The coming week will see financial markets continue to focus on the turmoil in the US financial system and the $US700 billion bailout plan, which seems to have been sorted out.

The US Government wants it available for approval before Asian trading opens today, but the opposition from the newly pure Republicans was a sticking point yesterday, even as the President and Senator McCain tried to push for a solution.

It’s likely to go to the vote tonight, our time.

But as we saw above, the real story remains the weakening state of the US economy, especially housing. 

There was enough information on the poor state of new and existing home sales last week to conclude that nothing has happened to alter the view that the US housing sector is still sinking and with it the economy as a whole.

US Government plans to alleviate that, the banking problems and the overall econom, are falling into the cracks caused by the current US election cycle.

If nothing is done in the next day or so, it’s very likely that markets will sort it out for everyone and everyone will lose and lose badly.

The employment data is likely to show a sharp slump in employment in September and rise in unemployment made worse by the recent hurricanes.

The Standard & Poor’s Case/Schiller home price index will show more downward pressure in July.

It’s due on Tuesday, along with a September survey of manufacturing activity in the US Midwest states and another reading on consumer confidence. A survey of US services sector is due on Friday.

The European Central Bank meets on Thursday and is expected to keep its lending rate at a seven-year high of 4.25% to fight inflation even as economic growth in the region contracts. 

Germany, France and Italy slipped into negative growth in the second quarter, dragging the zone down, and late last week Ireland fell into a full blown, two successive quarter-recession.

But no rate cut is expected because of a hardline against inflation from the executive and from Germany.

The struggle to keep the Belgium-Dutch financial group, Fortis, alive could influence the ECB if the company’s situation worsens. 

In Japan the Tankan survey of industrial sentiment and expectations will be released on Wednesday.

It will show how confidence among major Japanese companies has softened in the past quarter, with cuts suggested in spending, sales and exports, which slipped sharply in August, according to figures out late last week

The Japanese economy is slowing and contracted in the second quarter, and looks like it is again shrinking this quarter. 

The slump in exports, especially to the US and the impact of still high oil prices (compared to a year ago), is having a negative impact. Consumer inflation is running at a still high annual rate for Japan of 2.4%.

In Australia, data for retail sales, private sector credit, building approvals and the trade balance will be released.

The retail trade survey has been made less reliable after that $20 million funding chop led to a cutback in the size of the sample used to create the survey. 

Nevertheless, August retail trade data is likely to fall after the sharp rise reported in July.

But we will get a further sense of the state of the domestic economy, while the monthly private credit figures from the RBA will reveal if there’s been any further slowing in lending for housing and business, which has been a feature for most of the year.

The impacts of the slump in commodity prices and the value of the Australian dollar will show up in the Reserve Bank’s monthly release of its commodity price index tomorrow.

.

Inflation Story that Nobody Is Telling You

The vast majority of consumers see “inflation” as what we’re paying for groceries, gas, a Starbucks coffee, and electricity.

Yes, it’s true that rising prices for these necessities has been the poster child for inflation lately. But there’s much more to inflation than just forking over more at the gas station or coffeehouse.

When it comes to Europe, wage push inflation plays a crucial role.

Producers Pass the Inflation Buck

the Consumer

Producer prices are simply the costs required to produce goods and services. Naturally, when producers have to pay higher costs to produce goods, they’ll demand higher prices for the goods they’re selling. In other words, they pass their higher costs to you, the buyer.

Rising commodity prices tend to be a big reason why producers’ costs rise. More money spent in production means smaller profit margins at current prices. If a producer wants to make up for shrinking profit margins but can’t control his input costs, then he must pass on these costs in the form of higher prices. Excess money creation is what drives this type of inflation, affording higher prices.

No doubt, this is exactly why rising energy costs have been such a huge driver of the inflationary environment we’ve trudged through over the last several months.

The debate is heating up among whether this global inflationary period is coming to an end. I tend to believe it is. But, more importantly, economic growth and available credit across the globe is rolling over at the same time surging commodities have left inflation concerns on everyone’s mind.

For this reason central bank policy makers are struggling.

The cost of energy has buoyed the cost for producers, consumers, and everyone in between. But what happens when this pressure eases for a considerable stretch of time?

Inflation Is a Little Bit Different on the Other Side of the Pond

They don’t serve ice cubes in their drinks. They can drive on the left-hand side of the road. And inflation is also a little bit different in Europe. Despite this fact, inflation analysis in these respective regions often focuses on generalities and overlooks one particular difference. Let me explain…

Let’s focus only on two countries and two central banks: The Federal Reserve and the European Central Bank. If you haven’t been hiding under a rock for the last year, then you probably have some kind of idea how their respective policies vary.

The Federal Reserve has knocked off more than 3% from its benchmark interest rate in the last year. In that same time, the European Central Bank has mostly stood its ground, mixing in one rate hike of 25 basis points that brought its benchmark up to 4.25%.

And if you’ve been following my currency articles lately, you also probably know that this monetary policy discrepancy has been a boon to the euro, and a detriment to the buck. For many months, even years now, the relative performance of each currency has been primarily based upon expectations for this rate differential to change.

As you might imagine, inflation expectations play an enormous role in monetary policy expectations. Even though inflation has received plenty of attention over the last several months, many analysts have neglected an important difference between European inflation and U.S. inflation.

Now’s the time to pay closer attention.

What All the Analysts Have Missed Over the Last Few Months

In the last few weeks, commodity prices (particularly crude oil) have cracked. With that abrupt downturn also came a reprieve in inflation expectations. And that’s got many accepting the potential for a lasting shift towards even lower prices and less inflation pressure.

With that in mind, the dollar has managed to rally on two simple facts:

1. The U.S. Federal Reserve has already lopped off a considerable portion of its benchmark interest rate. So they’re now ahead of the rate-cut curve, which has helped maintain some growth in the U.S. relative to Europe.

2. The European Central Bank will be forced to bailout their deteriorating economy by cutting their benchmark interest rate.

Up until this point, the European Central Bank had a good reason to keep fighting inflation. But with commodity prices easing up, now may be the time for ECB policy makers to take action. Here’s why they’ve struggled…

Why Hasn’t the ECB Joined the Worldwide Rate Cutting Party Yet?

With many threats to global growth and concerns over several Eurozone member countries, many have been surprised the ECB has gone so long without letting up on the interest rate front. After all…

• The Federal Reserve has made several moves to lower rates
• The Bank of Canada has followed suit
• The Bank of England has gotten the ball rolling
• So has the Reserve Bank of New Zealand
• The Reserve Bank of Australia is likely next

If you’re wondering why the ECB hasn’t budged, look no further than labor unions. Simply put: Wage contracts put in place via labor unions have employees’ wages moving higher in lock-step with inflation.

There’s really no thought to profitability (the point when workers typically consider demanding higher wages). In other words, rising headline inflation fuels this wage-spiral. And this wage-spiral spurs greater headline inflation. And it continues on like this. That’s something Ben Bernanke hasn’t had to deal with.

You see, the Fed has been able to react to weakening growth by cutting interest rates. The plan: As growth moderates, or rolls over, inflation is likely to follow. But that assumption is more difficult to make when you’ve got rising wages keeping prices unnaturally high. The ECB hasn’t yet been able to make that assumption. Its interest rates remain high.
But here’s what you should expect…

When the ECB finally decides to cut rates, they will do so substantially and they will do so quickly. It will be their way of reloading. Because we know, with the labor unions continually eroding profit margins and forcing prices higher, the ECB will need some fire power for their next inflation shoot-out.

If they cut back rates now, they’ll be able to hike rates and combat inflation when the time comes again. All you need to do is be prepared to act accordingly.

NEW YORK - Wall Street ended mixed on Thursday after investors largely shrugged off a jump in oil prices and focused instead on a bullish analyst call on Lehman Brothers Holdings Inc that eased worries about the financial sector.
The Dow Jones industrial average rose 12.78, or 0.11 per cent, to 11,430.21.
The Standard & Poor’s 500 index rose 3.18, or 0.25 per cent, to 1,277.72, and the Nasdaq composite index fell 8.70, or 0.36 per cent, to 2,380.38.

LONDON - European stock markets closed lower on Thursday as higher oil prices back above $US120 added to gloom over the economic outlook and the health of the banks.
The FTSE 100 index held up better than its peers to show a loss of just 1.6 points or, 0.03 per cent, to 5,370.20 points.

FRANKFURT - The DAX was down 80.84 points, or 1.28 per cent at 6,236.96 points.

PARIS - The CAC 40 fell 61.26 points, or 1.40 per cent, to 4,304.61 points.

TOKYO - The Tokyo Stock Exchange’s benchmark Nikkei-225 index lost 99.48 points to end at 12,752.21.

HONG KONG - Hong Kong shares closed 2.58 per cent down on Thursday, taking the benchmark index to a 15-month low, after Beijing failed to confirm reports of new measures to stimulate the economy.
The benchmark Hang Seng Index fell 539.20 points to 20,392.06.

WELLINGTON - The New Zealand sharemarket nudged into positive territory on Thursday to outperform weak Asian markets as the annual reporting season wound up.
The benchmark NZSX-50 index closed up 0.04 points at 3332.06.

SYDNEY - The Australian stock market is expected to open flat today after a mixed lead from the US, although the futures index in Sydney was higher.
At 0745 AEST, the Sydney Futures Exchange’s September share price index futures contract was up 31 points at 4,875.
Annual results are due from Goodman Group, Worldwide Exploration, Insurance Australia Group, Transfield Services Infrastructure Fund and Billabong International.
Interim results are due from Caltex Australia Ltd.
The market awaits a statement from ABC Learning, which yesterday requested a trading halt on its shares pending an announcement.
Yesterday, the Australian share market closed lower after falls in the financial sector.
The benchmark S&P/ASX200 index was down 54.3 points, or 1.1 per cent, to 4875.2, while the broader All Ordinaries lost 47.9 points, or 0.96 per cent to 4949.6.

NYMEX
Oil prices rocketed on Thursday as traders tracked geopolitical tensions between the United States and Russia, a weak dollar and a large drop in US motor fuel reserves.
New York’s main oil futures contract, light, sweet crude for delivery in October, soared more than $6, to settle eventually up $US5.62 at $US121.18 per barrel.
Brent crude settled $US5.80 higher at $US120.16.
October briefly rallied a similar amount to a two-week high of $US120.93.

COMEX
Gold futures for December delivery gained $US22.70 to $US839.00 an ounce on the Comex division of the New York Mercantile Exchange.
Silver for September delivery added 68.7 US cents to settle at $US13.84 on the Nymex while September copper increased 14.9 US cents to settle at $US3.546 a pound.

NEW YORK - Wall Street scored a moderate gain after a volatile session on Wednesday that saw the major indices ratchet up and down on the price of oil and mixed feelings about the financial sector.
The Dow Jones industrial average rose 68.88 points, or 0.61 per cent, to 11,417.43.
The Standard & Poor’s 500 index rose 7.85, or 0.62 per cent, to 1,274.54, while the Nasdaq composite index rose 4.72, or 0.20 per cent, to 2,389.08.

LONDON - European markets closed mostly higher on Wednesday, while cautious over trends on Wall Street.
The FTSE 100 index was up 51.4 points, or 0.97 per cent, to 5,371.80 points.

FRANKFURT - The DAX put on 35.37 points, or 0.56 per cent, at 6,317.80 points.

PARIS - The CAC 40 added 33.08 points, or 0.76 per cent, to 4,365.87 points.

TOKYO - The benchmark Nikkei-225 index dropped 13.36 points to end at 12,851.69.

HONG KONG - Hong Kong shares closed 2.18 per cent up Wednesday, tracking a surge in mainland Chinese stocks ignited by reports that Beijing will soon unveil measures to shore up its economy, dealers said.
The benchmark Hang Seng Index rose 446.89 points, or 2.18 per cent, to 20,931.26. Turnover was 62.33 billion Hong Kong dollars ($A9.17 billion).

WELLINGTON - Telecom shares slipped to a 15-year low today, but along with the market as a whole the company managed to claw back early losses to end ahead.
The benchmark NZSX-50 closed up 12.91 points at 3332.02.

SYDNEY - The Australian stock market is expected to open higher today after US stocks had a moderate gain overnight.
At 0659 AEST, the Sydney Futures Exchange’s September share price index futures contract was up 37 points at 4,919.
In news today, the Reserve bank of Australia (RBA) will release its monthly bulletin and Australian Bureau of Statistics will issue new motor vehicles sales data from July.
Annual results are due from Amcor, Qantas, Fairfax Media, Healthscope, Sonic Healthcare, Downer EDI, OZ Minerals, Wesfarmers, Lend Lease, Challenger Infrastructure Fund, Wridgways, PaperlinX, Clough Resources, Auckland International Airport, Cabcharge, and Macquarie Office Trust.
Interim results are due from QBE Insurance, Babcock and Brown, Santos, Iluka Resources, Thakral Holdings, and Adelaide Brighton Ltd.
AWB Ltd will hold a shareholders meeting for A Class shareholders.
Yesterday, the Australian share market closed firmly in the black after a stronger commodity prices drove resources sector higher, helping to overcome a negative lead from Wall Street.
The benchmark S&P/ASX200 was up 63.1 points, or 1.3 per cent at 4,929.5, while the broader All Ordinaries gained 67.1 points, or 1.36 per cent, to 4,997.5.

NYMEX
Oil prices rose on Wednesday after a sharp spike the previous day as traders nervously mulled a larger-than-expected decline in US gasoline stocks.
Prices closed higher in edgy trade, wiping out declines experienced earlier in the day, as traders assessed a weekly US inventory report for clues on energy demand.
Crude oil for September delivery rose $US0.45, or 0.4 per cent, to settle at $US114.98 a barrel. Futures are down 22 per cent from a record $US147.27 on July 11.
Prices are up 62 per cent from a year ago.
The price action occured after the US Department of Energy said reported that US crude oil stockpiles climbed 9.4 million barrels in the week ending August 15.
Analysts had forecast a much smaller gain of 800,000 barrels.
In London, Brent North Sea crude for October delivery climbed $US0.45 to settle up at $US114.36.

COMEX
Gold futures for December delivery lost $US0.50 to $816.30 an ounce on the Comex division of the New York Mercantile Exchange.
Silver for September delivery fell 0.065 of a cent to settle at $13.04 on the Nymex while September copper shed 3.15 cents to settle at $3.397 a pound.

NEW YORK - Wall Street fell sharply for a second straight session on Tuesday after a hefty jump in wholesale inflation and a drop in new home construction gave investors more reason to believe an economic recovery is far off.
The Dow Jones industrial average dropped 130.84 points, or 1.14 per cent, to close at 11,348.55.
The Standard & Poor’s 500 index fell 11.91, or 0.93 per cent, to 1,266.69, and the Nasdaq composite index fell 32.62, or 1.35 per cent, to 2,384.36.

LONDON - European stock markets closed sharply lower on Tuesday, following heavy losses on Wall Street.
In London, the FTSE 100 index lost 129.8 points, or 2.38 per cent, to 5,320.40 points.

FRANKFURT - The DAX shed 150.45 points, or 2.34 per cent, to 6,282.43 points.

PARIS - The CAC 40 tumbled 116.05 points, or 2.61 per cent, to close at 4,332.79 points

TOKYO - The Tokyo Stock Exchange’s benchmark Nikkei-225 index dropped 300.40 points, or 2.28 per cent, to end at 12,865.05.

HONG KONG - The benchmark Hang Seng index closed down 446.3 points, or 2.13 per cent, at 20,484.37, its lowest closing level since August 17, 2007.

WELLINGTON - New Zealand shares sank nearly 0.5 per cent.
The benchmark NZSX-50 index closed down 15.03 points at 3319.12.

SYDNEY - The Australian stock market is expected to open lower today after US stocks fell overnight following a hefty jump in wholesale inflation.
At 0734 AEST, the Sydney Futures Exchange’s September share price index futures contract was down 35 points at 4,827.
In news today, the Westpac/Melbourne Institute leading index of economic activity for June will be released, and the Department of Education, Employment and Workplace Relations (DEEWR) will release its killed vacancies survey for August.
In company news today, Brambles, Perpetual, Mortgage Choice, Macmahon, Centennial Coal, AGL Energy, Crown, Pacific Brands, Domino’s Pizza, Noni B and Macquarie Leisure Trust Group will release annual results.
Coca-Cola Amatil and Macquarie Airports release interim results.
James Hardie Industries issues first quarter results and Fox Resources Ltd holds a general meeting.
Yesterday, the Australian share market closed more than two per cent lower, dragged down by the resource and financial sectors and a weak lead from Wall Street.
The benchmark S&P/ASX200 was down 118.6 points, or 2.38 per cent, to 4866.4, while the broader All Ordinaries dropped 113.1 points, or 2.24 per cent, to 4930.4.

NYMEX
Oil prices rebounded Tuesday, jumping back above $114 barrel after the dollar weakened against the euro and a rally in heating oil pulled new buyers into energy markets.
Light, sweet crude for September delivery rose $US1.66 to settle at $US114.53 on the New York Mercantile Exchange, after alternating between positive and negative territory earlier in the day.
The September contract expires Wednesday, adding to the volatility.
In London, October Brent crude rose $US1.31 to settle at $US113.25 a barrel.
Crude began the day lower after Tropical Storm Fay missed oil and gas installation in the Gulf of Mexico, easing concerns about a disruption in supplies.
But prices later spiked more than $3 a barrel, apparently driven higher by a surge in heating oil futures that triggered technical buy orders in energy markets, analysts said.

COMEX
Gold rose as the dollar dropped on speculation that a slumping US economy will prevent the Federal Reserve from raising borrowing costs. Silver was little changed.
Gold futures for December delivery rose $11.10, or 1.4 per cent, to $816.80 an ounce on the Comex division of the New York Mercantile Exchange. Earlier, the price touched $787.50 as the dollar climbed as much as 0.4 per cent.
Silver for September delivery added 0.005 of a cent to settle at $13.105 on the Nymex while September copper gained 11.35 cents to settle at $3.4285 a pound.

NEW YORK - Wall Street stocks plunged on Monday as jitters re-emerged over the financial health of mortgage-finance giants Fannie Mae and Freddie Mac, triggering fresh fears about the US credit crunch.
The Dow Jones industrial average fell 180.51, or 1.55 per cent, to settle at 11,479.39.
The Standard & Poor’s 500 index fell 19.60, or 1.51 per cent, to 1,278.60, and the Nasdaq composite index fell 35.54, or 1.45 per cent, to 2,416.98.

LONDON - European stock markets closed narrowly mixed in volatile trade. In London, investors set record results for the world’s biggest miner, BHP Billiton, against deep-seated concerns on the economic outlook.
The FTSE 100 index slipped, 4.6 points, or 0.08 per cent, to 5,450.20 points.

FRANKFURT - The DAX was off 13.14 points, or 0.20 per cent, to 6,432.88 points.

PARIS - The CAC 40 edged down 4.78 points, or 0.11 per cent, to 4,448.84 points.

TOKYO - The Tokyo Stock Exchange’s benchmark Nikkei-225 index rose 146.04 points, or 1.12 per cent, to end at 13,165.45.

HONG KONG - The benchmark Hang Seng index closed down 229.91 points, or 1.09 per cent, at 20,930.67.

WELLINGTON - Fisher & Paykel Appliances shares plunged 11.5 per cent, or by 24 cents to 185, after the short term cost of the move of much of the company’s manufacturing offshore was revealed.
Fisher & Paykel helped take the benchmark NZSX-50 index down 16.99 points to 3334.15.

SYDNEY - The Australian stock market is expected to open lower today after Wall Street fell overnight.
At 0743 AEST, the Sydney Futures Exchange’s September share price index futures contract was down 85 points at 4,920.
In news today, Australian Chamber of Commerce and Industry (ACCI) small business survey will be released, the Housing Industry Association of Australia issues its state and national outlook for the June quarter, and the Reserve Bank of Australia will release the minutes of its August 5 board meeting.
The Australian Bureau of Statistics releases data on merchandise imports for July, and the Melbourne Institute issues its quarterly wages report.
In company news today, OneSteel, Consolidated Media, Boral, Hutchison Telecommunications, Melbourne IT, JB Hi Fi, GWA International, Virgin Blue Holdings, Monadelphous Group, Thomas & Coffey, Oil Search and Newcrest will release annual results.
Lihir Gold releases interim results.
Origin Energy releases its target’s statement in response to a takeover bid by the UK’s BG Group.
The Australian share market nudged a little higher yesterday as investors anticipated a good profit result from BHP Billiton, which released its results after the close of the market.
The benchmark S&P/ASX200 index was up 3.3 points to 4,985, while the broader All Ordinaries index gained 4.6 points to 5,043.5.

NYMEX

Crude oil prices fell on Monday as Tropical Storm Fay looked set to spare energy facilities in the Gulf of Mexico and as the Baku-Tbilisi-Ceyhan pipeline appeared ready to reopen.
New York’s main contract, light sweet crude for September delivery, dropped 90 cents to close at $US112.87 a barrel.
Earlier, oil prices had climbed as investors worried that Tropical Storm Fay would strike the Gulf of Mexico, where nearly a quarter of US oil installations are located.
The New York futures contract had bounced above $US115 before losing steam when it became clear that Fay, which had battered the Dominican Republic, Haiti and Cuba, was on track to hit Florida.
Royal Dutch Shell said it had evacuated 425 staff from the Gulf of Mexico but said that no more workers would leave as Fay appeared likely to miss its energy installations.
According to the Miami-based National Hurricane Center, Fay could reach hurricane strength before making landfall in Florida late on Monday (overnight Monday to Tuesday morning AEST).

COMEX

Gold for December delivery closed at $US805.70 per troy ounce on the New York Mercantile Exchange, up from $792.10 on Friday.
Silver for September delivery added 28.5 cents to settle at $13.10 on the Nymex while September copper fell 0.75 cent to settle at $3.315 a pound.

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.

15 2008 - Australasian Investment Review – (AIR)

Suddenly the spectre of inflation no longer hangs over the world: it’s gone, banished by the reversal in sentiment in commodity and financial markets. Banished by fears of recession, which were confirmed overnight with Europe contracting in the second quarter, with Germany and France following Italy into a slump. Oil, copper and gold down, and wheat, corn and soybeans as well it’s been a sea change in sentiment in the past month. Slowing Europe and Japan suddenly mean the US is not alone, so it’s off into the greenback because you’ll be more protected there. Europe moved into a real slowdown in the June quarter,with growth contracting by 0.2%, Germany’s economy contracted by 0.5%. France slowed as well, with the economy falling a surprising 0.3% in the quarter. Growth is still up for the first half after the March quarter saw growth of 0.7%, but the size and speed of the slump was surprising, and emphasised why commodity prices are weakening, along with the euro. Inflation is supposed to have peaked, or is close to peaking; growth is slowing, and so will price pressures as recession bites. That’s why the surge in consumer inflation last month in the US came as a complete shock to the markets. Despite the slump in oil and petrol prices from mid-month onwards, and the rise in the value of the US dollar, the CPI surged by a rather large 5.6%, the highest rate since January, 1991 when the first Gulf War was raging. That compares to an annual 5.1% in the year to June. The CPI rose 0.8% in July, compared to June when it jumped 1.1%, so there was a small slowing. But the surprising news had no impact on interest rates, shares or sentiment. Oil was still easier, gold fell sharply, losing the gains of the day before and copper was lower. Higher food, petrol and energy costs were responsible, despite the drop in oil and petrol prices. Those falls are continuing, that’s why economists believe the CPI will drop sharply this month. Now the older and wiser of those in the market wonder if there’s something more dangerous approaching, along with the slumping global economy: deflation. More of that shortly. All year long, the debate has raged over whether the world faces a greater risk from resurgent inflation or from a deflation, caused by the credit crunch, to match Japan in the 1990s. The fall in commodity prices has, for now, convinced the market that we need not worry about inflation. In the US, the market for government inflation protected bonds (called TIPS) now implies that inflation will average 2.16% over the next decade. That’s the lowest in five years, but is it just as much an overshoot as the upward drive in commodity prices when they peaked midway through last month? What is still clear is that inflation is still with us: from the United States, through Europe and Asia, prices are still rising. Wholesale price inflation is double digit in China (but consumer prices are easing); in the US, Europe and the UK wholesale and consumer price inflation are at levels not seen for more than a decade in some cases.  In Japan this week’s report of a 7.1% jump in wholesale inflation was the steepest rise in 27 years In the eurozone, the consumer inflation hit 4.0% in July; more than double the European Central Bank’s inflation target of 1%-2%. Inflation stands at 3.6% in France, at 4.4% in Britain (its highest level for 16 years) and at its highest level for 12 years in Italy at 4.1% and 11 years in Spain where its running at 5.3%. In Germany inflation hit 3.3%, the highest rate since 1993 and enough to get the old anti-inflationist Bundesbank rolling in its grave. Inflation hit 4.3% in Norway, Eastern Europe it’s 6.7%, while in India it’s running at nearly 12% and in Japan at 1.9%, the highest for more than a decade. In some countries such as Argentina there’s doubt about the declared rate (9.3% there) because of changes to the way the government accounts for and reports inflation. In Thailand it’s running at 27% and higher in Egypt This week China reported a slowing in consumer inflation to 6.3% from 7.1% in June. But core measures which discount food and energy have risen past 2%. Now the point of this international roll call is to make a point: normally it would be enough to see interest rates rising everywhere: in India, the central bank is tightening policy, but apart from the increase at the start of July by the European Central Bank, central banks are holding back, transfixed in the case of the Fed and with the Bank of England by fears of a downturn and fears about inflation. So why then are financial markets (even bond markets) suddenly more relaxed about price pressures and galloping into equities and out of oil and commodities? Relative growth differences between the US, Asia and Europe is the one reason already stated, but the Merrill Lynch’s August fund managers survey provides a second reason. Big international investors no longer fear inflation.They worry more about recession, which they believe will take care of cost pressures.So does that indeed signal a deflationary period of rapidly falling growth and prices?

Here’s what Merrill Lynch concluded this week:

Fund managers’ fears of inflation have all but evaporated to reach their lowest level since the downturn of late 2001, according to Merrill Lynch’s Survey of Fund Managers for August.

Merrills said a total of 193 fund managers participated in the global survey from 1 August to 7 August, managing a total of $US611 billion. A total of 161 managers participated in the regional surveys, managing $US432 billion.

The survey captures an extraordinary reversal in investors’ attitude towards inflation. A net 18% of the 193 respondents expect global core inflation to fall in the coming 12 months.

In June’s survey, a net 33% thought inflation would rise.

A falling oil price and growing evidence of recession have prompted this rethink.

More investors believe that the global economy has already entered recession - 24% of the panel take that view this month compared with 20% in July and 16% in June. During the credit boom, investors urged companies to borrow more, but with the credit crunch biting, they are now concerned about leverage.

The net percentage of investors who believe corporates are under leveraged has tumbled to 9%, down from nearly 40% at the end of 2007.

“The message from investors to corporates is that if we are headed for a recession, they should clean up their balance sheets and prepare a financial buffer,” said Karen Olney, chief European equities strategist at Merrill Lynch.

“As banks de-lever, non-financial corporates will have to wake up to far less flexible world of credit.”

Merrill Lynch found that US assets are indeed back in favour (as it seemed in the Mat survey).

“With the economic downturn spreading to the eurozone and certain emerging markets, investors are starting to view U.S. assets as attractive.

“The net balance of asset allocators overweight U.S. equities stands at 12 percent, its highest level in more than six years.

“Supporting this view is the widely-held belief that the U.S. dollar is undervalued.

“A record net 58 percent say this month that the dollar is undervalued, while a net 71 percent say the euro is overvalued. Investors believe that the U.S. has a better corporate profit outlook and higher quality earnings than the eurozone.”

In Europe, investors are moving from oil to consumer stocks.

“European investors have responded to the fall in the oil price by selling oil producers and buying into discretionary consumer stocks.

“The percentage of European investors overweight oil & gas stocks collapsed to 11 percent in August from 52 percent in July.

“Investors have also significantly scaled back large underweight positions in travel & leisure, personal & household goods and retail companies.

“Technology and media sectors, both with significant exposure to consumer demand, also swung back in favour.

“At the same time, inflation fears among the European panel have fallen to levels even lower than in the Global Survey.

“A net 45 percent of European fund managers expect the region’s core inflation to fall over the next 12 months. In June, 32 percent of the European panel were predicting rising inflation.

“The market appears to have overreacted to a fall in the oil price, and investors have turned a blind eye to second round effects of inflation, such as rising wages,” said Karen Olney. “It will take several months of slowing global growth to be sure that the inflationary dragon has been slain.”

But the Merrill Lynch survey contains a cautionary note.

“One consequence of the recent fall in the oil price has been a rapid unwinding of what the survey has highlighted as a highly-crowded trade: Investors have reduced ‘long’ or overweight positions in energy and started closing underweight positions in financials.

“But have they lost sight of the fundamentals in unwinding this position?”

Merrill Lynch says it believes that the energy sector will continue to be supported by a strong oil price.

The firm forecasts oil at $US119 in the fourth quarter, underpinned by low, real global interest rates.

Francisco Blanch, Merrill’s head of global commodities research, said in a statement with the survey results: 

“While we have started to see some demand for oil curtailed in OECD economies, the economic fundamentals in China and other emerging markets support oil at more than $US$100 a barrel into 2009.”

“Investors have moved to close underweight positions in European financials after second quarter results suggested banks are on the road to improvement.”

But, according to ML’s Stuart Graham, head of European bank equity research, toxic write-downs are coming to an end and banks have completed more than half of their capital raising.

However, although earnings downgrades for banks are well under way, doubts remain about the sector’s ability to bounce back quickly.

“Banks are highly unlikely to see a V-shaped recovery in their share price given the uncertainties in the market,” said Stuart Graham. “Apart from the economic outlook, a key question is how stringent regulators will be in setting new rules to govern banks’ capital ratios. No one yet knows what the appropriate capital structure of the future is.”

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.

WASHINGTON - Troubled mortgage finance giant Freddie Mac reported a markedly higher second-quarter loss than expected as the US housing slump deepened. The mortgage monolith slashed its dividend by around 80 per cent.

NEW YORK - Time Warner Inc’s second-quarter earnings fell 26 per cent on declining subscriber fees at its AOL online unit, together with lower ad revenue at the Time publishing business.

LONDON - The International Monetary Fund slashed its growth forecasts for the British economy, pointing to high inflation curbing expectations of Bank of England interest rate cuts.

LONDON - A $US10 billion takeover bid from Anglo-Swiss mining giant Xstrata Plc sent shares in rival Lonmin Plc soaring Wednesday, but the world’s number-three platinum producer rejected the offer as being too low.

FRANKFURT - Reinsurer Munich Re AG said second-quarter net profit fell by 47 per cent amid market turmoil and asset writedowns of 889 million euros ($A1.5 billion).

FRANKFURT - Commerzbank, the second-biggest German bank, posted a gain in second-quarter net profit owing to a favourable tax offset. The bank however reported a plunge in operating earnings due to the global credit crisis.

PARIS - French bank BNP Paribas reported a 34 per cent fall in second-quarter profit, citing the impact of the US sub-prime meltdown, but said it remained in better shape than most of its competitors.

LOCAL NEWS

MELBOURNE - Giant B-triple trucks could soon be allowed on Victorian roads under a State Government plan to cut road congestion.

CANBERRA - Treasurer Wayne Swan vowed to keep an “eagle eye” on the banks to see if they pass on any interest rate cuts to consumers, but he admitted he can’t force them to do so.

SYDNEY - A Japanese company is looking to export water to Australia in large ships for agriculture and industrial use. Nomura Research Institute proposes delivering the water on ships that carry Australian coal to Japan’s second-largest steelmaker, JFE Holdings, which has a mill in Kawasaki near Tokyo.

STOCKS TO WATCH ON THE AUSTRALIAN STOCK EXCHANGE TODAY:

TAH - TABCORP LTD - up four cents to $8.60
Tabcorp Holdings Ltd releases its annual results today.

NWS - NEWS CORPORATION - up 63 cents, or 3.91 per cent, to $16.73
NWSLV - NEWS CORPORATION NON-VOTING - up 69 cents, or 4.43 per cent, to $16.28
News Corporation has reported a 57.2 per cent jump in annual profit following strong results for its film and cable businesses, but warned of less robust growth this year.

CXP - CORPORATE EXPRESS AUSTRALIA LTD - down one cent to $5.59
Business supplier Corporate Express has reported interim net profit down 4.4 per cent, but says the company is on track to achieve its earnings targets for the full year.

WAN - WEST AUSTRALIAN NEWSPAPERS HOLDINGS LTD - down 73 cents, or 8.15 per cent, to $8.23
West Australian Newspapers Holdings Ltd (WAN) has delivered a significant increase in annual net profit but says it remains cautious about the outlook for advertising revenue.

AIO - ASCIANO LTD - up four cents to $5.08
Ports and rail operator Asciano Group says it has an “open mind” towards any takeover proposal, provided it reflects fair value for the company.

CFE - CAPE LAMBERT IRON ORE LTD - in trading halt at 58 cents
Cape Lambert Iron Ore Ltd has entered a trading halt as the company finalises the $400 million sale of an iron ore project to China Metallurgical Group Corp (MCC).

TAL - TOWER AUSTRALIA LTD - down 16 cents, or 5.59 per cent, to $2.70
SGB - ST GEORGE BANK LTD - up $1.41, or 5.14 per cent, to $28.85
Tower Australia says the loss of corporate customer St George Bank will reduce its $700 million book of business by eight per cent and have a “part impact” on its 2009 profit.

NCM - NEWCREST MINING LTD - down 91 cents to $25.40
Newcrest Mining Ltd, Australia’s largest gold company, says gas supplies have resumed from Apache Energy Ltd’s Varanus Island facility, two months after an explosion cut the gas line.

RMD - RESMED INC - up 57 cents, or 14.14 per cent, to $4.60
Investors in ResMed Inc will be having sweet dreams after the sleep management company increased its annual profit by two thirds on improved US sales, sending its shares up 14 per cent.

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.

Anyone who tells you “there’s no such thing as a free lunch” obviously never heard of this investment strategy…

Let me explain. Several weeks ago, my good friend, David Newman, called me to tell me about this incredible new investment strategy that involves leverage on company dividends. In other words, you receive income every month and you have the potential for higher gains.

I’m going to be honest. At first, this whole idea seemed “too good to be true.” Frankly, the idea of putting leverage on dividends is just out of this world - even in a bad market. But the results were clearly quite impressive. In fact, the numbers looked so good that David is now researching these income-producing investments full-time.

The Dividend Index Has Been Shaky at Best

Worst Year Since 1974

David already sold me. I checked it out and this income-based strategy is a great tool to diversify your investment portfolio. That’s especially true today during one of the worst market environments since 2002 when just about everything is deep in the loss column.

This year, even conservative investments like corporate bonds, convertible bonds and other fixed-income investments are losing. Real estate investment trusts or REITs, were already hammered in 2007, and they’re still losing ground this year. Almost everything connected to income investing is down in 2008.

What about Treasury bills you say? Guess what: They won’t protect your portfolio either. Treasury bills barely yield 2%. After inflation and taxes you’re actually sitting on a loss of almost 6%.

Stocks, of course, have been drilled hard. Even international markets, including the once high-flying BRICs (Brazil, Russia, India and China) have tanked. European bourses are down 23%, Asian stocks are off by more than 13% and the Dow is down 14%.

Even time-tested dividend-paying strategies like the Dow Jones Select Dividend Index have plunged more than 22% over the past year - including the dividends.

After seven months of trading, U.S. and foreign stocks are logging their worst year-to-date returns since Nixon was President in 1974. These are rough times…

Beware the Dividend Trap!

The “Dividend Trap” is also a common investment mistake in a bear market.

When stocks take a virtual nosedive, value investors often swoop in and buy a blue-chip stock that already crashed. As the stock gets sliced and diced, the annual payout rises and makes the company even more profitable - right?

Not always. In fact, I call this the “Dividend Trap.”

In a bear market, be extra careful not to fall into this trap. Bear markets are usually accompanied by a profits’ recession, so companies typically reduce or cut dividends during a recession. That fact alone turns that tempting yield into a dangerous proposition.

For example, over the last six months a blizzard of American companies, mostly financial services stocks, have sliced or cancelled dividends altogether under the sub-prime contagion. Other companies outside of the financial sector have also chopped dividends because earnings have contracted for four straight quarters.

Just because a blue-chip stock pays a big dividend doesn’t necessarily mean you’ll get that payout in 12 months. If the market environment deteriorates from your point of purchase, watch out!

Income on Steroids

Although dividends have historically contributed to about 35% of a stocks’ total return since 1926, that total return feature has shriveled since the 1990s.

Dividends as a percent of total return have plummeted to barely 10% over the last decade. In short, dividends are much harder to secure these days. The S&P 500 Index, despite trading 20% below its October 2007 high, now only yields 2.8% in dividends. That’s hardly enough to save your bacon in a bear market. And global stocks, measured by the FTSE 500 World Index, yields just 2.7%.

But this new income strategy can boost your dividends exponentially - big time!

A NYSE-listed financial services stock that pays a paltry 1.84% in annual dividends can yield more than 12% in annual income.

Another company, a major oil producer, paying 2.1% in annual dividends can pay 10.5% in income annually.

How about a major oil driller yielding just 0.85% paying a 14% guaranteed cash dividend?

I know what you’re thinking. Very few things are really “guaranteed” in the investment world. But this new type of investment opens the door to a very special market that assures you’ll obtain these and other double-digit returns - even if the stock market continues to tank. In my book, that’s win, place, and show.

What’s truly amazing about this strategy is that even if a stock declines 10%, 20%, or even 50% in value, you’re assured of that big fat dividend! The stock can literally tank but you’re still getting that double-digit yield as the contract must be honored.

I can’t think of a better investment strategy in one of the toughest years for the markets. At the very least, every investor should allocate a portion of their portfolio to this strategy.

Death and taxes are guaranteed in this life. But now, so are dividends on steroids!

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 - Wall Street retreated again on Friday after readings on jobs and manufacturing - the first reports for the third quarter - indicated that businesses and workers still face a tough economy. The major indices ended a turbulent week mixed.
A massive quarterly loss at General Motors Corp and rising oil prices also gave investors reason to trade cautiously, but the market was considerably calmer than the first four sessions of the week, when the Dow Jones industrials rose or fell by triple digits each day.
The Dow fell 51.70, or 0.45 per cent, to 11,326.32, ending the week down 0.39 per cent.
Broader stock indicators also lost ground on Friday. The Standard & Poor’s 500 index fell 7.07, or 0.56 per cent, to 1,260.31, and the Nasdaq composite index fell 14.59, or 0.63 per cent, to 2,310.96.

LONDON - European share prices suffered steep falls on Friday as oil prices climbed and US automaking giant General Motors reported a huge loss.
In London, the FTSE 100 index shed 57.2, or 1.06 per cent, to end the week at 5,354.70.

FRANKFURT - The DAX fell 83.1, or 1.28 per cent to finish at 6,396.46.

PARIS - The CAC 40 lost 78.02, or 1.78 per cent to close at 4,314.34.

TOKYO - Japanese share prices closed down 2.1 per cent on Friday at a two-week low, hit by a slump on Wall Street, disappointing domestic earnings news and political uncertainty, dealers said.
The Tokyo Stock Exchange’s benchmark Nikkei-225 index slid 282.22 points to end at 13,094.59.

HONG KONG - Hong Kong share prices closed 0.6 per cent higher on Friday, tracking a recovery in the mainland on hopes that Beijing may ease controls to spur growth, dealers said.
The benchmark Hang Seng Index was up 131.5 points at 22,862.6.

WELLINGTON - The New Zealand share market as a whole was down, with the benchmark NZSX-50 index off 33.12 points to 3303.16.

SYDNEY - The Australian stock market is expected to fall after US equities slumped on readings on jobs and manufacturing which indicated that businesses and workers still face a tough economy.
The miners may decline as metals including gold and copper slipped on Friday.
At 0745 AEST on the Sydney Futures exchange, the September share price index futures contract was 38 points lower at 4,875.
In economic news today, the Australian Bureau of Statistics releases its house price indices for the June quarter.
Australia and New Zealand Banking Group releases its job advertisements data for July.
In other news, the Diggers & Dealers Mining Forum begins today in Kalgoorlie.
Argo Investments announces its annual results.
The Australian share market resumed its downward march on Friday, closing almost 1.5 per cent lower, led by falls from the financial sector amid further signs of a deteriorating economy.
The benchmark S&P/ASX200 fell 73.4 points, or 1.47 per cent, to 4904, while the broader All Ordinaries shed 74.6 points, or 1.48 per cent, to 4978.

NYMEX
Oil prices ended slightly higher on Friday, pushing back above $US125 a barrel as the threat of a conflict with Iran rattled energy markets after a week of wild swings.
The gains, however, were limited by lingering beliefs that fuel prices are still too high for cash-strapped Americans who are already cutting back on driving to save money.
Light, sweet crude jumped more than $US4 to a high of $US128.60 a barrel on the New York Mercantile Exchange, its highest level in nine sessions, before easing back later to settle at $US125.10, up $US1.02. Prices fell $US2.69 to settle at $US124.08 on Thursday.
In other Nymex trading, heating oil futures fell about 2.25 cents to settle at $US3.437 a gallon while gasoline futures added 1.34 cents to $US3.0843. Natural gas futures added 27 cents to settle at $US9.389 per 1,000 cubic feet.
In London, September Brent crude rose 62 cents at $US124.60 a barrel on the ICE Futures exchange.

COMEX
Gold futures turned lower after the dollar strengthened against the euro, weakening the metal’s appeal as a safe haven against inflation and weakness in the US currency.
Gold for December delivery fell $US5.20 to settle at $917.50 an ounce on the Nymex, after earlier falling to $910.30 an ounce.
Other precious metals also fell. September silver lost 27 cents to settle at $US17.52 an ounce on the Nymex.
September copper dropped 8.3 cents to settle at $US3.5785 a pound.

INTERNATIONAL NEWS

BOSTON - The rich are sharing America’s financial pain - and contributing to it. It may have taken longer and it may not be as acute as for the middle class, but there are early hints that the economic slump is crimping the lifestyles of rich Americans.

LONDON - The Royal Bank of Scotland (RBS) will this week unveil the biggest loss in the history of British banking due to a multi-billion-pound hit from the global credit crunch, The Sunday Times reported.

MADRID - Spain’s once-booming economy is in worse shape than expected and could slip to zero growth, the finance minister said in an interview published Sunday.

BAGHDAD - Iraq is inviting bids from contractors to drill seven new oil wells and complete work on four natural gas wells.

LOCAL NEWS

CANBERRA - Official house price figures due out today could give another clue to the prospects of an early interest rate cut.

CANBERRA - The aviation watchdog has formed a special team to investigate Qantas amid growing public concern the airline’s safety standards may have slipped.

SYDNEY - Qantas cabin crew have ruled out any industrial action over recent security scares, despite asking to meet company officials after another of the airline’s jets was forced to make an emergency landing.

MELBOURNE - Australian banks are profiteering from customers despite claims by the industry that margins are suffering from a troubled credit market, a new report shows.

MELBOURNE - The latest Ford Falcon is the first Australian-built car to win a world-best five-star rating for its crash safety.

SYDNEY - Iron ore tycoon Andrew Forrest’s paper fortune has slumped by more than 37 per cent in the past month in response to a short-selling blitz by international hedge funds against his Fortescue Metals Group.

MELBOURNE - Junior explorer Avalon Minerals Ltd plans to spin out the company’s Western Australia uranium assets into a new vehicle, Caliburn Resources Ltd, through a $2.4 million initial public offer (IPO).

MELBOURNE - The number of job ads dropped slightly in July despite a host of falling economic indicators, with the building and construction sector hardest hit, according to a survey.

STOCKS TO WATCH ON THE AUSTRALIAN STOCK EXCHANGE TODAY:

QAN - QANTAS AIRWAYS LTD - down one cent to $3.31
Australia’s aviation watchdog will launch an investigation into Qantas safety and maintenance operations following three mid-air emergencies on its jets in less than 10 days.

SUN - SUNCORP-METWAY LTD - down 1.85, or 13.83 per cent, to $11.53
Suncorp Metway Ltd says severe storms and the global credit crunch would cut its annual profit by half, prompting it to maintain a flat dividend in fiscal 2009, and sending its shares into a tailspin.

FMG - FORTESCUE METALS GROUP LTD - down 43 cents to $8.27
Shares in Fortescue Metals Group fell by as much as six per cent after a bulk carrier, transporting the company’s iron ore, lost steering and ran aground off Western Australia, blocking the vital Port Hedland shipping channel.

BUG - BUDERIM GINGER LTD - up 1.5 cents to 48.5 cents
Buderim Ginger Ltd has forecast its annual pre-tax profit to rise by as much as $2 million, in line with guidance.

CSR - CSR LTD - up one cent to $2.12
CSR Limited will spend $17.8 million to increase its ethanol production capacity to 60 million litres per annum, the company announced today.
AAP dlm/pe

US

Last weekend we saw another 2 US banks fold. Although they are small, there were fears that their problems are not contained to just these two banks, First Nation Bank and First Heritage Bank but other financial institutions as well.

2nd quarter GDP numbers showed a gain of 1.9% which is up 0.9% from the previous year. The number was weaker than expected. The most disappointing part of the numbers was the revisions. The 4th quarter 2007 GDP numbers were revised from 0.6% growth to a -0.2% reading. This is the first negative reading since 2001.

The big numbers will be the US non-farm payroll numbers out tonight. Expectations are for a drop of 75000 jobs.

Asia

With China’s stockmarket down 47% this year, there are reports that regulators are going to limit share sales. China’s stockmarket is the worst performing this year so far.

Australian banks were sold down heavily after ANZ was the latest Australian bank to announce an increase in provisions due to the ongoing problems in global credit markets.

In Australia, we saw a shocking retail sales report for the month of June. The market was expecting to see a flat result but instead, retail sales dropped 1%. Department store sales were down by 5.2% while clothing dropped 5%.

In New Zealand, business confidence fell to -38.7 which is the first fall in 4 months. The numbers support a case for more interest rate cuts after the NZ central bank cut interest rates last week to 8%.

It looks like the global slowdown has taken its toll on industrial production in Japan. The industrial production numbers for June were worse than expected with a fall of 2% compared to the previous month. But vehicle production rose 4.5% in June with strong demand for Japan’s smaller cars.

UK

HSBC which is Europe’s largest bank said that it may report its biggest drop in profit since 2001 due to the amount of bad US loans increasing. Meanwhile, Deutsche Bank had writedowns of 2.3 billion euros which was more than expected.

Eurozone retail PMI saw a rise in July to 38.2 from 36.3 due to stronger activity in Germany and Italy. The numbers still remain historically low.

Germany’s jobs report was in line with expectations with unemployed fell by 20000. But German consumer confidence is now at a 5 year low.

The estimates for Eurozone CPI are at 4.1% which is at a 16 year high. While inflation is a problem, there is not much that the European Central Bank can do with growth also slowing in the Eurozone.

UK housing data showed that home prices dropped 8.1% in July compared to a year earlier. This is the biggest decline since 1991.

End note

Economic indicators show that not only is the world grappling with inflation with consumers struggling with high energy costs, rising cost of food and living costs but on the other side of the equation, growth is also faltering. This week showed that it’s not just US banks that are struggling but financial institutions all over the world. Until the global economy starts showing signs of life, there will continue to be big moves in stockmarkets around the world.

Well well wouldn’t you know it? The banks have finally declared an increase in provisions for write offs. Why has it taken so long? Were they expecting some miracle to suddenly take the credit and confidence crunch woes away?

But is all the bad news out? Well, Tom or Thomas derived from Didymus who was a disbeliever – says it is not all out yet. Don’t ask me what is still hidden but there is something. I cannot just put my finger on it.

But the technicals are telling me there are still some nasties ahead. Most of it is out but not all. Take a look at the Elliot chart for the Finance sector:

click chart for more detail

What we can see is a projected leg down to 4200 and even as low as 3600. I would give a probability of 60% to the former and about 40% to the latter.

Have a look at OBV (On Balance of Volume) which is a great measure of volume strength and direction. No-one is interested in banks. Would you want to buy a bank right now? Maybe soon but not right now. So all we see are sellers. Of course there needs to be buyers but we are fussy and we want to see bank stocks cheaper before we will cheer up and buy.

Bargains are ahead of us but not just yet.