Stocks end worst week mixed after wild session

Stocks end worst week mixed after wild session

By TIM PARADIS, AP Business Writer16 minutes ago

Wall Street capped one of its worst weeks ever with a wild session Friday that saw the Dow Jones industrials gyrate within a 1,000 point range before closing with a relatively mild loss and the Nasdaq composite index actually ending with a modest advance. Investors were still agonizing over frozen credit markets, but seven days of massive losses and the possibility of further government support for the markets tempted some investors late in the session.

The Dow lost 128 points, giving the blue chips an eight-day loss of just under 2,400, or 22.1 percent. The average had its worst week on record in both point and percentage terms. The Standard & Poor's 500 index, the indicator most watched by market professionals, posted its worst weekly run since 1933.

The latest loss also means the Dow is down 40.3 percent since reaching a record high close of 14,164.53 a year ago, on Oct. 9, 2007. The S&P 500, which reached its high of 1,565.15 the same day, is down 42.5 percent.

Investors suffered a paper loss for the day of about $100 billion, as measured by the Dow Jones Wilshire 5000 index. For the week, investors lost $2.4 trillion, and over the past year, the losses have piled up to $8.4 trillion.

But there were signs Friday that some investors believe the market is near a bottom. On Thursday, selling accelerated in the last hour of trading. The Dow was down 221 points at 3 p.m. but closed down 679 points an hour later. On Friday, the Dow was down 468 points at 3 but rocketed 790 points and was up 322 points just after 3:30. It then sold off but closed down only 128.

And the Russell 2000 index, which tracks the movements of smaller company stocks, had a 4.66 percent gain Friday; small-cap stocks are often first on investors' shopping lists when they think a market turnaround is at hand.

"Nobody wants to miss the bottom," said Anton Schutz, president of Mendon Capital Advisors, who said of the Dow's performance, "I view it as a victory that we only finished down 100."

Some investors may have been placing bets ahead of the weekend meeting of officials from the Group of Seven nations, who gathered in Washington to discuss the economic meltdown. One of the potential remedies expected to be reviewed at the meeting is for governments to guarantee lending among banks.

"Everyone is hoping for really good news that can invigorate some buying and break this credit freeze, but your guess is as good as mine as to whether that will happen. I think people are desperate for action," said Jon Biele, head of capital markets at Cowen & Co. "It truly is remarkable to watch what's happening."

Still, Friday's widely mixed finish was proof that Wall Street still has a long list of troubles, and trading is likely to remain volatile when the market reopens on Monday.

"This kind of volatility in the market tells you that there are huge disagreements among investors about what the fundamentals are, about what the outlook is," said Ethan Harris, managing director and chief U.S. economist at Barclays PLC.

The hair-trigger mentality of the market — a reflection of the intense anxiety on the Street — was evident from the opening bell. The Dow fell 696 points in the first 15 minutes, recovered to gain more than 100 before that first hour was over and then turned sharply lower again. It spent much of the session with a deficit between 300 points and 500 points, regaining some ground and then falling again — until the last hour, when the average had swings spanning hundreds of points that took the Dow up as much as 322.

Investors have shuddered the past month over a credit market that remains frozen, posing a threat to the economy by making it harder and costlier for businesses and consumers to get a loan. But Friday's gainers included financial stocks, the ones most decimated by the credit crisis.

Harris said policymakers likely will continue to do what is needed to revive the credit markets. Actions taken so far by central banks, among them the Federal Reserve, have included increased lending and interest rate cuts.

"The deeper problem is not the stock market drop but the freezing up of the credit markets and that's the root problem and they have to keep applying the antifreeze until it works," Harris said.

The major indexes' sharp swings Friday were likely exacerbated by the computer-driven "buy" and "sell" orders that kicked in when prices fell far enough.

"Fear has been running rampant all over the Street. Fear and greed, that's what rules the Street. I think the carcass has been stripped to the bone," said Dave Henderson, a floor trader on the New York Stock Exchange for Raven Securities Corp. "The mood, it swings with the market. When we went positive, the euphoria down there was awesome. It's like at a football game."

The Dow fell 128.00, or 1.49 percent, to 8,451.49. At its low point Friday, the Dow was down 696.68 at 7,882.51, some 600 points above its low in Wall Street's last bear market, 7,286.27, reached Oct. 9, 2002. It crossed the line between gains and losses 32 times during the session.

Its close was the lowest since April 25, 2003.

Market index stats again told how horrific the run has been on Wall Street:

• The Dow lost 1,874.19 points, or 18.2 percent, during the week. Its dismal performance outdid the week that ended July 22, 1933, which saw a 17 percent drop — and back then, during the Great Depression, there were six trading days in a week.

• The Dow has fallen for eight straight sessions — the longest losing streak since the eight days of declines following the Sept. 11, 2001, terror attacks, when the blue chips lost 1,038.12, or 10.8 percent.

• It's been the worst run for the Dow since the nearly two-year bear market that ended in December 1974 when the Dow lost 45 percent.

• Since hitting their record highs a year ago, the Dow has lost 5,713 points, or 40.3 percent, while the S&P 500 is off 665.90 points, or 42.5 percent.

Beyond the Dow, broader stock indicators were mixed Friday.

The S&P 500 index fell 10.70 or 1.18 percent, to 899.22. The 18.2 percent drop for the week was the S&P's steepest decline since the week ending May 21, 1933; its worst loss was in 1929, when it fell 19.9 percent. The index lost 200.01 points for the week.

The Nasdaq composite index rose 4.39, or 0.27 percent, to 1,649.51. For the week, the Nasdaq lost 297.88, or 15.3 percent.

The Russell 2000 rose 23.28, or 4.66 percent, to 522.48. For the week, the Russell fell 96.92, or 15.64 percent.

Decliners led advancers 2-to-1 on the New York Stock Exhange, where consolidated volume came to a record 11.2 billion shares, compared with 8.14 billion traded Thursday.

Most major central banks around the world slashed interest rates this week after continuing problems in the credit market triggered concerns that banks will run out of money. Analysts have described the mood on trading floors this week as panicked at times, with investors bailing out of investments on fears there is no end in sight to the financial carnage.

A stream of selling forced exchanges in Austria, Russia and Indonesia to suspend trading, and those that remained opened were hammered. The rout in Australian markets caused traders there to call it "Black Friday."

European stocks sank Friday, with Britain's FTSE-100 falling 8.85 percent, German's DAX declining 7.01 percent, and France's CAC-40 ending down 7.73 percent. In Asia, the collapse of Japan's Yamato Life Insurance caused already nervous investors to pull even more money out of the market — the Nikkei 225 fell 9.6 percent.

An index considered to be Wall Street's fear gauge reached record highs on Friday in another sign of massive investor anxiety. The Chicago Board Options Exchange Volatility Index, known as the VIX, rose to an all-time intraday high of 76.94 Friday. The VIX, which usually trades under 50, tracks options activity for the companies that make up the S&P 500.

Still, prospects of further government help and, perhaps, attractive prices helped parts of the financial sector show signs of life. Big national banks were among the gainers, including Bank of America Corp., which rose $1.24, or 6.3 percent, to $20.87. Some smaller banks also rose, including Fifth Third Bank Corp., which advanced 67 cents, or 6.9 percent, to $10.40.

Not all financials enjoyed a bounce, however. Morgan Stanley Inc. fell $2.77, or 22 percent, to $9.68 as investors worried that even with a major investment from Japan's Mitsubishi UFJ Financial Group the company was still facing troubles. Meanwhile, Goldman Sachs Group Inc. fell $12.55, or 12 percent, to $88.80.

Financials were most prominent among the stocks that rose in the S&P 500, though technology stocks generally advanced. Apple Inc. rose $8.06, or 9.1 percent, to $96.80, while eBay Inc. rose 77 cents, or 4.8 percent, to $16.73.

Investors appeared unfazed by final results arriving in afternoon trading from an auction Friday that set the price of debt issued by now bankrupt Lehman Brothers Holdings Inc. at 8.625 cents on the dollar, down from a preliminary estimate of 9.75 cents.

The auction was for credit default swaps, which are contracts used to insure against the default of financial instruments like bonds and corporate debt. Traded in a $60 trillion, unregulated market, many of the instruments have fallen sharply because of their ties to bad mortgage debt. Those big losses and nervousness about who holds what CDS has made financial institutions hesitant to lend to one another. The auction could help the market determine which companies are most at risk from CDS losses.

___

AP Business Writers Joe Bel Bruno, Sara Lepro, Madlen Read and Dan Strumpf in New York contributed to this report.

___

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Nasdaq Stock Market: http://www.nasdaq.com

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U.S. Stocks Drop in Rollercoaster Day; Dow Swings 1,000 Points

U.S. Stocks Drop in Rollercoaster Day; Dow Swings 1,000 Points  By Lynn Thomasson Oct. 10 (Bloomberg) -- U.S. stocks fell for an eighth straight day in a whipsaw session that sent the Dow Jones Industrial Average to its biggest point swing ever. The Standard & Poor's 500 Index capped its worst week since 1933 and the Dow since 1914, as concern the financial crisis will drag the economy into a recession pushed Morgan Stanley and CBS Corp. down more than 20 percent and Exxon Mobil Corp. more than 8 percent. The Dow recovered from a 697-point tumble and rose as much as 322 points in the last hour as an industry group said the bankruptcy auction of Lehman Brothers Holdings Inc.'s debt won't worsen credit losses. ``At this point, investors are just focusing on getting through the day,'' said Alan Gayle, the Richmond, Virginia-based senior strategist at Ridgeworth Investments, which oversees about $70 billion. ``The markets are being driven by emotion and rumor.'' The S&P 500 slipped 10.7 points, or 1.2 percent, to 899.22. The Dow lost 128 points, or 1.5 percent, to 8,451.19. Both gauges extended their weekly drops to 18.2 percent. The Nasdaq Composite Index added 4.39 points to 1,649.51. Eleven stocks fell for every 10 that rose on the New York Stock Exchange. European and Asian benchmark indexes posted their worst weekly retreats on record as exchanges in Russia, Indonesia and Ukraine suspended trading in an effort to halt a global rout that has wiped out $25 trillion from global equities this year. Comments from President George W. Bush and Italian Prime Minister Silvio Berlusconi did nothing to restore confidence in financial markets and halt the global rout. Officials from the Group of Seven nations gathered for crisis talks in Washington this weekend to discuss the crisis. Dow Swings The Dow twice recovered from drops of 500 points or more, first in the opening hour and again after 2 p.m. The afternoon rally pushed the 30-stock index as high as 8,901.28 before the gains were surrendered in the final minutes. The S&P 500's eight-day losing streak is its longest since 1996. This week's declinespushed both the S&P 500 and Dow down more than 40 percent from their peaks last October. The S&P 500 ended the week trading for 17 times reported earnings of its companies, the cheapest valuation in more than a year. The market's ``fear gauge,'' as the Chicago Board Options Exchange Volatility Index is known, climbed to a fifth- consecutive record. The measure, which gauges the cost of using options as insurance against further stock declines, has tripled since the beginning of September. Almost 3 billion shares changed hands on the floor of the NYSE, more than twice the three-month daily average and the third-highest level since Bloomberg began compiling the data in 1988. Energy Slump The S&P 500 Energy Index, once the year's best-performing group, slumped 8 percent and lost 19 percent over the past two days. Oil fell below $80 a barrel for the first time in a year on concern the weakening economy will crimp demand. Exxon Mobil was the biggest drag on the S&P 500, losing 8.3 percent to $62.36. Chevron Corp. and ConocoPhillips were the second and third biggest drags, losing more than 9 percent each. Newmont Mining Co., the largest U.S. gold producer, slid 14 percent to $29.23 as bullion tumbled and copper lost 11 percent to cap its worst week in two decades. Morgan Stanley sank $2.77, or 22 percent, to a 12-year low of $9.68, while Goldman Sachs Group Inc. fell $12.55, or 12 percent, to $88.80 after their credit outlooks were cut to negative by Moody's Investors Service. The review of Morgan Stanley's A1 long-term credit rating affects about $200 billion of debt, Moody's said. The ratings assessor affirmed its Prime-1 grade for Morgan Stanley's short-term debt. The negative outlook for Goldman Aa3 long-term rating affects $175 billion of debt, and the company's short-term ratings were also affirmed at Prime-1. Credit Freeze Credit markets stayed frozen as the cost of borrowing in dollars in London for three months rose for a fourth consecutive day. The London interbank offered rate, or Libor, that banks charge each other for such loans climbed 7 basis points to 4.82 percent today, a high for the year, the British Bankers' Association said. The late-day rally in financial shares came after the International Swaps and Derivatives Association Inc. said Lehman's debt had ``little or no'' unanticipated costs and didn't cause any firms to fail. Sellers of credit-default protection on bankrupt Lehman's deb will have to pay holders more than 91 cents on the dollar after an auction today, setting up the biggest-ever payout in the $55 trillion market. Citigroup Inc. climbed 9.1 percent to $14.11 paring its decline this week to 23 percent. Bank of America Corp. added 6.3 percent to $20.87 and JPMorgan Chase & Co. rose 14 percent to $41.64. The S&P 500 Financials Index added 7 percent, reversing a drop of the same size and paring its weekly loss to 11 percent. Macy's, CBS Macy's Inc. slid $1.54, or 13 percent, to $9.92. The second-biggest U.S. department-store company cut its annual profit forecast, citing the weakened economy and diminished consumer confidence. Earnings per share this year may decline to $1.30 to $1.50, compared with its earlier projection of $1.70 to $1.85, the retailer said. CBS Corp. fell the most in at least 17 years, tumbling 20 percent to $8.10. The producer of television and radio shows reported a decrease in third-quarter profit on weakening advertising sales and said it's planning to take a $14 billion charge to reflect the declining value of its assets. `Category 4' ``This is still a Category 4 hurricane,'' said Scott Black, founder and president of Delphi Management Inc. in Boston, which has about $1.4 billion under management. ``I don't really think the market is going to zero, but for people who have cash on the sidelines, they can wait until the storm passes.'' Regional banks in the S&P 500 climbed 9.5 percent as a group in early trading and led the market higher for about 10 minutes in early trading on speculation mergers will accelerate and they will gain market shares from larger rivals hit worse by the credit crisis. M&T Bank Corp. helped paced the gains as Robert W. Baird & Co. raised its rating on the lender whose second-largest shareholder is Berkshire Hathaway Inc. and said the shares are more attractive following a plunge that erased almost a third of the stock's value. M&T Bank increased 12 percent to $72.75. Marshall & Ilsley Corp., PNC Financial Services Group Inc. and Zions Bancorporation each climbed more than 13 percent. Short Sales The New York Stock Exchange and Nasdaq Stock Market may propose a temporary ban on short sales for individual stocks that plunge as regulators seek to rein in short-selling, according to three people who have seen a draft of the rule. The plan, which may be submitted as soon as today, would require a stock that closes down more than 20 percent be protected from short sellers for the following three days, the people said. Analysts expect a 7.5 percent drop in third-quarter profit at S&P 500 companies, according to a Bloomberg survey published today. Last week, the consensus was for a decline of 5.6 percent. Earnings at financial companies are forecast to slump 74 percent on average in the period. Europe's Stoxx 600 slumped 7.5 percent, extending this week's decline to 22 percent, the most since records began in January 1987. The gauge trades at 8.5 times profit, the cheapest since 1981. `Could Be Heavy' ``The problem is the rules of valuation no longer exist,'' said Pierre-Yves Gauthier, founding partner of Alphavalue SAS in Paris. ``It's best to remain cautious. The economic slowdown is here. A recession could be heavy.'' Developing country stocks capped their worst week on record, with the MSCI Emerging Market Index losing 21 percent over the last five days, led by a 20 percent slide in Brazil's Bovespa and a 16 percent retreat in India's Sensitive Index. The MSCI gauge lost 4.7 percent to 589.58 today. To contact the reporter for this story: Lynn Thomasson in New York atlthomasson@bloomberg.net; Last Updated: October 10, 2008 17:08 EDT

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Why the greenback is on a tear

Surprisingly, a financial panic rooted in aversion to debt has spared the currency of the world's biggest debtor.

By Colin Barr, senior writer

October 10, 2008: 2:24 PM ET

NEW YORK (Fortune) -- There's a silver lining in the financial panic of 2008: the surprising strength of the dollar.

Investors have spent the year fleeing the scourge of leverage - the accumulation of assets via massive amounts of debt. A collapse of market confidence contributed to the failure of heavily indebted firms like Lehman Brothers and Washington Mutual, and forced the nationalization of AIG (AIG, Fortune 500) and others. Panic sales of companies that depend on borrowing in the locked-up short-term credit markets have only accelerated this week, with Morgan Stanley (MS, Fortune 500) off 25% two days in a row.

But it could be worse, believe it or not. While the stock market's October dive has decimated brokerage statements and retirement accounts around the world, the selling so far has spared the currency of the biggest debtor of all, the U.S. government.

In a twist few predicted, the rush away from risky assets has actually been good for the dollar - even though the U.S. needs to borrow $2 billion a day from its creditors overseas just to keep the lights on, and has been adding to its already substantial obligations at a rapid clip.

Recent weeks have brought a $700 billion plan to buy financial assets and a loan commitment to AIG that expanded into 12-digit territory in less than a month, among many others. This expansive government response to the financial crisis has had longtime skeptics of U.S. fiscal policy renewing their predictions for a dollar crash.

"While it is dizzying to predict how this plan will be implemented, it is fairly simple to foresee the macroeconomic consequences," Peter Schiff, president of broker-dealer EuroPacific Capital and a long-time bear on the dollar, wrote last month. "The U.S. dollar will be shattered beyond repair. The government simply has no means to make good on the trillions of new liabilities."

But the dollar hasn't been shattered, because it has become clear that the U.S. is far from the only economy to be sputtering. The International Monetary Fund warned this week that economic output will be flat next year in Europe and the U.K., and the other major developed economy - Japan - has yet to emerge from a slump that is now going on two decades.

Thus the U.S. currency has risen more than 15% against the euro in the past three months, including an 8% surge since Paulson proposed the Troubled Asset Relief Program in mid-September. The dollar has lost some of its value against the yen, but during the past month's tumult it has retained its value against the Japanese currency and against gold better than any other major currency has.

The dollar's strength even against classic safe-haven currencies such as the Swiss franc "partly reflects the unwinding of dollar-selling positions accumulated since mid-September," writes CMC Markets currency strategist Ashraf Laidi, "as well as funds' disposal of positions in emerging market assets."

One side effect from the recent rash of deleveraging has been that investors who earlier sold dollars to fund bets on commodities and stocks now must buy greenbacks to unwind those trades. Meanwhile, the safety of U.S. government bonds beckons: The yield on the three-month Treasury bill recently was 0.2% - meaning investors are willing to give up the prospect of earning any return on their money in exchange for being assured of capital preservation.

Still, there's some question about how long the dollar's renaissance will last. The dollar tumbled for most of the past six years against the currencies of major trading partners, as a surging oil-import bill contributed to massive U.S. trade deficits, before rebounding this summer as the commodities bubble collapsed.

But now economists wonder what will happen when the pace of deleveraging slows - and those holding dollar-denominated assets consider the expanding U.S. financing burden at a time when growth prospects look weak.

"When this process plays itself out," says University of Oregon economics professor Tim Duy, "the fundamentals working against the dollar will come into focus again." 

Where do your taxes go?

Of the $1,000 you paid in taxes (2007)
$420	goes to Past and Current Military
$220	goes to Health
$100	goes to Interest on Non-Military Debt
$90	goes to Anti-Poverty Programs
$40	goes to Education, Training & Social Services
$40	goes to Government & Law Enforcement
$30	goes to Housing & Community Development
$30	goes to Environment, Energy & Science
$20	goes to Agriculture, Commerce and Transportation
$10	goes to International Relations

Source: Breakdown of income taxes is based on Budget of the United States Government

SOURCE: http://www.nationalpriorities.org

Why I'm so bullish on China

Why I'm so bullish on China ...
by Larry Edelson

Dear Subscriber,

Other than cash, gold, and a few select natural resource stocks, the only other investments I'd make in these wild and crazy times are in Chinese companies, buying them hand over fist for the long haul.

Yes, that's right. Even bearing in mind the recent milk/melamine scandal, which is outrageous.

You see, China is about the only economy on the planet with both short- and long-term growth potential. Just take a look at the latest economic stats ...

China's August retail sales exploded 23.2% higher to their fastest growth rate in nine years.

Jewelry sales soared a whopping 44.3%, making China the world's second-largest consumer of gold jewelry. Even more impressive when you consider that only one out of every ten Chinese consumers can currently afford gold.

The booming retail sales growth is not confined to just the major east coast cities like Shanghai, either. That 23.2% figure is for ALL of China, proving that the expansion is now blanketing even the rural areas.

Think August might be just a freak month? Well consider the eight month, year-to-date retail sales growth of 21.9% — up from 16.8% for all of 2007. That's almost one-third higher!

No wonder Gome Electrical Appliances Holdings Ltd., China's No. 2 electronics retailer, reported that first-half profits almost tripled.

Have any doubt about domestic consumption supporting China's economy? Well these stats prove otherwise, that domestic demand is soaring.

It would not be good if all that spending occurred by going into debt. But that's not the case in China. Indeed ...

Disposable income in China is soaring.

Urban income jumped 14.4% for the first six months of this year. And even after accounting for inflation, the real net gains in urban incomes gained a huge 6.3%.

But it's not just the urban areas of China that are doing well.

Rural incomes are also soaring — exploding 19.8% higher in the first six months of 2008, from a year earlier. Net of inflation, rural incomes are up 10.3%!

Compare these figures to U.S. net income — adjusted for inflation it's MINUS .9%.

China's seasonally-adjusted Purchasing Managers' Index, jumped to 51.2 in September.

The index — which tracks changes in output, new orders, employment, inventories, and prices — is showing explosive manufacturing growth and indicates China's economy is weathering the global slowdown.

The output side of the index rose to 54.6 in September from 48.7 percent in August, while the index of new orders climbed to 51.3 from 46.

And in case you think China's exports are slowing, the index of export orders increased as well, to 48.8 from 48.4. Total overseas sales of Chinese goods are up 22.4% for the first eight months of the year.

Capital investment also continues to surge in China.

Fixed-asset investment growth rose a whopping 29.2% in July, while urban fixed-asset investment for the first half of the year increased 27%.

Property investment jumped 31%. Investment in farming, fishing and forestry sectors exploded higher by 61.9%. Total fixed asset investment in central provinces surged an amazing 35.3%!

I could keep going, but I think you get the picture. China's economy, despite what the naysayers are telling you, continues to crank ahead, firing away on eight cylinders.

So while the rest of the world is in the midst of a severe credit contraction, China's first-half GDP gained 10.1%, including outstanding rural growth of as much as 13% across six central provinces!

What about China's banks? Are they facing severe losses from what I call the "first world credit crisis?"

Hardly! At most, China's banks have about 3.7% of their total net worth invested outside of China. So even if all of that went up in smoke, it would hardly make a dent in China's banking capital.

Indeed, and ironically ...

China's banks are now some of the strongest in the world, with capital ratios far healthier than banks in the U.S. or Europe.

Many have banking reserves of as much as 14%, compared to as little as 4% in the U.S. and Europe.

Plus, Chinese banks are making money hand over fist:

— Industrial & Commercial Bank of China (ICBC), China's biggest bank by assets, grew its net profit 57.25% in the first half of this year. That makes it the most profitable bank in the world.

— China Construction Bank saw its first-half net profit jump 71.4%.

— China Citic Bank, the country's seventh-largest bank reported a 162% jump in net profits!

— Bank of China's first-half net profits grew 42.78%

The average net profit growth for the 14 listed banks for the first half of 2008 was an amazing 99.15%.

If you think those results are just the big, urban-based Chinese banks, think again: Smaller banks have been reporting even faster growth. China Merchants Bank increased profits 116% while Shanghai Pudong Development Bank reported a first-half net profit gain of 150%!

And get this: Most of these huge profit gains were seen while Beijing was still clamping down on interest rates and monetary growth to try and quell inflation.

They do not include the impact of last month's interest rate cut, the first in six years, nor the recent cut in the reserve-requirement ratio for smaller banks to 16.5% from 17.5%.

As these pro-growth initiatives bite, you can expect even higher growth levels at China's banks, more rapid growth in China's economy ... especially the rural areas ... and ...

An explosion higher in China's stock markets.

Yes, China's stock market is down this year. Big time. It's fallen a whopping 63% from its record high of 6,124 last year in the Shanghai Composite Index, including a 56% year-to-date loss.

But the Shanghai stock market now reminds me of 2002, when the world was fixated on potential horror stories in China's economy, and clueless about the reality in China.

Back then, I told my subscribers to buy with both hands. And I was right as can be, with the Chinese stock market soaring more than 300% in the ensuing five years.

Today, I am going to tell you this same thing. What you're hearing about China ... tales of the rural areas going through an uprising, derailing growth, protests in the countryside, banking problems, bad loans, a slowing economy, etc. — are as far from the truth and reality as they were back in 2002.

My view: The Shanghai Composite is going to TRIPLE in the next few years, three years max.

Bottom line: If you haven't already gotten a stake in this economic juggernaut, consider doing so now!

Two of my favorite China plays are the iShares FTSE Index (FXI), which tracks China's Shanghai stock market, and the U.S. Global Investors China Regional Opportunities Fund (USCOX).

Both offer incredible profit potential, are easy to buy, and are great ways to play China without having to open a foreign brokerage account or buy stocks overseas.

Two more things to be on the lookout for with China ...

First, China will continue to buy up oil and lend underlying support to the oil market for years to come. It's the chief reason oil prices have remained above the $90 level, and China will be the chief reason we will eventually see $200-a-barrel oil.

Second, I have strong reason to believe that Beijing is soon going to substantially increase its gold reserves, which at 600 metric tons, are among the lowest in the world as a percent of the country's foreign exchange reserves.

Why? Beijing now has almost $2 TRILLION in reserves in its piggy bank. I have no doubt that central bankers at the People's Bank of China have held high level discussions with Treasury Secretary Henry Paulson.

And Chinese central bankers are prepared to buy oodles of the U.S. Treasury securities that Paulson is going to have to auction off to raise funds for the $700 billion plus U.S. bank bailout.

Put simply, China is going to use a large portion of its $2 trillion in reserves to help bail out the U.S.

But the authorities in Beijing are no dummies. They also know that the U.S. dollar is in a long-term downtrend. So, they don't want to see any of the investment they are about to make in the U.S. go down the tubes because of a falling dollar.

They have only one choice: Bolster the country's gold reserves while they're investing in U.S. Treasuries.

Bottom line: In addition to driving oil prices higher, soon you will be hearing that China is a big, big gold buyer.

So hold those core gold holdings I've recommended!

Best wishes,

Larry

(SOURCE: http://www.moneyandmarkets.com )

For more information and archived issues, visit http://www.moneyandmarkets.com

Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Tony Sagami, Nilus Mattive, Sean Brodrick, Larry Edelson, Michael Larson and Jack Crooks.

U.S. Considering Taking Ownership Stakes in Banks

Thursday , October 09, 2008

AP

WASHINGTON — The U.S. Treasury Department is considering taking ownership stakes in many U.S. banks in a bid to restore confidence in the badly shaken financial system.

An administration official, who spoke on condition of anonymity because no decision has been made, said the $700 billion rescue package passed by Congress last week allows the Treasury Department to inject fresh capital into financial institutions and get ownership shares in return.

This official said all the new powers granted in the legislation were being considered as the administration seeks to deal with a serious credit crisis that has caused the biggest upheavals on Wall Street in seven decades and continues to roil global markets.

Supporters of this approach, such as Sen. Charles Schumer, D-N.Y., argue that injecting fresh capital into U.S. banks who want to participate in the program would be an effective way to bolster banks' balance sheets and get them to resume lending. Taxpayers would benefit because the government would receive an equity stake in the bank in return for providing the capital.

"This idea would, at a minimum, complement the administration's planned approach of buying up troubled assets and may prove to be the most promising tool of all in Secretary Paulson's kit," Schumer said in a statement.

A decision to inject capital directly into financial institutions in return for ownership stakes would be similar to a plan announced Wednesday by Britain.

Treasury Secretary Henry Paulson told reporters that Treasury was moving quickly to implement the $700 billion rescue effort and he specifically mentioned reviewing ways to bolster the capital of banks.

"We will use all the tools we've been given to maximum effectiveness, including strengthening the capitalization of financial institutions of every size," Paulson said at a Wednesday news conference.

Asked whether he would try something like the British plan, Paulson said: "We have a broad range of authorities and tools. ... We've emphasized the purchase of liquid assets, but we have a broad range of authorities. And I'm confident we have the authorities we need to work with going forward."

The administration so far has stressed its major goal is to purchase bad loans from financial institutions.

Paulson said that while the financial market turmoil has hurt the economy, the administration is moving quickly to begin the largest financial system rescue effort in history.

Even with the program to buy bad assets from financial institutions, he said, some banks will fail. He also called for patience, saying "the turmoil will not end quickly and significant challenges remain ahead."

In an attempt to help stop the financial crisis from causing a global economic recession, the Federal Reserve and other central banks cut interest rates in a rare coordinated move Wednesday.

Paulson called the coordinated rate cuts "a welcome sign that central banks around the world are prepared to take the necessary steps to support the global economy during this difficult time."

Paulson on Monday selected Neel Kashkari, 35, an assistant Treasury secretary, to be the interim head of the new program. In his remarks Wednesday, Paulson said the administration would move quickly to nominate someone to fill the job permanently.

Paulson said he was consulting with President Bush, congressional leaders and presidential candidates Barack Obama and John McCain before choosing someone to fill the job permanently. The post requires Senate confirmation, something Paulson predicted could occur in November.

The administration has been rushing to implement the program, which cleared Congress last Friday. Paulson said it would be several weeks before the program makes its first purchases of troubled assets.

"U.S. and global financial markets continue to be severely strained," Paulson said at the briefing called to preview the upcoming weekend meetings of finance officials of the Group of Seven major industrial countries, the 185-nation International Monetary Fund and the World Bank. The global credit crisis was expected to be the major agenda item at those talks.

Homeownership Resurgence Plan

SOURCE: http://www.johnmccain.com/Informing/Issues

John McCain will direct his Treasury Secretary to implement an American Homeownership Resurgence Plan (McCain Resurgence Plan) to keep families in their homes, avoid foreclosures, save failing neighborhoods, stabilize the housing market and attack the roots of our financial crisis. America’s families are bearing a heavy burden from falling housing prices, mortgage delinquencies, foreclosures, and a weak economy. It is important that those families who have worked hard enough to finance homeownership not have that dream crushed under the weight of the wrong mortgage. The existing debts are too large compared to the value of housing. For those that cannot make payments, mortgages must be re-structured to put losses on the books and put homeowners in manageable mortgages. Lenders in these cases must recognize the loss that they’ve already suffered.

The McCain Resurgence Plan would purchase mortgages directly from homeowners and mortgage servicers, and replace them with manageable, fixed-rate mortgages that will keep families in their homes. By purchasing the existing, failing mortgages the McCain resurgence plan will eliminate uncertainty over defaults, support the value of mortgage-backed derivatives and alleviate risks that are freezing financial markets.

The McCain resurgence plan would be available to mortgage holders that:

• Live in the home (primary residence only)

• Can prove their creditworthiness at the time of the original loan (no falsifications and provided a down payment).

The new mortgage would be an FHA-guaranteed fixed-rate mortgage at terms manageable for the homeowner. The direct cost of this plan would be roughly $300 billion because the purchase of mortgages would relieve homeowners of “negative equity” in some homes. Funds provided by Congress in recent financial market stabilization bill can be used for this purpose; indeed by stabilizing mortgages it will likely be possible to avoid some purposes previously assumed needed in that bill.

The plan could be implemented quickly as a result of the authorities provided in the stabilization bill, the recent housing bill, and the U.S. government's conservatorship of Fannie Mae and Freddie Mac. It may be necessary for Congress to raise the overall borrowing limit.

Fed orders emergency rate cut to rate cut to 1.5 percent

Fed orders emergency rate cut to rate cut to 1.5 percent

By JEANNINE AVERSA, AP Economics Writer 1 minute ago

The Federal Reserve cut a key interest rate by half a percentage point Wednesday to steady an economy teetering on the kind of financial collapse that America suffered in 1929.

Fed Chairman Ben Bernanke and his colleagues ratcheted down their key rate by 0.5 percentage point to 1.5 percent. The action revives the central bank's rate-cutting campaign which had been halted in June out of concerns that those low rates would worsen inflation. Since then, however, economic and financial conditions have dangerously deteriorated, forcing the Fed to reverse course.

The fact that the Fed felt it couldn't wait until its regularly scheduled meeting on Oct. 28-29, underscored the urgency of the situation.

The Fed took the action in a coordinated move with other central banks, which also were cutting their rates.

"The pace of economic activity has slowed markedly in recent months," the Fed said "Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit."

Although inflation has been high, the Fed believes that the recent drop in energy prices and the weaker prospects for economic activity have reduced this threat to the economy.

In addition, the Fed reduced its emergency lending rate to banks by half a percentage point to 1.75 percent. Given the intense credit crisis, banks have been ramping up their borrowing from the Fed's emergency "discount" window.

In response, the prime lending rate for millions of borrowers will drop by a corresponding amount. The prime rate applies to certain credit cards, home equity lines of credit and other loans.

The hope was to spur nervous consumers and businesses to spend more freely again. They clamped down as housing, credit and financial problems intensified last month, throwing Wall Street into chaos. Many believe the country is on the brink of, or already in, its first recession since 2001.

The Fed's last rate cut was in late April, capping one of the most aggressive rate-cutting campaigns in decades as it scrambled to shore up the faltering economy. After that, the Fed moved to the sidelines, holding rates steady as zooming food and energy prices during that period threatened to ignite inflation. In the past few months, energy prices have retreated from record highs reached in mid-July, giving the Fed more leeway to drop rates again.

At its last meeting in September, the Fed struck a more dire tone about the economy, hinting that a rate reduction once again could be in the offing.

Even with the unprecedented $700 billion financial bailout quickly signed into law by President Bush on Friday, the failing economy and the jobs market probably will get worse. Many believe the economy will jolt into reverse later this year — if it hasn't already_ and will stay sickly well into next year.

One of the most crucial pillars of the economy — the jobs market — has cracked, and wage growth is slowing. This means that consumers will be even more hard-pressed to spend in the fashion that helps grow the economy.

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