Making Sense Out of Crazy Markets

Stock markets have been particularly hard to figure out during the past few months, with their
roller-coaster performance. One day, they’re up 200 point, and the next day they’re down points.
There are two major factors I see involved:

1. First, economic news is very contradictory. On the one hand, many companies are reporting record profits, while at the same time the housing market continues to deteriorate and jobless claims are rising. Many U.S. companies on paper are doing better than ever, thanks to outsourcing of jobs (which cuts labor costs), growing foreign sales (aided by a weak dollar), and tight inventories.

On the other hand, many U.S. workers — particularly those with large debt — are discovering that their finances are deteriorating. This contradictory economic news is causing investors to quickly take profits, whenever stocks rise appreciably.

2. Very jittery investors. Increasingly, investors are aware that serious problems could quickly cause our economy to go into recession. Big problems including deteriorating housing
markets (which include many European countries), and more fundamental economic problems in the U.S., including the soaring cost of debt, faltering economic growth, and increasingly-tight credit requirements. Investors realize that those problems could cause the economy to fall into
recession in the next 6-12 months, and send stocks tumbling. At the same time, for now, there are still excellent profits being made in many stocks.

In a sense, investors are on a razor’s edge, vacillating between bull and bear.

What Crazy Markets Mean For You

In view of continuing, huge fluctuations in the market, we have the following advice.

First, limit your exposure in stocks by investing no more than 30-40% of your money in stocks. Also, take interim profits on your positions, by selling 1/2 when they are up 30% or more.

Second, keep another 30% of your investment dollars in cash or cash-equivalents, such as strong
foreign currencies or short-term bonds.

Third, keep 10%-20% of your funds in gold and silver. They should soar next year. I recommend that you own both bullion coins, and for large amounts of savings — Perth-Mint Certificates — in which your gold and silver are held in depositories in Perth, Australia. (www.perthmint.com.au)

Fourth, for the possibility of some very large profits, open a commodity and currency options account. There are no guarantees, but in September, our average Intelligent Options currency option recommendation was up 389%, turning $10,000 into $48,900 in 30 days. Our top-performing Australian dollar calls were up an incredible 1,580% in five weeks, turning $10,000 into $168,000 (now our all-time, top-performing option). Call 1-800-297-8288 to order or for questions call 1-707-746-8796 and ask for Jim Elwood.

A minimum of $10,000 is required to open a commodity and currency account, and $20,000 is
preferred. The required paperwork also take a few weeks to process before your account is functional.

10 Ways to Protect Your Assets from the Mortgage Meltdown, Recession 2008

Soaring mortgage defaults and the end of easy money are creating a devastating credit crunch and sparking investor panic across the country.

The bankruptcy of companies like American Home Mortgage and subprime lender Bear Stearns … the wild, 100-400 point daily swings in the DOW (which Bear Stearns Chief Financial Officer Sam Molinaro calls “the worst he’d seen in 22 years”) … and the growing wave of home defaults and foreclosures are just the beginning.

How bad is it? Here are some examples:

• Home foreclosures are skyrocketing across the nation. In San Joaquin County, California, there were 785 foreclosures in the second quarter of 2007. That’s 12-times the number of foreclosures in the same period in 2006.
  Nationwide, foreclosures were up in June 87% over the previous year.
• Losses are spreading among mortgage lenders. Freddie Mac, a huge quasi-governmental lender, reported a loss of $211 million in the first quarter of 2007.
• Home prices are plummeting. In Detroit, Fannie Mae has a “charming colonial” on the market for $7,000, despite $59,000 outstanding on the loan.
  In many of the most-affluent areas of California, homes are now being sold at auction for 50%-75% of the price they garnered just six months ago. Some less desirable homes are not selling at any price.
• Interest costs are soaring. In early August 2007, the prime lending rate hit 7.50%. That’s up over 50% from the sub-5% rates available just a few years ago.

In addition, many would-be borrowers with even small blemishes on their credit are finding that no loans are available to them.

As we have been warning for several years (see “Surviving the Coming Real Estate Crash,” IIR, June 2005), thousands, or even millions of investors will be devastated by these dramatic events.

What’s more, the real estate crash has begun to trigger an even-more worrisome collapse of derivative investments, which could dwarf the effects of the real estate crash.

Fortunately even in these frenzied markets you can not only preserve the value of your assets, but you can actually add to them handsomely.

More on that in a moment. But first, you need to understand how the growing credit crunch is about to affect your paycheck, business, assets and investments.

A CLASSIC INFLATIONARY BUBBLE

The frenzy we are now witnessing in real estate and financial markets is nothing less than the collapse of a classic inflationary bubble.

A combination of low interest rates, easy credit, and government monetary inflation encouraged millions of Americans to finance homes they couldn’t afford, buy luxury cars and boats they didn’t need, and take expensive vacations they couldn’t pay for.

Just 12 months ago, anyone with a pulse could get hundreds of thousands of dollars in credit to buy a new home.

Indeed, at the peak of the mortgage mania, in some areas mortgage brokers were giving borrowers up to 120% of the cost of their home loan! In other words, lenders paid you to borrow money from them. Or at least, so it appeared.

Just fill out the paperwork for a “no-doc, negative amortization loan” and you could get a 40-year mortgage plus a check for $20,000 or $30,000 from some unscrupulous lenders. Then you make payments for less than your interest costs for a few years.

Lo and behold, hundreds of thousands of deadbeats who couldn’t qualify for an unsecured $1,000 credit card, suddenly became proud “homeowners.”

Of course, it was all an illusion. All these borrowers really owned was debt. As I warned in June 2005, when creative mortgages reset to higher payments, thousands of new “homeowners” would discover that they couldn’t afford the homes they were living in … and then the housing bust would begin.

The Center for Responsible Lending warns: “If foreclosures continue to rise as predicted … though some people will become first-time homeowners due to subprime loans, there will be significantly more borrowers that will lose their homes to foreclosure.”

What no one is talking about is the root cause of the easy credit and creative loans which made this insane credit bubble possible.

INCREASE IN U.S. MONEY SUPPLY (M3)
2004-2007

Source: Increase in money supply

THE FAKE OWNERSHIP SOCIETY
— 2004-2007 —

It all goes back to George Bush and former Fed Chairman Alan Greenspan, and their “ownership society” initiative launched in 2002.

A key element of that initiative was the idea was that America would be much better off if more people owned homes. To make this possible, these officials did two things that encouraged millions of low-income wage-earners who rented their residences to take out mortgages.

First, they created the money needed to finance all of these new loans. How? By inflating the U.S. money supply at the fastest rate we have seen for decades.

Between 2004 and 2007, the Federal Reserve doubled the rate of increase of the money supply (M3) from 6% to over 13% a year, as shown by the chart.

Awash in new currency, banks had to put the money somewhere. That turned out to be real estate.

No one asked, “How could low-income workers who could barely afford rent, make house payments?”

In 2002, President Bush launched his “Ownership Society” initiative, including programs to greatly increase the ownership of homes by low-income Americans. Here’s how the White House web site describes this initiative:

“Expanding Homeownership. The President believes that homeownership is the cornerstone of America’s vibrant communities and benefits individual families by building stability and long-term financial security. In June 2002, President Bush issued America’s Homeownership Challenge to the real estate and mortgage finance industries to encourage them to join the effort to close the gap that exists between the homeownership rates of minorities and non-minorities. The President also announced the goal of increasing the number of minority homeowners by at least 5.5 million families before the end of the decade. Under his leadership, the overall U.S. homeownership rate in the second quarter of 2004 was at an all time high of 69.2 percent. Minority homeownership set a new record of 51 percent in the second quarter, up 0.2 percentage point from the first quarter and up 2.1 percentage points from a year ago.President Bush’s initiative to dismantle the barriers to homeownership includes: American Dream Downpayment Initiative, which provides down payment assistance to approximately 40,000 low-income families; Affordable Housing. The President has proposed the Single-Family Affordable Housing Tax Credit, which would increase the supply of affordable homes; Helping Families Help Themselves. The President has proposed increasing support for the Self-Help Homeownership Opportunities Program; and Simplifying Homebuying and Increasing Education. The President and HUD want to empower homebuyers by simplifying the home buying process so consumers can better understand and benefit from cost savings. The President also wants to expand financial education efforts so that families can understand what they need to do to become homeowners. Source: White House website

A key mechanism to expand homeownership was liberalizing mortgage qualification rules, making it possible for millions of previously unqualified low-income people to finance homes.

What no one asked was: “How could low-income workers, who could barely afford rent on a small apartment, suddenly afford much larger mortgage payments on a house?”

As recently as the fall of 2006, as home inventories were soaring, former Fed Chairman Alan Greenspan was still strongly recommending “creative mortgages.” The money was provided by the Federal Reserve, and much of it was disbursed through the two 600 pound gorillas of the lending industry, the quasi-federal agencies Fannie Mae and Freddie Mac.

These creative mortgages included . . .

• Interest-only loans, in which no principal on the property was initially paid.
• “No-doc” loans, in which the borrower’s word was accepted without documentation regarding his or her income.
  These loans are an invitation to commit perjury. A study by Mortgage Asset Research found that 90% of borrowers with no-doc loans grossly inflated their income, often by 50% or more.
• Negative amortization loans, in which the borrower could – for the first few years – pay less than his interest on the loan; meaning he or she owed more every month on “their” property.
• Subprime loans, in which people with bad credit could (initially) get low-interest loans with little or no downpayment … only to much higher payments a few years down the road.

What many borrowers who never read the fine print in their mortgage agreement failed to realize was that the low payments on these loans were only good for a few years.

After that, their payments would go up and their interest rates could skyrocket, adding hundreds, even thousands of dollars a month to their payments.

For many subprime borrowers who could barely make minimal payments, the financial effects of mortgage resets have been devastating. In some cases, the re-set payment is higher than their entire take-home pay!

The result was inevitable: Skyrocketing mortgage defaults and home foreclosures.

Nationwide, mortgage defaults (borrowers 3 months or more behind in their payments) were up over 83% in March 2007 compared to March 2006.

In many areas, foreclosures – lender repossession of homes – are up 5-to-10-fold over the previous year!

In addition, foreclosures and defaults are now spilling over into the primary lending market, and more and more borrowers with good credit and traditional loans are going into default and facing foreclosure.

In the near future, the U.S. may have no choice but to look to countries like India and China to buy our assets, to avoid a continuing implosion of real estate

But the worst is yet to come. BusinessWeek says that the increase in home foreclosures won’t peak and begin to fall until at least March of 2008. However by then, foreclosures are expected to be several times higher than they are today.

As home inventories increase, credit becomes much harder to get, and real estate prices fall, problems are spilling over into the primary mortgage loan market. More and more would-be home buyers with good credit are finding it difficult or impossible to sell their old home or finance a new one. It could be years before real estate prices again experience sustained increases.

Another huge wild-card is the retirement of millions of Baby Boomers in the next ten years, many of whom will be selling their large homes, and moving to smaller houses or apartments.

According to Yale economist Robert Schiller (interviewed in the July 2006 issue of IIR), the only way we can prevent a continuing implosion in U.S. real estate prices is by selling assets to countries like China, India, and Brazil, which have large, emerging middle-class citizens with more and more cash to spend.

THE HIDDEN DERIVATIVES CRISIS
— 2004-2007 —

Subprime borrowers unable to make re-set monthly payments are only one of many groups affected by the growing mortgage credit crunch.

What most people don’t realize is most lenders no longer retain ownership of their mortgages, but rather bundle them together and then resell to other investors — such as pension funds, insurance companies, private equity companies, and foreign banks. Many major investors are foreign companies and banks.

Worldwide there are now over $365 trillion in derivatives. That’s an incredible 12-times the GDP of the entire world.

Large banks in China and Japan have been two of the biggest purchasers of U.S. mortgages – so a bank in China or Japan may already own your home if you have taken out a mortgage any time in the past ten years.

Once mortgages are bundled and resold they morph into securities such as Residential Mortgage-Backed Securities (RMBs). Such securities are just one example of derivatives – debt or investment derived from other debt and investments.

In addition to mortgage derivatives there are also insurance derivatives, pension fund derivatives, stock derivatives, and futures derivatives.

The important thing to understand about derivatives is that they create an enormous, inverted pyramid of debt and financial obligations based on comparatively small real assets.

According to the Economist, credit derivative product companies (CDPCs) can leverage their capital up to 30-times. Thus $1 trillion in mortgage debt can turn into $30 trillion in derivatives.

Derivatives themselves are also bundled together and resold, creating debt upon debt.

Because they have been so profitable, in the last few decades hundreds of trillions of dollars in derivatives have been created.

Derivatives are now owned by many of the world’s largest and most trusted financial institutions, such as Bear Stearns, Citibank, and the Bank of China.

Worldwide, Agora Research estimates there are now some $365 trillion in derivatives.

That’s an almost unimaginable sum, amounting to over twelve times the gross domestic product of the entire world!

Today many banks, hedge funds, pension plans and corporations that have invested in these derivatives are in a very precarious position. According to NewsMax.com, many derivatives are so highly-leveraged that “a fall of a mere 2 percent in the value of the underlying assets could wipe out the entire portfolio.”

The recent bankruptcy of American Home Mortgage and several divisions of Bear Stearns is just the beginning of the effects of the real estate meltdown and derivative crisis.

Most at risk are funds and institutions which are heavily invested in derivatives, including many banks, pension funds, insurance companies and large companies. Indeed our entire economy is now at risk of recession.

10 WAYS TO PROTECT YOURSELF

• Recommendation #1:
  Find out if your bank and the other institutions you depend upon for financial security are safe. If you don’t like what you learn, switch.

  You can do this by getting an objective, independent safety rating on your bank, insurance company, pension plan, Medigap insurer, and stocks from Weiss Ratings, 15430 Endeavour Dr., Jupiter, FL 33478, 1-800-289-9222.

  Some of the country’s largest banks, insurance companies and pension plans are most at risk from bad real estate investments and derivative debt.

  On the other hand, many well-capitalized smaller banks, insurance companies, etc. are much safer.

• Recommendation #2:

  If you are having difficulty making your mortgage payments, take action immediately. Cut your spending, get a second job, take in a roommate, do whatever you have to do to preserve your property.

If you have already received a default notice, contact your lender immediately. You may be able to get them to let you skip a payment or two, reduce your payments temporarily, or get a lower-interest loan from a local savings and loan. Perhaps you can borrow money from a friend or relative. There are also some new federal and state government programs to help. The worst thing you can do is to do nothing. By the time you receive a foreclosure notice, it will be too late.

Be very cautious about any company that offers to “save” your home for you. It could be a scam in which they strip your home of equity, sell it out from under you, and then saddle you with even larger debt. Have an attorney go over the paperwork for any such deal. If the company refuses or pressures you to sign up immediately, say thanks but no thanks.

If you are deeply “underwater” on your property (i.e., you owe more than the property is now worth), your only option may be to sell your home for as much as you can, work out a deal with your lender, and move.

• Recommendation #3:

  Make sure your job or business is safe. Most at risk in a recession are businesses that depend upon good financial times, low interest rates, and free spending by consumers – such as new cars, boats, vacation condos, expensive vacations, music lessons, etc.

  Funding for anything to do with the arts is also likely to plummet. If your job is at risk, do everything you can to make yourself irreplaceable at work, including taking classes to upgrade your skills, working free overtime and initiating projects to cut costs or bring in more revenue. If your business is at risk, think of how you can modify your products and advertising to bring in more revenue during a recession.

• Recommendation #4:

  Consider businesses and careers that prosper during a recession. These include auto repair (people fix up rather than replace cars in a recession) … discount grocery stores (people still need to eat) … a bar or liquor store (liquor sales go way up in a recession) … gun repair and other basic skills.

• Recommendation #5:

  Sell any stocks you have in at-risk companies such as home builders like Lennar (LEN), Ryland Group (RYL), and Hovnanian Enterprises (HOV). According to BusinessWeek, lenders particularly at risk include ECC Capital Corp. (ECR), New Century Financial Corp. (NEW), Long Beach Mortgage Corp. (a unit of Washington Mutual), NovaStar Financial Inc. (NFI), and Fieldstone Investment Corp. (FICC).

• Recommendation #6:
  Keep lots of money in cash or cash-equivalents, such as gold, silver and strong foreign currencies. Consider getting an account with EverBank, www.everbank.com which enables you to keep your money in savings accounts and CDs denominated in gold, silver and any of several strong, foreign currencies.
  If you prefer to keep your funds in a local bank, be sure to shop around for the best CD rates.
  Remember: With the U.S. dollar now depreciating at over 13% a year, even if you get 6% interest, you are still losing 7% a year in purchasing power.
• Recommendation #7:

  Invest in strong foreign corporations. Economies of many foreign companies are now largely independent of the U.S. And nations like China, India, Indonesia and Brazil are experiencing tremendous growth, even as the U.S. falters. You will find many recommendations for foreign stocks in our current portfolio and future newsletters.

• Recommendation #8:

  Seriously consider opening a commodity and currency options account. Even if stocks tank you can do great investing in these options which profit from a falling dollar and rising commodity prices.
  My Intelligent Option Service recommendations, for example, have been going up 100% about every six weeks in 2007. Of course, there are no guarantees. But at that rate, $5,000 grows to $80,000 within six months. For more information, call 707-746-8796

• Recommendation #9:

  Prepare now for a major downturn in the U.S. economy. Pay off high-interest credit cards, cut your expenses, move to an area with a low-cost of living, but good jobs. There are many such medium-sized towns in the Midwest and Southern U.S.

• Recommendation 10:

  Be kind to yourself. Use a tightening economy as an opportunity to strengthen your connections with family and friends, and take joy in life’s everyday pleasures. Weekly family dinners and recreation don’t have to cost a lot. Take walks in a park, volunteer to help out in your community and relax.
  Even if we hit a rough patch, the economy will eventually recover.

Recession Ahead? Leading Indicators Predict 2008 Recession

by Jarret B. Wollstein, Editor

The Dow is at an all-time high. The Fed just cut the prime Fed funds rate by 0.5%. Paychecks are growing. So why are so many analysts — including former Fed chairman Alan Greenspan — talking more and more about the possibility of recession next year?

Despite the rosy indicators mentioned above, many leading economic indicators forecast recession next year. Those indicators include:

The Consumer Price Index (M2) and the Producer Price Index. Despite occasional, official claims to the contrary, both are rising. The basic cause: expansion of the money supply, which is controlled by the “inflation-fighting” Federal Reserve. In reality, the Fed is the engine of monetary inflation and hence the primary cause of price inflation. Expect lots more of both in 2008.

Productivity and Labor Costs. In the 12 months ending June 2007, U.S. labor costs were up a huge 4.9%. At the same time, productivity fell. This is a recipe for falling profits, increased bankruptcies and higher inflation. Source: Bureau of Labor Statistics

Non-Farm Payrolls. Falling non-farm payroll is a leading economic indicator of economic contraction ahead. Between August 2006 and August 2007, non-farm payroll declined by 4,000 jobs. Source: Bureau of Labor Statistics. New jobs are needed each month to absorb new workers.

Jobless Claims — First Time. First time claims for unemployment benefits have been rising since this past April, and now are at 334,000. This is another recession indicator. Source: Department of Labor.

Consumer Confidence (U. of Michigan “Consumer Expectations Index”). This indicator has been trending lower since December 2006. Source: University of Michigan.

Retail Sales. Year-over-year, inflation-adjusted retail sales have dropped sharply over the past six months. At the same time, same-store sales fell to the lowest level in July 2007 since March 2003. Source: U.S. Census Bureau.

Business Inventories. Year-over-year change in business inventories has fallen sharply over the past year, and could soon turn negative. This indicates the U.S. economy is about to enter a recession. Source: U.S. Census Bureau.

Durable Goods Orders and Non-Defense Capital Goods (other than aircraft). Durable goods are items designed to last at least three years, such as cars and refrigerators. Some 15% of consumer discretionary spending goes for durable goods. When durable goods and non-defense capital goods orders fall — as they are currently — that indicates recession soon. Source: U.S. Census Bureau.

New Housing Starts and Building Permits. Directly and indirectly, housing construction has a huge impact on the U.S. economy. In the wake of the subprime mortgage meltdown, housing starts have fallen through the basement, and have now fallen 74% through
July of this year. Source: U.S. Census Bureau.

Corporate Profits. The year-over-year change in corporate profits is a major leading indicator of where our economy is going. This indicator is down sharply during the past three quarters. Source: Bureau of Economic Analysis.

Recession in 2008?
The title of a new article by- Robert Murphy — author of The Politically Incorrect Guide to Capitalism, published by the free-market Von Mises Institute — summarizes what may be ahead: The Worst Recession in 25 years? http://www.mises.org/story/2728

As Murphy points out, we are at the end of an enormous financial bubble, created by Federal Reserve
monetary expansion — and the party is now over.

Exchange Traded Funds, A Great Alternative to Mutual Funds

by Jarret Wollstein, editor

Note to first-time readers: Over the last 24 months, 5 out of 6 of my stock picks have been winners, with 44% average returns – making IIR one of the top investment newsletters in the world. I write quality articles every month on topics such as “How the Recession in 2008 Will Affect You and How to Profit From It” and “10 Ways to Invest in Foreign Currencies as the Dollar Falls.” Go to TheInvestorReport.com to subscribe. Now back to the article…

With stock markets now displaying some of the highest volatility ever, where can you invest for consistent high returns year-after-year? One good alternative is commodity and international Exchange Trade Funds (ETF). As you know if you’ve been reading IIR for even a few months, we strongly recommend investing in commodities, international stocks, and foreign currencies, which have been soaring while the dollar has been plummeting.

ETFs provide an easy and profitable way for the average investor to invest in commodities, without having to set up a commodity or currency account (which requires a minimum of $10,000). Here are some examples of the huge one-year returns from top-performing commodity and currency ETFs:

• Oil Services Holders Trust (OIH), + 54% (5 yr., +289%)
• Energy Select Sector SPDR (XLE) +46% (5 yr., +255%)
• Vanguard Emerging Markets Stock ETF (VWO) + 55% (5 yr, +115%)
• iShares Singapore Index Fund (EWS) + 54% (5 yr., + 283%)
• iShare Brazil Index Fund (EWZ) + 87% (5 yr., +1,135%)
• iShares FTSE China 25 Index Fund (FXI) +120% (5 yr., +248%)
• iShares Korea Index Fund (EWY) + 45% (5 yr., +271%)
• iShares Hong Kong (EWH) +48% (5yr., +182%)

What is an ETF?

An Exchange Traded Fund (ETF) is an investment company which invests in a particular market sector, a specific group of stocks, or even commodities or currencies. When the underlying investments go up, your ETF shares go up. When the underlying investments go down, your ETF shares go down. Thus, ETFs usually closely track the performance of what they invest in. An Exchange Traded Fund is
similar to a mutual fund or index fund, in that many ETFs enable you to invest in a variety of different
investments for one low fee. For instance, one ETF might invest in dozens of different energy
companies.

Thus while you may not be able to afford to buy shares in 30 different energy companies, you almost certainly will be able to afford to buy shares of an energy ETF. Like mutual funds, ETFs also provide you with diversification, while enabling you to select types of investments which can beat the
market. ETFs also give you a certain degree of protection from risk:

Even if one or a few stocks which an ETF invests in perform poorly, others are likely to perform better,
minimizing your risk of huge losses. Also, like mutual funds, ETFs enable you to control your cost and risks. With ETFs, you can place “limit buy” and “limit sell” orders (which limit your initial cost and enable you to set minimum selling prices), and automatic stop-losses. This is often not possible with mutual funds.

ETFs and mutual funds do have one big disadvantage compared to stocks:

Returns are less than those for top-performing individual stocks. That’s one reason why you probably
should have both in your portfolio.

Differences between mutual funds & ETFs

Although ETFs are similar to mutual and index funds, there are also some major differences:

Difference #1: Trade any time. You can only buy and sell mutual and index funds during normal market hours, Monday-Friday. Some even require you to own shares for months before you are allowed to sell them. However, you can trade most ETFs 24-hours-a-day, 365 days-a-year. That’s a huge advantage when markets are moving quickly.

Difference #2: Lower entry costs. You can buy ETF shares for as little as $200, compared to the thousands of dollars needed to buy shares in mutual funds and index funds.

Difference #3: Lower transaction fees. Most mutual funds pile on the fees. There are fees for buying, fees for selling, and even fees to compensate the mutual fund for its marketing expenses. ETFs don’t usually charge any of these fees.

Difference #4: Lower management fees. ETF annual management fees are a fraction of those charged by most mutual funds. For example, the Barclays i- Share S&P 500 ETF charges .09% a year in fees, versus twice that much for the Vanguard 500 Index Fund.

Difference #5: Easier Asset Management. You can buy a variety of different ETFs – stock, bond and commodity, for instance – in just one, online brokerage account;
then track your accounts in that one account. If you buy several mutual funds, you will have to set up several different brokerage accounts, unless all of the mutual funds are sold by the same vendor.

Difference #6: Greater Transparency. ETFs are openly traded on exchanges, with publicly-available bid/ask spreads. In contrast, mutual funds have to be purchased at set prices after
the U.S. stock market closes, creating the possibility of excessive bid/asked spreads and even fraud.

Difference #7: You Can Short – Sell ETFs. Short-sales – in which you technically “borrow” shares and then sell them (replacing them later), is not possible with most mutual funds.
While short-sales are risky (your risk is unlimited if the market goes against you), they are useful trading tools for advanced traders.

In additional to these differences, ETFs have these further advantages over most mutual funds and stocks:

• International Reach. ETFs make it easy to invest in commodity stocks in China . . . energy companies in South America . . . and banks in Europe.

• Sector Concentration. If you think technology stocks are great and want to save yourselves
the trouble of massive research, just pick a high-returning technology ETF.

• Easy investment in Treasury Bills and municipal bonds. There are many ETFs that specialize in these investments.

• Multiply Your Returns. There are also ETFs designed to go up twice as fast as the underlying index they track.

Major ETFs

There are now thousands of different Exchange Traded Funds throughout the world, and over 300 in the U.S. alone. Exchange Traded Funds have grown from virtually zero in the 1990s to over one thousand today, with combined assets of over $500 billion.

Here are some of the major sponsors of Exchange Traded Funds:

Barclays iShares. With over 100 ETFs with hundreds of billions in assets, Barclays is one of the largest ETF vendors. Most of Barclay’s ETFs are based on equity and fixed-income stocks which are listed by vendors, such as S&P, Russell, Dow Jones, and Goldman Sachs. This makes Barclays the standard for the ETF industry.

Claymore. Claymore issues a number of creative ETFs, including one fund – Claymore/Zacks Yield Hog ETF (CVY) which aims to beat Dow Jones returns. Another interesting Claymore fund is their BNY BRIC ETF (EEB), which invests in U.S.- listed ADRs of companies based
in Brazil, Russia, India and China. An ADR is an American Depository Receipt of ownership in shares of a foreign company trading on a U.S. stock exchange.

PowerShares. PowerShares ETFs are designed to out-perform similar ETFs offered by other vendors. PowerShares has also been appointed by NASDAQ as the sponsor of the widely-followed Cubes (QQQQ) index, which tracks the Nasdaq 100 index, which is heavily-
dominated by technology stocks.

ProFunds Advisors. This ETF-issuer specializes in funds designed to match or out-perform the stock indices like the DOW and S&P 500. ProFunds also has ETFs designed to go up, when the underlying indices go down; essentially bear-market ETFs.

Rydex Instruments. Rydex ETFs are unusual since they are weighted equally for each stock in their portfolio, as opposed to the usual practice of weighing ETFs by the market capitalization of the stocks. In other words, if Rydex buys $20 million worth of one stock in a particular ETF, they will buy $20 million worth of all other stocks in that ETF, giving each stock “equal weight” in the value of the ETF. Rydex equally-weighted ETFs include their S&P 500 Equal-Weighted ETF (RSP), Energy ETF (RYE), and Technology ETF (RTM). A number of Rydex ETFs are designed to double the performance of the underlying securities. Rydex has received a five-star rating from Morningstar.

State Street Global Advisors. State Street created the first U.S. ETF, the S&P 500 SPDR (SPY). They now issue dozens of ETFs, with new ones added all the time.

Vanguard. Vanguard has become internationally famous for the large variety of ETFs that they issue. Their fees are among the lowest in the industry.

How to Invest

With hundreds of different Exchange Traded Funds to choose from, selecting one can be a difficult
task. Here are some suggestions:

1. Be clear on your investment objectives. The first question you need to ask yourself before making any investment, is what are your investment goals. Are you looking for steady income? High appreciation? Consistent returns? An insurance policy for recession? Before you can pick an ETF, you need to be clear about your financial goals. Once you have decided what your goals are, you will almost certainly be able to find an ETF designed to help you achieve them.

For instance, if you are looking for steady income, you may want to invest in ETFs heavily-invested
in dividend stocks. If you are looking for high appreciation, carefully examine the performance of the highest appreciating ETFs currently. If you want an insurance policy for recession, consider ETFs
that go up when equity markets go down.

2. Research any ETFs you are interested in. See what information is available on major financial websites, such as Fortune.com, Businessweek.com, YahooFinance.com and Big-Charts.com. Also be sure to look at recent news

3. Only invest in ETFs that have been going up for both the last two years and the last six months. The two-year record gives you a reasonably long-term trend. Any ETF that isn’t selling for significantly more now (say 50% to 100%) than it was two years ago, is not worth investing in, in my opinion.

Similarly, you don’t want to buy shares while the price is declining. Wait until it bottom’s out and then purchase.

4. Diversify by investing in several types of ETFs. Although buying shares of a single ETF can provide you with significant diversification (for instance a metals ETF might invest in several
dozen different metals stocks), you should still not put all of your eggs in one ETF basket.

Thus you might consider investing in a commodity ETF . . . and an energy ETF . . . and an ETF based on the Indian economy.

5. Buy several different foreign ETFs. If you favor investing internationally, I recommend you invest in ETFs from several different countries – such as India, and Brazil, and Australia.

This will give you an important hedge against problems in a single country or region of the world. For instance, recently, British investments took a hit because of problems in the sub-prime mortgage
markets in that country. And in the 1990’s, Mexican investments were devastated in a matter of days when the peso was devalued.

6. Compare ETFs with mutual funds, index funds, and other alternative investments. Although ETFs have distinct advantages over most mutual funds and index funds, that doesn’t mean they are always the best investment. We all have limited funds, and it pays to shop around.

7. Watch your investments carefully. The days of “invest and forget” for long periods of time are over. You should check on how your ETF shares are performing at least once a week, if not daily. If you don’t like what you see, SELL.

The in/out cost of buying and selling ETF shares is not very much compared to your investment,
and how much you could lose if markets suddenly turn against you.

8. Use automatic stop-losses. As is the case with stocks, we strongly recommend that you put automatic stop-losses on all of your ETF positions, to protect yourself from sudden downturns in the market.

You will need to adjust your stop-loss figures, depending upon the type of ETF that you buy. Thus ETFs based on highly volatile investments – such as currencies and commodities – should have stop-losses set at 25% or 35% below the most recent daily high, as opposed to our normal 15%.

ETFs which have lower volatility, such as those based upon large baskets of Blue Chip stocks,
could have stop-losses at our normal 15% or even less.

9. If you have large amounts of capital to invest, get a professional investment advisor.
If your investments total $100,000 or more, the few thousand you might pay a professional
investment advisor will be well worth the cost. Ask family members and friends for names of advisors they have used and trust. Shop around for a professional you are comfortable with.

10. Don’t make ETFs your only investment. You should also keep at least 30% to 50% of your funds in cash and cash-equivalents, such as CDs, foreign-currency accounts, and precious metals.

Also consider investing in top-performing individual stocks in sectors you like, plus bullion, gold, silver, options, foreign currencies, and — when the market bottoms out — real estate.

Recommended ETFs

Prices are as of market close, 9-28-07. Because of high market volatility, we recommend that stop-losses at 25%, rather than our usual 15%.

Note: This is the end of the article for non-paying readers. I hope you’ve learned something new about ETF’s, and I hope you make lots of money from them. Specific ETF recommendations, along with great stock recommendations, are available for paying subscribers. To find out more about how to subscribe so that you can get hard-hitting analysis and advice month after month, click here or go to TheInvestorReport.com