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

Morgan Stanley’s International ETF Boom includes Japanese Smaller Companies

Morgan Stanley Capital International (MSCI) continues to launch some exciting exchange-traded-funds (ETFs) over the last 12 months – many in hard-to-invest foreign markets.

MSCI (NYSE-MXB) is an independent unit of Morgan Stanley (NYSE-MS). The company, the world’s premier benchmark service-provider, launched its widely followed series back in 1969, the MSCI World Index. I reference MSCI for all global performance comparisons, including emerging markets, regional indices and even benchmarks denominated in euro.

Over the last several weeks, MSCI has launched single-country ETFs for Israel, Thailand and Turkey – hot emerging markets until recently. Through its association with iShares, MSCI now offers 36 ETFs in the United States. And in Frankfurt, the index-tracking firm also offers over 15 ETFs denominated in euro.

One of the more interesting and eventually, highly lucrative ETFs is the iShares MSCI Japan Small-Cap ETF.

Mike Burnick, editor of Global Market Investor, and I remain big Japan bulls and agree that Japanese stocks remain the best values in the world – still in a bear market since peaking more than two years ago. There’s no doubt that based on virtually every valuation matrix, including price-to-book and price-to-cash-flow, Japanese stocks are dirt-cheap.

I’ve been bullish on Japanese smaller companies for more than a year (see above chart of the 2nd Section Index). Admittedly, I was early getting aboard this train in late 2006; but despite a declining Tokyo 2nd Section Index (small-caps) over this period, the yen has surged from more than 120 to the dollar to about 99 this morning. That’s cushioned the blow somewhat for dollar-based investors.

Yet, I’m encouraged by the price action lately. Even in the midst of a global bear market, Japanese smaller companies are actually up almost 4% in March while other indices are in the red. This might be a compelling turning point. The gains, incidentally, have not been entirely because of the yen’s strength vis-à-vis the dollar; the market is rising in local currency.

The Global Market Investor and The Sovereign Individual portfolio remain bullish on the Land of the Rising Sun and the surging yen. Value investors sometimes have to be painfully patient awaiting a major market reversal. I think Japan’s Nikkei is worth that wait as it eventually musters a huge double-digit gain over the next 12-24 months while smaller stocks finally emerge from their morass and gain in excess of 100%.

The Twin Currency Portfolio Anti-Inflation Plan

In the financial world, inflation is the cancer that eats away at your long-term purchasing power. It doesn’t matter which currency you hold. All governments have debauched the coin to some extent over time, including the mighty Germans prior to the euro in 1999 and even the illustrious Swiss franc. The Americans, of course, have infamously nearly destroyed the dollar through years of military conflicts, massive deficits and costly financial bail-outs. The Romans, through decades of expansion and protracted conflicts also destroyed their currency. History constantly repeats in financial circles.

The U.S. government states consumer prices have averaged about 4.3% per year over the last thirty years. I say CPI is closer to 8% per annum over the last three decades and is accurately measured by the rise or increase in broader monetary aggregates, or money-supply expansion as defined by M-3. For a great graphic understanding of this assumption, visit www.shadowstats.com. Everbank’s Frank Trotter alerted me to this web site last month while at the Sovereign Society St. Kitts Emergency Money Summit. I think you’ll agree there’s something grossly inaccurate about the official CPI calculation.

Basically, every thirty years your purchasing power erodes by a formidable 94% or roughly 8% compounded per annum. A one hundred dollar bill in 1977 would now be worth only $10 – an amazing statistic.

The key for every investor is to outpace inflation in their domestic base currency, Treasury bills and global stock market benchmarks. Since investing is a long-term journey, at least five years, measure portfolio returns quarterly to ensure proper asset allocation goals and risk parameters. And make sure your portfolio is global. That means quality large-cap stocks that mostly pay dividends, alternative investments, index funds, commodities, gold, foreign currencies and even esoteric items like fine art and premium red wine. Heck, throw in classic baseball cards and other rare memorabilia; just make sure you’re diversified.

If you’re really concerned about the dollar, and everyone is lately, then you should achieve two investment objectives; first, outpace U.S. inflation and T-bills, and second, own a separate portfolio of hard currencies and gold.

If you’re a dollar-based investor, measure you returns versus U.S. inflation, risk-free T-bills, the S&P 500 Index and the MSCI World Index. Don’t be derailed or dissuaded by the dollar’s dismal returns since 2002 against the euro and other currencies; investors make the mistake of measuring their returns against the euro because the dollar has been pummeled. Measure your returns to benchmarks in that respective currency.

A dollar-based investor should first outpace U.S. inflation and the risk-free rate. That’s your first benchmark. You won’t be able to outpace every asset class every year, including foreign currencies, real estate, art, farmland, etc. Your primary task, if you’re dollar-based, is to beat inflation and the risk-free rate, or T-bills.

For euro-based investors, you must outpace Euro-zone inflation, three-month EURIBOR and the MSCI World Index, in euro terms. Concentrate your investments only in non-dollar currencies, and mainly in euro for proper currency representation.

More than ever, I think investors in the United States should have two portfolios.

One should be diversified globally and denominated in U.S. dollars. The second portfolio should comprise a foreign currency or euro-denominated portfolio, which can easily be implemented through European private banks. Both currency portfolios must own gold.

The dollar is now the most oversold and unloved currency in the world. Everyone, and I mean every investor, is vehemently bearish. I still believe it’s a huge mistake to dump your dollar holdings at these low levels because many great investments are denominated in dollars, including some of the best money-managers, stocks and alternative investments.

Don’t abandon the dollar; but make sure you have a separate Anti-Dollar Portfolio in place as a hedge against phony government inflation data on both sides of the Atlantic. In thirty years, I’m sure a global portfolio in both currencies will outpace rubbish government inflation data.

I’ll see you Monday. Have a great weekend.

Oil Maverick Sends Mixed Signals, Confuses Markets

Just to make sure we set the record straight, I want to be very clear about what I’ve read about Boone Pickens, his hedge funds and his current thoughts on oil and gas.

It seems Mr. Pickens has confused the markets by delivering conflicting views about oil’s near-term direction.

Two weeks ago in an article in the venerable Wall Street Journal, Mr. Pickens exclaimed that he thought oil “had to come down” over the near-term after a dizzying rally topping at $110 per barrel last month. I’ve included the link for your review. http://www.cnbc.com/id/23272368

Then, only a few days ago in a separate interview with CBNC, Pickens forecast a continuation of $100-plus oil in the wake of tightening supplies, which is the case following lower than expected inventories released yesterday morning.

Pickens also admitted he was probably wrong betting against oil and gas (e.g. shorting) during the first quarter. For the first two months of 2008, Pickens’ hedge funds tanked 14%, according to The Wall Street Journal.

Pickens is probably the world’s foremost authority on energy trends and easily one of the richest oil gurus. He still believes oil prices can remain high in the foreseeable future. I imagine, and this is pure speculation, that Pickens is now long oil and gas as we shortly conclude the first quarter.

Hedge fund managers like Pickens often change investment positions like the weather. It’s hard to accurately gauge exactly where they stand on any given trading day, and as evidenced in recent interviews, Pickens has probably cut his short oil and gas positions this week.

Yet demand weakness for oil continues in the United States. Total oil product demand averaged 20.3 million barrels a day over the past four weeks, down 2.2% compared to 12 months ago.

I still have a problem believing crude oil prices can continue to rally from current levels.

The United States is in an economic recession and still the world’s largest net consumer of refined energy products. In my eyes, the “easy money” in oil is over as this bull market matures. Since the 2001 recession, spot crude oil prices have skyrocketed a cumulative 425%.

Too Far, Too Fast: The Trouble with $100 Oil

It’s hard to believe the world’s largest economy is probably in recession this year while energy prices remain near all-time highs. In fact, I’d bet that by the end of the year, crude oil and the rest of the energy complex will suffer a long overdue correction as global demand slows amid a decline in consumption and growing inventories.

And I’ve got some smart money in the same company in 2008…

One of the legends in the oil industry is also making big bets against oil this year after riding the oil bull for the last six years all the way to the bank.

Soaring Oil as U.S. Growth Slows?

For the first time in the post-WW II period, the price of spot crude is actually rising at the same time the world’s largest economy is contracting.

From an all-time high of $110.33 per barrel on February 19, 2008, West Texas intermediate crude oil has declined to $100 this week. Still, prices are up over 60% over the last 12 months while other distillate fuels have also surged since March 2007. Gasoline, natural gas, heating oil, diesel, jet fuel – you name it, the entire complex has literally gone through the roof!

But what makes this a dangerous speculation at these lofty levels is the contraction in overall demand as the United States suffers a recession this year combined with a slowdown in most major and even emerging market economies. Plus, soaring oil prices have also reduced net demand as prices finally hit the upper end of what the market can absorb.

U.S. Demand Declining since 2006

True, the world needs oil. However, even a hot commodity like oil is forcing companies, individuals and governments alike to look beyond Black Gold and boost alternative fuels like coal, wind, solar, nuclear fuel and ethanol to supplement high prices. Alternative fuels remain very cheap relative to oil and gas and consumption is growing, especially for cheap coal and increasingly, nuclear energy where uranium prices have plunged more than 25% year-over-year.

According to the EIA or the Energy Information Agency, U.S. total demand for crude oil was actually unchanged in 2007 from 2006 levels at 20.6 million barrels per day. And consumption is slowing in 2008 as the economy suffers from the tribulations of a housing bear market, a credit crunch and broad-based consumer slowdown.

China Can’t Support High Oil Prices Alone

Total global energy demand continues to exceed supplies by approximately 1 million barrels per day, or 86 million barrels versus 85 million barrels of net supply. It’s hard to imagine that China, which continues to rapidly boost consumption, can offset declining U.S. petroleum demand without triggering a major correction in oil prices this year. The United States economy might not be the powerful force it was 20 years ago, but it still remains a formidable consumer of almost every raw material, including oil.

Investors and especially speculators wrongly assume that oil demand is elastic, or that high prices will command a buyer. That’s simply not the case and proof is the growing transition from energy-based fuel consumption to alternative fuels this decade amid Peak Oil. A high price for any commodity will ultimately encourage research and eventually, consumption into a cheaper alternative. This largely explains why we’ve seen a boom in nuclear energy, coal, wind and solar energy this decade; consumers won’t pay a high price indefinitely.

Texas Oil Maverick Turns Bearish

Inventories are rising for most refined products this spring setting the stage for a major price decline as speculators finally pull the trigger on one of the most lucrative commodity trades since 2002.

Recognizing the shift in consumption and rising inventories, Texas oil maverick, T. Boone Pickens, has turned bearish on oil in 2008. His hedge funds, which have earned a fortune for investors are now net short on oil. His funds, down 14% the first two months of this year and now scoring direct hits as crude slides from $110 a barrel last month. Pickens believes large speculators are heavily long crude oil and in the absence of demand-side fundamentals are priming themselves for a major spill.

Mr. Pickens, by the way, is not alone betting against oil in 2008.

Long-Term Bull, Short-Term Bear

My Commodity Trend Alert (CTA) service has been recommending a reverse-index exchange-traded oil fund since last fall. I expect oil and gas stocks to break down, a trend that is already underway as many energy stocks disconnect from the oil price recently – a bearish sign. Even with oil trading at $100 a barrel, we’re sporting a small profit on this trade since late 2007!

Longer term, oil prices are likely to head much higher as global economic growth accelerates and China and other emerging powers devour more energy and refined products derived from oil. The world is not replacing its annual production compared to 35 years ago, meaning we are consuming more oil than we can replace every year.

But no bull market is uninterrupted; commodities suffer violent corrections, particularly following blistering gains. Oil prices will decline this year, probably to the $75 or $65 per barrel range, depending on the severity of the U.S. economic recession and whether foreign economies catch a similar cold, or at the very least, downshift from a strong growth trend since 2003.

Morale Hazard Down the Financial Drain

Only a few days before its imminent collapse, executives at Bear Stearns Cos. were exclaiming they were liquid and solvent, vehemently denying rumors of a liquidity crisis. By Friday, March 7, the once venerable Wall Street investment bank was on the verge of financial ruin, facing a tidal wave of client redemptions as liquidity ran dry.

In the span of less than 12 months, Bear Stearns’ stock price went from a high of $159 per share to just $12 recently, an incredible 92% nosedive. Worse, all 14,000 employees who were required to invest about a third of their salary in company shares have been virtually wiped-out – and almost half of these people will probably lose their jobs following the official merger with JP Morgan Chase later this summer.

Officially, the Federal Reserve and JP Morgan Chase averted a panic in financial markets in March by consuming Bear Stearns and the banks’ tattered and near-worthless assets. But by bailing-out Bear Stearns, the Fed has set a path to its long-term destruction as it continues to absorb devalued paper and effectively marginalizing its role as keeper of the financial system.

Where’s Glass-Steagall Now?

The Federal Reserve is now on course to change the path of financial history this spring by acting as the lender of last resort to investment banks -- unprecedented since its creation in 1913.

If the now defunct Glass-Steagall Act, which separated commercial and investment banking in 1933 in the midst of the Great Depression, was still intact, U.S. banks would be a far more stable outlet for risk-taking. In 1999, the government repealed Glass-Steagall to the detriment of the American banking system, and to a large extent, Swiss, British, French and Canadian financial institutions as well.

Monetizing Near Worthless Paper

In its struggle to save the faltering U.S. financial system, the Fed is now monetizing almost worthless sub-prime mortgage-backed securities. And JP Morgan Chase, which was effectively forced to consume Bear Stearns’ share capital for a bargain-basement price of just under $300 million dollars, relented to the Fed’s demands earlier this month to bail-out the bruised investment bank.

Since the beginning of March, the Fed has now acted as lender of last resort to countless money-center, regional and investment banks looking to swap devalued mortgage-backed securities for Treasury bonds. Over $200 billion dollar billion dollars’ worth of taxpayers’ money has already been disbursed to wash-out credit risk. The Fed’s balance-sheet is assuming all sorts of toxic waste in exchange for Treasury debt – a tremendous coup for the reckless financiers on Wall Street who sold the world esoteric CDOs, or collateralized mortgage-backed securities.

The Fed and Morale Hazard

What ever happened to morale hazard? Why does the Federal government continue to bail-out the derelicts that cause financial panics? In the process, the individuals and institutions that should assume financial responsibly are bailed-out by the American taxpayer. In my opinion, the Federal Reserve is totally out of control and engaging in buy-out activity of the most dangerous variety that should be under the guise of the Federal government, not the nation’s central bank, if at all.

In previous economic crises, the Federal Reserve has acted as the lender of last resort. This is not the first time the Fed has called in the cavalry to support a badly wounded financial system.

In August and September 1998, the Greenspan Fed orchestrated a spectacular bail-out of Long Term Capital Management (LTCM), a hedge fund that invested in illiquid and exotic fixed-income securities using almost 50 times notional leverage before imploding. The Fed arranged a massive bail-out fearing a domino-effect across Wall Street as counter-parties to LTCM faced a liquidity scramble. Along with other money-center banks and regional Federal Reserve banks, the government engineered a bail-out and the economy and the stock market quickly recovered.

Meanwhile, ten years later, the founder of Long Term Capital Management, John Merriwether, is facing a run on his hedge fund after launching another product almost immediately following the first collapse in 1998. Amazing!

Once again, in 1990-1991, the Fed, fearing an outright collapse of the residential real estate market organized another formidable bail-out of the Savings & Loans, or thrifts that recklessly issued loans to homeowners in overheated real estate markets, mainly in Texas and other large states. Taxpayers once again came to the rescue with over $200 billion dollars or an inflation-adjusted $330 billion in constant dollars to bail-out the S&Ls.

The Biggest Bail-Out in History

In late March 2008, the Fed and other global central banks are now in discussions to form a super bail-out fund to once and for all wash-out sub-prime securities under one massive swoop. Once again, individuals and institutions that participated in the biggest financial fraud in history will probably get bailed-out.

The sub-prime mortgage mess continues to bleed U.S. and several large international banks, denying financial institutions the ability to repair smashed-out balance sheets and to effectively lend money. A severe financial crunch, the sub-prime crisis is tipping the U.S. into economic recession in 2008 and resulting in a global slowdown as cross-boarder investment capital trickles to a halt, business activity slows and banks remain reluctant to lend to one another in overnight credit markets. The financial drain is clogged and the Fed wants it cleared now.

Gold as the Ultimate Currency

Gold has performed brilliantly over the last several years and recently topped $1,000 an ounce for the first time in history. The sub-prime crisis, a dollar bear market, major supply shortages in South Africa and booming investment demand courtesy of exchange-traded-funds worldwide has catapulted gold to spectacular heights this decade. And the best is yet to come.

Overbought, gold should continue to retrench as the U.S. dollar manages to muster a short-term relief rally. This is especially probable in the event the Fed and other central banks announce a sub-prime bail-out initiative. The dollar’s rally, however, won’t last long until the European Central Bank (ECB) relents its inflation-fighting concerns and cuts interest rates. As the ECB and other central banks join the Fed and cut lending rates, gold will resume its bull market charge and head even higher as the expansion of bank credit heads into full swing to combat deflation in housing, bank lending and financial assets.

The United States and her allies will successfully rescue the financial system from the abyss in 2008. World markets will survive and eventually recover. But the long-term structural damage now underway in American finances, its balance-sheet and ultimately, the dollar, is appalling.

I’m looking to add to my gold positions at $875 an ounce and below on this correction. Bank on it.

Shipping Trends Indicate Softening Global Trade

Major barometers of shipping activity continue to slow this year – and not just in the United States.

The Baltic Exchange Dry Index, a global composite of lease rates charged by the world’s leading shipping companies to move dry bulk goods, continues to decline, now off more than 30% from its high last fall. The data suggests shipping companies’ earnings have peaked following a boom from 2003 until mid-2007.

Although the United States continues to benefit from a cheap dollar, boosting exports, imports are declining as shipping companies consolidate schedules to reduce costs as container volume declines compared to a year-earlier. Fuel costs, more than any other variable, continues to eat away at margins, despite fuel surcharges.

And it’s not just container shipping companies feeling the pinch…
Federal Express (NYSE-FDX) reported its third straight decline in profit last week amid a growing slowdown in freight volume and surging fuel costs. The freight-volume boom ended more than a year ago, and shipping has continued to slow along with the economy for months.

Along with United Parcel Services, Fedex’s main rival, diversified transportation companies handle more than 22 million packages per day. The only good news for transport companies is the acceleration in trans-Pacific trade where both operators continue to bolster sales at the expense of slower traffic in the United States.

The trucking business has been especially hit hard as skyrocketing diesel fuel continues to break into margins. As a result, railroads have benefited as companies shift transportation modes from trucking to rail in order to reduce costs.

Global shipping, both sea and land, are now entering a major slowdown as the U.S. economy contracts this quarter. Asian growth will probably continue to keep earnings from falling off a cliff; however, it’s fair to assume that the bull market in shipping stocks has ended since last fall as the weight of a U.S. slowdown combined with soaring energy prices slams the industry. Only the rails are making any inroads in a tough 2008.

Fannie and Freddie to the Rescue

Regulators in the United States opened the doors to mortgage giants, Fannie Mae (NYSE-FNM) and Freddie Mac (NYSE-FRE), helping to send mortgage-backed bond yields lower yesterday. The move ranks as one of the most important in a series of government-sponsored plans to widen the mortgage parameters in an ongoing liquidity crisis.

A key indicator I track to measure credit spreads continues to ease. The yield differential on the benchmark 30-year mortgage bond declined again to close at 2.74% -- down markedly from 3.70% on March 6. Just 14 days ago the spread or different between the 30-year mortgage bond and benchmark T-bonds had widened to a 20-year high.

If the United States is going to emerge from recession quickly, or suffer a soft economic contraction, mortgage rates must decline and housing must form a secular bottom.

Housing is at the epicenter of this crisis; the Federal Reserve has expanded its role beyond lender of last resort to money-center banks since last fall. The Fed, for the first time since 1913, is also providing liquidity through daily auction facilities to investment banks.

It’s now obvious that the Fed will do all it can to save the financial system. This sends the wrong message to investors and especially those reckless executives that structured mortgage-backed “garbage” and sold them to the unsuspecting public. Bear Stearns should have failed. Other liquidity-starved institutions should also head down the same path without the assistance of taxpayers’ funds. But the reality of the situation is completely different; the United States and the global economy cannot afford a financial collapse on Wall Street.

From an investment perspective, gold should be accumulated over the next few weeks, or sooner, amid weakness. The Fed and eventually, the rest of the world will inflate bank credit to the point of debasing their currencies once more and inviting aggressive inflation.

Deflation, or falling prices, is now pervasively widespread in housing, stocks, bonds (excluding T-bonds) and possibly, some commodities in the industrial metals sector. Governments will do all they can to reflate the financial system in 2008 – even the tough-talking European Central Bank (ECB), which I expect to reduce interest rates soon. If oil continues to slide, as I expect, this will open the door for the ECB to cut rates and finally take some hot air out of the euro.

The way I see it, the Fed will have to keep interest rates low for a long time because the financial system can’t handle another round of rate hikes anytime in the near future. This won’t be bullish for the dollar. Although the buck is badly oversold at these low levels and dirt cheap versus all currencies, there’s just no compelling argument for the currency to embark on a secular rally like it did from 1995 to 2001. Certainly not in a credit crisis that will take at least another several months or longer to extinguish.

I’m buying gold for my investors on the current dip and hope you’ll do the same. Deflation or inflation, I’m still expecting gold to top at least $2,000 an ounce in this bull market. And don’t worry; the current correction is perfectly normal after a huge advance from $675 an ounce last August to $1,035 this week. Use this correction to build or add to your gold bullion or gold ETF positions.

I’m off tomorrow for Good Friday. Have a good weekend.

It’s all about Housing and the Yen

The Fed’s significant 0.75% interest rate cut yesterday resulted in the biggest single day rally for stocks in six years. That’s the good news. The bad news is that the Japanese yen continues to strengthen and stocks in New York and Europe look wobbly despite the big rate cut. There’s no follow-through for this market even after the Fed injects massive doses of liquidity through creative financial engineering and machete-like interest rate cuts.

What really irks me is the performance of the yen – up 24% since last summer and likely to break its all-time high of 85 yen to the dollar recorded in 1995. As global leverage is unwound, the yen is rising. Risk reduction is bad news for capital markets, not least for the Japanese economy, which relies heavily on exports. I’ve been bullish on the yen for more than a year along with my TSI colleagues; but even I must admit the yen’s advance has been too rapid and unfortunately, will continue to harm the domestic economy and foreign markets as investors accumulate even more of the Japanese currency.

The Federal Reserve has now assumed about $400 billion dollars’ worth of distressed or bad debt over the last several months. The printing presses are now wide open. The dollar can’t find a bottom, and unless central banks do something soon, the world’s reserve currency will decline to newer lows versus most currencies.

I think, more than any other causal variable, the dollar is going down because U.S. housing is still bleeding a slow death. This bear market is tied to housing; until it stabilizes, most assets will remain under pressure.

What would compel me to turn bullish on world markets? I would need to see riskier credits or non-Treasury debt prices firm or at least stabilize; oil prices must decline; an end to rapidly falling housing values and of course, a stable U.S. dollar.
As for gold, prices are too high and we’re now witnessing a correction this morning.

Gold prices have surged from about $675 an ounce last August to over $1,000 this week without taking a pause. I’d be looking to build new and existing gold positions around $925 or $900 an ounce. Previous corrections have been severe but have also provided superb entry points for investors. That’s exactly how my Commodity Trend Alert service played the last major freefall in June 2006; we aggressively bought gold at $581 and silver at $10.35 an ounce.

I’m now looking to build new gold positions over the next several days as prices pull back in conjunction with a dead-cat U.S. dollar bounce and possibly, a stock-market rally.

Bear Stearns and the Next Domino in Global Banking

Bear markets typically end or crescendo at the point of maximum pessimism. Though we’re not there yet, Bear Stearns’ effective demise last Friday is another domino in the growing list of troubled banks and investment banks in the United States, Canada and Europe.

I don’t feel bad for the executives at Bear Stearns. These guys deserve to have their heads handed to them for throwing the company into effective bankruptcy last Friday after loading-up on mortgage-backed securities to the hilt. News that one of the most successful hedge funds with $25 billion dollars in assets was pulling the plug on Bear Stearns as their prime broker was probably the straw on the camels back. Other hedge funds began withdrawing their assets en masse by mid-week and by Friday the party was over at Bear Stearns. Or maybe, the “mirage” was finally exhausted.

Right up until Friday, Bear Stearns exclaimed that its liquidity was significant and investors were wrong to assume it was suffering a liquidity crisis. Of course, a few hours later, the firm avoided bankruptcy only because of the Fed’s insistence that JP Morgan Chase purchase the wounded investment bank for just $225 million dollars, or $2 per share.

What a disaster – and not just for shareholders. I feel badly for the 14,000 Bear Stearns’ employees who were obliged to plunk about a third of their salaries into company stock; these people not only face massive layoffs following the JP Morgan Chase consumption, but also have seen their entire investment basically destroyed.

The Federal Reserve, in my eyes, did the right thing, despite wiping-out many investors in the process. The alternative, however, could have been significantly worse with other banks possibly joining Bear in a domino-like liquidity freefall; the perception of a liquidity problem was rampant across several smaller investment banks last week, and by Friday fear had spread to Lehman Brothers, a major player on Wall Street.

Forget moral hazard; the Fed did the right thing because right now the market would be at least several hundred points lower and other banks might have probably failed.

The broader economy is now in a freefall and letting Bear Stearns go under would have resulted in a crash because big hedge funds park their cash at the firms’ prime brokerage unit. The economy can’t afford losing a major player.

So where do we go from here? Like I’ve suggested in these pages over the last several months, investors should be heavily diversified across major asset classes, including high-value blue-chip stocks that pay dividends, foreign currencies, gold, commodities, alternative investments that appreciate in a bear market, and cash. We’re not at the bottom yet for this bear market, but we’re certainly getting closer as the Fed throws major amounts of credit to arrest deflation in financial assets.

Dogs of the World not Spared after Eight Weeks of Turmoil

After eight weeks of trading since its inauguration on January 15th, the Dogs of the World have been true to their name -- Dogs. But with more than eight months left of trading in 2008, I remain optimistic that this strategy will outpace most indices as dividends begin to save the day and deeply depressed stocks in our portfolio begin to rally.

Since January 15th, the Dogs of the World has declined 10.5%, excluding dividends, compared to a 6.2% loss for the S&P 500 Index and a 7.8% decline for the MSCI Value Index, a composite of value-based global equities. On an annualized basis, the Dogs’ yield of 7.7% back in mid-January reduces its losses to -8.9% thus far into 2008.

Three out of ten Dogs of the World have posted gains in 2008 while the rest have suffered losses – a few posting big double-digit declines and falling in sympathy with global market since January.

To be sure, trying to make money in a bear market isn’t easy. Stocks have been crashing for weeks in the midst of more sub-prime related losses, hedge fund failures, mono-line insurers’ bailout plans and a host of bearish economic statistics sending the market to four year lows. And the sell-off has been global; all major and emerging markets are deep in the red in 2008 declining along with Wall Street.

So should you abandon the Dogs of the World now at these low levels? Is it time to run for the hills amid market mayhem and fears of a deep economic recession unfolding in the United States?

Absolutely not…

Investors should remain committed to the Dogs of the World for the remainder of the year. Volatility is a prevalent theme in the markets since last July and investors should remain committed to value-based strategies that pay dividends. The Dogs still pay an effective yield in excess of 8% at these levels and those dividends will start kicking-in soon as the year progresses. I also don’t expect some of the Dogs’ to remain at these low levels for the remainder of the year after hitting fresh lows last Friday. The market has been pounded badly over the last five months.

It’s hard to be an investor in a bear market. But the worst time to sell good stocks that pay dividends is when they’re smashed-out. Stick with the strategy. We’ve still got more than eight months left in the calendar year.