (fire sale) prices. This financial commitment is in addition to $17.4 billion in losses and asset write-offs already disclosed by Citi related to sub-prime and other mortgage investments gone bad. Speculation is rampant that the biggest U.S. bank may need to raise even more capital, similar to the $7.5 billion investment it accepted from Abu Dhabi.

Unfortunately, Citigroup is not alone in this modern-day accounting shell-game. In fact, this kind of off-balance sheet accounting got many banks and financial firms into trouble. The same off-balance sheet shell-game that resulted in the ruin of Enron and WorldCom not so long ago has run rampant in the financial sector – and amazingly – it’s been perfectly legal to get away with it! 

This is what has been referred to as the “Shadow Banking System” – a largely unregulated, unsupervised extension of traditional banking that depends on increased leverage to boost a bank’s bottom line. In recent years, Wall Street’s banks and brokers worked overtime creating a surplus of derivative securities, all of which are devilishly difficult to understand, and even harder to value.

Now the complex shell-game of financial engineering has broken down, and the result has been a huge global credit crunch that’s still with us in the New Year. Banks and brokers have reported nearly $100 billion in sub-prime related losses in 2007, with a lot more to come this year.

Now, the Financial Accounting Standards Board (FASB), the supposed watch-dog for the industry, has imposed new rules requiring banks and brokers to more fully disclose their risky assets. The riskiest – and hardest to value – of these is termed “Level 3” assets.

The problem, as shown in the graph above, is that many leading Wall Street firms carry more of these highly-toxic L-3 assets on their balance sheet than they have equity capital. According to data from Royal Bank of Scotland, Morgan Stanley is at the most risk, because risky level 3 assets equal two and one-half times its equity capital.

This means that if Morgan were forced to write-off just 40% of its level 3 assets in the future – then its entire equity capital would be wiped out – and the House of Morgan would technically go broke!

According to a recent report by Merrill Lynch, Wall Street’s banks and brokers may face additional sub-prime related losses and asset write-offs of up to $500 billion between now and 2010!

Faced with a potential financial-sector crisis of this magnitude in 2008, it’s no wonder investors are still wary of banks and brokers in the New Year. But you know what the Chinese say: where there’s crisis, you usually find opportunity.

In spite of all this “doom and gloom” and all the uncertainty of year-end, so far at least the Financial Sector SPDR ETF (symbol: XLF) has held above its November lows. The iShares DJ U.S. Broker Dealer Index ETF remains above its low reached in August.

I smell potential upside profit opportunity, if these lows continue to hold – stay tuned!