So now we have the mega US government fund that will save the markets from imploding. It has stopped the rot in sharemarkets, but credit markets remain wary and uncertain. But for the time being, we have to assume that the bailout is going to work even if it could allow some of the folk who caused the current crisis to keep ducking reality and avoid taking their lumps. So it’s no wonder there are mutterings about the fates of Lehman Bros, Merrill Lynch and AIG: the usual collection of opportunists and lurk merchants want to know why the bailout came Friday and not last Sunday when Lehman failed, and then AIG was taken over and Merrill Lynch sent hurrying into the embrace of Bank of America. Lawyers are being assembled and loopholes looked for. So the cynics and smarter investors are asking who gets to bear the cost in the long run. The answer is the American taxpayer is the only one who will pay. So the poor American taxpayer who have already lost their homes in three million cases; faces that prospect in millions more; are losing their jobs (an extra 610,000 so far this year), will now having to support stumping up $US700 billion, and well over a $US1trillion if the costs of early support moves are added in. What about shareholders and managements of the institutions being supported by the Treasury plan? The plan will be rightfully extended to foreign institutions which hold these dodgy securities (That includes the likes of Barclays in London and Deutsche Bank in Germany), so what also about their management and boards? On all the evidence so far, it will do nothing to help end the root cause of the problem, the continuing decline in US home sales, new home starts and house prices. Until that happens, the cost to the US Treasury and to US and other financial groups will continue to escalate. It’s going to do nothing to stop that, or change the direction of the US economy which is sliding towards an increasingly nasty looking recession. An announcement is due from the US government shortly, led by Treasury Secretary Hank Paulson, Federal Reserve chairman Ben Bernanke and US Congressional leaders, detailing the final agreement and the scope of the legislation for the fund. The fund will be around $US700 billion, but that considerably underplays the true cost of the debacle so far. Since March Mr Paulson and Mr Bernanke have spent $US29 billion guaranteeing the bailout of Bear Stearns, $200 billion at least on the bailout of Fannie Mae and Freddie Mac, $85 billion on the bailout of AIG (the big insurer which wrote credit default swaps on a range of debt that it had no idea about) and at least $US50 billion guaranteeing money market funds. That’s $US364 billion. Seeing financial institutions around the world have already written down or lost over $US500 billion (and have raised around $US360 billion in new capital), the cost so far of the debacle that started with dodgy subprime mortgages and associated credit derivatives is well over $US800 billion (including Fannie, Freddie IAG etc). If the $US700 billion is for new purchases of bad securities (and it could be extended to non-US groups at the decision of the Treasury secretary), the cost will balloon.  That will allow the likes of Deutsche Bank, UBS, Credit Swiss and French and UK banks to unload their dodgy securities in certain cases. Assuming that the $700 billion is spent on new securities, the cost could be well over $US1.1 trillion, excluding already announced losses (and over $US1.6 trillion if they are included). Remember that a lot of analysts and commentators, plus bankers and their mates laughed at the International Monetary Fund when it said earlier in the year that the losses could be $US1 trillion. It was obviously very conservative. We are yet to see whether the debt to be bought will include non-mortgage related debt, say CDSs (Credit Default Swaps) and other dodgy credit derivatives issued over the debt of groups like General Motors or healthy US or foreign corporations’ debt. Will it include leverage buyout debt for the likes of private equity groups like Blackstone, KKR, CVC and the like? And on top of all the spending so far on the likes of Bear Stearns and AIG, there’s the $US500 billion spent or being spent a day by the Fed funding the markets in the US, Europe, Japan, Canada, Switzerland and other areas. There’s the $US180 billion swapped last week, there’s the monthly $US200 billion being lent to banks and other groups in the US each 28 days and there’s the daily $US33 billion being injected into US commercial banks each day and the $59 billion primary dealers last week (investment banks).

Even in a US economy that produces $US14.4 trillion worth of goods and services a year, that’s a lot of loot.

In fact a working paper from two IMF economists estimated that banking crises chew up an average of 16% of the GDP of an economy. That’s based on looking at 42 major banking crises around the world from 1970 to 2007 (and not including the current problem).

Spending all that money will intensify long-standing questions about America’s fiscal health, possibly at the expense of another drop in the value of the dollar.

No wonder the US dollar blew out on Friday, sliding to over $US1.44 on the euro (the Australian dollar rose by more than 1.5c in offshore trading on Friday night).

To mitigate the cost and make for a more brutal (to the selling groups) and equitable arrangement for US taxpayers, the purchases could be made by the US Treasury through a bidding process.

Companies that want to offload their dodgy assets would bid to sell to the government at a huge discount. The company willing to sell at the lowest price wins. That’s a reverse auction.

The government would then be able to sell the assets back into the market when it wanted: the government could give the banks a share of the upside if there are any profits.

The Fed lent that $US85 billion to AIG at a margin of 8.5% over the rate banks lend to each other internationally (so-called 3 month LIBOR). That’s around 11% or a bit more in normal times outside of last week.

Using that as a yardstick, the pricing by the Fed could be brutal indeed.

So far it seems like the purchases will be aimed at dodgy housing-related debt of varying kind, but you can bet there will be pressure to offload corporate and buyout loans that are going bad. The property related debt specified in the proposed bill is residential (AND) commercial.

That alone will limit the Fund’s ability to concentrate solely on residential debt.

And what about personal loans, credit card and car loan debt tied to foreclosures and home equity loans which is another disaster area?

The idea seems to be that the US government will buy at below-market rates and sell for a gain when the housing market recovers: when that will happen, no one is willing to say.

The problem is that the dodgy housing-related assets have proven extremely difficult to value as the demand for them has disappeared.

And there is a nasty message there: those banks and financial groups that stayed away from this sort of toxic debt are being punished. The incompetent and imprudent will be rewarded by being bailed out. This is what moral hazard is all about.

The strong stock-market rally late last week reflects the belief that companies have been saved from the cost of making dodgy decisions on these loans from incompetent and risky decisions to speculate and gear balance sheets to generate big earnings for the company and themselves.

The inevitable death of weaker firms will be delayed, and in turn that will delay the reckoning that must occur before a sustainable economic recovery can take shape.

The US government is seeking to eliminate legal challenges by making the Treasury the sole and final arbiter and not allowing any legal challenges, a move that has upset Americans in the legal field (naturally).

While the proposal calls for the purchase of as much as $US700 billion of bad loans, it’s unknown what taxpayers will ultimately pay for the bailout.

The Bush administration’s proposal requests that the US Congress authorises an increase to America’s debt ceiling.

That’s set to rise to $US10.6 trillion for fiscal year 2009 - which runs from October 2008 through September 2009, to accommodate a Federal Budget deficit already estimated at some $US580 billion.

But now the Administration wants to lift the ceiling to $US11.315 trillion to allow for the purchases of these dodgy mortgage-backed assets.

US commentators say that it’s unclear at this point if it will help homeowners.

If the Treasury buys an entire securitized loan, it could help struggling homeowners by modifying the terms. This could include reducing a loan’s interest rate or principal balance to help prevent foreclosure.

But if it doesn’t buy all the securities. It could be held to ransom by the other holders.

The bottom line remains: if the plan doesn’t stem the tide of foreclosures, home prices will not stabilize and the economy will not recover and banks and other financial groups will still be on death watch.

It will not help them lend more money for housing business, credit cards and the like.

US Debt Increases By 50%
Speaking of government bail outs (which we weren’t, but anyway) the long anticipated move by the US government to fully finance and support Fannie Mae and Freddie Mac appears to have finally come to pass this morning.

The US government has in all but name nationalized both institutions. It effectively means that the US government owns nearly half of all outstanding mortgages in the United States and follows on the heels of news last week that the UK government was offering “free” mortgages to first home buyers.

As Moody’s chief economist points out “the federal government has now become the nation’s mortgage lender.”

How much money are we talking about here? It is, wait for it, USD$5 trillion, that’s USD$5,000,000,000,000 in home loans. That is one big exposure to the mortgage markets that the government is burdening its taxpayers with.

But sleep easily, because US Treasury Secretary Hank Paulson thinks that the government may only have to cough up a maximum of USD$200 billiion to cover any debt shortfalls. That’s USD$200,000,000,000 - which still looks like a whopping big number to us.

Let’s just put these numbers in perspective. Over the past few years you have all read about the massive debt hole that the US government is in, how it is unsustainable, how the country is living beyond its means. The current US national debt (although by the time you receive this email it will be higher) stands at USD$9,674,134,313,303 so in one fell swoop you could argue that the national debt has been increased by over 50% to just under USD$15 trillion.

It’s time to shift your focus to the most unloved, abused securities.

Here’s why: As the global economy slips into an economic recession over the next several months, those unwanted securities will yield the fattest profits for your portfolio.

The last time the global economy suffered the tribulations of a major economic recession was back in 1990. We can thank the last U.S. real estate “bubble” (a.k.a. Savings & Loans Crisis), and the demise of the European Exchange Rate Mechanism (ERM) for that contraction of output. You may remember the European Exchange Rate Mechanism (ERM) as the euro’s predecessor - the European Currency Unit (ECU).

Asia, however, saw the biggest decline in economic output since WW II starting in 1997 when Thailand triggered the Asian economic crisis. That watershed event led to the massive destruction of credit, currencies, and stock-market values. As a result, regional economies plunged into the abyss until they finally bottomed in late 1998.

The last U.S. recession in 2001 was mild by historical standards. That’s because housing values continued to appreciate during that span while financial assets were decimated. Basically, money had somewhere to flow unlike this year. Until recently, commodities have been the only “game” in town for investors. And now, even commodities are pulling back.

The Worst Worldwide Recession in 20 Years

The economic slowdown now threatening the United States and other industrialized economies will probably lead to the worst recession in almost 20 years.

The world economy will continue to struggle with the heavy burdens of rising food and energy inflation. On top of that, industrialized nations are facing deflation in housing and bank credit. And all the while, consumption will continue to erode because consumers will save more and spend less to address balance-sheet erosion.

For the first time in the post-WWII era consumers are facing a bizarre mix of lethal food and energy price inflation and deflation (or declining prices) in real estate and financial assets (stocks and bonds).

Never in the post-war period have consumers and investors alike faced such a challenging environment. We’ve simply never had to deal with two powerful economic forces converging with lightening speed.

Deflation, not inflation, does far more destruction to consumers and the global economy. That’s because debt burdens become increasingly difficult if not impossible to finance.

That’s the lesson of the 1997-1998 Asian economic crisis, the Russian ruble collapse in 1998 and now, the credit and real estate deflation attacking the United States and Western Europe since August 2007.

Inflate or Die

In a typical deflation environment, credit “bubbles” deflate. This process or monetary phenomenon can take several years to control until finally the forces of inflation eventually win. At that point, global central banks usually try to print their way out of economic distress.

The only way to beat deflation or an environment of rapidly declining prices is to expand bank credit like there’s no tomorrow. That’s what Asian central banks did in 1998 and the United States started in 2001.

The last U.S. deflation, back in the 1930s, was eventually cured by the Second World War. The war led to renewed economic production as the United States converted from a sleepy, peaceful country to a wartime economic juggernaut.

But today, the sub-prime crisis has morphed into a diabolical monster as it spreads from one facet of credit to the next. In the process, debt deflation or credit destruction is now underway.

The entire gamut of credit deflation reads like a bad movie script - and it’s still unfolding.

Bank credit continues to tighten in the United States and Europe, particularly in the United Kingdom, Ireland and Spain. As a result, default rates are now rising for companies and consumers.

Credit card delinquencies are surging and even top-notch investment-grade companies are being denied credit. Corporate bond spreads trade at multi-year highs, banks’ capital ratios have plunged amid a blizzard of unprecedented losses, and mortgage markets are hemorrhaging.

The Debt Deflation Strategy

According to data from Morgan Stanley, only U.S. Treasury bonds posted gains during the last deflation or Great Depression of the 1930s. Gold, however, might have gained in value had FDR not confiscated ownership in 1933.

In my view, gold along with the U.S. dollar would post significant gains versus most assets, including foreign currencies in a debt deflation.

Silver, however, might not appreciate as strongly as gold in a severe recession.

Silver remains mostly an industrial metal and I doubt it would appreciate in the same context as gold during price deflation. That’s because industrial demand for silver would collapse in a hard recession, unlike gold - viewed universally as a surrogate currency and a long-term store of value against fiat currencies.

Other commodities, including oil, are unlikely to rise in value if the current economic situation deteriorates further. There’s no historical case to be made for holding raw materials in a debt deflation. Not even China will save commodities from a major decline.

High quality Treasury bonds and non-financial A and AA-rated corporate bonds are also ideal hedges against credit destruction. As interest rates collapse amid an outright deflation or severe recession, long-term debt prices should rise markedly. Avoid junk bonds and any other category of bonds that aren’t of the highest quality.

The U.S. dollar is also poised to rise vis-à-vis most currencies as the recession unfolds. That’s because foreign economies lag behind the U.S. credit squeeze by about 12 months and will increasingly find debt deflation at their doorstep.

Foreign central banks will begin cutting interest rates in 2009 to offset rapidly deteriorating output. That makes the dollar more attractive on a relative basis because the Fed has already aggressively reduced lending rates to boost growth. That’s certainly not the case in Europe and Asia.

Get Out of Dodge While You Can

I would also consider opening a foreign bank account to hold some gold and U.S. dollars as a safe-haven strategy.

It is not unfathomable that some sort of foreign exchange control may arise over the next few years. If that happens, it will restrict your overseas transfers and stop individuals from opening a foreign account. The British government imposed such controls in the early 1970s during an economic crisis. It can happen again.

I have little faith, apart from the above short list of strategies, that other assets will protect investors. Debt deflation is the absolute worst nightmare for investors, central banks and the general populace.

The key is to protect what you have. At some point, as the crisis eventually subsides, great bargains will beckon in distressed debt, bankruptcy reorganization securities, common stocks and real estate.

For now, I’d brace for some difficult years ahead and start planning for a hard economic landing. In a worst case scenario, it’s better to be safe than sorry.

NEW YORK - Wall Street ended a volatile week with a mixed showing on Friday as worries about credit markets and the economy tempered investors’ upbeat sentiments about falling oil prices.
Investors were encouraged early in the Friday session as oil’s pullback lifted the outlook for consumer companies and eased concerns that record-high energy prices would force Americans to curb spending.
The Dow Jones Industrial Average advanced 43.97 points, or 0.38 per cent, to close at 11,659.90, while the tech-rich Nasdaq composite fell 1.15 points, or 0.05 per cent to 2,452.52.
The broad-market Standard & Poor’s 500 index gained 5.27 points to finish at 1,298.20.

LONDON - Europe’s main stock markets mainly rose on Friday, boosted by Wall Street gains and weak oil futures, but London fell as the mining sector was hit by falling metals prices, analysts said.
The FTSE 100 lost 42.6 points, or 0.77 per cent, to close at 5,454.80 points.

FRANKFURT - The DAX 30 ended 3.81 points, or 0.06 per cent, higher at 6,446.02.

PARIS - The CAC climbed, or 32.71 points, 0.74 per cent, to finish at 4,453.62 points, with trading subdued because of a public holiday in France.

TOKYO - The Tokyo Stock Exchange’s benchmark Nikkei-225 index rose 62.61 points, or 0.48 per cent, to end at 13,019.41.

HONG KONG - The benchmark Hang Seng Index fell 232.13 points, or 1.09 per cent, at 21,160.58.

WELLINGTON - The New Zealand sharemarket rose on Friday as Fletcher Building continued to strengthen following Wednesday’s annual profit result.
The benchmark NZSX-50 index rose 17.23 points to 3351.13.

SYDNEY - The Australian stock market has had a flat lead with New York indices closing mixed on Friday as worries about credit markets and the economy tempered investors’ upbeat sentiments about falling oil prices.
At 0738 AEST, the Sydney Futures Exchange’s September share price index futures contract was down eight points at 4,930.
In news today, miner BHP Billiton Ltd and steelmaker BlueScope Steel are to release their annual results, as are rubber products manufacturer Ansell, online job agency Seek Ltd and online service provider iiNet Ltd.
The Australian share market closed flat on Friday as a rally in banks and property trusts, triggered by a positive US lead, offset falls in mining and energy stocks.
The benchmark S&P/ASX200 index was up 0.6 of a point to 4,981.7, while the broader All Ordinaries index lost 0.1 of a point to 5,038.9.

NYMEX
Oil fell to its lowest price in three months on Friday, briefly touching the $111 level after the dollar muscled higher and OPEC predicted the world’s thirst for fuel next year will fall to its lowest point since 2002.
Light, sweet crude for September delivery fell $1.24 to settle at $113.77 a barrel on the New York Mercantile Exchange after falling to $111.34, its lowest price since May 2 and more than $35 - or 24 per cent - below its July 11 trading record above $147.
As high energy costs force countries around the globe to cut back on consumption, crude prices have plummeted and are now within striking distance of $100 a barrel, a level first reached on February 19.
At the pump, retail gas prices also continued falling, with a gallon of regular shedding about half a penny overnight to a new national average of $3.771, according to auto club AAA, the Oil Price Information Service and Wright Express. Gas peaked at $4.114 on July 17.
Crude fell after the dollar gained strength against the euro on US data showing that industrial output rose more than expected in July.
The 15-nation euro has lost some of its lustre compared to its American rival amid growing evidence that European economies are slowing.
The euro bought $1.4675 in trading Friday, down from $1.4811 late Thursday.

COMEX
Gold for December delivery dropped $22.40 to settle at $792.10 an ounce on the New York Mercantile Exchange, after earlier falling to $777.70, its lowest level since October.
Other precious metals traded mixed Friday. Silver for December delivery shed $1.43 to settle at $12.93 on the Nymex, its lowest close since almost a year ago, while September copper rose 1.65 cents to settle at $3.2925 a pound.

After a longer than normal delay, commodity prices have entered a significant correction on the back of slumping global growth and a stronger $US.

Notwithstanding, occasional bounces (such as that seen in the last 24 hours) the downwards correction in commodity prices has further to go over the next six months or so.

The AMP’s Dr Shane Oliver says this is good news for the global growth outlook and for shares generally as it takes pressure off inflation and hence clears the way for lower interest rates.

But it is bad news for resource shares and the $A, as we have seen with its 12 cent fall in a month against the US dollar.

While the correction in commodity prices has further to go, their long-term trend is likely to remain up, he says.

From recent highs oil, gold and copper prices have fallen around 20% and wheat and corn prices are down around 30%.

Of course this has occurred from very high levels, as evident below.

What is driving the slump in commodity prices?

What are the implications?

Is this the end of the commodity bull market or just a correction?

Commodity prices and the global growth cycle

In a normal global economic downturn commodity prices fall in response to slowing economic activity.

This takes pressure off costs and inflation, allowing interest rates to fall which sets the scene for an economic rebound.

This time around has been a bit different. Until a month or so ago commodity prices remained very strong being propelled by still strong growth in the emerging world (notably China), investor demand for commodities as a hedge against a falling $US, and speculative demand made possible by the growth of commodity funds and partly fuelled by investor scepticism with financial assets.

The problem was that the surge in commodity prices, notably for oil, was not only cutting into profit margins and consumer spending power but that it was directly adding to global inflation; this was keeping global central banks far more hawkish than they should have been.

So while the credit crunch meant interest rates should have been falling, in the US and UK and being increased in others (e.g., in Europe and Australia).

The end result has been more global economic pain than would normally be the case.

Back to normal

The past month has started to see commodity prices return to something like their normal relationship with the global growth cycle with sharp falls now becoming evident.

There are several reasons for this.

Firstly, recent data has shown that Japan and Europe are flagging just as badly if not worse than the US. In fact the recent flow of economic indicators suggests that both regions may now be in recession.

This is bad news for the emerging world including China because they will find it harder to divert their exports away from the already weak US.

Secondly, it has become increasingly clear that China, India and other emerging countries are also slowing.

Chinese economic growth looks like being 9 to 10% this year compared to last year’s near 12%.

As a result, Chinese authorities are now starting to back pedal on some of last year’s tightening.

Indian growth is likely to slow back to 7% from 9% last year with aggressive monetary tightening starting to bite.

Growth in Brazil is also likely to slow on rising interest rates.

Thirdly, the slump in share markets as oil went through $US120 a barrel in May and increasing evidence of falling oil demand indicated that the surge in the oil price was starting to “choke off” growth and hence oil demand.

Rising base metal inventories are also starting to become evident. See the chart below.

Fourthly, the realisation that growth outside the US is now slowing faster than that in the US has seen the $US break higher.

This in turn has suddenly removed investor demand for commodities, such as oil and gold, as a safe haven against a falling $US.

The combination of all of these fundamental developments has seen commodity speculators squeezed.

The favourite trade recently was long oil/short banks, but in the last few weeks it has suddenly reversed.

This has forced investors to close their positions, which has only added to the severity of the moves.

A pause, not the end, in the commodity super cycle

China may be slowing but is not about to collapse and the long term demand potential in emerging countries is huge.

China’s copper usage per person is less than half US levels and its oil usage per person is around 10% that of developed countries.

Rising income levels and the increased use of agricultural products for fuel will also see ongoing upwards pressure on agricultural demand.

Just as we have seen in the last six years, supply will struggle to keep up with commodity demand over the long term.

As such, the long term trend in commodity prices is likely to remain up. See the chart below.

In this context the recent pull back in commodity prices should be seen as a correction, but it likely has further to go.

Commodity prices remain well above their rising trend (as evident in the previous chart) and speculative positioning and sentiment regarding commodities is yet to fall back to levels associated with a durable rebound.

More fundamentally the economic news over the next six months is more likely to get worse before it gets better.

The next chart shows the relationship between a leading indicator of world growth (based on the OECD’s leading indicators for OECD countries plus Brazil, Russia, India and China) and commodity prices.

Normally there is a close relationship, but it broke down last year and into mid this year as the leading indicator fell but commodity prices surged.

But a more normal relationship seems to be getting reestablished. As can be seen below, the leading indicator suggests more weakness in commodity prices ahead.

Against this backdrop speculative positions in commodities are likely to be wound back further particularly as the $US now seems to be on a firmer footing relative to other currencies.

In the very short term commodities have become oversold and due for a bounce, but the trend over the next six months or so is likely to remain down.

Implications – the good and the bad

The cyclical down turn in commodity prices now underway has a number of implications

Firstly, the correction in commodity prices is good news for the global economic outlook and share markets generally.

Softer commodity prices will remove much of the pressure on inflation.

This in turn will help global central banks move towards lower interest rates and provide greater flexibility to deal with the ongoing credit crunch.

We expect lower interest rates in Europe, the UK, Japan and Australia over the next six months.

Secondly lower commodity prices will also help reduce corporate cost pressures and provide increased spending power for consumers.

To the extent lower commodity prices make it easier for a healing of the global economy it should be positive for global shares generally.

Thirdly, falling commodity prices are of course bad news for resources shares.

As such, there is potential for a further reversal of their relative out performance versus financial shares over the last year.

See the chart below in relation to Australian resources and financial shares

Given the relative importance of resources in the Australian share market, it is also likely to mean that Australian shares may under perform global share markets for a while yet as the commodity correction continues to run its course.

Asian shares are likely to be key beneficiaries of the correction in commodity prices given Asia’s high reliance on commodity imports.

Fourthly the commodity price downswing means the $A has entered a cyclical correction greater than any of the pullbacks seen in recent years.

While the $A is oversold having fallen 13% in four weeks, and so may have a short term bounce, more downside is likely in the months ahead, possibly to $US0.80.

Parity against the $US has been postponed probably till late 2009 after the commodity cycle turns up again.

And lastly a downturn in traded commodity prices will also dampen the terms of trade boost for the Australian economy, adding to the case for RBA interest rate cuts.

Conclusion

Commodity prices have entered a cyclical correction which looks like running a bit further.

While this is bad news for resources shares, the relative performance of Australian shares and the $A, it’s necessary to clear the way for lower interest rates to combat the credit crunch.

So overall it’s more good news than bad.

More broadly we think that the commodity super cycle remains alive and well, but a sustained resumption of the uptrend in commodity prices probably won’t get underway till some time next year.

NEW YORK - Wall Street sank after weak readings on economic growth and the job market. The Dow Jones industrial average fell more than 200 points.
The Commerce Department reported that gross domestic product grew 1.9 per cent in the second quarter. Economists polled by Thomson Financial/IFR had expected growth of 2.4 per cent.
The Dow lost 224.64, or 1.93 per cent, to 11,431.43.
The Standard & Poor’s 500 index shed 23.12, or 1.79 per cent, to 1,266.07, and the NASDAQ fell 22.64, or 0.95 per cent, to 2,355.73.

LONDON - Europe’s main stock markets closed mixed on Thursday, with attention focused on interest rate decisions in Britain and the eurozone, highlighting the dual threats of inflation and recession. Both central banks kept rates on hold.
The FTSE 100 index shed 8.6 points, or 0.16 per cent, to close at 5,477.50.

FRANKFURT - The Dax lost 17.9 points, or 0.27 per cent, to finish at 6,543.49.

PARIS - The CAC 40 rose 9.1 points, or 0.20 per cent, to 4,457.43.

TOKYO - Tokyo share prices closed down 0.98 per cent on Thursday as investors took profits after the previous day’s surge amid renewed pessimism over the local and US economies.
The Tokyo Stock Exchange’s benchmark Nikkei-225 index lost 129.90 points to end at 13,124.99.

HONG KONG - Hong Kong share prices closed up 0.7 per cent on Thursday as worries over the local earnings outlook kept investors from celebrating Wall Street’s two-day rally.
The benchmark Hang Seng Index was up 154.45 points to 22,104.20.

WELLINGTON - New Zealand shares closed up 0.79 per cent on Thursday, but off their peak as the market trended down following a solid start.
The benchmark NZX-50 index rose 26.55 points to 3,378.89.

SYDNEY - The Australian stock market is expected to open lower today as recent US optimism ebbed and oil reversed its recent decline.
At 0732 AEST, the September share price index futures contract on the Sydney Futures exchange was 58 points lower at 4,917.
Today’s events include annual results from Telecom NZ and Programmed Maintenance Services holds its annual general meeting.
Westpac will deliver a market update while, in Melbourne, ANZ and Bankwest will appear before the House of Representatives Economics Committee’s inquiry into competition in the banking and non-banking sectors.
AngloGold Ashanti Ltd chief executive Mark Cutifani will address the Melbourne Mining Club.
The Australian share market closed marginally firmer yesterday, with the banking sector gaining ground.
The benchmark S&P/ASX200 index was up 14.2 points, or 0.29 per cent to 4983.3, while the broader All Ordinaries climbed 11.9 points, or 0.24 per cent to 5030.

NYMEX
Oil prices jumped back above $US120 a barrel on Thursday, halting a steep three-day slide after Kurdish rebels claimed responsibility for a fire at Turkish pipeline that supplies Western countries.
Light, sweet crude for September delivery rose $US1.56 to settle at $US120.02 a barrel on the New York Mercantile Exchange, after prices swung between positive and negative territory.
Gasoline futures also rose, while heating oil and natural gas futures finished lower.
Crude had tumbled more than $US6 over the previous three days, bringing prices $US30 lower than the July high above $US147 a barrel.
Before Thursday’s rally, Nymex front-month crude futures had fallen around 20 per cent, or about $30. The decline comes amid mounting evidence that high energy prices are forcing Americans to cut back on driving.
The US Energy Department’s Energy Information Administration said on Wednesday that crude supplies rose 1.7 million barrels in the week ended August 1, while inventories of distillate fuel - which include diesel and heating oil - jumped 2.8 million barrels.
Meanwhile, EIA data showed gasoline stockpiles fell 4.4 million barrels last week, much more than the 1.4 million drop expected by analysts.
The market also was eyeing more tension over Iran’s nuclear program.
In other Nymex trading, heating oil futures slipped 0.43 cent to finish at $US3.2336 a gallon, while gasoline prices rose 5.34 cents to settle at $US3.0027 a gallon. Natural gas futures fell 20.2 cents to settle at $US8.571 per 1,000 cubic feet.

COMEX
Gold fell for a fifth straight session, the longest losing streak since June 2007, as a rebound in the dollar eroded its appeal as an alternative investment. Silver fell, too.
Gold futures for December delivery fell $5.10, or 0.6 per cent, to $877.90 an ounce on the Comex division of the New York Mercantile Exchange. Earlier, the price gained as much as 1.1 per cent. The metal last fell for five straight sessions from June 4 to June 8, 2007.
Silver futures for September delivery fell 24.8 cents, or 1.5 per cent, to $16.257 an ounce on the Comex. Silver still has gained 9 per cent this year, while gold advanced 4.8 per cent.

The bull market for financial services stocks first began in 1982. And this bull market hit a crushing dead-end in August 2007. It will be years before this sector fully recovers.

Let’s start with banks. Right now, large and small banks are desperate to recapitalize their smashed-out balance sheets. They continue to dilute shareholder equity through massive rights offerings and new issues. Dividends have been sliced and diced.

Since last August, banks have written off or lost a cumulative US$476 billion during the worst credit crisis in a generation.

The Last Nail in the Coffin for Financials

We’re Postponing, NOT Avoiding Systemic Risk

Over the last 12 months, the Federal Reserve and the U.S. Treasury have dreamed up and orchestrated spectacular bailouts to preserve the financial system and avoid systemic risk.

But what are they really achieving? Long-term the consequences of the Fed’s actions will be horrendous. In the not-too-distant future, you’ll see existing and future generations of Americans paying dearly for our leaders rescuing one financial institution after another.

There is no “avoiding” systemic risk. The final consequence of Morale Hazard is a larger, more threatening financial panic down the road.

When the government bails out institutions and nationalizes failed enterprises, they only increase long-term inflation. For starters, they have to pay for those bailouts. So the government ultimately turns to taxpayers to fund the expansion of credit. By interfering with capitalism’s natural progression, the government delays its own financial reckoning.

In my opinion, an insolvent institution must be allowed to fail.

Morale hazard has played a major role on Wall Street and at the Bernanke Fed since March. Investors and analysts have seriously questioned the Fed’s unorthodox role as lender of last resort.

What business does the central bank have to collateralize a failed institution’s almost worthless debt with Treasury securities? That’s what the Fed did with Bear Stearns Cos. in March. The Fed did the same thing for other troubled but unnamed investment banks and banks over the same period.

NETQUOTE MORNING MARKET REPORT
(Oil is the September contract on the NY Mercantile Exchange (NYMEX). Gold is the December contract on the COMEX division of the NY Mercantile Exchange. Silver and Copper are the September contracts on NYMEX.)

NEW YORK - Stocks pared early losses and traded narrowly mixed Wednesday as a drop in oil prices helped restrain fresh worries about the financial sector.
Investors began the day fearing more industry-wide writedowns of bad home loans after mortgage financier Freddie Mac reported a larger than expected second-quarter loss.
But a reversal in oil prices, continuing a decline that propelled stocks sharply higher on Tuesday, helped calm investors about the forces tugging at the economy.
Freddie Mac, which substantially increased its reserves for souring loans, lost about three times Wall Street’s expectations on a per-share basis.
The company also announced that it expects to cut its third-quarter dividend as it seeks to preserve capital.
The well-being of Freddie Mac and sister company Fannie Mae is a big concern on Wall Street as the government-chartered companies hold or back nearly half of all US mortgage debt.
The Dow rose 40.3, or 0.35 per cent, to 11,656.07.
The Standard & Poor’s 500 index added 4.31, or 0.34 per cent, to 1,289.19, and the NASDAQ rose 28.54, or 1.21 per cent, to 2,378.37.

LONDON - Europe’s major bourses extended their rally, posting fresh gains thanks to positive trading in banking and mining shares.
In London, the FTSE 100 index climbed 31.6, or 0.58 per cent, to close at 5,486.10.

FRANKFURT - The Dax added 42.69, or 0.65 per cent, to 6,561.39.

PARIS - The CAC 40 rose 61.98, or 1.41 per cent, to 4,448.33.

TOKYO - Japan-based shares staged a powerful rally on Wednesday, snapping a three-day downturn as investors cheered a drop in crude prices, gains on Wall Street and a weaker yen.
Tokyo’s Nikkei 225 index rose 340.23 points, or 2.63 per cent, to end at 13,254.89.

HONG KONG - Hong Kong’s stock exchange was closed Wednesday due to a severe tropical storm sweeping the region.
On Tuesday, the blue-chip Hang Seng Index retreated 565.17 points, or 2.5 per cent, to 21,949.75.

WELLINGTON - The New Zealand sharemarket rose strongly as markets around the world posted healthy gains.
New Zealand’s NZSX 50 closed up 56.66 points, or 1.72 per cent, to 3,352.34.

SYDNEY - The Australian stock market is expected to open relatively flat today, but may rise slightly after oil continued to slide.
At 0750 AEST, the September share price index futures contract on the Sydney Futures exchange was 15 points higher at 4,986.
Today’s releases include the Australian Industry Group/Housing Industry Association Australian Performance of Construction Index for July, and Australian Bureau of Statistics (ABS) labour force data for July.
Tabcorp Holdings Ltd releases its annual results.
The Australian share market gained more than three per cent yesterday, buoyed by a strong US lead and hopes of cuts to domestic interest rates.
The benchmark S&P/ASX200 index closed 148.7 points, or 3.08 per cent higher at 4969.1, while the broader All Ordinaries climbed 136.1 points, or 2.79 per cent to 5018.1.

NYMEX
Oil prices briefly dropped below $US118 a barrel on Wednesday - $US30 below their record high - after a jump in US crude and other fuel stockpiles fed beliefs that high energy prices are eating into demand.
Light sweet crude for September delivery finished the session down 59 cents at $US118.58 a barrel on the New York Mercantile Exchange.
It was crude’s lowest settlement price since May 2. Prices earlier fell as low as $117.11, an $US30 or 20 per cent drop from their trading high of $US147.27 reached on July 11.
Some investors believe a 20 per cent pullback signals a change in sentiment toward the oil price.
In London, September Brent crude fell 70 cents to settle at $117 a barrel.
Oil market traders are paying close attention to see if oil falls below $US117, a key resistance level expected to trigger a rash of technical selling by computers programmed to dump oil contracts once prices fall below a certain threshold.
Investors appear to be reacting less to potentially bullish factors like the weather and geopolitical developments and instead are turning their attention more to fundamentals.
In other Nymex trading, heating oil futures fell 4.41 cents to settle at $US3.2379 a gallon, while gasoline prices fell 0.71 cent to settle at $US2.9493 a gallon. Natural gas futures rose 4.7 cents to settle at $US8.773 per 1,000 cubic feet.

COMEX
Gold closed lower for a fourth straight session on Wednesday as another drop in crude prices coupled with a stronger dollar diminished the metal’s appeal as a safe-haven asset.
Gold has faced strong downward pressure in recent weeks - dropping five per cent in the past month, as dwindling demand for energy and a weakening US economy cuts into the price of crude and other commodities.
Gold for December delivery fell $US2.90 to settle at $US886.10 on the New York Mercantile Exchange, after earlier falling to $US880.50, the lowest level since June 16.
Other precious metals traded mixed. Silver for September delivery dropped 6.7 cents to settle at $US16.505 an ounce on the NYMEX.
September copper added just over half a cent to settle at $US3.4235 a pound.
Further weighing on prices, the US dollar has gained ground in recent days against the euro, encouraging selling by investors who bought precious metals to hedge against inflation and weakness in the US currency.

 the Dow Jones Utility Average (DJUA) continues to break down this summer. But while the DJUA sinks, another Dow index continues to hold its ground.

In fact, one of the great index mysteries of 2008 is the relentless strength of the Dow Jones Transportation Average or DJTA.

This barometer is up 8.3% this year and traded 9.9% below its all-time high this spring. But for now, the index has failed to confirm Dow Theory because the larger Dow Jones Industrials Average has lagged. It’s still off 20% from its high last October and down 14.6% in 2008.

In a bull market, both averages must rise together. But in a bear market, which is where we stand now, the Dow is in the gutter while the Transports remain rather resilient even amid US$125 oil.

I believe what’s happening for the Transports is an anomaly. The railroads are leading this index higher this year, mainly because of booming freight revenues as a consequence of surging fuel costs. Other segments of freight are getting smashed, including ground and air transport.

It’s only a matter of time until the Transports break down. That freight moving across the country is bound to slow. I see that happening as overseas economies finally break from their dizzy growth rates. When that happens, look for the Transports to confirm the Dow in bear market territory.

In the August 5th issue of U.S. News and World Report an extensive article notes that many younger people are leaving the United States. These young emigrants are taking their young families and seeking their fortune or an easier life in foreign lands.

If this data collected from 2005 and 2007 is correct, it’s possible that three million U.S. citizens are going abroad to live each year. Assuming that number is accurate, that’s a huge increase over recent years.

And according to the study, the largest number of relocating persons is not retirees, but rather they are young adults ranging from 25 to 34 years old. That’s particularly interesting considering this age range pays for Social Security and other benefits for older generations.

John Wennersten, author of Leaving America: The New Expatriate Generation (Praeger Pub. 2008), sees this exodus of Americans as “a long-term trend.”

Wennersten writes that while Americans who go abroad are typical pioneers in some ways looking for a new “Go West,” they also are part of a larger development, “a global economic shift that is fostering real economic growth in neglected areas of the world, like Latin America, Eastern Europe, and Southeast Asia.”

U.S. citizens are certainly not the sole beneficiaries of this shift. However, they are active players in foreign countries where former state-run industries are being privatized. This is creating new trade markets and opportunities.

Retail sales fell sharply in June, taking most economic commentators by surprise. Even perennial optimists, such as Shane Oliver, were forced to consider that the odds of a recession were “at least 40 percent”.

In reality, the fall in retail sales was inevitable. Spending in Australia has been driven by the biggest debt bubble in our history, and when that bubble peaked, spending had to fall. Since households had taken on a far larger share of debt than business during this bubble, the impact was bound to be seen first in retail sales, rather than investment spending, as I pointed out in November 2006:

“If households reduce their debt levels smoothly, they will have less disposable income to spend and retail sales will slump. If bankruptcies become widespread, the sales downturn will be overlaid with a financial crisis.” (Debtwatch, November 2006, p. 18; see http://www.debtdeflation.com/blogs/pre-blog-debtwatch-reports

The suddenness of the turnaround is also no surprise, when you look at the data from a financial point of view. Just as your personal spending each year is the sum of your net income plus the change in your debt, aggregate spending for the economy is the sum of GDP plus the change in debt. As debt rises, the contribution made to spending by any change in debt also rises. Private debt–and household debt in particular–has risen so much in Australia that, at its peak, the change in debt was responsible for almost 20 percent of aggregate demand.

Figure 1

As is obvious in Figure 1, debt’s contribution peaked at the end of 2007, and it has been falling ever since. The monthly figures make this even more obvious (Figure 1 records change in debt over a whole year). The monthly increase in total private debt peaked at $30 billion in mid-2007, and trended up to $27 billion by the end of 2007. It has since fallen to a mere $5 billion in the month of June (see Figure 2).

Figure 2

At some point debt will not continue to increase. It will turn negative, and change in debt will therefore subtract from aggregate demand rather than adding to it. Given that at its peak, debt financed almost 20 percent of demand, even stabilising debt at its current level–$1.85 trillion, compared to a GDP of $1.1 trillion–would result in a 20 percent fall in aggregate demand.

This hit will be felt by both asset and commodity markets: asset prices will fall, as will output and employment. The government’s attempts to counter this–by running a deficit rather than a surplus–will initially be swamped by the sheer scale of the turnaround in debt-financed spending. Even if the government runs a deficit of A$20 billion–the same scale as this year’s intended surplus–it will make up for less than a tenth of the fall in debt-financed spending.

The current “credit crunch” is, therefore, only the first act in a long-drawn out process of reducing debt levels. The second act will be “the recession we can’t avoid”. That recession–which will affect most of the OECD, since all major OECD nations bar France have suffered a similar blowout in private debt levels–will only add to the current decline in asset prices.

NEW YORK - Wall Street fell moderately Monday in an erratic session dominated by worries about inflation, somewhat soothed by a steep drop in the price of oil.
That decline eased some of investors’ worries about inflation.
Wall Street initially sold off after the Commerce Department said an inflation gauge tied to consumer spending rose by a sharp 0.8 per cent in June, reflecting higher gasoline prices — the biggest jump in the indicator since a one per cent rise in February 1981.
The report fed investors’ growing concerns about the impact of rising prices on consumers, whose spending is the lifeblood of the economy.
The Dow Jones industrial average fell 42.17, or 0.37 per cent, to 11,284.15. The Dow had been down more than 100 points in early trading.
Broader stock indicators also declined. The Standard & Poor’s 500 index fell 11.30, or 0.9 per cent, to 1,249.01, and the Nasdaq
composite index declined 25.40, or 1.1 per cent, to 2,285.56.

LONDON - Europe’s main stock markets closed lower on Monday, with fears about the impact of an economic slowdown and a fall in profits at global banking giant HSBC weighing on sentiment, dealers said.
The FTSE 100 index shed 34.5 points, or 0.64 per cent, to end at 5,320.20.

FRANKFURT - The Dax fell 46.65 points, or 0.73 per cent, to finish at 6,349.81.

PARIS - The CAC 40 lost 33.71 points, or 0.78 per cent, to close at 4,280.63.

TOKYO - Japanese share prices closed down 1.23 per cent on Monday, ending below the key 13,000 points level as investors worried about weak company earnings and losses on Wall Street.
The Tokyo Stock Exchange’s benchmark Nikkei-225 index slid 161.41 points to 12,933.18, the lowest close since July 18.

HONG KONG - Hong Kong share prices closed down 1.5 per cent Monday as concern about oil prices once again spooked investors, while banking titan HSBC posted a 29-per cent profit tumble.
The Hang Seng index shed 347.68 points to 22,514.92 after a jump in US unemployment and a fall on Wall Street also soured sentiment.

WELLINGTON - The New Zealand sharemarket was one of the few markets to post gains.
The benchmark NZSX-50 index was up 16.06 points at 3319.22, after losing 33 points on Friday.

SYDNEY - The Australian stock market is expected to decline after US equities fell on worries about accelerating inflation.
Resource stocks may slip after commodities including oil and gold declined overnight.
At 0735 AEST on the Sydney Futures exchange, the September share price index futures contract was 44 points lower at 4,817.
In economic news today, the Reserve Bank of Australia announces its decision on interest rates following its monthly board meeting.
The Australian Industry Group/Commonwealth Bank Australian Performance of Services Index for July is due.
In company news, Seven Network Ltd releases its annual results and AXA Asia Pacific Holdings Ltd releases interim results.
Telstra Corp Ltd group managing director of public policy and communications Dr Phil Burgess speaks at an American Chamber of Commerce in Australia lunch.
Campbell Brothers Ltd holds its annual general meeting.
Yesterday, the Australian share market closed weaker today on lower base metal prices and a profit downgrade by Lend Lease Corporation.
While resources and property stocks came under pressure, infrastructure firm Asciano Group soared following a $2.9 billion unsolicited takeover offer by a private equity player and an independent investment fund.
The benchmark S&P/ASX200 index fell 16.3 points, or 0.33 per cent, to 4887.7, while the broader All Ordinaries index lost 20.4 points, or 0.41 per cent, to 4957.6.

NYMEX
Oil prices plunged to a three-month low on Monday, briefly tumbling below $US120 a barrel in another huge sell-off after Tropical Storm Edouard seemed less likely to disrupt oil and natural gas output in the Gulf of Mexico.
Crude’s steep drop - prices fell more than $US5 at one point during the day - dragged down other commodities from corn to copper and mimicked the big nosedives of the past three weeks, adding to growing beliefs that the oil bubble is at least temporarily deflating.
A gallon of regular gasolene fell on average about half a cent overnight to $US3.881 ($US1.02 a litre).
Also weighing on oil prices Monday was a report by the Commerce Department that consumer spending after adjusting for inflation fell in June as shoppers dealt with higher prices for gasoline, food and other items. That fed investors’ expectations that a US economic slowdown is sharply curbing US demand for fossil fuels.
Light, sweet crude for September delivery fell $US3.69, or 2.9 per cent, to settle at $US121.41 a barrel on the New York Mercantile Exchange. It was crude’s lowest settlement price since May 5.
Earlier, prices plummeted to $US119.50, the lowest level since May 6.
Crude has now fallen in six of the last nine sessions and has shaved 18 per cent off its trading record of $US147.27 reached July 11.
In London, Brent crude for September delivery fell $US3.50 to settle at $US120.68 a barrel, after earlier falling to a contract-low of $US118.80.
Natural gas futures also fell sharply, dropping 66.3 cents, or 7.1 per cent, to settle at $US8.726 per 1,000 cubic feet.
Gasoline futures fell 8.41 cents, or 2.7 per cent, to settle at $US3.0002 a gallon.
In other Nymex trading, heating oil futures fell 8.67 cents to settle at $US3.3501 a gallon.

COMEX
Gold fell as a drop in energy costs reduced the appeal of the precious metal as a hedge against inflation. Silver declined, too.
Gold futures for December delivery fell $US9.60, or one per cent, to $US907.90 an ounce on the Comex division of the New York Mercantile Exchange. The metal fell 2.1 per cent last week, the third straight decline.
Silver futures for September delivery declined 38 cents, or 2.2 per cent, to $US17.14 an ounce. Silver has gained 15 per cent this year, while gold advanced 8.3 per cent.
Copper futures for September delivery tumbled 13.85 cents, or 3.9 per cent, to $US3.44 a pound on the Comex. Earlier, the price touched $US3.426, the lowest since Feb 8.

What’s worse: the state of the US banking industry, car industry or jobs market?

At the moment you’d have to say the US financial sector, especially the banks, are doing badly, with an outlook for more bad debts, write-downs and no sign of a pick up in business from any sector for the next year.

The US car industry is looking sick and its outlook is now becoming as clouded as that for the banks as the two sectors business activities mesh: possibly the only bright spot is the continuing fall in US petrol prices to below $US3.90 a US gallon. 

But that’s a thin benefit and could quite easily reverse if the current tension with Iran intensifies this week. (The car industry is looked at in detail below.)

And the US jobs market: Well America must create 115,000 jobs a month merely to keep pace with population growth. So far this year it’s fallen short every month, and even though the July loss of 51,000 jobs was said to be ‘better’. Better than what?

Than the forecast loss of 70,000 jobs for the month. But was it? Well, 76,000 jobs were lost in the private sector and 25,000 created in various levels of government. That’s hardly encouraging

And there was further restatement of May and June job losses, so 26,000 fewer jobs were lost in those months, but that was thin pickings for the optimists.

That’s because, as US analysts point out, the US workforce has grown by 1.4 million people in the past year, but employment has dropped by more than 200,0000.

The ranks of part time people have grown as companies have cut hours and working weeks.

Some economists say there are an extra 1.4 million people doing part time in the US now than there were a year ago. Cuts in the number of hours worked are estimated to be equal to around 300,000 jobs.

The average working week last month fell from 33.7 hours in June to 33.6 hours.

Average hourly earnings rose at annual rate of 3.4%, failing to reverse the gradual decline since last summer and still less than the inflation rate of 5% at the moment. (Don’t worry about core measures; they don’t fully reflect the impact of oil and petrol price movements in some US measures, or the cost of what’s happening in financial markets.)

That working week of an average 33 hours and 36 minutes per week, was six minutes less than in June and matched the shortest workweek since the US Labor Department started collecting these records 44 years ago in 1964

Economists say that when combined with the net loss of 51,000 jobs, the total number of hours worked in July fell 0.4% and indicated the economy is turning lower again as it started the third quarter.

Some economists now say the US economy will grow at less than 1% this quarter.

On that basis the outlook for the US jobs market is gloomy, and that makes for an even gloomier outlook for the embattled US car industry which is starting to resemble the US banking and finance sector as high oil and petrol prices and plunging sales wreak havoc on General Motors, BMW, Nissan and Toyota’s sales, earnings and financial strength.

Sales in July fell more sharply than expected, and car leasing losses are ballooning as a result and hurting the finances of all companies, with BMW especially hurt, along with Ford, GM, Mercedes, Nissan, Toyota and Chrysler.

Overall, US car sales dropped 13% in July from the same month of 2007: they also fell 4% from the already depressed June. According to industry figures, that made July the worst month for the industry in 16 years.(see below)

The problems from the broader economic slowdown and credit crunch are spreading to Europe, with car sales off nearly 8% last month, and off more in the UK.

It was the ninth consecutive month of declining sales in the US market - the first time that has happened since the last recession seven years ago — and the worst monthly performance since April 1992.

GM posted a $US15.5 billion second half loss to go with a multi-billion first half loss; Nissan blamed a 42% plunge in quarterly earnings on a fall in the value of leased vehicles in the US and unfavourable exchange rates. Nissan is trying to cut 12000 workers from its US car making plants to lower costs.

But the big surprise was BMW’s second bout of bad news from the US with it being forced to put away hundreds of millions of dollars more in provisions for losses on car leases and the drop in the second-hand car market.

It has now been forced to provide over $US1 billion in the first six months of the year. It saw earnings drop 58% before interest and tax. So bad was the result that BMW has abandoned its 2008 profit forecast.

It now expects little improvement next year with the company’s CEO, Norbert Reithofer, saying: “We assume that 2009 will be another difficult year full of challenges”.

“Business conditions for the automobile industry deteriorated sharply again in the second quarter due to further ongoing steep rises in oil and raw material prices, the weakness of the US dollar, the impact of the international financial crisis and a weaker US economy,” Mr Reithofer said in a statement.

To try and correct the problem, BMW says it is going to cut production and raise prices, which won’t be wise at a time when buyers in its major markets in Europe and North America are facing slowing economies, rising petrol costs and the possibility of more job losses.

BMW actually had a small rise in US sales in July, as did Mercedes which last week warned of an 11%, 700 million euro drop in gross earnings this financial year (but those sales would have been loss-makers given the weakness of the US dollar and the rising cost of car leases going bad in America).

That will be a message that industry giant, Toyota will detail when it provides its first quarter profit figures this week. It is suffering in the US with car sales down a sharp 12% in July as it continued to suffer for having too few cars consumer want (like the Prius) and too many that they don’t any more (like the Tundra SUV).

All three companies were hurt by a glut of used Sports Utility Vehicles and pick-up trucks in the US and large losses in car leasing: some of the big SUVs (the BMW X5 and X3 for example) have seen their resale values plunge, while the values for some GM, Ford and Chrysler models have collapsed to be virtually worthless.

Questions were asked about Ford’s future when it revealed a $US8.7 billion second quarter loss 10 days or so ago: GM is in a far worse shape and the $US27 billion in liquid funds it had for its automotive business last December has now shrunk to just over $US21 billion. The company has bled about $US1billion.

GM’s second-quarter loss, compared with a $US800m profit a year earlier, includes $US9billion in special items. 

These included the cost of redundancy payments, plant closures and an impairment charge on GM’s 49% stake in GMAC, which had another big loss. Cerberus, the private equity owners of Chrysler, own the other 51% of GMAC and the losses for both continue to raise questions about its viability.

All up GM, Ford, Nissan, Chrysler and BMW have set aside an estimated $US10 billion to cover losses and provisions for the drop in resale values for car leases and the higher depreciation rates now needed.

Car loans and leases are rapidly becoming a big problem outside the car company finance arms with more and more banks being forced to make provisions.

When added to rising provisions for personal debts on credit cards, student loans and other small business finance, the US financial system is facing another shock on top of the plunging value of housing, commercial and real estate loans.

Ratings agency, Standard & Poor’s lowered US car company ratings last week. 

It’s no wonder.

The Big Three US carmakers saw their share of sales in their home market plunge to a record low of 43% in July, well behind the 49% share of Asian brands. All three are basket cases, making their last attempts to restructure and stay alive.

But even the Asian automakers had trouble providing American buyers with the fuel-efficient vehicles they want: most of overseas brands saw sales drop from July 2007.Toyota was especially hurt: even though its overall market share edged higher to 17.4%, its sales fell sharply for the month.

GM’s car and light truck sales plummeted 26% in July with sales of light trucks, which include pickups, SUVs and so-called crossover vehicles, off a whopping 35%. 

Even sales of GM’s more efficient cars fell 1% last month as the company remained on the nose with its core market (GM actually had far more success in Europe, Asia and other markets in the first half with higher sales and earnings).

Ford sales dropped 14.9% in July with pickups and SUVs at its core Ford, Lincoln and Mercury brands down 26% for the month. Ford car sales rose 8%, a rare bright moment for the industry.

Chrysler sales plunged 29% as its Chrysler; Dodge and Jeep brands went unwanted by US buyers.

The sales decline was severe enough that the company, which had long been the nation’s No. 3 automaker until a few years ago, narrowly avoided dropping past Nissan to Number 6.

Nissan’s sales rose, but quarterly profit was off 46%, and sales fell for makers of low-priced cars, such as Mitsubishi and Hyundai.

Toyota showed that it’s not only the truck/SUV heavy US automaker that is struggling. It has a broader range of vehicles, with two hybrids in its fleet, but its sales were down 12% from a year earlier,

The US is Toyota’s biggest single car market, but it’s now struggling and faces rising uncertainty.

July was the 10th month in a row that the car company’s sales have fallen compared to the same month of the previous year. 

Toyota was hit by a 24% drop in SUV sales and a 32% drop in sales of its pickup models.

Even sales of its car models eased (off 0.6%) as it was again hurt by having limited stocks of its fuel-efficient models most in demand.

Honda had a good June with a small sales rise (but a big drop for the CRV): July saw sales of most models fall as it posted an overall decline.

No doubt you’ve already read numerous financial articles that all began with…”In these difficult times.” These days everyone seems to have a different opinion of why the markets are down (including yours truly).

But the fact is this isn’t the first time we’ve experienced severe turmoil in the financial markets, and it won’t be last. But it seems the big industry players in the market never learn from their mistakes. Indeed, time and time again, sooner or later, the pain withers, and the greed factor comes back.

We have lived through investment bubbles and calamities for centuries. In the 1800s, it’s said that even the British royal family got swept into the investment fad at the time. If you want to go back even further, the Dutch traders had their own famous bubble in 1636 when speculators inflated the price of tulip bulbs.

Yes, the speculative bubbles and crashes may differ over time but one thing remains the same: When all is said and done, everyone wishes they had cashed out just before the bubble began in the first place. But as we all know, only a few fortunate investors manage to get out in time.

But imagine how wonderful it would be to not have a care in the world when the market falls another 300 points. Imagine not even bothering to check your account statement because you already know what it will say no matter what. Wouldn’t it be fun to watch CNBC and laugh out loud when you hear the markets just plummeted again? Saying: “Haha - not me! You can’t touch me!”

It’s all possible…with “capital guaranteed investments.”

The Ammunition You Need to Laugh at the Markets

I call them “capital guaranteed investments.” But they’re also known as principal protected notes, or structured bonds.

These investment products allow you to gain all the advantages of investing in the markets, but your investment capital is fully protected in case the market drops. In other words, you guaranteed to get back your original investment - no matter what.

You may be asking: How does that work?

The concept is actually quite simple. As you know, you usually buy a bond at par i.e. US$1000 per bond. However, you can also buy a bond at a discount, say US$950 and then it matures at US$1000. So what happens to that extra US$50? Your broker could use the extra US$50 to buy you options on a particular index, like the S&P 500. That gives you the participation in the stock market.

Most guaranteed capital investments work that way. These investments are structured so you have exactly the same rewards based on any upside movement. So if the S&P or Dow moves up 30% over two years, then you receive 30%. And if the market crashes or goes nowhere, then you still bought your bond at US$950, so it will mature at full face amount and you walk away with your original principal intact.

The only caveat is you don’t make any interest on the bond, because you essentially used your money to buy the stock index.

Super Bonds = Guaranteed Capital + Triple-Digit Gains

Here’s the norm: If your stock or retirement portfolio is up 15%, then it can only take a single stock sell-off to make that 15% disappear. Plus, your actual principal vanishes as well. But a simple structured bond can save you from that calamity.

Most investors think of bonds as long-term investments that have to be locked in. But that’s not true at all. Let me explain.

Let’s say you’re in a 3-year bond linked to the Dow. Eight months have gone by and you’re now up 12%. With a structured bond, you can promptly sell that 3-year bond and roll the 112% (your initial 100% capital plus 12% return) into another structured bond with a full capital guarantee. This way you lock in your 112% gain no matter if the market goes up, down or sideways.

In fact, you can just sit back laugh because you are now buffered and protected with your 112% gain. Then let’s say another six months go by and you’re up another 6%, you can roll that again and now you sitting on a protected 118%! Isn’t this amazing?

Better yet, you can invest in such structured bonds linked to a whole variety of markets, like commodities, or international stocks. Investing in oil, cattle, copper, sugar or Brazilian equities can be arduous and complex enough…but you can do it all with structured bonds.

Question: Which market will outperform all others in the next few years? Will it be the stock market, Commodities, foreign currencies, or bonds?

Answer: “Who cares?”

With a capital guaranteed investment, you can get the upside of whichever market performs the best and deliver you those gains plus your initial capital.

The contrast was telling: there was India’s central bank sending a strong signal that it will not tolerate high inflation by announcing a larger than expected increase in its key lending rate and threatening more measures to come.

And there was US ratings agency; Standard & Poor’s lifting China’s credit rating one notch to A-plus from A, despite all the poor publicity about the Olympics.

They are not directly related, but they do point to the de-coupling going on in the so-called cornerstones of the emerging economies. 

China, for all its problems is still travelling fairly well with growth and exports slowing, but inflation falling; India is gripped by surging inflation and falling growth.

Surging oil prices and subsidies are undermining the Government’s economic record and boosting inflation, in China firm price controls remain in place, but a black market continues and when the games finish, the question is whether the controls will be relaxed.

And if that happens, will inflation return to the upswing, from the present 7.1% annual level?

But Standard & Poor’s said it upgraded China’s debt ratings because of the improved fiscal and external positions in the world’s fastest-growing major economy.

The long-term sovereign credit rating was raised to A+, the fifth highest on its scale, from A, and the outlook is stable. The short-term rating was increased to A- 1+, the highest notch, from A-1.

That means China has the same short term rating as the heavily indebted US economy.

“The ratings upgrade is motivated by China’s improving fiscal and external position,” Standard & Poor’s said in a statement.

China’s economy grew 10.1% in the second quarter from a year earlier, but that was the fourth straight quarter of slowing growth as exports slowed.Growth ran at 11.9% last year

But in India a very different story, for all the positive news about growth and business opportunities.

The Reserve Bank of India’s increase in the benchmark “repo” rate by 0.50% to a seven-year high of 9% represents the third time in two months that the bank has raised interest rates to try and bring inflation under control.

Inflation is at a 13-year high of nearly 12%, much higher than China, or its other emerging economy rival, Brazil.

The RBI also increased the cash reserve ratio by 0.25% to 9%. 

That’s the amount of funds banks must keep on deposit at the central bank and is the same mechanism China’s central bank is using to try and slow activity. China’s rate is around 17.5%.

The Reserve Bank of India cut its forecast for economic growth this financial year by 0.50% to 8%.

Rising oil and food prices have given India a big headache with inflation that is nearly triple its levels at the beginning of the year and more than double the RBI’s target of under 5.5%.

A national election has to be held before May next year and the government has been under pressure from bans on exports of essential food items and raw materials and cancelled futures trading of important commodities to try to rein in prices. 

These moves have been done to try and hit inflation, but they seem to have backfired, as inflation has risen regardless of these attempted control measures.

RBI governor Yaga Venugopal Reddy said in the statement that it was critical to demonstrate “a determination to act decisively” against inflation.

But he said he was confident India could still sustain a relatively high rate of growth of 8%, which doesn’t seem to be possible, given what’s happening in the wider economy.

The Governor has lowered his forecast by one percentage point to 7.2% for the year ending March 2010 and the central bank conceded that it had lost ground in its battle against inflation, saying while it would prefer to see it at 5%, while a more realistic target for the end of the March 2009 financial year would be 7%.

The RBI has been raising borrowing rates since 2004 to try and control cost pressures.

India’s inflation rate is 11.91% as higher prices of gasoline and diesel fed into the economy.

The central government will pay around $US43 billion in oil subsidies, even though it has allowed prices to rise by a small amount.

Standard & Poor’s said this month that India’s BBB- credit rating, the lowest investment grade, may be cut to junk if the faster inflation and higher government spending ahead of the election increases the budget deficit.

The Indian government has waived $US17 billion of farm debt and kept those oil subsidies.

There’s a long way from India’s rating and China’s which now reflects that it is approaching advanced country status.