NEW YORK - Even the optimists are showing some caution.
The Dow Jones industrial average tacked on a modest 32 points on Thursday after being up as much as 139 points earlier.
The Dow rose 31.9, or 0.37 per cent, to 8,770.92. The S&P 500 rose 5.74, or 0.61 per cent, to 944.89, while the Nasdaq Composite index rose 9.29, or 0.5 per cent, to 1,862.37.
Investors welcomed a drop in jobless claims, growth in retail sales and better-than-expected demand at a government debt auction. But traders also seemed mindful of how far the market has come in its three-month rally.
The stock market has at times run low on fresh evidence of economic recovery that could push the rally further. Data released on Thursday helped but weren’t enough to keep the pace of buying strong.
Stocks rose to their highest levels in afternoon trading when the Treasury Department said an auction for 30-year Treasury bonds attracted strong demand.
That allowed investors to set aside some of their recent worries about higher interest rates.

LONDON - European stock exchanges sprinted ahead, powered by reports of rising retail sales and lower jobless claims in the US.
The FTSE 100 index added 25.12 points, or 0.57 per cent, to close at 4,461.87.

FRANKFURT - Germany’s DAX gained 56.08 points, or 1.11 per cent, to 5,107.26.

PARIS - The CAC 40 index rose 19.67 points, or 0.59 per cent, to 3,334.94.

TOKYO - Japanese share prices briefly topped the 10,000 level for the first time in eight months before closing down 0.1 per cent at 9,981.33 on profit-taking.
The benchmark Nikkei-225 index shed 10.16 points after touching a high of 10,022.23 in morning trade, its highest level since October 8.

HONG KONG - Hong Kong share prices were flat, as gains in Chinese financial firms offset strong profit-taking pressure on Hong Kong property developers, dealers said.
The benchmark Hang Seng Index closed up 5.37 points, or 0.03 per cent, at 18,791.03.

WELLINGTON - The sharemarket slipped as the NZ dollar rose, reducing exporters’ earnings, and wholesale interest rates rose, reducing the attraction of investing in equities.
The benchmark NZSX-50 index closed down 31.43 points, or 1.11 per cent, at 2796.54.

SYDNEY - The Australian share market is expected to open higher after US stocks and commodity prices, including gold, copper and oil, gained overnight.
At 0719 AEST on the Sydney Futures Exchange, the June share price index contract was seven points higher at 4,061.
In news on Friday, the Australian Office of Financial Management will tender $700 million of June 2011 Commonwealth bonds.
Australian Agricultural Company Ltd holds its annual general meeting.
On Thursday, the Australian share market closed at a fresh seven-month high as resource stocks continued their strong gains amid renewed attention to Rio Tinto and BHP’s proposed iron ore tie up.
A smaller than expected drop in jobless numbers also improved investor sentiment.
The benchmark S&P/ASX200 index closed up 22.8 points, or 0.57 per cent, to 4047.2, while the broader All Ordinaries index added 30.4 points, or 0.76 per cent, to 4046.7.
It was the strongest close for both indices since November 10.

NYMEX

Oil prices hit an eight-month high as the dollar fell and a series of reports suggested that consumers and business may be more willing and able to spend money on energy.
Benchmark crude for July delivery rose $US1.35 to settle at $US72.68 on the New York Mercantile Exchange. Prices hit $US73.23 at one point.
In London, Brent prices added 99 cents to settle at $US71.79 a barrel on the ICE Futures exchange.
Crude prices rose sharply in the morning after the federal government announced a drop in first-time jobless claims last week. Another report said retail sales grew in May for the first time in three months, in part because of spiking gasoline prices.
Prices at the pump began to rise quickly in May and have not stopped, hitting levels not seen since October on Thursday.
In the summer of 2008, crude prices neared $US150 per barrel before prices crashed. Crude traded below $US33 per barrel before the year was over.
In other Nymex trading, gasoline for July delivery rose 4.96 cents to settle at $US2.0649 a gallon, and heating oil added 2.08 cents to settle at $US1.8534 a gallon. Natural gas for July delivery rose 22.5 cents to settle at $US3.933 per 1,000 cubic feet.

COMEX

Most commodities, including gold, finished higher as weakness in the dollar sent investors in search of a shelter from inflation.
The dollar fell further against the euro and the British pound amid more evidence that the economy’s slide is abating. This sent investors in search of assets with the potential for bigger returns, like stocks and commodities.
Investors pushed prices for stocks, gold, and other metals higher after the government said initial jobless claims fell last week. Another report said retail sales grew in May for the first time in three months.
Gold for August delivery added $US7.30 to settle at $US962 an ounce on the New York Mercantile Exchange.
Among other metals, July silver jumped 26.8 cents to $US15.493 an ounce, while July copper futures rose 7.8 cents to $US2.445 a pound.
Platinum was flat, while palladium fell. Aluminum prices finished higher.

Investors Behaving Bad

There is a long list of academic theories and models that attempt to explain and understand the economy and markets. While none are perfectly infallible, many nevertheless have their merits and provide important practical lessons.

One of the most exciting and fastest growing areas of research is in the field of Behavioral Finance, which seeks to understand how we approach investing by applying the lessons of psychology. While most other economic schools of thought assume that investors are rational, sensible and well informed, behavioral finance acknowledges that we are emotional beings who often exhibit impulsive, irrational and sometimes self destructive tendencies.

While a thorough and detailed review of the field is not possible in this forum, I would nonetheless like to outline some of the major findings from this area of research. Hopefully this will allow us to better understand our motivations and allow us to avoid making poor investment decisions. (For those who are interested in a more detailed review, I highly recommend the book “Behavioral Investing: A practitioners guide to behavioral finance” by James Montier).

Below are some of the more common biases we tend to exhibit as investors.

1. Short term focus

Humans are highly focused on the short term, and will most often choose immediate satisfaction over long term gratification, even if the latter is objectively a more rewarding proposition. This means that we often opt to lock in small profits today rather than allowing our investments time to grow into something more substantial. Furthermore, it means we are easily scared off by short term losses even if there has been no fundamental cause for alarm.

2. Herd mentality

   We are all hard wired to go with the flow. None of us like to act in opposition to the general consensus, and find it much easier to behave in a way that is consistent with our peers. This means that we are easily carried away by irrational exuberance and overly sensitive to crippling pessimism. Although it has been repeatedly demonstrated that the best time to invest is during periods of great pessimism and the best time to sell is during periods of unbridled optimism, the vast majority of us do the exact opposite.

3. Overconfidence

   It is easy to demonstrate that most novice investors tend to fare very poorly, but this fact does little to discourage people from diving head first into the markets with little understanding or planning. We all tend to see ourselves as “above average” and assume that we will be smart enough to avoid the stupid mistakes made by others. Furthermore, when investments go our way we chalk that up to our amazing skill and insight. When the market moves against us, it is simply bad luck. This means we often fail to recognize mistakes as mistakes, and are doomed to repeat our past errors. The lesson here is to remain as realistic as possible, and don’t fool yourself into thinking that you have special abilities above that of the ordinary person.

4. Heads in the sand

   We all love to hear things that agree with our own opinions and reinforce our beliefs. More importantly we loathe anything that disagrees with our outlook and tend to dismiss it as unimportant, or often simply wrong. The truth is that we do ourselves a serious disservice by ignoring information purely on the basis that it disagrees with our own view. Investors who limit themselves in this way are destined to fail at evaluating events in an objective and considered fashion.

5. A focus on the irrelevant

   Our brains have evolved to identify patterns, and indeed this has provided us with an important survival mechanism. Unfortunately though, we are often prone to see patterns where none exist and in contradiction to what a more thorough and balanced analysis would tell us. Many people base their investment decisions on price alone, while others look to the heavens and use astrology as the basis for their decisions. Because unrelated phenomenon will inevitably align from time to time, we will most often view this as validation, and in conjunction with the previous point, will fail to consider anything that questions the assertion. Investors would do well to ignore any investment style or technique that is not strongly supported by evidence.

6. I know best

   Many experiments have shown that we tend to give more weight to our own experiences than we do to the experience of others, or even rigorous statistical evidence. The classic example is with someone who has smoked all their life and never gotten sick, or who has a parent who smoked 10 packets a day and lived to be 100. Despite the fact that the dangers of smoking are well established, they will disregard the facts because it doesn’t match their own experience. Similarly, if someone has lost money in the market then they believe that share market investing is a dangerous and reckless exercise. On the other hand, those that have done well recently will mistakenly believe that it is easy and relatively straightforward to make good money trading shares. The truth of course lies somewhere in between these two extremes, but few people are accepting of evidence that does not agree with their own experience.

7. The endowment effect

   It seems that ownership tends to drastically distort our perception of value. That is, we tend to attribute a greater than reasonable value to something purely on the basis that it is ours. This gets us into trouble when we own shares that are performing poorly. We tend to assume that the market has made a mistake, not us, and that the price will ultimately recover. Sometimes this will even cause us to buy more stock in the hope of “averaging down” our losses. Smart investors do not become emotionally attached to their shares.

We cannot change the fact that we are emotional beings, and nor would we want to. The point is that investment decisions should be driven primarily by reason and objectivity. That is, although it may be easier said than done, you should invest with your head, not your heart. The best way to do this is to establish a very clear strategy prior to entering the market. Map out in advance what it is you are looking to achieve and have a clear plan of action to respond to all likely scenarios. This way you will never be taken by surprise, and will be less likely to act irrationally and emotionally.

Make the markets work for you

Obey the Stop Signs

Trading without a stop loss is like rock climbing without a safety harness. One small lapse in judgement could spell catastrophe,

• Imagine what it would feel like to not worry about money.
• Imagine unlocking the techniques used by the world’s best professional traders, every day of their lives.
• Imagine knowing you’ve got a safety net so you never again feel fear while trading.

Well, if that’s what you’re aiming for, you’d better pay close attention to what I’m about to tell you.

The Solution

The simple truth is that without a clear idea regarding how to set a stop loss, you are sacrificing your future.

A stop loss tells you when to jump ship, and get out of your trade. I’m sure you know this - but have you really applied it? To join the elite inner circle of outrageously successful traders, your first aim must be capital preservation…

And this can only be achieved by setting a stop.

Yes, that’s right. If you aim to rake in the dollars, and this is your number one priority, money will cheekily skip away from you and jump into someone else’s pocket. Making money is a by-product of following your trading plan. Your plan must cover your entry rules, your exit rules and your position sizing methodology. Each of these three areas is essential to your success.

There are traders out there right now, making huge profits, while others around them are getting squashed. The difference between these two vastly different groups of people is the way they approach trading, and the methods that they use.

From the emails I’m getting over the past few weeks, many traders are struggling to find the best stop loss method to suit the current market conditions. Some haven’t even realised the importance of setting a stop loss, until they got run over by the rampaging bears. So, let’s start here and cover some of the basics.

Loss Control

Suppose you have $5000 to trade with, and you lose 50% of this amount. How much money in percentage terms do you have to make to breakeven on your next trade? If you automatically said 50%, this is incorrect. You need to make 100% on your remaining $2500, to make up the lost $2500, and break-even! Things are never as intuitive as they first appear. This table emphasizes the importance of keeping your losses small so that you can recover and continue to trade.

If you lose 25% of your account, you must make 33.3% profit on the remaining equity, simply to break-even. Keep your total equity drawdown to less than 20% and you have a chance of surviving in the sharemarket. Trading is not about avoiding risk - it is about managing risk.

Types of Stops

An initial stop is designed to protect your capital. Even successful traders find that they only make winning trades around 50% of the time. As long as the dollars gained outweigh the dollars lost, then you will be profitable, even if your hit-rate is quite low.

A breakeven stop will help lock in a no-loss trade. This type of stop is implemented once a trade has begun to co-operate and there is now little threat of your initial stop being hit. At least when you have moved your stop to breakeven, there is a chance that you will end up with a profitable trade. Especially with the application of leverage, it is important to move your stop to breakeven as soon as reasonably possible. This will minimise the potential drawdown of your account.

Trailing stops are designed to protect your profit. Once the trade has trended strongly in the expected direction, you can follow the trend by moving your stop. You could also decide to extract money from the position if the option hits your profit target. I only use profit targets for option and warrant trades, not for share trades. Profit targets tend to cap available profits. Learn to protect your profits as well as protecting your initial capital and you will be well on the way to trading effectively.

You may also need to consider a time stop if the instrument doesn’t co-operate in your allotted time frame. Try not to be too trigger happy when exiting based on a time stop for a share. The markets distribute money from the impatient to the patient. Give your trade a chance to co-operate before exiting.

Be aware that if the market is dropping like a stone, it may gap past your stop loss level. If that happens to you, just exit anyway, even if your loss was greater than initially anticipated.

I’ve been exactly where you are now - filled with hope and determination, but unsure about the best way to become an exceptional trader. I can tell you one thing - until I committed to my own trading education, I was stuck. I just couldn’t generate the trading results I felt I deserved. However, with the right techniques, you can break free.

The US Dollar Index (USDX) has been correcting since the beginning of March. The bullish trend started at mid-December failed to break above and even reach the previous high posted at 90.71 in November 2008 (point B on the chart).

There are currently several contrarian signals that are likely to drive the price action sideways and to increase the volatility.
The Momentum tools argue for a continuation of the current decline. This decline has started from the peak of March 4, at 90.24. A sharp reversal move has been driving back the Dollar Index to the current levels of 84.33, which is 6.5% lower. Both the MACD and the technical momentum indicator are bearish.

The points B and D also build a double top (highs at 90.71 and 90.24). It’s a technical pattern that generates pull back moves. However the recent plunge drove the Relative Strength Index (RSI) into oversold area. This oscillator just jumped back above the trigger line, which is a bullish signal on the short-term. Last time this pattern occurred, it was in last December (point C, first blue ellipse). At this time the Index was similarly oversold and strongly rebounded during the following weeks. Another indicator argues for a coming bounce: the Bollinger Bands. First, they have widened in March, which confirms that the volatility mentioned above has increased significantly. Second, one of the main interpretations of this indicator is when bottoms/tops made outside the bands are followed by bottoms/tops made inside the bands, then it’s a signal for reversals in the trend.

This is exactly what happened here. And a move that originates at one band tends to go all the way to the other band. The moving average in the middle often also acts as an intermediary support/resistance level. This observation is useful when projecting price targets.

That’s why a short-term rebound is expected now. Profit-taking from the Dollar sellers could drive the Index back towards 87. Then the bears are likely to generate a new downward wave. In this scenario the price action would probably test the low of December (point C) that also corresponds to the 61.8% Fibonacci retracement ratio of the bullish trend occurred between July and December 2008 (between points A and B).

Relations, Impact & Relevance
Those are the three other parts of your perfect media feeding frenzy.

The first, relations, is your relationship with the local media. Local newspapers…TV stations and radio stations…how is your relationship with them? Non-existent? Offer some of your goods & services to get the ball rolling.

Perhaps even make a trade for some advertising space (if you’re not buying already). Any angle you take, you’re best off if you’re on a first-name basis with at least someone at all of your local media outlets. You want to make sure that your charitable deeds get covered, and you don’t want to fight to make that happen. So be on good terms with the local media.

The second and third parts, Impact and Relevance, are intertwined but still different things. Your relevance is going to be determined by what’s going on in the news. What are people reading about today, right now?

Can you spin the AIG bonus fiasco to work for your masseuse parlor? Make sure you think long and hard about this one…make sure it’s a good fit. Because the fit between the news and your small business is going to determine your…

Impact. When all’s said and done, impact is what matters. Impact is the reason I still remember Willie Gary’s free gas giveaway. Hundreds of PR stunts go unwatched all across America every day just because people miss the impact.

Four-dollar gas was extremely relevant last summer. It affected the lives of almost everyone in South Florida. And Willie Gary – an attorney who’s become wealthy representing the people – was paying it forward and giving gas away for free.

Think about it; that meant plenty of people got to put their money back in their pocket and drive for free for a week. It meant a few families wouldn’t have to skip meals during the week to keep gas in the tank.

And it’s not just impact for the people he helps, but the people who see it or hear about it. I never collected a dime of free gas, but if I met Willie Gary today I’d be obliged to shake his hand and offer thanks for the kind things he’s done.

If you give a free cheeseburger to a millionaire who lost some money in the stock market, don’t expect much love from the media. But if you give a free pizza to every family whose head-of-household was laid off when the steel mill closed, you’re going to see much more impact.

Those are the four components you need to start a media feeding frenzy that could build your business’ name in the community and stretch your advertising dollars beyond comprehension.

But I’d be remiss if I didn’t give you a little extra…so here’s the cherry on top;

The Worst Way to Buy a Share of China’s Rebound

Regular readers of the China Stock Digest are well aware that China and the United States are headed in exactly the opposite direction. While the U.S. economy shrinks dramatically, China’s economy continues to expand. That makes China an obvious place to invest, but how?

The trend among many investors has been to pick an Exchange Traded Fund, better known as an ETF. According to ETF fans, that’s the best way to buy a position in any given sector without having to become a stock picker. The alternative is to buy a mutual fund, but most mutual funds charge high fees and often produce subpar returns.

ETF investing sounds good in theory but it’s exactly the wrong way to invest in China. Let’s take a look at the most popular China ETF, the iShares FTSE/Xinhua China 25 Index (FXI). The FXI Index is supposed to represent the performance of the largest companies in China. FXI consists of 25 of the largest and most liquid Chinese companies. Stocks in the FXI are weighted based on the total market value of their shares, so that securities with higher total market values have a higher representation in the Index. Sounds impressive, doesn’t it?

Well, not so fast. You would think that buying a basket of China’s largest companies should give you some protection against the wild swings of small cap stocks, wouldn’t you? No so. The FXI Index lost approximately 50% of its value last year even though China’s economy was expanding at a rate of almost 10%. How is that possible?

Let’s take a closer look at what goes into the FXI index. The biggest companies in China belong to a class familiar to China Stock Digest readers. They’re called State Owned Enterprises or SOEs. The problem with any State Owned Enterprise is that it may be a publicly-traded stock, but it is majority-owned by the government of China. In some cases, state ownership may exceed 85%. It’s not hard to guess whether politics or shareholder interests take priority when times get tough.

Consider the problem of one FXI component: China Petroleum & Chemical, better known as Sinopec (SNP). Sinopec is the largest petrochemical refiner in China with real equity valued at $300 billion.

But Sinopec shares lost well in excess of 50% of their value over the past year and the company is selling far below book value with a market cap of only $47 billion. The problem goes back to Sinopec’s state ownership and control. When international oil prices spiked last June, Sinopec was slapped with a nationwide price freeze on many of its refined fuel products. Profits were off 50% for the year even though fuel consumption was increasing. During the worst months of the oil price boom, Sinopec was actually subsidizing consumers and losing money on every gallon of gas it sold.

Another FXI component, Huaneng Power (HNP), one of the largest electricity producers in China, is also hemorrhaging money. Huaneng faces strict ceilings on its electricity prices because the government wishes to pacify hundreds of millions of consumers. Unfortunately, coal prices have skyrocketed and Huaneng has no choice but to pay the bill. The company has just reported that it will show a huge loss for 2008 even though it continues to build new, money-losing coal-fired generating stations. Share prices have undergone double-digit declines.

Another SOE, China Life Insurance (LFC) suffered a decline in share prices of more than 35% over the past year.  The company says its profits for 2008 may fall more than 50% because of a significant drop in its returns from its equity investments. Company watchers know that China Life was mandated by the government to invest heavily in the stock market in hopes of stabilizing wild speculation on the Shanghai Stock Market. In other words, China Life took a hit partly in service of Beijing’s mandarins.

Many China-focused mutual funds suffer from the same problem. They tend to invest in the large cap SOEs. Mutual funds and index funds usually stay fully invested even when the entire market takes a downturn. The China Stock Digest advises subscribers to get out of the market entirely when a bearish trend threatens to take all stocks down.

We’ll have more on the right way to invest in China and the outlook for SOEs in 2009 in the upcoming issue of the China Stock Digest. February’s Issue of China Stock Digest had the latest Stocks to buy and an extensive watch list of China stocks that are ready to bring big profits in 2009. To learn more about the profits to be made in China, please visit the link to subscribe: http://www.chinastockdigest.com/Page.php?Category=risk-free-subscription

P.S. Don’t Miss This Live Event with China Stock Guru - Jim Trippon
I will be speaking at the Orlando MoneyShow Feb. 5th & 6th at the Gaylord Palms Resort Orlando, FL. For a complete list of my schedule speaking time and to register for this special live event visit: Orlando MoneyShow

Committed to your PROFITS from China,

Jim Trippon,

Editor in Chief
China Stock Digest

These past few weeks have been marked by a raft of capital raisings and dividend cut backs as companies struggle to lower their debt burden and shore up their balance sheets. The massive rush by so many companies to follow this path reveals the concern they must have over slowing growth, difficult funding and the uncertainty over how long these tough conditions will persist.

In almost every case, the capital has been raised through heavily discounted share placements which have led to massive drops in share price. Qantas is a case in point with shares dropping by 18% the day after the capital raising was completed.

What’s interesting to note though is that all placements have been extremely popular and in most cases have been oversubscribed. This demonstrates that the institutions understand that raising additional capital is the prudent thing to do, even though it will mean a bit of pain in the near term. Moreover, they understand that when the good times return, these companies will be better placed to recover and that, from a longer term perspective, it would be a mistake to miss out on these current opportunities. In addition, if the instos are currently already a shareholder, failing to participate in the share placement would mean a dilution of their existing holdings.

They also know that even with the scaling back of dividend payments, participating in discounted share placements exposes them to exceptional yields. On average, those that participated in the recent raft of placements have locked in yields of approximately 11% in the first year! And that’s AFTER accounting for the drop in dividends per share.

I think there is something long term investors can learn from the institutions. As long as the business remains viable with reasonable long term prospects, these hefty share price drops should be seen as a gift from heaven. And I would argue that most of these stocks, such as Wesfarmers, Westfield, Qantas, and Lend Lease will be around long after you and I.

Consider the case with Qantas. It cut its interim dividend by 2/3rds, and if we assume they do the same for the final dividend that’s an annual payment of 12 cents per share. Given that the price dropped to $1.87 after the capital raising, that presented investors with an opportunity to receive a 6.5% yield – fully franked.

But what about investors who had the misfortune of getting in prior to the big drops? If you purchased Qantas shares 6 months prior to the cut in dividends you would still be on a yield of around 3.5%, which is pretty much just under the long term average for the market. Besides, all this just demonstrates the need to make regular investments into the market. Not so much for the purposes of dollar cost averaging (although that has real benefits in a falling market) but more so because at any given point we only have so much we can afford to invest. If we invest as we save we act to continually build our holdings and build our wealth consistently. Think of it as a form of saving that has exciting growth and income potential.

Let me make the point that I’m not trying to sugar coat the current situation. Of course it would be better if companies weren’t forced to lower the dividends and didn’t need to raise any cash. But the fact is that we can make the best of a bad situation and turn adversity into advantage. As long as these companies weather the storm and go on to greater prosperity, as most of these big blue chips most surely will, then the best strategy is to stay resolute and continue to build our portfolios. There’s no doubt it will be a scary ride, and the light at the end of the tunnel could be some distance off, but in years to come you will be glad you did.

Bloated State & Local Governments…

In the period between 1960 and 2000, the Federal Government went from two million total employees to three million. This difference didn’t even track the total growth in population over that period. But in that same period, state and municipal governments went from six million total employees all the way up to 20 million.

And since then, the situation hasn’t really improved. When the “War on Terror” terrified us into giving up a greater portion of our personal liberties for the promise of “security,” these payrolls ballooned again.

Think about it in practical terms; when was the last time you went to the DMV or the county courthouse? There were at least a handful of TSA-style security guards to frisk and scan you…since everyone’s a terrorist until proven innocent these days…who do you suppose pays their bills?

Why you do! And you also pay for another 20 million more state & local employees who rely on over US$74 billion in your annual taxes to keep a roof over their heads. But you have to remember; these outfits aren’t run with the trademark efficiency of business titans like IBM or Microsoft.

Instead - as you can see from the chart at the right - they constantly waffle back and forth from periods of excess savings to periods of excess debt (note that the Census data for this chart ended in 2007…when our crisis was just beginning and state & local governments held a collective savings rate of -10%!)

Sovereign Society Investment Director Eric Roseman chimes in, “The growing funding concerns facing municipalities has already spread to several states, including California, which requires cash to finance a massive budget gap in 2009. California, with a long string of budget deficits has declared a State of Emergency in December as the state runs out of cash. California is the largest issuer of muni debt.”

“What’s truly alarming about December’s scrapped Port Authority offering was the short duration of the fixed-income term of only three years. Investors would typically embrace a short-term note that pays a tax-free yield. But these are not normal times.”

“The rating agencies have also confused investors since the market has lost confidence in their ability to accurately rate and rank credit offerings.”

“As the U.S. economic recession deepens into 2009 it would be advisable to avoid tax-exempt municipal bonds, despite their attractive yields. The risk is too high. You’ve got to believe that many more cities, towns and states will suffer from a credit squeeze coupled by a lack of buyers as revenues continue to decline in a deteriorating economy. Avoid muni bonds.”

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.