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Wish you had bought Apple twenty years ago?

For many investors, tech stocks are the only stocks. Everything else is "the old economy." Technology is where it’s at.

I spent a big part of my early career at IBM — the original tech stock — so I know the sector well. Not to mention that I live in the "Silicon Hills" of Austin, home to hundreds of technology start-ups.

Early buyers of companies like Microsoft (MSFT), Apple (AAPL), Cisco (CSCO), and Intel (INTC) enjoyed exponential growth. Wouldn’t it be great to get in on the ground floor of the next big thing?

Of course it would. The problem is that we don’t know the future. Individual technology stocks are a roll of the dice. Maybe the company you’re considering has the combination of ideas, talent and capital that leads to success. More likely, it doesn’t.

This doesn’t mean the whole sector is a gamble. Far from it! The pace of innovation is picking up every year. And as the global economy recovers, I expect the technology sector to lead the markets higher.

Thanks to the exchange-traded-fund (ETF) revolution, you now have many more ways to get involved in technology. No longer is your choice limited between risky individual stocks and technology mutual funds with high fees and onerous trading restrictions. ETFs offer a safer, less expensive, and easier way!

Here are some technology ETF ideas for you. As you’ll see, you can trade the whole sector or zero in on niches that may be hot.

Broad-Based Tech

If you want to play the technology sector as a whole, you can pick from several broad-based sector ETFs. Two of the most popular are Select Sector Technology SPDR (XLK) and iShares Dow Jones U.S. Technology (IYW). Both are very liquid and own the familiar large-cap domestic tech stocks, like Hewlett-Packard and IBM.

These ETFs provide a great way to get quick, broad exposure, but they can be a drawback as well. They may not have as much upside when particular sub-sectors are growing faster.

To fill that void, you can look at …

Niche Technology ETFs

This group lets you identify several distinct categories within the tech sector. As the market grows, these sub-sectors are getting less and less dependent on each other. This is a trading opportunity — if you can predict where the momentum is shifting.

With focused ETFs, you can now buy and sell these niches just as easily as you trade the entire sector. Here are a few examples:

Semiconductors: The companies that design and build semiconductors and related equipment are an industry all their own. Specialty ETFs covering this group include iShares S&P North American Technology — Semiconductor (IGW), PowerShares Dynamic Semiconductor (PSI), and SPDR S&P Semiconductor (XSD).

Software: It’s no stretch to say that software runs the world. Two ETFs that specialize in software companies are iShares S&P North American Technology — Software (IGV) and PowerShares Dynamic Software (PSJ).

Networking: The tech revolution really took off when computers started talking to each other. The equipment that makes this possible is yet another technology sub-sector. You can buy it with PowerShares Dynamic Networking (PXQ) and iShares S&P North American Technology — Multimedia Networking (IGN).

"Clean" Tech: If you’re concerned about the environment, you might want to look at PowerShares Cleantech (PZD), which specializes in earth-friendly tech stocks.

Nanotechnology: This one is still science fiction in some ways — but so was space travel fifty years ago. Nanotechnology is all about creating devices and materials so tiny they have to be manipulated at the molecular level.

It’s far too early to determine which companies will dominate this industry, so it’s best to buy a basket of stocks to get the exposure you desire. And there’s no better way to buy a basket of stocks than with an ETF that follows this region of the market: PowerShares Lux Nanotech (PXN).

Tech vs. Telecom

I remember a time, not so long ago, when conservative investors bought telephone stocks for their steady income. Seems quaint now, doesn’t it?

The line between technology and telecommunications can be hard to draw these days. How do you classify AT&T, for instance? They provide old-fashioned phones as well as internet service.

Obviously the technology and telecom sectors overlap each other. In fact, the most popular technology ETF, Select Sector Technology SPDR (XLK), doesn’t even attempt to make a distinction and combines them both into one fund.

However, there are ETFs with "telecom" in their name, and they tend to be dominated by the big cellular stocks as well as companies that make networking equipment. Examples include Vanguard Telecom (VOX) and iShares Dow Jones U.S. Telecommunications (IYZ).

Technology is a global industry.

Global and International Tech

Surprisingly to some people, not all technology companies are American. In fact, some of the top players are in other regions of the world: Companies like Samsung, Nokia, Canon, SAP, and Research in Motion are all headquartered outside the U.S.

But you won’t find these stocks represented in many U.S. ETFs because they’re considered "foreign" stocks. Yet they are still critical tools for the tech investor.

If you want access to these stocks, you need to look for an "international" or "global" technology ETF. (Rule of thumb: Global means the whole world — U.S. and foreign. International means non-U.S.).

ETFs in this category include: iShares S&P Global Technology (IXN), SPDR S&P International Technology (IPK), and WisdomTree International Technology (DBT).

As you can tell, technology is a global industry — and a growing one. So investors need to be familiar with this sector … the opportunities can be enormous if your timing is right.

Best wishes,

Ron

P.S. I’m now on Twitter. You can follow me at http://www.twitter.com/ron_rowland for frequent updates, personal insights and observations about the world of ETFs.

If you don’t have a Twitter account, sign up today at http://www.twitter.com/signup and then click on the ‘Follow’ button from http://www.twitter.com/ron_rowland to receive updates on either your cell phone or Twitter page.

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

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Every week in my Money and Markets column, I try to show you how to boost your portfolio by using exchange-traded funds (ETFs). Today I’m giving you an assignment: Know your ETFs.

Specifically, I want you to get familiar with six of the most popular ETFs that track key stock market benchmarks. You need to know their ticker symbols by heart … they’re the bread and butter in your ETF shopping cart.

These six ETFs are large and actively traded; in fact, even with more than 800 other ETFs available it’s not unusual for this small group to account for almost half the value of all ETF trading in the U.S.

Now I’m NOT saying you should buy any of my bread and butter ETFs right now. My point is that if you want to be a successful investor, it’s a big help to know what’s available. If you do, you’ll be able to react more quickly when the time is right.

Ready to get started? Here we go.

Bread and Butter ETF #1: SPY

SPDR Trust is the granddaddy of all ETFs. Introduced in 1993, the SPY (that’s the ticker symbol) was the very first U.S.-listed ETF and tracks the S&P 500. This index of 500 large-capitalization stocks is a standard benchmark for the U.S. equity market.

When you buy shares of SPY, you get an instant portfolio of 500 domestic stocks covering every industry sector. Financials, technology, health care, energy … they’re all in there!

No wonder, then, that when big investors want to get instant, diversified market exposure, they often turn to the SPY. But you don’t have to be a millionaire; you can buy SPY shares even if you only have a few hundred dollars.

Bread and Butter ETF #2: QQQQ

PowerShares QQQ used to be called the "Nasdaq 100 Tracking Stock" until the Nasdaq honchos decided to spin off their ETF business to PowerShares.

This can be confusing, so read closely: The name of the ETF is PowerShares QQQ, with three Q’s. The ticker symbol is QQQQ. That’s four Q’s. Clear enough? Obviously someone wants to keep us all on our toes.

In any case, the QQQQ is based on the Nasdaq 100 Index. Note that this is not the same as the Nasdaq Composite Index that you typically see quoted in the news media. The Nasdaq 100 is a sub-set of the Composite, consisting of the 100 largest non-financial stocks in the index.

Back in the 1990s, the Nasdaq was home to many small technology companies — a few of which grew much bigger. That legacy survives in the Nasdaq 100, which is heavily tilted toward technology stocks. In fact, many traders look at it as nothing more than a large-cap tech benchmark.

If you want exposure to banks, real estate or insurance stocks, don’t bother with the QQQQ. You won’t find them there. Nor will you find the blue-chip companies that call the New York Stock Exchange their home. But if you’re after a highly liquid, volatile trading vehicle, the QQQQ is hard to beat.

Bread and Butter ETF #3: DIA

The DIAMONDS Trust follows the Dow Jones Industrial Average, which is probably the best-known stock market proxy in the world.

Unfortunately, the Dow is also mostly useless as a benchmark, at least in my opinion, and so are products like the DIA that attempt to follow the Dow.

I’ve used the DIA from time to time since it came out in 1999, but it has three big problems …

First, like the Dow, it’s very narrow with only thirty stocks. That simply isn’t enough to reliably represent the U.S. industrial economy, as the Dow purports to do.

Second, the DIA excludes some key sectors like transportation and utilities. Dow Jones publishes separate indexes for those groups.

Third, the Dow and the DIA are weighted by the share price of the component stocks rather than the market value. This was advantageous back in the days when you had to calculate things on the back of an envelope, but now it’s just outmoded.

Despite these issues, there are times when the DIA can come in handy. For instance, if you’re looking for an actively-traded proxy of mega-cap stocks, the DIA might be a good pick.

Bread and Butter ETF #4: IWM

The IWM is the iShares Russell 2000 Index Fund. What’s the Russell 2000? You already know the answer if you’re a fan of small-cap stocks.

Each year, Frank Russell Associates ranks all the stocks in the U.S. by their market value. Chop off the top 1,000 biggest stocks and consider the next 2,000. That’s the Russell 2000.

These are relatively small companies — but that’s the whole point! When the U.S. economy is booming, small-cap stocks usually lead the way higher. And the IWM lets you buy hundreds of tiny stocks in one simple trade.

The IWM should be a staple item for almost every investor. It’s easy to jump in and out as the economy fluctuates, and you get plenty of diversification. There’s no better way to play the domestic, small-cap stock market.

Bread and Butter ETF #5: EFA

The iShares MSCI EAFE Index Fund is international because it’s based on the Europe, Australasia and Far East Index published by Morgan Stanley Capital International.

I know that’s quite a mouthful. Let me break it down for you: The EAFE Index is designed to represent the entire developed world, excluding the U.S. and Canada. It includes Western Europe, Australia, Japan — the countries with modern stock markets and banking systems (in contrast to the emerging markets, which we’ll get to in a minute).

The list of countries in the index can change. Recently MSCI promoted South Korea and Israel to developed-market status, and stocks from those countries were added to the index and to the EFA.

The EFA is useful as a way to round-out a portfolio that already includes enough U.S. stocks. Say you own the SPY and the IWM, but you want to have exposure to the rest of the world. Add the EFA to the mix and you’re almost there.

I say almost because there’s one final piece …

Bread and Butter ETF #6: EEM

The EEM is the standard ETF if you want to trade emerging markets. These are places that only recently established economic ties with the rest of the world and are growing quickly. Markets like Brazil, Russia, India and China are good examples.

MSCI produces an Emerging Markets Index as a benchmark for these markets, and the EEM lets you trade that index. This is a really handy fund because it’s often difficult and expensive to buy individual stocks in emerging markets.

The EEM is a quick and easy way to allocate some of your portfolio to emerging markets. Keep it on the tip of your tongue for the next time you’re ready to make such a move.

Express Check-Out
For Active Investors

There you have them: SPY, QQQQ, DIA, IWM, EFA and EEM. These are the six ETFs every investor ought to know. Get familiar with them. Add them to your watch list, and be aware of how they could fit into your portfolio.

Best wishes,

Ron

P.S. I’m now on Twitter. Please follow me at http://www.twitter.com/ron_rowland for frequent updates, personal insights and observations about the world of ETFs.

If you don’t have a Twitter account, sign up today at http://www.twitter.com/signup and then click on the ‘Follow’ button from http://www.twitter.com/ron_rowland to receive updates on either your cell phone or Twitter page.

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

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"Here the message must be sent that Mr. Madoff’s crimes were extraordinarily evil and that this kind of manipulation of the system is not just a bloodless crime that takes place on paper, but one instead that takes a staggering toll," Chin said.

"Objectively speaking, the fraud was staggering," said U.S. District Judge Denny Chin.

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You’ve seen the headlines: U.S. Dollar Plunges! U.S. Dollar Surges!

Why should you care? More to the point, why won’t the dollar just hold still?

Actually, in one sense it does hold still. Whatever happens in the currency markets doesn’t change the number of dollars in your wallet — or your bank account. But it can certainly change what your dollars are worth in comparison to other currencies.

If you live in the U.S., the day-to-day swings in the dollar are nothing to worry about. The long-term downtrend in the dollar is another matter. Since the beginning of 2002, the U.S. Dollar Index has dropped more than 30 percent. That’s almost a third of your international purchasing power — gone!

Even worse, the Obama administration’s reckless spending — with the willing complicity of Bernanke’s Federal Reserve — threatens to send the dollar even lower in the coming years.

What can you do about it? Once again, ETFs come to the rescue!

ETFs Make Currency Trading Easy …

Investing in foreign currencies used to be difficult. Your choices were limited to trading risky futures, lining up at the currency exchange window at major airports, or bringing home some funny-looking bills and coins from your international vacation.

Now, thanks to ETFs, you can load up on euros, yen, pesos and pounds just as easily as you buy a stock. You can even go short in some of these currencies with inverse ETFs. So there’s no reason to keep all your eggs in the dollar basket any longer.

Of course, the fact that you can do something doesn’t mean you should do it. Always have a clear goal in mind before you trade any ETF, and make sure you understand the risks. And even if a trade makes sense for you, get started slowly.

For instance, suppose you just want to diversify your portfolio so you can have some protection from a falling dollar. If you don’t want to make a big bet on the dollar against any single currency, take a look at an ETF like the PowerShares DB U.S. Dollar Index Bearish Fund (UDN).

UDN gives you exposure to all the major world currencies.

UDN is designed to replicate a short position in an index that tracks the U.S. dollar against the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. In other words, UDN goes up as the U.S. dollar goes down against this basket of other major currencies.

Or you can take the opposite position with the PowerShares DB U.S. Dollar Index Bullish Fund (UUP). This one goes UP as the currencies mentioned above fall when measured against the greenback.

Maybe you have a strong feeling about the British pound. How can you turn your forecast into a profit opportunity? One simple way is buying CurrencyShares British Pound Sterling Trust (FXB), an ETF that holds a position in the United Kingdom’s currency.

Have a yen for the yen? CurrencyShares Japanese Yen (FXY) gives you a chance to profit when the yen is outpacing the dollar.

You can buy the British pound with FXB.

Lately, though, the opposite has been more often the case — the yen is one of only a few currencies weaker than the dollar in recent weeks. That ought to tell you something about Japan’s economy! So is there a way to profit if the yen drops?

You bet there is!

The ProShares UltraShort Yen (YCS) is a bearish yen fund. It’s also 2X leveraged so your gains are amplified if your bet is correct. For instance, if the yen drops 10 percent, this ETF’s shares stand to rise 20 percent. However, if you’re wrong, your losses can add up quickly. Therefore, timing your trades correctly is very critical.

I Want to Highlight One Other
Currency ETF Because It’s So Unique …

The PowerShares DB G10 Currency Harvest Fund (DBV) tracks an index that shifts exposure based on the yield of the ten top world currencies — the G10.

With DBV, you’ll have the equivalent of a long position in the three highest-yielding G10 currencies and a short position in the three lowest-yielding G10 currencies.

If you know anything about hedge funds, you probably recognize this as the so-called “carry trade.” Put simply, it’s borrowing at low interest rates and using the loan to buy higher yielding assets elsewhere. It was an easy way to make big bucks for years. But those managers had their heads handed to them in 2008.

Now it’s beginning to look like the carry trade may start to work again. If it does, DBV is an easy way for you to get access to the same strategy millionaire hedge fund investors are using.

There you have it: Six ETFs to help you get in on the world’s currency markets. However, more than two dozen other currency ETFs and ETNs are now available. Unfortunately I don’t have room here to give you the whole list, but they aren’t hard to find. Look around and you’ll see many ways to get out of the greenback — or bet on its recovery.

Best wishes,

Ron

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

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If you think everything you’ve witnessed in the economy over the last two years is virtually unprecedented, think again.

The People’s Bank of China — the central bank for 1.3 billion people and America’s biggest creditors — has just issued an economic report calling on the world to replace the U.S. dollar as the world’s reserve currency … and for the International Monetary Fund to issue a new, single "super-sovereign currency."

Make no mistake about it: As China and other major nations with surplus reserves move steadily forward with this new mission, it could have massive implications for almost everything you own.

It could impact every single stock traded in the U.S.

It could affect the value of every long-term Treasury bond … corporate bond … and municipal bond.

It’s bound to send gold soaring through the roof … and could spark another rocket ride higher in the prices of oil and gas.

But as much as I don’t like it, it comes as no surprise to me, or to anyone who has been following the patterns of history over the years.

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

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Have you noticed? Gold is starting another run on the $1,000 mark. From April 17 through May 26, gold bullion jumped from $ 867.90 to $953.90 an ounce – a 10 percent gain in less than six weeks. Right now gold may be a little ahead of itself. But I suspect it will be challenging the all-time high of $1,032.70 hit on March 17, 2008, in the near future.

While it’s always been possible to participate in the gold market by purchasing mining company shares, until recently there were only two ways to get direct access to a rising gold market. One was to visit a dealer and buy physical gold, such as gold coins, and store it somewhere safe. The other was to trade futures and options on gold bullion. If you short on money you might want to get a payday advance.

You can still use these tools to invest in gold. But there are some potential drawbacks …

* A thief could break into your house and find the gold you hid – and your homeowner’s insurance might not cover the loss.

* The high leverage of futures trading is tempting but enormously risky. Read those account documents carefully. You are, quite literally, putting your entire net worth at risk with every trade.

* And although options trading can be wildly profitable, your timing has to be nearly perfect.

Now, however, you have an additional, much simpler way to invest in gold: Exchange-traded funds, or ETFs, that are designed to track gold’s price. That’s right. You can get in on the gold market just as easily as you can buy a stock!

GLD: The First Gold ETF

State Street Global Advisors launched the first gold-based ETF in 2004. Now called SPDR Gold Shares, the fund has the easily-recalled ticker symbol GLD.

GLD was revolutionary. Structured as a trust, each share of GLD is equal to 1/10 of an ounce of gold. State Street had the shares listed on the New York Stock Exchange, and GLD turned into an instant success.

Imitation is the sincerest form of flattery. And GLD didn’t have the market to itself for long. In 2005, iShares introduced a very similar product, the iShares COMEX Gold Trust, ticker symbol IAU. (If you remember high school chemistry, you know AU is the symbol for gold on the periodic table.)

There are some minor technical differences between these two ETFs. But GLD and IAU offer essentially the same thing: An easily-traded security that tracks the price of gold bullion almost perfectly.

As with other ETFs, GLD and IAU allow institutional investors to "create" and "redeem" shares in exchange for the underlying portfolio, which in this case is gold bullion. This creates an arbitrage opportunity. If the share price of GLD drifts too far above or below the actual gold price, professional traders push it back into line very quickly.

Which ETF should you consider buying? It’s really a personal preference. Both are huge and very liquid, though GLD is much larger than IAU. Just remember that every ten shares you buy gives you the equivalent of one ounce of gold. And you don’t have to store it under your bed.

Leveraged Gold!

I mentioned earlier that futures trading involves leverage and risk. I don’t recommend it for most people. However, if you want to use a little bit of leverage to trade gold, there are less-risky ways to do it …

PowerShares DB Gold Double Long ETN (DGP), launched in early 2008, is a quick and easy way to leverage gold’s price movements without the risk of a futures or an options account. DGP tracks an index of gold futures and is designed to return twice the change in the index.

Just as GLD drew competition from other ETF sponsors, DGP has a near-twin in ProShares Ultra Gold (UGL), which also moves two times the daily price change of gold bullion.

These leveraged funds are structured differently from normal ETFs. DGP is actually not an ETF. Instead it’s an ETN: An exchange-traded note. What’s the difference? Functionally speaking, ETFs and ETNs look very similar, but the actual structure is quite different …

An ETN is a debt obligation of a bank, in DGP’s case it’s Deutsche Bank. That means you’re taking credit risk when you buy an ETN. If Deutsche Bank should fail or go bankrupt, you could lose money even if gold goes up. (See my February 6, 2009, Money and Markets column to learn why ETNs may be riskier than they look.)

Meanwhile, UGL is a "commodity pool" rather than an "investment company" like most ETFs. ProShares uses gold futures to get the necessary leverage, but the pool structure insulates investors from margin calls.

Does this mean you should avoid DGP and UGL? No, not at all. It means that with the added leverage, they are different types of funds with different risk factors that you should consider.

Investing is all about risk. The smart thing is to know the risks and use them to your advantage. And when using leverage, understand that if the underlying index or the price of gold goes down, your fund’s share price can fall twice as fast.

DGP and UGL are both good ways to speculate in gold if you are in a position to watch the trade closely and can afford the added risks. But if you want more of a long-term core position in gold, GLD and IAU are probably better choices.

There you have it: Four easy ways to profit from gold with minimum hassle. You can buy GLD, IAU, DGP or UGL from any stock broker, either a traditional firm or an online discount brokerage.

I’ll be back next week with more ETF ideas for you. Good luck!

Best wishes,

Ron Rowland

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

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Storm #3
Auto Sales Down 44 Percent!

At their peak in February 2007, U.S. and foreign-owned companies sold automobiles in America at an annual pace of 16.6 million units.

Last month, their sales pace plunged to 9.3 million, a decline of
44 percent (including the best performers like Toyota and Honda).

Again, as with housing, we saw a tiny uptick in the prior month, hailed by high officials as a “sign” of improvement. Yet, as with housing, it was weaker than all prior “signs of a turn” over the past 26 months – each of which was followed by a sharper plunge.

Any lights at the end to Detroit’s dark tunnel? Only those of three speeding freight trains:

• The Chrysler bankruptcy, despite all the talk of a “quick and easy” procedure, is not only frightening U.S. car buyers away from the Chrysler brand, it’s also scaring them from other U.S. and foreign makers. And it’s not only hurting auto dealers and parts suppliers, but also smacking auto lenders. Meanwhile …
  
  
• GMAC, the nation’s largest auto lender, is already in its death throes, with the government now estimating it could suffer additional losses of a whopping $9.2 billion over the next two years. Will the Obama administration bail it out? Perhaps. But it would still have to downsize its operations, throwing another monkey wrench into General Motors’ sales. Meanwhile …
  
  
• General Motors is now sinking even more rapidly toward bankruptcy than it was just a few months ago. According to last week’s New York Times column, G.M., Leaking Cash, Faces Bigger Chance of Bankruptcy …

“Even after receiving $15.4 billion in federal loans, General Motors is once again on the brink of financial collapse.

“The automaker’s first-quarter earnings released Thursday showed that G.M. was losing more money and sales than it was in late December, when the government began its bailout.

“With its cash reserves down to the bare minimum and its revenue plunging, G.M. seems more certain each day to be heading toward a bankruptcy filing. …

“The company’s chief financial officer, Ray Young, called the drop … ‘a staggering number,’ and said consumers were showing increasing concern about G.M. products because of the potential for bankruptcy.”

General Motors’ CFO added: “Once you start losing revenues, you get yourself into a vicious cycle from which you cannot recover.”

Sound familiar? It should. It’s the same vicious cycle I’ve been warning about for many moons – falling revenues prompting mass layoffs, and mass layoffs driving down revenues.

Storm #4
Biggest Decline in Consumer
Credit Ever Recorded!

Any economist counting on the consumer to get things going again had better go back for some more Rorschach tests …

… because you don’t need a therapist to interpret the image depicted in my chart below. It shows very clearly how the nation’s lenders are dumping consumers and making a mad dash for the exits:

In the third quarter of 2007, banks dished out $44 billion in net new loans on credit cards, autos, and other consumer credit (excluding mortgages).

Then, just 12 months later, in the third quarter of 2008, that giant credit machine collapsed to a meager $8.7 billion, a decline of 80 percent!

But the collapse didn’t end there. In last year’s fourth quarter, not only did new credit disappear, but lenders actually pulled out of the consumer credit market to the tune of $19.5 billion.

And they did it AGAIN in the first quarter of this year, pulling out another $12.2 billion.

It is the biggest collapse in consumer credit ever recorded.

Now do you see why I’m recommending a shrink for any economist fixated on a recovery?

They know how important credit is. They know that few Americans have the savings to splurge on consumer goods. And they’re tired of knowing that a recovery is virtually impossible without credit.

And yet here we are, with the biggest-ever collapse in consumer credit – and they’re still searching for the “signs”!

Storm #5
Big Banks!

Whether the government lets big banks fail or not, the impact on the economy is similar: A massive contraction of bank loans and credit, sabotaging attempts to revive credit flows and stimulate the economy.

Reason: These banks must build capital quickly, and the only realistic way to do so is by cutting back on their lending.

The official stress test results released Thursday on 19 U.S. bank holding companies were supposed to help determine exactly how much capital they’ll need, and the total came to $75 billion.

That’s no small amount. But the stress tests will go down in history as the world’s most elaborate effort to paint lipstick on a pig.

To show you why, first, let me provide our analysis based on data from TheStreet.com Ratings, the Comptroller of the Currency (OCC), and the banks’ first-quarter financial statements. Then I’ll show you why I believe the official results grossly underestimate how much capital the banks will need and how much pressure they’ll be under to slash lending.

We find that …

• Seven institutions – JPMorgan Chase & Co., Citigroup, Wells Fargo & Co., Goldman Sachs Group, GMAC LLC, SunTrust Banks, Inc., and Fifth Third Bancorp – are at risk of failure and may have to cut back lending dramatically to stay alive.
  
  
• Eight institutions – Bank of America, Morgan Stanley, PNC Financial Services Group, US Bancorp, BB&T Corp., Regions Financial Corp., American Express Co., and Keycorp – are borderline, meaning they could be at risk of failure with worsening economic or financial conditions and will also have to cut back on lending.
  
  
• Only four institutions – MetLife, Bank of NY Mellon Corp., Capital One Financial Corp., and State Street Corp. – appear to have adequate capital to withstand worsening conditions. But even they may voluntarily cut back their lending in an attempt to maintain their current financial health.

Moreover, of the $11.6 trillion in assets held by the 19 institutions, those likely to cut back dramatically represent $6.56 trillion, or 56.5 percent, of the assets; while borderline institutions hold $4 trillion, or 34.7 percent.

Only $1 trillion – just 8.8 percent – of the assets are held by institutions with adequate capital, based on our analysis.

In contrast, the government is trying to persuade us that most have plenty of capital … the rest can easily raise it … and none will have to slash lending in a way that would sabotage the prospects for an economic recovery.

So what explains this vast discrepancy between the official conclusions and ours?

The simple answer: Three unmistakable deceptions in the government’s stress tests …

First deception: The assumptions.

To come up with estimates of future losses, the government assumed what they call “a more adverse” scenario. But their more adverse scenario is actually less adverse than the current reality!

Hard to believe? Then just look at their own numbers in the chart the Fed published recently:

• Their “more adverse” scenario is predicated on the presumption that the GDP will contract no more than 3.3 percent this year. But in actuality, the GDP is already contracting at an annual pace of 6.1 percent!
  
  
• Their “more adverse” scenario also assumes that unemployment will average 8.9 percent this year. But unemployment has already reached 8.9 percent in April, and no one – not even economists fixated on recovery signs – is anticipating anything but a further rise.

Either they’re delusional. Or they’re cheating at solitaire.

Second deception: No mention of systemic risk!

The banking regulators have published two major white papers on the stress tests – “Design and Implementation” plus “Overview of Results.” However, in these papers, they have failed to even mention the greatest risk of all: systemic risk.

This is the risk that …

• A few key players in highly leveraged instruments like derivatives could default on their trades.
  
  
• These defaults could set off a series of failures, with the most severe impacts felt by banks that hold the largest share of the derivatives in the country.

This is the giant risk that the Government Accountability Office (GAO) wrote about in its landmark 1994 study, “Financial Derivatives: Actions Needed to Protect the Financial System,” warning of “a chain reaction of market withdrawals, possible firm failures, and a systemic crisis.”

This is the giant risk that triggered the collapse of Bear Sterns, the failure of Lehman Brothers, and the $180 billion bailout of America’s largest insurer, AIG.

It’s the giant risk that AIG executives themselves wrote about in their recent memorandum, “AIG: Is The Risk Systemic?,” warning of a “cascading impact on a number of life insurers already weakened by credit losses” … and “a chain reaction of enormous proportion.”

It’s the giant risk that the International Monetary Fund is most concerned about when it warns of another $3 trillion in global losses due to the banking crisis.

It’s the giant risk that prompted former Treasury Secretary Henry Paulson to literally drop to his knees last September, begging Congress for $700 billion in bailout funds for the banking industry.

Since that day, the U.S. economy has suffered the worst back-to-back GDP declines in over 50 years, burning the nation’s fuse even closer to a blow-up.

And yet, suddenly, in a massive undertaking that was supposed to accurately evaluate the banks’ exposure to these dangers, it’s also the giant risk that has been scrupulously scrubbed from 59 pages of official white papers, a half dozen press releases, plus multiple public pronouncements – all about the stress tests, all without a single mention of systemic risk.

This omission is both deliberate and unforgivable.

It means the stress tests have failed to fairly evaluate the credit exposure of each bank to defaults by their trading partners. And it means the tests are creating a false sense of security for investors and the public that can only lead to greater mistrust, more loss of confidence, even panic.

The omission is especially misleading for large banks that dominate the derivatives market … would be at ground zero in any meltdown … and would therefore be among the first to suffer massive losses.

The prime example: The OCC reports that, at year-end 2008, JPMorgan Chase (JPM) held $87.4 trillion in notional value derivatives, including $8.4 trillion in credit default swaps.

(To see for yourself, click here to download the OCC’s latest report; scroll down to page 22; and check out the top line “JPMorgan Chase Bank NA.” Note: The next to the last column “Total Credit Derivatives” is 99 percent made up of credit default swaps, according to the OCC.)

Why is this such a big problem? For several reasons:

• Although it’s cut back a bit, JPM still has 43.6 percent of all the derivatives held by all U.S. commercial banks, or $17 trillion more than Bank of America and Citibank combined. Among the 19 bank holding companies in the stress tests, that puts JPM closer to ground zero than any other bank.
  
  
• It’s well known that credit default swaps are the highest-risk sector of the derivatives market. And yet, in this sector, JPM has 52.8 percent of the total held by all U.S. commercial banks, or nearly double the total held by BofA and Citi. This puts JPM even closer to ground zero.

• JPM execs insist they’re smart and know how to handle their risks very neatly. But if that were the case, why did they suffer a whopping $2.5 billion loss in their credit default swaps in the fourth quarter? (OCC, page 27, Table 7, line 1, last column.)
  
  
• The OCC also reports that, for each dollar of capital, JPM still has $3.82 in total credit exposure. Mind you, that’s JPM’s exposure to just one kind of risk (defaults by trading partners) in just one kind of instrument (derivatives). In addition, JPM is also assuming market risks in derivatives plus a series of risks in its other investing and lending operations. (OCC, page 13, table at bottom of page, line 1, last column.)
  
  
• Despite all this, in their “more adverse” scenario, the banking regulators estimate JPMorgan Chase’s total “counterparty and trading losses” will not exceed $16.7 billion, a fraction of the true potential losses in a financial crisis.

With the fatal omission of systemic risk from their analysis, the government concludes that JPMorgan Chase is in good shape and does not need any additional capital.

The same omission leads to a similar conclusion for Goldman Sachs, despite the fact that Goldman has over $10 in total credit exposure per dollar of capital, or nearly triple the credit risk of JPMorgan Chase.

The only realistic conclusion: Both these institutions will need huge amounts of capital, driving them to cut back massively on new lending.

Systemic risk is the elephant in the room. Everyone knows it’s there. Everyone understands the dangers. But they’re afraid of the answers. So they dare not ask the questions.

The fundamental answer, though, is clear: Systemic risk is what drove the financial markets into a deep freeze seven months ago; and it was that storm which helped drive the economy into a tailspin.

Today, systemic risk is not gone. If anything, it’s far worse.

Third Deception: Improper influence.

In its white paper, the Federal Reserve admits that the stress tests were based, to a large extent, on each bank’s self-evaluation – not only for loan loss estimates that can be derived from past data, but also for the future performance of trading accounts, which can be far more subjective.

Moreover, each institution was allowed to appeal the final results, and several banks strenuously negotiated for more favorable grades. They even got regulators to accept their projections of future revenues, treating those future revenues almost as if they were cash in the kitty.

In contrast, we never permit the companies we evaluate to influence our evaluation process or our results. To do so would defeat the entire purpose of the exercise. But much like conflicted Wall Street rating agencies, that’s essentially what the bank regulators have done – from start to finish.

Put simply, the stress tests were too easy; the banks took the exams home with cheat sheets; and if they didn’t like their final grade, they could get the examiners to give them a better one.

Yet despite all these fudge factors, the government still estimates these institutions could suffer $600 billion in additional losses over the next two years.

And this is being portrayed as another “sign” of recovery?!

My view: We will have a recovery someday. But only AFTER we honestly recognize the grave mistakes of the past and own up to the hard sacrifices still ahead.

Until that happens, I’m staying the course, investing my own money in a way that protects me from the dangers and gives me an opportunity to profit from the next decline … which, by the way, promises to be the biggest of all.

If you want to follow along with me, check your inbox for an alert that I’ll soon be sending you personally – with the sender name “Martin D. Weiss, Ph.D.”

Good luck and God bless!

Martin

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

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Any economist fixated on so-called “signs of a recovery” needs to have his head examined.

As I’ll prove to you in a moment, the hard-nosed reality is that five major economic cyclones are in progress at this very moment.

The storms are not abating. Nor are they changing direction. Quite the contrary, what you see today is, at best, merely a deceptive calm before the next, even larger tempests.

For investors who follow Wall Street, it could be fatal.

For contrarian investors, however, this insanity opens up some of the greatest opportunities in many years: Precisely when we see plunging barometers all around us, we also have a new surge of hype on Wall Street, driving stock prices higher.

Result: The rally has lowered the cost of contrary investments precisely when their prospects are best. Consider the five storms, and you’ll see exactly what I mean …

Storm #1.
Plunging Jobs

On Friday, the Bureau of Labor Statistics announced that job losses were running at a slightly slower pace than in the first quarter. So Wall Street cheered.

But it’s a joke, and the 539,000 additional Americans out of work aren’t laughing.

Nor are the 23 million people – 15.8 percent of the work force – who are officially unemployed … are struggling with lower paying part-time jobs … or have given up looking for work entirely.

Look. In December 2007, there were 138.1 million jobs in America. Now, there are only 132.4 million.

So even if you accept the government’s tally of the narrowest unemployment measure, 5.7 million jobs have been lost.

Plot those figures on a chart and the picture is absolutely unambiguous: Jobs in America are collapsing. Right here and now!

Where’s that “slightly slower pace of collapse” they’re raving about? You’d need a microscope to see it.

Storm #2
U.S. Housing Starts Down 77.6 Percent!

Housing is the nation’s largest industry. With it, the entire global economy boomed in the mid-2000s. Without it, a recovery is next to impossible.

The big picture: Housing starts, the best measure of the industry’s health, peaked at an annual pace of 2.3 million units in early 2006.

Now, they’re running at barely more than a 0.5 million units.

That’s a decline of 77.6 percent – three-quarters of America’s largest single industry wiped out.

Yes, back in February, there was a tiny uptick: Starts rose from 488,000 to 572,000. And everywhere we heard voices cheering the “spectacular” jump in housing starts.

What they didn’t tell you is that the so-called “jump” was actually smaller than six of the seven minor upticks we’ve seen in housing starts since 2006. Nor did you hear them say much when this measure fell anew in March.

Subscriber, this industry is not recovering. It remains in a state of near total collapse.

The only major change: Lenders have given up waiting for a recovery that never comes. So they’re throwing in the towel, unloading huge inventories of foreclosed properties at fire-sale prices. And they’re calling that a “recovery”?

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

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One of the first signs of financial trouble includes chronic trouble making the minimum payments on credit cards, personal loans, mortgages and other obligations. If you’re unable to make even the minimum payments on your obligations, you need to understand immediately where your money is going. It’s not unusual for people with relatively high incomes to end up with little or no money at the end of the month. Try tracking all of your expenditures for a month. Keep a close tally of late fees, over-limit fees, overdraft fees, and  ATM fees. Also keep track of how much you spend on “incidentals” and “minor purchases.” At the end of the month, you may be surprised to find out how much you’re spending in these areas.

Another sign of financial trouble is falling behind on monthly payments. If your mortgage or rent payments are chronically late, or if you skipped one or more payments, you should consider yourself in financial trouble. Providing a living space is a very basic need, and if you’re having trouble paying the mortgage or rent, you probably need immediate assistance with your to finances and debts.  Developing a budget may help you see how you’re coming up short.

If you’re using a credit card to pay for necessities each month, you’re either in financial trouble or soon will be. Like housing, providing food, medicine, and utility service for your home is a basic expense that should be covered by your monthly income. If you’ve lost your job or your income has been reduced suddenly, you may need to make drastic changes to your lifestyle to accommodate your new, lower income level. Look at your expenses to see if you can shift you’re spending on necessities to a cash-only basis. Then look to see if you can eliminate some of your credit card spending.

If you’re using credit cards to pay off other credit cards, you may have mounting debt problems. This strategy may resolve an immediate problem, but isn’t sustainable in the long term. If you pay your credit card bills with another credit card, you’re probably living beyond your means and racking up some very expensive interest charges in the process. You need to work on more successful debt relief strategies that resolve your debt problems rather than shifting them from place to place each month.

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