Eric Roseman's Eruptions: Stocks, Global Markets and Commodities BLOG

Banks Have Already Posted Bulk of Bear Market Declines

Unless we’re heading into a multi-year recession with near-doomsday consequences for the U.S. economy, the majority of banks in the United States, Canada and possibly even Europe have posted the bulk of their horrendous declines at this point. Even Banque Socgen’s stunning $7.2 billion dollar rogue trading loss last week in Paris failed to dent a long-awaited rally for the distressed banking sector. Although not all banks rallied, most certainly did with U.S. financial services leading the way with double-digit gains for many issues.

I’m coming clean…I’ve disclosed in these pages since last fall that I’ve been chipping away at U.S. large-cap banks. I currently own Bank of America (still down) and have already made a few bucks vulture investing in U.S. Bancorp recently.

The way I see it, global corporate earnings outside of the financial services sector will be a major disappointment in 2008 as expectations remain too high. Banks, on the other hand, can still decline another 20% or so from current levels but all the bad news has virtually been priced into low stock prices, including sub-prime, mono-line and other collateralized debt obligation (CDO) disasters looming over the horizon.

On the other hand, earnings troubles await many cyclical companies, including natural resource producers, autos, heavy equipment manufacturers and other segments of the economy tied to U.S. and international growth. Global “recoupling” is now the buzzword as foreign markets rediscover just how correlated they are to Wall Street – even the emerging markets. Yes, the emerging markets now grow organically on a grander scale and have become increasingly less dependant on the West for growth; but that relationship is still powerful and won’t disappear tomorrow.

Many highly cyclical commodities tied to the growth cycle are now falling out of bed. Most base metals and oil stocks have already peaked since mid-2007 and other sectors will follow suit. Basically, we’re now entering a recession in the United States and earnings will have to be revised lower. This implies more pain for stock prices, regardless of Federal Reserve interest rate cuts.

If you’re afraid, and I mean truly afraid to buy bank stocks today, then that little voice inside your head is probably wrong. It’s time to do exactly the opposite of whatever your gut instinct is telling you. In the past, I’ve been greatly rewarded buying amid chaos; my only regret is I’ve never had the guts to buy enough.

In the investment business, fear is usually an investors’ best friend when it comes to buying securities. Chip away at the banks now and continue to build your positions throughout the course of the year.

I’m in-transit on Friday but will return on Monday, February 4th. Have a good weekend.

The Cardinal “Rule of 72”

Compounding is real magic – if you know how to calculate results. The problem is most investors fail to appreciate the math associated with long-term financial planning, or more precisely, fail to plan accordingly because financial projections and mathematical equations are done incorrectly. The result is usually inadequate savings at retirement.

At a time of increasing market volatility and uncertainty, investors must understand how to calculate compound interest. That’s what the Rule of 72 is all about; as you debate whether to save or spend for your retirement, keep the Rule of 72 in mind.

Simple Interest versus Compound Interest

A recent survey conducted by The Wall Street Journal found that most investors underestimated how much savings grow over a period of time. Equally devastating was the damage debt accumulation factored into retirement planning, or the worst evil in the financial planning world coined “reverse compounding.”

Saving for a rainy day is vital to retirement planning, but so is paring down one’s net debt; over time, high debt loads can eat into capital as extraordinarily high interest rates on credit cards turn manageable debts into explosively high monthly burdens, draining savings.

The first thing investors and savers should do is think in terms of “compound” interest, not simple interest.

For example, an 8% annualized return on an investment portfolio over ten years does not equate to an 80% cumulative return. That’s a popular mistake most investors surmise. Rather, the cumulative return over this period is actually higher at 116%. If you divide 72 by the rate of expected return, you end up with a figure that tells you how long it will take to double your money. In this case, an 8% annualized return will double your capital in nine years.

The beauty and power of investment compounding is that our original capital contribution earns returns on top of our investment gains, or unrealized gains accrue on top of more unrealized gains year after year, resulting in a higher effective rate of return, or compound interest. That’s the difference between simple and compound interest – and over time, it can make or break your retirement goals.

Don’t Forget Credit Card Debt!

One of the worst debts to accumulate is credit card installment debt. Interest rates on most cards run as high as 20% or more in some cases, and literally turn a sizable outstanding balance into a debt-financed nightmare over time. On credit cards, individuals pay interest on original purchases plus monthly interest charges. It’s a diabolical monster that continues to grow like a disease until debt balances are finally paid in full.

The first thing an investor should do before embarking on a savings goal is to reduce or completely eliminate installment debt payments. Once credit card bills are paid in full, the devastating consequences of reverse compounding is eliminated and a proper long-term savings program can commence without the drag of interest charges.

And remember: don’t be lured by low introductory finance charges with a new credit card company for transferring your balances. That low single-digit rate expires after a few months and then balloons to a double-digit rate just like other credit cards.

The best strategy is to simply eradicate the existing debit balance on all credit cards and maintain a debt-free lifestyle so investment compounding can work for you.

Plan now for Rough Markets and Capital Preservation

Since mid-2007, global stock-market volatility has exploded with a vengeance after four years of historically low volatility. In the absence of any systemic or financial shocks, stocks enjoyed uninterrupted gains from the bear market low of October 2002 until July 2007 when sub-prime reared its ugly head. The U.S. broader market almost doubled over this period, though for the most part barely posted any material gains from its peak in March 2000 amid the dot.com mania.

And unbelievably, the S&P 500 Index has barely posted any gains at all over the last decade after adjusting for inflation.

At this stage of the economic cycle, which is now adjusting to a slowing profit environment and an economic recession in the United States, the time to preserve long-term compounding is now!

In order to preserve compound interest amid soaring volatility levels, consider an asset allocation plan that divides your nest-egg among blue-chip stocks worldwide, including dividend-paying companies, high-quality bonds, commodities (including gold), and foreign currencies. With the U.S. dollar losing about 90% of its value every thirty years, investors must allocate resources across a broad spectrum of assets to preserve long-term purchasing power.

Also, I suggest adding a few mutual funds that can make money in a bear market, too.

Not many money-managers can produce a positive rate of return amid plunging stock values, but I’ve discovered several that can achieve absolute returns in the United States and offshore. A 10 to 15% long-term allocation to these products can mitigate capital losses during bear markets and when applied to a globally diversified asset allocation portfolio, should preserve your compounding even in a bad market.

The Rule of 72 is vital to your long-term financial goals. Before starting on your retirement building plan make sure to minimize or eradicate debt balances so compounding works in the right direction.

History Suggests Stocks Finish Higher as Fed Cuts Rates

Global stock markets, including the United States, have endured an absolute pounding since July. Many large-cap and small-cap indices have already hit bear market territory this month.

The S&P 500 Index has declined 11.5% since July 1st while the S&P 600 Small-Cap Index has plunged 17% over the same period. And the MSCI World Index of major economy markets has declined 10% over the last seven months. Oddly enough the MSCI Emerging Markets Index has advanced 4.8% since July 2007; but before getting too excited allow me to throw some cold water on that rally. Emerging markets have sunk 17% over the last three months as investors get reacquainted with re-coupling and not decoupling.

But there is a silver-lining amid the depressing state of the markets lately…

According to research from U.S.-based fund managers, Neuberger and Berman, the past 11 series of Federal Reserve interest rate cuts have shown to be supportive of equity market gains 12 months following the first Fed rate cut. The only exception was in 2001 as stocks continued to slide; they also plunged further in 2002, dropping a dizzy 22% -- the worst calendar year loss for U.S. stocks since 1973. And that was more than 12 months following the first Fed rate cut.

But history usually shows an average gain of 16% one year following the first rate cut. That’s a pretty impressive return. Stocks began sliding last July and the Fed cut the discount rate for the first time since 2003 in August. Still, five months later, we’re deep in the red and that’s after more interest rate cuts.
Although the Fed’s interest rate tonic usually helps the market at some point, it’s coming too late this time around. Housing is the bubble that’s coming undone now and rate cuts won’t do much for homeowners who face foreclosure. For homeowners, what matters is price, not rate cuts.

Why Sub-prime is Different

Unlike previous economic crises and financial shocks when the Federal Reserve, foreign central banks and money-center banks successfully arrested the carnage in asset values, this crisis is remarkably different and threatens untold damage to bank balance-sheets and investor confidence.

The main difference between the sub-prime mortgage crisis that’s still inflicting wounds across the Western world and prior systemic shocks is the ability or inability of coordinated intervention to halt the disease. And by “coordinated intervention” I allude to government-sponsored bail-outs of reckless institutions that really have no business continuing as a corporation yet alone warranting a bail-out. But that’s how things work in the financial world: if a crisis develops, you don’t fix it, but instead, throw piles of money at the problem until the bleeding stops. That’s what worked in 2002, 1998, 1990-1991 and in 1987.

The cork on this bottle called “sub-prime” is very different compared to previous financial failures in U.S. economic history. That’s because previous shocks were relatively far more contained and centralized in one sector of the economy; this shock, a diabolical monster, has morphed into a runaway train threatening to spread to consumer auto loans, credit card installment debt and commercial real estate loans – all securitized and packaged by Wall Street the same way as mortgage-backed collateralized debt obligations, or CDOs.

Thus far, the sub-prime crisis has cost global banks about $107 billion dollars. That’s chunk change compared to what the final tab will cost over the next few years.

Investors should be concerned this time around because unlike the S&L Crisis in 1989-1991, the Russian rouble and Long Term Capital Management blow-up ten years ago or even the regional Asian economic crisis in 1997-1998, sub-prime is not contained. It’s not a area of the market that you can just throw hundreds of billions and hope the problem goes away. As it spreads to other structured products tied to synthetic loans, more government money will be required to stabilize the financial system, including help from our White Knights – the Sovereign Wealth Funds or SWFs.

This crisis, like others in the post WW II period, will eventually pass. But it’s a big mistake to think the worst is behind us. I think there’s more bad news coming from earnings, domestic consumption and growing personal bankruptcies. Truth is most investors and bankers themselves still don’t have a handle on the depth of this crisis or how much it’ll cost taxpayers and shareholders.

I’m starting to bargain-hunt amid the stock-market carnage, especially in stocks that pay big dividend yields. But I also know the worst isn’t over, either, so I’m saving some powder. You should too.

Listen in on my FREE Emergency Money Summit Teleconference...going on right now.

Baltic Dry Index Plunges 42% from November Highs

The London-based Baltic Dry Index, a freight gauge for the transportation costs of major bulk commodities, has collapsed 42% from its all-time high last November.

Transportation costs for iron, coal and the grains plunged to a six-month low last week – the largest decline since records began in 1985. The large price drop clearly suggests that global economic growth is slowing and bulk shipping rates are finally coming down to earth following a price explosion since 2003.

Historically, the performance of the Baltic Dry Index has correlated strongly to the CRB Index and other commodities indices. But this time, the CRB Index is just a few percent below its all-time high a few weeks ago and has not declined in sympathy with freight costs (see above chart). This suggests the demand for raw materials remains very strong despite fears of a growth slowdown worldwide.

Which index is more accurate at this stage? The Baltic Dry Index is forecasting a major end to the commodities boom while the CRB Index and other commodity benchmarks are just shy of their highs earlier this month. We won’t see price divergences remain this extreme for much longer; at some point, either the Baltic Dry Index quickly recovers or the CRB Index hits a peak and crashes. Time will tell.

As Inverse Stagflation Threatens Growth, Look to Euro-Zone Corporate Bonds

Over the next 12-24 months the European Central Bank (ECB) will begin cutting lending rates to revive faltering economic growth. The Bank of England has already set a course to monetary reflation and I expect the Swedes, Danes and Norwegians to follow suit. Like the Federal Reserve, the Europeans will shortly abandon tough-talking anti-inflation rhetoric and cut interest rates to fight the ongoing credit crisis and the threat of deflation now gripping real estate and corporate bank lending.

While historically vigilant against inflation, the ECB has no choice but to relent to the growing forces of price deflation. That makes high-grade Euro-zone and even British corporate bonds attractive investments over the next two years as European rates decline. If you’re dollar-based, consider buying only investment-grade European corporate bonds hedged back into dollars; the American unit is heavily oversold and might be at the cusp of a short-term cyclical bear market rally against the overvalued euro and pound. The latter unit is tied to the American growth cycle more than any other European economy and the pound is heading significantly lower versus the dollar.

I like short-term and mid-term Euro-zone corporate bonds. For example, Sweden’s telecommunications giant, Telia Sonera (rated A- by the rating agencies), has an 8-year issue trading 8.3% below par-value and paying an effective yield of 5.52% in euro, or 171 basis points more than comparable German bunds, a key euro-zone benchmark. You can purchase these and other corporate bonds through European private banks, including Jyske Bank in Copenhagen, EFG Private Bank in Stockholm and Euram in Vienna. Many of these issues are also tax-free at the local level if you’re a non-European Union resident investor; be sure to ask your private banker about these benefits.

The current global economic environment is mired by a bizarre cocktail of rising prices for energy and foodstuffs and strangled by growing deflation in housing values, bank lending and now, stock prices. This “inverse stagflation” model will force central banks to cut interest rates because consumers hold the bulk of their wealth in housing and stocks in the United States; more than any other variable these two asset classes are now plunging in value – highly deflationary and threatening consumption and therefore corporate earnings. It’s these economic and financial circumstances that tipped my investment models to bearish this month for the first time since 1999.

In 2008 and 2009, I’m looking at euro-zone and British gilts bonds for conservative investors. Just make sure to hedge your exposure if you’re dollar-based.

Not Going for Broke; Hedge Now and Protect Your Nest Egg as Deflation Packs a Punch against Inflation in Market Massacre

The global panic on Monday, January 21 will go down in the history books joining the ranks of other short-term systemic threats to the financial system. The bear market in stocks, defined as a peak-to-trough decline of 20% or greater has already occurred in many major and emerging markets, engulfing small-caps, REITs and a growing universe of high-yield and other commercial paper markets since last summer; the crippling blast on Monday was a panic. The losses are enormous in January trading as the credit crisis accelerates forcing the Fed to cave-in to markets in order to minimize the duration of an economic recession.

Folks, deflation’s back and it’s blended in a bizarre yet toxic mix of rising inflation in most services, food consumption and energy on a global scale with China and the rest of the fast-growing emerging markets gulping raw materials. But get this; the secular bear market in U.S. housing since late 2005 combined with plunging global stock market values has officially killed the stock bull in January. Consumer asset deflation is now a major threat to growth and therefore corporate earnings in 2008. Welcome to “inverse stagflation,” or rising inflation combined with falling asset prices.

Deflation versus Inflation: Retirement Make or Break

Deflation is the nemesis all investors abhor. It strikes hard at most asset classes and destroys values far more effectively than inflation, another monetary phenomenon where hard-money investors can profit in things like gold, oil and foreign currencies. In deflation, cash is king (also foreign currencies) and probably even gold, the ultimate monetary store of value. We’re not sure about gold glowing in a depression because Roosevelt outlawed ownership in the 1930s; but we can conclude in an age where most central banks desire competitive currencies, the race continues to devalue paper money vis-à-vis hard assets like gold now at an all-time high.

Major Shift as Bull Trampled

It’s been a highly profitable ride for commodity bulls, global stocks, small-caps and emerging markets alike since 2002 with gains exceeding a few hundred percent or more. Now the tide is shifting to safety of assets, income, value and the ability to hedge in other non-stock securities that can appreciate in an equity bear-market.

Select commodities, including gold and silver, currencies, value dividend-paying stocks and distressed debt securities all offer tempting pickings after a global pounding since November. But how do you get started amid mayhem?

Time for Investors to Act Now!

The major threat to retirement portfolios this year is the growing credit crisis, spreading from one facet of credit to others, including bond insurers, auto installment loans and credit card debt – all securitized in similar ways to sub-prime securities. In many ways, the credit crisis is like a runaway freight train -- and where it stops nobody knows.

Some holes have been plugged back into the financial system (LIBOR rates have narrowed since Christmas) and banks continue to inject massive doses of liquidity in concert with powerful Asian and pan-Arabian investment capital, or the Sovereign Wealth Funds (SWFs). But the waters aren’t 100% safe as markets continue to drop like a rock in the worst January on record.

Although governments and banks are working to resolve the credit squeeze, more bad news is on the horizon. Earnings are slowing, consumption is declining and for the first time in seven years, inflation is taking a break. Inflation, always higher than reported figures due to subjective distortions and probably in the 8-10% annual range over the long-term, is fighting a new battle with deflation since last summer.

The recipe to deal with a crisis, any crisis, is to throw all you can at the problem until you put the cork back on the bottle for another few years, or until elections. That’s been the history of previous U.S. or global panics as central banks create mounds of credit to arrest asset price deflation.

Investors must diversify and protect their wealth in currencies, commodities, including gold, prime real estate, and solid blue-chip winners for the long haul and for every market environment. The bull market is over and a new economic and investment landscape demands an effective and profitable asset allocation commitment, particularly in bear markets for most assets.

What’s Hedging?

Hedging can be best defined as owning two cars and paying for the privilege to not use the idling vehicle for a long time – hopefully. Or, in this case, staying invested in global markets and owning securities that provide a negative correlation to financial assets so you’re portfolio isn’t devastated by a crippling bear market.

You never can afford to be completely out of the stock market. Most investors and institutions alike always maintain sizable equity representation in their asset mix. Even today, amid a growing bear market, most institutions still hold at least 40% to 50% of their giant client portfolios in stocks. It’s hard to argue about the long-term merits of staying invested and historical returns prove that point.

Indeed, stocks are for the long haul and few asset classes have outpaced equities’ total return, even adjusted for inflation, over the past 100 years. The key to uninterrupted compounding is to stay invested.

But as economic cycles change, usually accompanied by rising volatility, investors must embrace defensive investing.

Secular Bear Markers are Crippling, Attack Wealth

My biggest fear is losing several years’ worth of compounding in a major market blow-out. Only eight years ago the mother of “bubbles” over the last 100 years, tech stocks, blew up as that bear market spread throughout the non-real estate economy for more than 36 months. And back in 1973 and 1974, the worst bear market since the Great Depression caused total carnage resulting in spectacular losses for global stocks. Believe it or not, the S&P 500 Index has actually declined adjusted for inflation since 1998 – a period marked by a bust earlier this decade and a boom in the post-2002 period, especially abroad.

The point here is that bear markets do occur and when they do, wealth is severely compromised.

My strategy is to stay invested, at least partly, in great stocks, solid fund managers and diversified exchange-traded-funds; but I also want to ensure I’m protected if things get uglier. I’ll pay a few percentage points a year for this protection and forego higher overall profits as a result. In a bear market, you can still make money; stocks and other risky assets that have greatly appreciated should be sold to make room for other far more exciting and lucrative investments with low to negative stock-market correlation.

Financial advisors have generally done a poor job protecting clients in bear markets because they don’t understand the concept of hedging and what it means to spread your clients’ assets across more than eight technology stocks or the S&P 500 Index. You’ve got the spread the risk ahead of economic change. Now is the time to make sure you’ve got the right blend of assets, bank accounts and the credibility of the security or management team you’re entrusting your wealth.

In St. Kitts next month, the Sovereign Society team, including our global blue-chip panel will show you how to implement market hedges and to all-weatherize your assets. There’s no time to waste.

Don’t Panic

Global stock markets are now melting down. The futures this morning on the Dow and other U.S. aggregates show huge triple-digit losses following massive declines yesterday in Europe and Asia. Europe appears to be stabilizing today and that’s good news for nervous investors. Make no mistake about it: The bull market is dead.

Heading into this morning’s trade the MSCI World Index is now down a dizzy 12.2% this month and the MSCI Emerging Markets Index has tanked 13.5%. This is by far the worst January for global stocks since the Morgan Stanly Capital International database was formed back in 1969; it’s also the worst start for U.S. equities since 1950.

The absolute worst thing an investor can do now is panic and sell beaten down stocks at these levels. The battle of emotions now surfaces for most investors – even experienced individuals as the tribulations of capital loss and widespread panic turn into outright fear. The impetus to dump stocks now is formidable for many investors.

My advice is to avoid selling in a down market. Stocks are extremely oversold at the moment, and at some point will embark on a massive triple-digit recovery lasting a few days, possibly more. It’s at this juncture, not before, that investors should sell stocks that they don’t want to hold. In other words, sell on strength.

Over the next 12-18 months global stocks are going to have a tough time making any serious gains. I still expect equities to outpace government bonds this year because Treasury’s are priced at extreme levels, offering zero yield-value at this point while equities are now pricing in a recession. Equities are cheap -- and getting cheaper. Stocks will likely tread water for the next several months but should finally start to modestly recover towards the end of the year as global monetary stimulus packs a powerful punch to save the economy.

Tomorrow, I’ll comment on why 2008 and possibly, 2009 will be critical years for your retirement planning and how to position your portfolio for a tough market over the next 12-24 months. That’s what our St. Kitts Emergency Money Summit is all about next month.

Autos and Basic Materials: The Next Casualties

In 2007, virtually every segment of the financial services sector witnessed dramatic declines as sub-prime write-downs and a plunge in investment banking revenues sank bank stocks in North America and Europe. And while the crisis is far from over as sub-prime spreads to consumer installment loans and possibly, asset management companies, the next major shoes to drop will result in big profits for contrarian investors in 2008.

Among the next major blow-ups this year are loans tied to automobiles and industrial materials producers. Both sectors are highly vulnerable to an implosion, and for different reasons.

The autos face major headwinds from a widespread credit crunch, a bear market in housing and fragile consumer confidence fractured by soaring gasoline prices. The auto industry is heavily exposed to tighter credit conditions; auto companies maintain a high dependence on consumer credit for the sale of their products. With domestic consumption now weakening coupled with rising unemployment since December, the trend is not friendly for big ticket discretionary items in the United States.

Meanwhile, the industrial materials sector has mostly enjoyed a huge boom over the last six years amid a bull market in commodities. But some sectors have now hit “bubble” valuations, namely the agri-business sector and industrial metals. The latter, mainly steel, copper and nickel are hugely overpriced relative to a softening global economy and possibly a hard economic landing in the United States in 2008 and a crash in China later this year or in 2009.

The Big Three -- Less Ford Motor?

From now until 2018, or sooner, the odds are rising that one major American auto manufacturer won’t exist. Whether this company is acquired or collapses is hard to forecast at this stage; but one thing is for sure: The global auto industry can’t handle combined capacity from three giant U.S. manufacturers indefinitely.

Over the last four years I’ve betted against Ford Motor buying put options. That speculation worked out very well. Of the three major U.S. car manufacturers, Ford Motor is probably the most vulnerable with General Motors (GM) not too far behind. Both companies have soaring retirement benefit costs, declining car sales and a stale lineup of vehicle production compared to more exciting brands emanating from Europe and Japan. In 2007, Toyota surpassed GM, selling more cars than the Detroit-based goliath for the first time in history.

The United States continues to lose the race against foreign manufacturers, especially the Japanese since the 1980s. Toyota and Honda continue to strip market share away from the Big Three this decade.

In 2007, total U.S. vehicle sales were less than 16 million units – the lowest number since 1998. Ford Motor alone recorded a dizzy 8.9% drop in new car sales in December compared to 12 months earlier while GM declined 4.4% and Chrysler actually increased 0.5%.

In my book, the auto companies rank among the weakest industries in the world, probably in the same company as airlines. Both business models absolutely stink with combined debt outstanding now totally out of control. Autos are the next sub-prime.

U.S. Recession, Chinese Crash

If the U.S. economy is softening this quarter and heading into recession, defined as two consecutive quarterly contractions in GDP output, then it’s fair to assume that other global economies will also slow. The prevailing theory of global “decoupling” is nonsense; consumer demand in local markets like India and China remains too nascent and still largely unsupportive of a domestic-led expansion without a boost from American exports. I have very little confidence that China can escape a slowdown if the U.S. suffers a recession. Asian emerging markets still heavily rely on U.S. and European exports; inter-regional trade among these countries has certainly grown but again, is hardly enough to sustain solid growth without consumption demand from the West.

If the Federal Reserve and the European Central Bank (ECB) have been too late cutting interest rates to boost economic growth since last summer, then the opposite is true about The Bank of China; the Chinese monetary authorities are struggling to reign in credit. The Bank of China has raised short-term lending rates since 2005 but to no avail. The economy continues to boom despite government efforts to cool growth and rampant money-supply, or the excessive creation of bank credit.

Chinese inflation is soaring, interest rates are still too low and most of all, most banks have recklessly issued real estate loans. If you think sub-prime is a major crisis issue in the United States, wait until China’s banking system finally comes undone when the humungous building boom draws to a crushing conclusion. It’s absolutely ridiculous to believe China’s economy won’t crash. All great economic powers over the past one thousand years have suffered major depressions on the way to greatness, including the United States, Germany, Japan and England since the mid-19th century.

Bubble Trouble

China’s consumption boom will end, at least temporarily, as the economy eventually adjusts from hyper growth to a mid-cycle slowdown. I think this transition has already started. And if that’s true then all industrial metals and most chemical and industrial material manufacturers are trading in “bubble” territory right now and ripe for a major decline over the next 12 months. The same goes for Mainland Chinese stocks – heavily overvalued and also primed for a major crash following a 300% advance since 2006.

Betting against U.S. auto manufacturers and industrial materials will probably yield contrarian investors some enormous profits this year or in 2009. Both sectors offer compelling short-sale fundamentals and poor investment arguments at this stage of the five-year economic boom. When they pop, they’ll yield fortunes for speculators.