03/12/2008

Despite the Federal Reserve's announcement Tuesday that it would, in effect, ramp up loans of cash and securities to banks and dealers in an attempt to rescue the beleaguered mortgage-linked securities market, the pain in the credit market remains.

The Fed's thought here is to let firms borrow up to $200 billion of Treasuries and pledge various flavors of mortgage-backed securities, including both agency and private-label instruments, as collateral. Well, this sounds like an attempt to juke the stats to me, but we'll all soon see if it works as intended.

Certainly, Wall Street liked what it heard Tuesday, but I caution you to keep something in mind. Some of the biggest up days we've ever seen in the market have occurred during bear markets. Why does this happen? Well, for starters, there's a lot of short covering in a bear market. That means traders who hold short positions are forced to cover those shorts when the market makes a sharp move higher. That short covering fuels more and more buying, and that buying leads to higher prices.

But aside from what happened Tuesday, keep in mind that the fundamentals driving this bear market are still in place. Indeed, this is not your father's bear market, and here's why.

First, Americans have been living way beyond their means for quite some time. If we go back 31 years to when my father first started what is now my Successful Investing advisory service, it was very common for the average family to save money every month. That average family had little credit card debt and, in many cases, there was a safe and secure pension waiting for dad when he reached retirement.

Today, the savings rate is below zero, credit card debt is at all-time highs and the burden of retirement is now squarely on the back of every individual. Very few people today have a safe and secure pension to look forward to, and many of us simple have not saved enough to satisfy our retirement needs.

Unfortunately, the problem of saving too little and running up high amounts of debt is being reflected in the political sphere. Our elected leaders have run federal budget deficits for years and they keep adding to the nation's fiscal liabilities year after year.

Spending too much and running up too much debt are two key reasons why the value of the U.S. dollar vs. rival foreign currencies is at historic lows, while inflation is at 20-year highs. Add the credit bubble that created the real estate boom and bust, and you have the ingredients for a toxic cocktail of asset deflation.

Yes, this is not your father's bear market. Fortunately, the bear market survival kit developed by my father, Dick Fabian, and refined during the years by myself and my team can help you get through this current bear market -- despite its 21st century manifestation.

If you'd like to find out how to protect yourself from this wildly gyrating market, I invite you to check out my Successful Investing service. We've been helping investors just like you navigate treacherous market waters, and we've helped tens of thousands preserve their capital while growing their wealth.

Isn't it time you approached this market with a game plan?

For more on how to get your plan in place, click here.

I suspect by now that all of you have heard about the situation with New York Gov. Eliot Spitzer. The governor resigned today in disgrace, and for a few poignant thoughts on this issue I knew just where to turn. Here now is my good friend and writer/thinker extraordinaire Jim Woods, with some very interesting thoughts on the real lessons learned from the Spitzer affair.

'Client 9': Earning The Enmity of Decent People

By Jim Woods

A "...tireless crusader and once-charmed politician reduced to a notation on a federal affidavit: Client 9."

That's how the New York Times described disgraced and soon-to-be-former New York Gov. Eliot Spitzer.

Spitzer's downfall came courtesy of his self-described personal failings, and the rather self-absorbed and arrogant notion that he, "failed to live up to the standard I expected of myself." That failing, of course, was the governor's alleged involvement as a client (Client 9) in a high-priced prostitution ring.

Before I continue with what I think are the real lessons to be learned in this tragicomedy, I know that both Doug and I feel badly for members of Mr. Spitzer's family. They are innocent victims of the governor's actions, as are the citizens of New York.

Unfortunately, this isn't the first time Spitzer's actions have caused the suffering of the innocent -- and most likely, you the investor, are among this man's victims.

You see, Eliot Spitzer was a man who built his reputation and his career on the backs of Wall Street's elite. As New York's attorney general, Spitzer conducted crusades against what he thought of as Wall Street's shady practices and overly generous compensation packages.

Now there is no doubt that some of Wall Street's practices can legitimately be called shady, but the idea that a state attorney general can wield the power of the state on what he thinks is an "overly generous" compensation package is a disgraceful assault to the principles of free markets and a disgusting abuse of government power.

Spitzer's abuse of power forced many Wall Street firms to pay exorbitant fines for supposed violations, and of course, fighting these fines cost many companies millions of dollars in legal fees. And where do you think the money came from to pay these fines and legal fees?

You guessed it, from you, the investor.

It's investors who pay the price in the form of higher account fees, and lower share prices of many brokerages and other financial institutions. Indeed, the cost of complying and preparing for Mr. Spitzer's assault on Wall Street is virtually incalculable, and there is no doubt that the brunt of the financial burden ultimately fell on the backs of investors and shareholders.

"Companies almost always agreed to Mr. Spitzer's demands that they pay stiff fines and change the way they operated -- all without any trials or judicial determinations that they had done anything wrong," wrote John Fund of the Wall Street Journal in a great piece titled Eliot the 'Enforcer'.

Fund goes on to write, "Mr. Spitzer would frequently settle with corporate higher-ups, who were wealthy enough to pay millions in fines, and then go after their lower-level employees. Those individuals were often found not guilty at trial."

Basically, what these tactics amount to is a government shakedown carried out by an overly aggressive prosecutor with his eye on the state house, where presumably he would be in a position to wield the government's axe even harder and on a statewide basis.

Rather than shy away from his aggressive tactics, Spitzer was proud of how he went about his duties. "Listen, I'm a steamroller," he once famously told a State Assembly leader in his initial days as governor. That pretty much sums up Spitzer's view of himself and the role government should play in society.

For his tactics and for his crimes, Spitzer has certainly earned the enmity of decent people. Unfortunately, I think most people, including those in the press, will concentrate on the hypocrisy factor in this case rather than the abuse of power that fueled Spitzer's career.

Sure enough, Spitzer is the new poster boy for hypocrisy, but the sad thing here is that it took a tryst with a prostitute to expose Spitzer for what he really was -- a man with a disregard for the rule of law.

Jim Woods is freelance financial journalist specializing in the markets and the economy. He welcomes your comments on this piece, and he can be contacted here.

ETF Talk: Shiny Gold, Nutritious Wheat, Tasty Corn and Sweet Sugar

The commodity boom certainly is enticing aggressive investors. In last week's ETF Talk, we discussed commodity exchange-traded funds (ETFs) that tracked an individual commodity, such as gold, silver or oil. These ETFs in recent months have outperformed the market to generate positive returns.

This week, I am looking at commodity funds that are diversified and that invest in more than one commodity. Two examples of such diversified commodity funds are offered by the PowerShares ETF fund family. Those funds are PowerShares DB Agriculture (DBA) and PowerShares DB Commodity Index Tracking Fund (DBC).

PowerShares DB Agriculture (DBA) tracks the performance of the Deutsche Bank Liquid Commodity Index - Optimum Yield Agriculture Excess Return. That index is intended to mirror the performance of the agricultural sector. DBA holds future contracts in corn, wheat, soy beans and sugar -- some of the most liquid and heavily traded agricultural commodities.

With the developing world's growing demand for more and more food, it's easy to see why agricultural commodities will continue to prove profitable for investors in the years ahead. The question is how much higher commodity funds will rise, in light of their record-setting returns. The fund rose 33.83% during 2007, following its launch on January 5, 2007.

PowerShares DB Commodity Index Tracking Fund (DBC) seeks to reflect the performance of the Deutsche Bank Liquid Commodity index. The index uses futures contracts on six heavily traded physical commodities: crude oil, heating oil, gold, aluminum, corn and wheat. The fund's 2007 return hit 31.66% during 2007. DBC's share price is up 16.95% since its inception on February 3, 2006. As you can see from the following chart, DBC remains on an upward trajectory.

Another positive sign, indicated in the charts above, is that the volume of both ETFs is strong and growing. An ETF that tops 1 million shares a day is commanding a respectable amount of interest. Both ETFs meet that mark. When the stock market soared on Tuesday, March 11, 2008, the volume reached a healthy 3,379,423 shares for DBA and 1,474,089 for DBC.

My word of warning is that commodity funds have zoomed so much it stands to reason that a cautious investor will wonder when the ascent will end. The commodity rally may be too extended for many investors to climb aboard at the current lofty price levels but other investors seem to have a high enough tolerance for risk to keep these ETFs going up -- at least so far.

Your Term Policy Could Be A Gold Mine 2

By Kevin Yurkus, president of Fairway Capital

If you're like me, you probably have a cheap term life insurance policy. In most cases, our term policies expire without paying a benefit. When the term is up, we simply allow our policies to cancel. We think, "What other option do we have?"

Well, think again, because now there is an alternative for many term-life policy holders -- an option that the majority of the public is unaware of -- an option to sell an expiring term policy for cash. Yes, that's right. You can sell an expiring term policy for cash.

How is this accomplished? In recent years, a secondary market has emerged whereby Wall Street institutions (Deutsche Bank, Credit Suisse, Berkshire Hathaway, etc.) pay policy holders cash to purchase their life insurance policies. In short, these institutions offer cash settlements to buy in-force life insurance policies.

Why does this market work? It's because Wall Street capitalizes on the best-kept secret in the insurance business. It's the secret of "lapse rates" and involves the hundreds of millions of dollars that life insurance companies collect without having to pay claims. Insurance carriers collect our money for years and how do we reward them? By letting our life insurance policies expire, essentially creating an ATM for insurance companies.

Let me illustrate how incredible this opportunity can be. I know of a case where a 73-year-old man owned a $3 million term policy. The policy was set to expire in less than one year.

Like many of us, he was prepared to let his term policy expire since it had served the purpose of covering his insurance needs for a period of time. He was fortunate enough to read an article in The Wall Street Journal in December 2006 and discovered that his policy might be eligible to be sold for cash in the secondary market. After finding out more, he received an offer of $400,000 to buy his policy.

This opportunity doesn't work for everybody. Wall Street wants policies only on people who are at least 65-years old. Why? It's because Wall Street does not want to wait forever to collect on an investment.

If you are more than 65 years of age and have term life insurance (or know someone who does), DON'T LET IT EXPIRE!

You could be eligible to capitalize on a large cash settlement for this otherwise "dead' asset. In fact, if you have any type of insurance, Wall Street might pay big bucks to buy your policy.

If you are interested in this opportunity, please contact me, Kevin Yurkus, president of Fairway Capital, by calling 800.338.1035. You can also contact me via e-mail or by visiting my Web site.

The Wisdom of 'The Wire'

"A life... you know what that is? It's the s**t that happens while you're waiting for moments that never come."

—Detective Lester Freamon of "The Wire"

Last Sunday, HBO's scintillating, gritty and beautifully written police drama series "The Wire" came to an end. The series, which lasted five seasons, is truly must-see TV. Forget about sitcoms, "American Idol" or sports. The quality of this show is what makes TV worth watching. If you haven't seen "The Wire" yet, I highly recommend you get to your local video store or buy the DVD from Amazon. I guarantee you this television masterpiece will be well worth your time.