Belt And Suspender Buys 2009

dvisers agree that stocks are cheap. Still, most are locking in yields just in case things get worse.

While Barack Obama's inauguration as the 44th U.S. president did little to help the ailing stock market, many economists think that under his leadership, the economy will begin to recover in mid-to-late 2009. Obama wants to increase investment in our infrastructure by building roads and bridges, investing in alternative energy and providing more affordable health care, among other things.

This could mean that, right now, investors have some excellent investment opportunities. Price-to-earnings ratios of big-value stocks are very low, and growth stocks are the cheapest they have been in more than a decade.

We polled a number of our top guru partners to ask them how investors can profit from a market recovery this year. Their overriding recommendation: make opportunistic buys of deeply discounted stocks. But just in case things get worse, devote a portion of your portfolio to safer yield investments that insure you will get paid while you wait for equities to turn around.

One way to do that, says Richard Lehmann, editor of Forbes/Lehmann Income Securities Investor,is to invest in preferred shares of companies.

"The financial crisis has been particularly hard on preferreds because that market is thin and includes mainly small investors who are quicker to panic than institutional investors," Lehmann says. "Because of that, preferred shares could be among the best buys now and have better than average upside in 2009."

Among Lehmann's recommendations: Bunge's (nyse: BG - news - people ) 4.875% perpetual-convertible preferred that is convertible into 1.0846 shares of Bunge stock. Bunge is a U.S.-based global agribusiness and food company. Lehmann says that by investing in its preferred shares, you get a high yield--currently nearly 8%--and a capital gains play in a fairly recession-proof industry.

But there are also many great large-cap stocks at dirt-cheap prices. Jim Stack, editor of InvesTech Research, for example, says Stryker (nyse: SYK - news - people ) is an exceptionally good investment right now.

The orthopedic and medical equipment company has performed well, with fourth-quarter sales of orthopedic implants up 4% from the previous year. Meanwhile, sales of its MedSurg equipment were up 3%. The company remains on track to complete its eighth consecutive year of double-digit revenue growth.

"Stryker boasts a sterling financial position with a debt-free balance sheet and over $2 billion in cash," says Stack. "The firm's strong free cash flow gives it the flexibility to develop new products or make strategic acquisitions."

Another large-cap that has attracted money managers is pharmaceutical giant Bristol-Myers Squibb (nyse: BMY - news - people ), according to Charles Carlson, editor of DRIP Investor.

"Bristol-Myers Squibb has a history of shooting itself in the foot, which is probably one reason Wall Street has not embraced these shares in recent years," says Carlson. "Still, with the earnings picture brightening, 2009 should be a much better year for the stock."

Carlson points out that BMY offers a yield of nearly 6%, a rising profit stream and a speculative kicker in the way of takeover appeal. The company has undergone a significant restructuring in recent years, shedding businesses while boosting its biopharma presence. Shares now trade at just 11 times the 2009 consensus earnings estimate, an attractive valuation.

While gurus like yield-generating investments, one lesson that investors learned from 2008 is to diversify. One way to do that is through yield generating funds and exchange-traded funds (ETFs).

Janet Brown, editor of NoLoad Fund X, says yield-oriented investors should consider shares of iShares Dow Jones Select Dividend (nyse: DVY - news - people ). DVY tracks a Dow Jones index of the 100 stocks with the highest dividend yields and the fund itself currently provides a yield of 5.85%.

To be included in the index, a stock must have a positive five-year dividend-growth rate and the company must pay out less than 60% of earnings as dividends. Stocks are also screened by their daily trading volume.

Ron Rowland, editor of All Star Fund Trader, recommends Merger Fund, which provides a 2.4% yield. The Merger Fund arbitrages companies involved in pending mergers, takeovers and other corporate reorganizations. Rowland says that this provides good profit potential with limited downside and low correlation to the index benchmarks.

With the S&P 500 down about 38% in 2008, the Merger Fund held nearly steady with a loss of less than 5%. "The weak economy could actually work to the advantage of MERFX as companies restructure and [as] the strong take over the weak," says Rowland.

Another way to diversify your investments: put money into the ETF CurrencyShares Japanese Yen Trust (nyse: FXY - news - people ).

David Penn, Editor of Short Term Power Ratings, says that with the Bank of Japan having already lowered the interest rate on the yen to near zero, it will be difficult for other currencies to appreciate against it as central banks around the world rush to lower their interest rates to stimulate the economy.

"The yen benefited from the flight to safety in 2008," says Penn. "Should the global economy remain weak in 2009, the Japanese yen--and, by extension, the CurrencyShares Japanese Yen--could be a great place for investors to ride out the storm."

Jack Adamo, editor of Jack Adamo's Insiders Plus, has a slightly different recommendation: Consider real estate investment trust Annaly Capital Management (nyse: NLY - news - people ).

Annaly buys only Ginnie Mae, Fannie Mae (nyse: FNM - news - people ) and Freddie Mac (nyse: FRE - news - people ) bonds, all of which now have explicit U.S. government guarantees. The company uses modest leverage to increase shareholder returns. "With short-term rates likely to remain low for several years," says Adamo, "Annaly's interest-rate spread will be wide and profitable."

Adamo says that the market is scared blind right now by anything with the word "mortgage" attached to it. The shares, which would normally yield about 7%, have thus been battered to the point where they now yield nearly 13%. He says that the average dividend, based on the 11 years it has been public, would yield 10%. As credit markets normalize, Adamo expects these shares to double as people seek safe returns in a volatile market.

Diversification doesn't just mean investing in funds and ETFs. Another way, of course, is to acquire shares of companies outside of the U.S.

Over the past 10 years, many emerging markets outperformed the U.S. However, they were decimated in 2008, in some cases falling far more than the U.S. markets. Rudy Martin, editor of Latin Stock Investing, thinks that could mean better opportunities as markets rebound.

His recommendation: Buy the Brazilian oil and natural gas exploration company Petrobras (nyse: PBR - news - people ). "Petrobras has a lock on the distribution of ethanol with two pipelines planned and a five-year budget of at least $1.5 billion for biofuels production and processing," he says. "The company also plans to invest $8.9 billion in petrochemicals over the next five years."

Martin expects the company to do well in 2009 as oil prices rise. He is in good company: Billionaire George Soros also has a stake in Petrobras.

Another great international play: Fortis (other-otc: FRTSF.PK - news - people ). Gordon Pape, editor of The Canada Report, says that Fortis (not to be confused with the troubled European financial giant of the same name) is a low-risk stock that has held up well.

Fortis is the largest investor-owned gas and electric distribution utility in Canada. Its financial results recently have been very strong: The company recently reported third-quarter net income of 49 million Canadian dollars, compared with 31 million in the same period of 2007.

Plus, Pape says it has one of the best records in Canada for sharing the wealth with its stockholders. The stock currently pays a quarterly dividend of $0.25 a share providing a yield of just under 4%. Pape says that will likely increase in 2009.

But Carl Delfeld, editor of Chartwell Advisor Global ETF Report, says that a safer way to invest internationally is to buy shares of WisdomTree Emerging Market SmallCap (nyse: DGS - news - people ). Delfeld likes DGS because the ETF offers exposure to 14 countries but is not overly weighted in Chinese, Mexican, Russian and Indian stock markets. Plus he says that the fund is collectively trading at a price-to-earnings ratio of only six and a surprisingly low price-to-cash-flow ratio of 4.7, making this an excellent prospect in a rebound.

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Panic Bargain Hunting

Corporate yields are sky-high, and if you pick the right paper you won't get burned. Better get some gold too.

The early-January euphoria in the stock market tells me there is still a high degree of enthusiasm and risk taking spirit in the market. Income investors have even more reason to expect good things in 2009 given the major turnaround in yields that took place in December.

The last three months had roller coaster-like swings in yields as investment grade bonds rated A rose 136 basis points in October and then fell 91 and 125 basis points in November and December to finish at 7.44%.

Junk bonds had even a wilder ride, with B-rated issues rising 461 and 179 basis points in October and November, only to rise 247 points in December to finish at 18.12%. The latter yield looks attractive but don't be fooled: The default wave of such bonds is barely under way, so the time to dive in is probably a year or so away.

Tallying up the year-end results for Forbes/Lehmann Income Securities model portfolios shows disappointing results. The low-, medium- and high-risk portfolios finished down 17.86%, 28.94% and 40.08%, respectively. These results compare favorably only to the stock market indexes, with the Nasdaq, the S&P 500 and the Dow Jones industrial average down 40.54%, 38.49% and 33.84%, respectively. Small solace here, but that's the kind of year it was.

Looking into 2009, we see good prospects for yields to come down given the low inflation and even deflation in the economy. With investment-grade corporate bonds and preferreds yielding 5% to 9%, the expectations for price appreciation are quite good, especially when compared with the outlook and uncertainty in the stock market.

As I have pointed out before, the steep decline in our recommended preferreds was due to the thin depth of this market and the tendency of small investors to panic more quickly than the institutional investors who dominate the bond market. This value erosion will reverse as confidence comes back, and therefore, the preferred market has more turnaround potential than exists in the bond market.

In any case, the chances for a full recovery of 2008 losses in fixed income will not be hurt by the poor economic outlook, something that cannot be said for the stock market.

As in years past, we have developed new model portfolios to reflect the current market situation and outlook. As before, we have low-, medium- and high-risk portfolios as well as a blended portfolio, which represents my preference in diversification as to income sources and levels of risk. Our aim is to diversify risk while still reaping the benefits of a major turnaround.

We do not feature a convertible portfolio for 2009, since I believe the stock market is not the place to make a major fund commitment today. This may change by year-end, but not before the debt markets have recovered.

Major investment ideas for 2009 include converting your traditional IRA into a Roth IRA. Chances are your IRA has suffered a major decline in 2008 and faces a significant recovery in 2009.

If your principal concern is asset protection and not income, consider buying Treasury Inflation-Protected Securities. Their current yield, plus inflation adjustment, has not been this good for several years, and with the projected stimulus spending, future inflation is not only likely, it may well become a matter of government policy.

An allocation into a gold--SPDR Gold Shares (nyse: GLD - news - people )--or platinum--Platinum Group Metals (amex: PLG - news - people )--exchange-traded fund should also be considered.

Canadian oil trusts have cut their dividends about 29% to reflect the lower oil prices, and yields are still in the 15% range. They are buys at these price/yield levels. Banks bailed out by the government still yield in the 8% range. They won't fail, and that yield won't last.

As for the General Motors (nyse: GM - news - people ) bailout, its debt is worth at least 30 cents on the dollar, but currently trades at 16 cents on the dollar and yields 50% while you wait for it to structure a pre-packaged bankruptcy. The unions have equal standing with bondholders and more to lose here. It's hard to see Congress shorting the unions. The big losers here will be current equity shareholders.

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Worse Than A Bad Bank

If the idea of the government setting up a "bad bank" to manage troubled assets sounds ugly, there's an idea that could be even uglier: insuring these toxic securities.

It's already being done. In recent weeks, the Treasury Department has set up guarantee plans for giant pools of bad assets from Citigroup (nyse: C - news - people ) and Bank of America (nyse: BAC - news - people ). The guarantees seek to limit the losses the banks will face on these bad assets and reduce some of the uncertainty about the banks' balance sheets.

Providing guarantees on pools of banks' toxic assets might be termed the "lazy man's bailout." On the face of it, the government does not run into the complex valuation problem, a symptom of trying to purchase the assets. Instead, the Treasury can just circle some assets, name a price, slap on a premium and--voila!--Uncle Sam to the rescue.

Of course, in reality insurance is much more difficult (just ask AIG (nyse: AIG - news - people )). Private insurance companies complete complex analyses involving deep actuarial evaluation to create guarantees. And that's just for everyday life insurance policies.

So imagine how difficult it would be to price an insurance policy for a $306 billion pool of abstruse assets, as in Citi's case. In order to do so, an insurer would have to look at all of the assets in the pool and have some sort of performance assumption, estimating loss scenarios it could face.

Determining the future performance of these assets is a problem the Treasury is trying to avoid in the first place. After all, if the government can predict the future, it might as well purchase the securities and establish that bad bank everybody is talking about.

Treasury officials did not respond to a request for comment.

Up to now, the guarantees the Treasury has put in place have been rather benign. They limit the government's losses on Citi's $306 billion pool to $15 billion and Bank of America's pool of $118 billion to $10 billion. That means any losses in excess of this amount will be the banks' responsibility.

Given the fees the government is charging, this comes out to a net protection of between 3% of Citi's pool of toxic assets and 5% of Bank of America's. Peanuts. If these assets are so bad, any losses would likely exceed 5%.

If the Treasury wants guarantees to accomplish anything significant, it will have to structure them to expose the government to the vast majority of losses, critics argue.

Without loss limits on the guarantees for Citi and Bank of America, the exposure to taxpayers would be staggering: nearly $350 billion.

The upside? Sure, the government will charge the banks a fee. But for that fee to be enough to protect taxpayers, it would need to be so high that banks couldn't afford it. Meanwhile, the government would eat nearly all of the losses for up to 10 years.

This begs the question: With a guarantee program, is the Treasury doing what's in the best interest of taxpayers or what's easiest?

"What's being really stated is that the Federal Reserve and Treasury have no trust in the FDIC to resolve failed institutions," says Joshua Rosner, an analyst at investment research firm Graham Fisher & Co.

"Instead, they are asserting that no large intuitions should be resolved," he adds. In particular, Rosner sees guarantees as a way to specifically protect the large New York banks--a cause very close to new Treasury Secretary Timothy Geithner's heart as former head of the New York Federal Reserve.

Allowing the Federal Deposit Insurance Corporation to run a bad bank could very well involve the failure of some large banks that could not sustain the write-downs associated with these asset sales.

That might be a tough pill to swallow, but it's better than the alternative. Until banks recognize all their losses, the credit crunch will continue and the economy will remain stalled indefinitely.

For this reason, Brian Olasov, a banking expert from McKenna Long & Aldridge LLP, is also unconvinced that pursuing guarantees on the toxic assets will solve the problem. "I would be very leery of false solutions that seem like delay tactics in recognizing problems."

So are investors. The share prices of Citi and Bank of America did not suddenly soar after their guarantees were announced.

Providing responsible guarantees with taxpayers' best interest in mind is not any easier than purchasing assets for a bad bank. But, as Rosner has argued, in the bad bank scenario, at least the taxpayers gain any upside that these troubled assets might see. By insuring them, that upside will still belong to the banks holding the assets. Yet, if the assets incur losses, the government pays in either plan.

If Geithner's Treasury has the best interest of taxpayers in mind, he might seek a bailout that provides them some upside and gets the financial industry out of its funk as quickly as possible. Guarantees might be an easy fix, but they might not accomplish either of these goals.

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Asian Markets Head For Lunar New Year On Sour Note

Stock losses persisted as the week drew to close, with investors reeling from the deteriorating health of tech bellwethers and financial firms.

Asian tech companies suffered Friday, as a wave of worse than expected earnings from makers of electronic components and consumer products hammered Japanese and South Korean stocks. Commodity producers also fell in Hong Kong and Australia, as hope for a first-half demand rebound faded. A distinct lack of confidence in the financial sector hit Australian banks.

Japan's Nikkei 225 index plunged 306.49 points, or 3.8%, to close at 7,745.25. The broader Topix index toppled by 2.8%, to 773.55.

Sony (nyse: SNE - news - people ) shares were dumped, dropping by 6.8%, to 1,802 yen ($20.41), after it warned Thursday that it expects to post a full-year operating loss of 260 billion yen ($2.9 billion), the company's first loss in 14 years. (See "Stringer Tries To Turn Sony's Distress To Advantage.") Canon (nyse: CAJ - news - people ) slumped by 5.2%, to 2,540 yen ($28.77), and Panasonic (nyse: PC - news - people ), by 5.3%, to 1,058 yen ($11.98).

In the automotive sector, Toyota Motor (nyse: TM - news - people ) shares decelerated by 2.3%, to 2,790 yen ($31.60), as the carmaker reportedly mulled cutting 1,000 full-tme jobs in Britain and the United States. Tire maker Bridgestone (other-otc: BRDCY - news - people ) laid off more than 500 employees at a Tennessee plant; its shares rolled down by 4.0%, to 1,151 yen ($13.04). Nippon Steel announced that it would more than double its planned production cuts for the current half-year. Nippon Steel (other-otc: NISTY - news - people ) shares tumbled by 5.0%, to 265 yen ($3.00), while competitor JFE Holdings (other-otc: JFEEF - news - people ), which had already scheduled reductions in output, dived by 7.9%, to 2,150 yen ($24.35). Oil exploration firm Inpex Corp. seeped down by 5.95%, to 648,000 yen ($7,339.87), as the short-term outlook for oil prices dimmed.

An adverse court ruling regarding the calculation of statute of limitations for customers claiming excess interest repayments smacked down the shares of consumer finance companies: Promise Co. (other-otc: PMSEY - news - people ) plunged by 14.2%, to 1,617 yen ($18.32), while Takefuji Corp. (other-otc: TAKAF - news - people ) fizzled by 11.7%, to 609 yen ($6.90). Shares in three nonlife insurers that are in talks to merge to form the largest such company in Japan all fell sharply Friday: Mitsui Sumitomo Insurance Group Holdings (other-otc: MSIGY - news - people ) fell by 7.2%, to 2,200 yen ($24.92); Aioi Insurance Co. (other-otc: AIOIY - news - people ), by 5.2%, to 404 yen ($4.58); and Nissay Dowa General Insurance Co. (other-otc: NDGIF - news - people ), by 5.65%, to 468 yen ($5.30). Leading brokerage Nomura Holdings (nyse: NMR - news - people ) dropped by 5.6%, to 606 yen ($6.86), following a lowering of its outlook by Goldman Sachs.

The dollar traded around 88.28 yen, weakening toward the end of the session, from 88.85 yen in late U.S. trading Thursday.

Hong Kong's Hang Seng index diminished by 0.6%, to 12,578.60. PetroChina (nyse: PTR - news - people ) slid nearly 3.0%, to 5.58 Hong Kong dollars (72 cents), on the weakening of crude prices. China Petroleum & Chemical Corp. (nyse: SNP - news - people ), or Sinopec, which had advised investors that its current-year profit is likely to drop by more than 50%, saw its shares percolate down by 1.7%, to 4.18 Hong Kong dollars (54 cents). Aluminum Corp. of China (nyse: ACH - news - people ), or Chalco, which had also warned on earnings, ratcheted down by 3.0%., to 3.20 Hong Kong dollars (41 cents). Yanzhou Coal (nyse: YZC - news - people ) got drilled by 5.8%, to 4.90 Hong Kong dollars (63 cents). Bellwethers HSBC Holdings (nyse: HBC - news - people ) (up 0.8%, to 57.45 Hong Kong dollars [$7.41]) and China Mobile (nyse: CHL - news - people ) (up 0.4%, to 68.45 Hong Kong dollars [$8.83]) enjoyed slight gains on short-covering ahead of the Lunar New Year holiday break. Fosun International (other-otc: FOSUY - news - people ), a diversified manufacturing and real estate conglomerate, tanked by 8.1%, to 2.28 Hong Kong dollars (29 cents), after releasing its own profit warning based on lower steel prices and the depressed property market.

Taiwanese markets remained closed in preparation for the Lunar New Year. China's Shanghai Composite index lost 0.7%, to 1,990.66. “China remains the big global growth wildcard in 2009. Despite the announcement of huge fiscal stimulus packages in recent months, investors remain very skeptical about Chinese and Asian growth,” Michael Hartnett, chief emerging markets equity strategist for Banc of America Securities-Merrill Lynch, wrote in a Friday report.

U.S. President Barack Obama's Treasury secretary nominee, Timothy Geithner, told the Senate that China is "manipulating" its currency, rhetoric signaling that the administration intends to up the ante in U.S.-China trade relations.

South Korea's KOSPI index dwindled by 2.05%, to 1,093.40. Samsung Electronics (other-otc: SSNLF - news - people ), which posted a quarterly operating loss Friday that far exceeded market forecasts, sank by 4.1%, to 442,000 won ($321.59). Its counterpart, LG Electronics (other-otc: LGEAF - news - people ), dived by 5.8%, to 68,300 won ($49.69), on persisting concerns about its own earnings. In contrast, SK Telecom (nyse: SKM - news - people ), the country's No. 1 mobile communications operator, posted fourth-quarter earnings that quadrupled, in part on one-time gains, yet shares dipped by 0.9%, to 210,000 won ($152.79). Fixed-line and broadband provider KT Corp. (nyse: KTC - news - people ) gave back 1.2%, to 41,000 won ($29.83).

Australia's S&P/ASX200 tumbled by 4.1%, to close at 3,342.70. The broader All Ordinaries index moved 3.8% lower, to 3,300.30. New Zealand's NZX 50 index backtracked by 1.1%, to 2,705.09.

With commodity prices weakening again, BHP Billiton (nyse: BHP - news - people ), which earlier this week scrapped a disastrous $3.7 billion nickel investment, skidded by 5.8%, to 27.45 Australian dollars ($17.68). Rio Tinto (nyse: RTP - news - people ) dipped by 1.9%, to 38.06 Australian dollars ($24.52). Gold miner Newcrest Mining (other-otc: NCMGY - news - people )'s shares were tarnished by 4.2%, to 30. 57 Australian dollars ($19.69), after having revealed a fall in production on Thursday.Oil firms also were set back: Woodside Petroleum (other-otc: WOPEY - news - people ) retreated by 4.6%, to 33.15 Australian dollars ($21.36), and Santos (nasdaq: STOSY - news - people ) surrendered 4.3%, to 13.40 Australian dollars ($8.63). Sims Metal Management (other-otc: SMUPF - news - people ), the world leader in recycling scrap metal, according to TradeTheNews.com, crashed by 20.5%, to 14.80 Australian dollars ($9.53), in the wake of a profit warning. Major Australian commercial banks reflected investor concern about weakness in the financial sector; all were down by at least 5.9% for the day, with National Australia Bank (other-otc: NABZY - news - people ) sliding by 6.5%, to 16.94 Australian dollars ($10.91), and Commonwealth Bank of Australia (other-otc: CBAUF - news - people ) depreciating by 7.2%, to 12.06 Australian dollars ($7.77).

India's BSE Sensex 30 index backslid by 1.6%, to 8,674.35. Infosys Technologies (nasdaq: INFY - news - people ) shed 2.1%, to 1204.65 rupees ($24.45), after reports emerged that the outsourcing giant is competing with IBM (nyse: IBM - news - people ) to buy Fidelity Investments' Indian information technology unit.

Elsewhere in Asia, the Straits Times index in Singapore declined by 1.4%, to 1685.23, and Thailand's Thai SET 50 index diminished by 1.3%, to 300.72.

Light, sweet crude for February delivery shed $1.37, to $42.30 a barrel, by the conclusion of Asian trading hours on the New York Mercantile Exchange.

--Reuters, the Associated Press and Thomson Financial contributed to this report.

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$3,000 Gold And Sagging Stocks

Don't expect much to change in the stock market but look for gold to soar.

The fact that the common stocks of Fannie Mae (nyse: FNM - news - people ), Freddie Mac (nyse: FRE - news - people ), AIG (nyse: AIG - news - people ) and General Motors (nyse: GM - news - people ) are still trading publicly and the private equity holdings in GMAC (nyse: GJM - news - people ) and Chrysler have not been wiped out are signs that the government cut bad deals for the American taxpayer.

The further fact that banks that received tens of billions--excuse me, hundreds of billions of taxpayer dollars--are still paying multimillion-dollar compensation packages to some of their employees suggests that the government cut even worse deals for American taxpayers.

HCM remains of the view that the bailouts were necessary but structurally flawed because they failed to properly align the interests of those assuming the ownership risk of these companies--the American taxpayer--with the executives who failed to demonstrate their competence or good faith in performing their jobs.

The fact that the former chairman of Goldman Sachs (nyse: GS - news - people ) led these negotiations is indicative of the deep conflicts of interest that lie at the heart of the poor policy choices and flawed ideology that forced the financial system to the precipice while unjustly enriching so many in the process.

In America, those in positions of power continue to keep the world organized in ways that accord with their needs. The result is the development of solutions that worsen problems rather than solving them.

There is a conundrum at the heart of the government's efforts to revive the economy. The recession is the cure for the disease of too much debt, too much speculation and too little productive economic activity that led to the current crisis.

These excesses must be purged from the system, and the only way to do this is through a downsizing of the economy characterized by significant debt shrinkage, job losses and wealth destruction. Of course, none of these conditions are politically acceptable, which compels the government to take steps that risk curing the symptoms but not the disease.

There is an enormous risk that large amounts of the money will be wasted on projects that will not add to the productive capacity or capital stock of the American economy. This is a problem that already exists, i.e., that too much of the economic firepower of the country is aimed at nonproductive or speculative activities.

Government watchdogs are already making noises about some of the so-called "shovel-ready" plans being promoted by state governors that seem to be nothing more than pork-barrel, make-work projects that will do little more than direct money based on political favoritism and will not permanently improve economic prospects.

Placing the stimulus plan in the hands of state governments is an extremely dangerous prospect since it will surrender federal control over those funds to local authorities who are far less subject to independent oversight and far more susceptible to political corruption.

The disgusting spectacle of Illinois state politics, while hardly representative of all American state governments, is not an isolated incident of corruption on the local level and should serve as a warning since hundreds of billions of federal dollars are about to be divvied up. After all, we are still waiting to find out what happened to all of the money that was supposed to be spent rebuilding New Orleans.

The housing market is continuing to deteriorate in large part because capital is still not being made available to potential homebuyers. The same is true of the automobile market, which explains the government's decision to invest directly in GMAC and compel the company to become more aggressive with its auto-lending programs.

This effectively makes the government a direct lender, which is what HCM has been expecting since it became apparent that the first $350 billion of TARP money was trapped inside the recipient banks and was not making its way into the real economy. Now the government needs to become, in one form or another, a direct mortgage lender.

It took the government far too long to take sufficiently aggressive steps to lower mortgage rates. Finally, in late November 2008, the Federal Reserve announced it would purchase half a trillion dollars of mortgage-backed securities by June 2009.

Since that announcement, 30-year mortgage rates have dropped from above 6% to just above 5% and appear likely to drop below 5% shortly. Fifteen-year fixed mortgage rates have already dropped below 5%.

Now the government needs to take more meaningful steps than it has in the past with respect to foreclosure relief. Past efforts appear to have been ineffective, with many aid recipients again falling behind on their mortgage payments within a relatively short period of time.

Depending on banks to take these steps on their own is not going to work because their balance sheets are still too damaged (they are still sitting on mountains of toxic paper of all types--mortgages, corporate loans, CDS, CDOs, you name it).

The government needs to keep people in their homes for many reasons--to help preserve hope and dignity, to keep neighborhoods and communities intact and to keep these properties from further weighing down the balance sheets of already-clotted financial institutions.

This could be achieved through a program that combines extending loan maturities, haircutting loan principal and making the government/American taxpayer a partner in the future recovery in the value of the property.

The U.S. dollar is likely to weaken over the course of the year and beyond, particularly against non-Japanese Asian currencies. The U.S. printing presses are running overtime and the dollar is doomed. We do not expect the dollar to weaken further against the euro despite the European Central Bank's continuing obsession with the ghosts of Weimar, since Europe's economies are in every bit as much trouble as America's.

Moreover, the euro and British pound are not much better off in Asian currency terms. Investors should consider owning bonds denominated in non-U.S. currencies with a special focus on non-Japanese Asian currencies and the Swiss franc.

Fortunately, investors who continue to invest in U.S. dollars no longer need to worry about the safety of owning certificates of deposit issued by U.S. banks now that these banks are partially owned by the U.S. government.

Gold should remain a key component of all investors' portfolios as the anti-dollar, anti-derivative, anti-LBO trade. At some point, sooner rather than later (i.e., within five years), gold will trade at $3,000 an ounce.

If there is any good news in the financial markets, it is that credit markets are already trading as though another Great Depression is at hand. David Swenson, head of Yale University's endowment and one of the most highly respected voices in the investment world, was recently quoted as saying "[t]here are some really extraordinary investments in the credit world. Everything, from bank loans to investment-grade bonds to less-than-investment-grade bonds, is priced at extraordinarily cheap levels."

While we part company with Mr. Swenson on the attractiveness of less-than-investment-grade bonds, which we would strongly suggest avoiding, we agree that investment-grade corporate bonds and bank loans of large capitalization companies remain the most attractive areas to focus on at the current time.

Corporate bond and loan prices have already dropped far more than credit fundamentals would suggest is justified. In many cases, bond and loans are trading far below recovery values due to the dearth of buyers in the market.

The unlikely prospect of buyers returning anytime soon in size should keep prices depressed for the foreseeable future. Accordingly, the significant rise in bankruptcy filings and out-of-court debt restructurings is unlikely to produce significant additional losses for debt holders on a mark-to-market basis in 2009.

Markets are already discounting Armageddon, so Armageddon or anything less should create very attractive investment opportunities.

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U.S. Bank Lifeline Hoists Asian Stocks

Asian markets recovered some lost ground Friday, to close out the week in a more buoyant mood, lifted by the semiconductor sector, which is anticipating a price rebound late this year following heavy consolidation efforts in the industry. A weakening of the yen gave a boost to Japanese exporters. Investors were also heartened by the U.S. Congress's release Thursday evening of the second half of the $700 billion in bailout funds under the Troubled Asset Relief Plan and the government's $20 billion cash injection into Bank of America.

In a turnaround from Thursday's steep slide, Japan's Nikkei 225 index gained 206.84 points, or 2.6%, to close at 8,230.15. The broader Topix index swelled by 2.75%, to 817.89.

Mizuho Financial Group (nyse: MFG - news - people ) rose by 3.3%, to 248 yen ($2.75), after announcing that it would replace its president and the chiefs of its core banking units.

Chip makers all advanced, to varying degrees: Elpida Memory (other-otc: ELPDF - news - people ) rocketed by 13.6%, to 559 yen ($6.19), while Tokyo Electron (other-otc: TOELF - news - people ) shot up 8.5%, to 3,120 yen ($34.54), and Advantest (nyse: ATE - news - people ) surged by 4.0%, to 1,262 yen ($13.97). Hitachi (nyse: HIT - news - people ) shares were initially depressed following reports that the electronics giant was likely to record a loss of more than $1.1 billion for the current fiscal year, but they were swept up in the wave of positive feeling to finish 0.6% higher, at 364 yen ($4.03). Panasonic (nyse: PC - news - people ) cut its projection for earnings in the current year; its shares nonetheless gained 1.7%, to 1,125 yen ($12.45). Sony sprang ahead by 4.8%, to 2,075 yen ($22.97).

Honda Motor (nyse: HMC - news - people ) soared by 8.0%, to 2,010 yen ($22.25), after it said it had slashed output in Japan by 56,000 vehicles. Toyota Motor (nyse: TM - news - people ) climbed by 6.0%, to 3,010 yen ($33.32), even as it moved to idle North American factories for more days in the first quarter. Fuji Heavy Industries (other-otc: FUJHY - news - people ), the maker of Subaru automobiles, jumped by 6.6%, to 276 yen ($3.06), despite reportedly revising its current-year forecast from a modest gain to a modest loss, announcing production cuts including the scrapping of an auto plant, and placing its dividend policy under review, according to TradeTheNews.com.

The yen slid by 0.6% against the dollar, to 90.36 yen, by the close of trading in Tokyo, breaking through the psychologically significant 90-yen level, lightening the foreign exchange burden on Japanese exporters' overseas earnings.

Hong Kong's Hang Seng index was the weak sister among the major Pacific Rim equity averages, eking out a 0.1% gain, to 13,255.51, after Thursday's tumble. HSBC Holdings (nyse: HBC - news - people ) continued its recent slide, down 2.7%, to 64.20 Hong Kong dollars ($8.27). But Chinese banks rose, as China's sovereign wealth fund raises stakes in major lenders, following through on a September promise to buy more shares to prop up their prices. (See "China's Sovereign Wealth Fund Turns Inward.") Industrial and Commercial Bank of China (other-otc: ICBAF - news - people ) rose 3.6%, to 3.44 Hong Kong dollars (44 cents); China Construction Bank (other-otc: CICHF - news - people ) perked up by 3.7%, to 3.91 Hong Kong dollars (50 cents); and Bank of China (other-otc: BACHF - news - people ) appreciated by 4.6%, to 2.04 Hong Kong dollars (26 cents). Mainland-based real estate firms also prospered Friday.

Bank of East Asia (other-otc: BKEAY - news - people ) shares leapt by 5.65%, to 16.46 Hong Kong dollars ($2.12), while Ping An Insurance (other-otc: PNGAY - news - people ) moved down by 3.2%, to 35.20 Hong Kong dollars ($4.54). Chinese airlines rallied: Air China (other-otc: AIRYY - news - people ) bounced back by 3.9%, to 1.88 Hong Kong dollars (24 cents), and China Eastern Airlines (nyse: CEA - news - people ) thrust upward by 2.8%, to 1.11 Hong Kong dollars (14 cents), on news of a financing deal.

China's Shanghai Composite index gained 1.8%, to 1,954.44. Taiwan's Taiex weighted index added 0.8%, to 4,353.70.

South Korea's KOSPI index increased by 2.15%, to 1,135.20. Hynix Semiconductor (other-otc: HXSCF - news - people ) jumped by 5.8%, to 6,950 won ($5.06). Samsung Electronics (other-otc: SSNLF - news - people ) added 2.1%, to 469,000 won ($341.79), after announcing a business and management shake-up. The tech giant faces its first operating loss in nearly a decade. (See "As Earnings Hit A Dry Spell, Samsung Prunes.") LG Display (nyse: LPL - news - people ) spiked by 1,300 won (96 cents), or 5.7%, to 24,100 won ($17.56). After the bell, though, it posted a fourth-quarter loss of 684 billion won ($503.4 million), its first loss in seven quarters, on plummeting prices for liquid crystal displays owing to oversupply. Hanwha Corp. vaulted by 13.3%, to 26,800 won ($19.53), on investor expectations that it will drop its bid for Daewoo Shipbuilding & Marine Engineering.

Australia's S&P/ASX200 moved up by 0.6%, to 3,550.90. The broader All Ordinaries index inflated by 0.5%, to 3,494.90. New Zealand's NZX 50 index edged up by 0.3%, to 2,752.16.

BHP Billiton (nyse: BBL - news - people ) advanced by 3.4%, to 29.88 Australian dollars ($20.13), while counterpart Rio Tinto (nyse: RTP - news - people ) put on 2.8%, to 38.35 Australian dollars ($25.84). Gold miners did well, with Lihir Gold (nasdaq: LIHR - news - people ) up 5.1%, to 2.68 Australian dollars ($1.81); Newmont Mining (nyse: NEM - news - people ) up 2.8%, to 5.57 Australian dollars ($3.75); and Newcrest Mining (other-otc: NCMGY - news - people ) up 2.5%, to 28.95 Australian dollars ($19.51). Woodside Petroleum (other-otc: WOPEY - news - people ) underperformed the market, down 1.5%, to 33.53 Australian dollars ($22.59), on its announcement that it was suspending a liquefied natural gas project off the California coast because of unfavorable market conditions. Troubled shopping center owner Centro Properties (other-otc: CEOPF - news - people ) jumped by 4.2%, to 12.5 Australian cents (8 cents), before trading was halted, once its creditors agreed to extend the terms of $22 billion in the company's debt.

Elsewhere in Asia, Thailand's Thai SET 50 index pulled up by 2.5%, to 302.64. India's BSE Sensex 30 improved by 3.1%, to 9,323.59. Singapore's Straits Times index appreciated by 1.55%, to 1,730.45.

Light, sweet crude for February delivery lost 5 cents, to $35.35 a barrel, by the conclusion of Asian trading hours on the New York Mercantile Exchange.

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Oil On Troubled Waters

Investors looking for safe havens need look no further than the integrated oil companies Exxon Mobil and Chevron for shelter from the financial storm.

It's not so much that these companies are seeing profits grow -- they aren't -- but they had better-than-expected fourth-quarter results, significant cash resources and because they do everything from finding and pumping oil to refining and selling it to motorists, they are benefiting from the recent decline in energy prices in ways that smaller companies cannot.

The industry contracted toward the end of the year with demand falling in a weakening economy, a selloff in oil and gas prices, and the global credit crunch. (See “Rebuilding Global Markets.”) Over the summer, crude hit record highs, peaking at over $147 per barrel. Since then, oil has tumbled below $40 a barrel as demand in the United States and other big consumer nations eased amid a global economic slowdown.

But the largest oil companies like Exxon and Chevron, which have billions in cash, are well suited to weather the downturn. “Exxon has lots of strength and flexibility,” said Edward Jones analyst Brian Youngberg.

Exxon posted a 33.3% slide in fourth-quarter earnings, to $7.8 billion, or $1.55 per share, but that beat the Street forecasts by a dime, compared with year-earlier profits of $11.7 billion, or $2.13 per share, when the Irving, Texas-based firm set a U.S. record for quarterly profit. It has since topped that mark twice, first in last year's second quarter and then with earnings of $14.8 billion in the third quarter. Revenues fell 27.4% to $84.7 billion.

Exxon’s bottom line took a big hit from its exploration and production, or upstream arm, where net income fell 31.7%, to $5.6 million, on lower crude prices, which the firm said decreased earnings by $3.2 billion in the quarter.

San Ramon, Calif.-based Chevron said its earnings rose to $2.44 per share, from $2.32 per share a year earlier, helped by a one-time gain of $600.0 million from an asset swap in which it received stock for a producing field. Excluding the one-time gain, adjusted earnings did fall from the year-prior to $2.23 per share, but still beat expectations from analysts polled by Thomson Financial that anticipated earnings of $1.81 per share.

The sharp decline in oil prices did hit Chevron’s revenues, which tumbled 26.4%, to $45.2 billion, from $61.4 billion in the year-earlier period.
Chevron's total oil and gas production fell 70,000 barrels per day, to 2.5 million barrels, largely from reductions in the Gulf of Mexico due to hurricanes that hit the region in September.

On Thursday,Royal Dutch Shell (nyse: RDSA - news - people ) posted a quarterly loss of $2.8 billion, against a net profit of $8.5 billion a year earlier, as sliding oil prices and the global economic slump sapped earnings across nearly all the company's divisions. (See “Boom Times Over For Shell.”)

Britain's BP (nyse: BP - news - people ) is expected to report earnings on Tuesday.

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Asia stocks slip on grim corporate outlooks

Asian stocks slipped on Monday while the yen and U.S. dollar advanced, with investors expecting another week of grim news on corporate earnings and the global economy.

Rising inventories and a severe pullback in consumer demand in the face of a global economic crisis have had a shock effect on companies around the world and many have been slashing their forecast results for 2009. Hitachi Ltd (nyse: HIT - news - people ) stocks tumbled 18 percent after it warned of a record annual loss.

Dismal U.S. economic reports as well as uncertainty about a massive fiscal stimulus package in Washington helped spark the worst Wall Street January performance ever. U.S. Treasury bonds meanwhile have provided little solace since dealers have been lately more concerned about the government's growing borrowing needs to finance multiple rescue plans.

"There's no question that the global economy has worsened a notch more, and concerns about this will be in a tug-of-war with expectations for economic stimulus policies," said Hiroichi Nishi, general manager at the equity division of Nikko Cordial Securities in Tokyo.


Japan's Nikkei share average fell 0.5 percent, down for a second day. In addition to Hitachi, shares of bearing maker NTN Corp and Fujifilm (nasdaq: FUJI - news - people ) Holdings Corp both fell after the companies slashed their profit outlooks.

In Australia, where the benchmark stocks index was down 1 percent, shares of miner Rio Tinto Ltd were up 6.2 percent after state-owned Chinese aluminium company Chinalco held talks with Rio to take a stake in the firm.

Stocks in Asia-Pacific outside Japan were down 1.1 percent, according to an MSCI index.

Hong Kong's Hang Seng index fell 2 percent, weighed by a 1.6 percent decline in HSBC (nyse: HBC - news - people ). Europe's largest bank has seen its Hong Kong-listed stock post a sixth consecutive month of declines in January.

THE YEN'S TREND IS YOUR FRIEND

The yen rose against major currencies, proving the haven of choice for global investors seeking safety.

"Basically, the market trend has not changed after data in the U.S. and the euro zone showed faltering economies," said Yuichiro Nakamura, FX dealer at Shinkin Central Bank in Tokyo. "The yen is the key beneficiary, and the dollar is the next."

The U.S. dollar was at 89.65 yen, slipping 0.3 percent from late U.S. trade on Friday. The euro declined 0.8 percent to 114.38 yen.

The euro dipped to a two-month low against the dollar around $1.2715 amid anxiety about the slumping economy in Europe and ahead of a European Central Bank meeting this week.

The Australian and Indonesian central banks were also expected to set policy this week, with both expected to deliver interest rate cuts in hopes of easing the blow of global recession.

Japanese government bonds were in demand with equity markets under pressure. The lead 10-year bond future rose 0.1 point to 139.01, though it has remained in a fairly narrow trading range for the last two months.

U.S. Treasuries were mostly a bit higher after crashing in January. The benchmark 10-year note's yield, which moves in the opposite direction of the price, was at 2.85 percent compared with 2.86 percent late on Friday in New York.

The yield shot up 63 basis points in January, the biggest monthly increase since April 2004, according to Reuters data. The move up in yields has narrowed their difference with corporate bond yields, increasing their appeal for investors as a hedge against adverse movements in government debt.

"A worse economy pushes government yields down but credit spreads wider. A better economy does the opposite. For high-quality bonds (A rated), these two effects could nicely offset each other, producing a similar return for the holder under either scenario," said asset allocation strategists with JPMorgan in London in a note.

The U.S. crude oil future for March delivery has kept above $40 a barrel for about two weeks, with the market speculating on additional measures by OPEC to put a floor under prices.
Crude was up 22 cents to $41.91 a barrel

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Obama Shames Bankers

Amid a "hat trick" of new bad economic data (sales of new homes plummet, businesses cut orders, and jobless claims soar), President Barack Obama's economic team is weighing up a two-part bailout for the banking sector, the Wall Street Journal reports. The plan aims to help banks but not put too great a burden on taxpayers by "buying a portion of banks' bad assets and offering guarantees against future losses on some of the remainder." Yet even while the Treasury looks to help banks, Obama is beating up on the fat cat culture, excoriating top bankers as "shameful" for awarding themselves $20 million in bonuses as the economy tanked, the New York Times writes. Around the globe, other governments are wondering how the U.S. will pay for its $800 billion stimulus package. They fear that huge U.S. government borrowing will "drive up inflation and interest rates around the world," writes the NYT. Then there is the thorny issue of protectionism. Already European legislators have said they may challenge the so-called Buy American provision of the stimulus bill that "would, with some notable exceptions, ensure that only U.S.-produced iron and steel be used for construction," writes CNN Money.


On a day when Japan reported a record 9.6 percent drop in industrial production, perhaps we shouldn't be surprised to hear that Honda's net profit fell 90 percent in the fourth quarter of last year, "as the credit crisis and cautious consumer sentiment led to slow sales of even small fuel-economy cars," writes the WSJ. Staying with autos, the Detroit Free Press asks how long Ford can go it alone now that it is poised to access its final $10 billion line of credit. According to one analyst, Ford's independence play depends on "the second half [of the year] getting better." The slow expiration of the domestic auto industry is killing innovation throughout the greater economy, writes the WSJ, noting that the Big Three have long played a "nurturing role" in helping their suppliers keep up with new technology. Talking of innovation, Business Week wonders whether Detroit could learn and prosper from the Google model of open-access experimentation. Releasing a car in beta may not be as strange as it sounds. Remember the Pinto?

Hot on the heels of the Wyeth-Pfizer marriage, Swiss Big Pharma giant Roche has stepped up its bid to control California biotech company Genentech, the Financial Times reports. Having been rebuffed last year by Genentech's committee of special directors, Roche has decided to appeal directly to shareholders with an offer of $86.50 a share for the 44 percent of the company it doesn't already own.

The sun continues to shine on Amazon. While the rest of the economy drives off a cliff, the online retailer has reported an "amazing fourth quarter" that saw an 18 percent surge in revenue, Business Week reports. Amazon's "competitive pricing" succeeded in stealing sales from other Internet retailers as it enjoyed a "Wal-Mart effect with people trading down to Amazon to get better prices over the holiday,” in the words of one analyst. CEO Jeff Bezos was also keen to highlight the growing demand for Amazon's Kindle. The company is poised to unveil a new version of the electronic book reader in early February, writes the NYT. Staying in techland, Dell is preparing to enter the smart-phone market as its PC business continues to tank. Insiders tell the WSJ that Dell could go up against the likes of Apple and Research in Motion as early as next month.

Finally, from shameful bankers to shame-faced: The WSJ reports we can now count two former Merrill chief executives and a former Merrill investment-banking chief among the list of investors burned by Ponzi schemer Bernie Madoff.

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GDP Dip Worst Since 1982

The Wall Street Journal and the New York Times are in lockstep on their headlines for respective stories on the ever-worsening U.S. economy. The WSJ's leading headline reads, "Economy Dives as Goods Pile Up," while the NYT goes with "Steep Slide in U.S. Economy as Unsold Goods Pile Up." Both papers chronicle the economy's sickly state, reporting that gross domestic product fell 3.8 percent in the fourth quarter, the largest decline since 1982. It was, however, less than the 5 percent to 6 percent that economists had forecast and "well below" the 1958 record of 10.4 percent, the Journal says.

The less-than-expected contraction was due to consumption, which "collapsed so quickly that goods piled up in inventory, unsold but counted as part of the nation's output," according to the Times. As a result, businesses will likely curb their inventory spending, leading economists to believe that the first few months of this year will "bear the brunt of the recession."

Following the report, President Barack Obama said Friday that the data were not "just an economic concept" but a "continuing disaster for America's working families." He used it to emphasize the urgency of his $819 billion stimulus package, which is now being debated in the Senate after having passed through the House on Wednesday.

The news also sent stocks tumbling, leading to a rather downbeat denouement for the first month of the year. The WSJ reports it was the worst January on record in the Dow Jones Industrial average's 113-year lifespan and the fifth consecutive month of declines. The Dow finished at 8,000.86, an 8.84 percent drop for the month and a 31 percent drop over the past five months, marking the steepest decline since the five months ended December 1937. According to the Journal, the results could be a harbinger. "Historically, stocks' performance in January often foretold performance for the year. For the Dow, January has accurately predicted the year's direction 75% of the time. In the past 30 years, it has been right 26 times," the paper says.

Bloomberg reports that Bank of America will dole out 2008 bonuses of $50,000 or so over the course of three years for its capital markets and investment banking divisions. Citing an anonymous source, the site writes that a portion of each bonus, "perhaps less than 10 percent," will be paid in quarterly installments this year. The bank will pay interest on the remainder at LIBOR, which yesterday was 1.18 percent for three-month dollar loans. The news source has headhunter Jeanne Branthover saying that the approach was "historic." "Employers can get away with anything right now because people are just happy to be employed," she said.

The article complements the WSJ's lead Money & Investing story on executive pay, which says that some officials on Wall Street think that compensation could get curtailed more in coming months due to legislation. On Friday, Sen. Claire McCaskill introduced a bill that would limit the salary, bonuses, and stock options of executives at firms getting federal bailout money to no more than $400,000 a year, not counting benefits. Why that much? It's what President Obama makes. Showing it's sometimes latent sense of humor, the WSJ writes, "In 2007, Goldman Sachs Group Inc. Chief Executive Lloyd Blankfein earned that much in about two days."

In a graphic, the paper reveals that John Mack, CEO for Morgan Stanley, got $40 million in stock and options in 2006; Lloyd Blankfein, CEO for Goldman Sachs Group pocketed $54 million for 2006 and $69 million for 2007; and Robert Rubin, director and former senior counselor for Citigroup, received $115 million since 1999.

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