By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report

It wasn’t quite the Bin Laden trade we wrote about months ago, but at $7.14 billion, it was noteworthy.

We’re referring, of course, to the trades taken by 31-year old trader Jerome Kerviel, former employee of Societe Generale SA (SCGLY). In recent months, he made nearly $73.5 billion in trades on bets he placed on European markets – including contracts on the Dax, Eurostoxx and FTSE indices.

The sad thing is that according to several anonymous sources, Kerviel, who assembled the massive trades while betting on declines in the markets during 2007, was making the right bets. In fact, one source suggested that he only took on fictitious losing positions to cover up the winners he’d built up. And those losing positions are what ultimately caused the $7.14 billion hit to SocGen’s balance sheet.

Publicly, Societe Generale doesn’t agree.

Chief Executive Officer Daniel Bouton stated that Kerviel set up a fictitious company, which fronted losing futures trades. Bouton also indicated that Kerviel hacked company computers and control procedures to elude detection.  SocGen management is going above and beyond to make the results of the ongoing investigation public.  More details will likely come out for days to come.

In a bizarre twist, those close to the investigation, speaking anonymously, say that it doesn’t even appear Kerviel had or would have profited from his gains – something Bouton confirmed in statements last week.  It seems Kerviel’s motivation was fame, not money: He wanted to be a star trader and run with the big dogs, when he should have just stayed on the porch.

If all of this is correct, it stands in stark contrast to the $1.4 billion trade in 1995 that all but wiped Barings Bank from the face of the earth. Singapore-based trader, Nick Leeson, was badly upside down and losing money for his employer, while pocketing an estimated $35 million in his own personal accounts. Using loopholes so wide you could drive a truck through them, Leeson managed to run up massive trading losses that equaled Barings entire assets, forcing the long-standing bank into bankruptcy. [Incidentally, Barings, which literally funded the Napoleonic Wars, was subsequently sold to Dutch giant ING Greop N.V. (ING), for a single British pound, just $1.98 at today's exchange rates.]

It also runs contrary to a similar trading scandal in Japan in the late 1980s when trader Yasuo Hamanako, known as "Mr. Five Percent" because he was believed to control five percent of the global copper markets, blew through $2.6 billion of Sumitomo’s assets while trying to corner the copper markets.

Or the $4 billion in losses at Long Term Capital Management which cratered spectacularly when Russia defaulted on government bonds in 1998 and forced interest rate differentials between risk free assets and other government paper to increase sharply.

Then, there was the $6.6 billion Amaranth debacle. Energy trader Brian Hunter got upside down on natural gas positions that triggered massive losses when the company had to cover them.

For now, Societe Generale has a large enough balance sheet to take the hit, but it’s had to seek an $8 billion capital infusion in the process. Like Barings before it, the French bank is now vulnerable to takeovers, but as Bouton acknowledged, "It wouldn’t be the first time."

Nor the last… at least not when it comes to the litany of spectacular financial blowouts.

Despite the fact that the world is now clamoring for more oversight and controls, we suggest that no amount of regulation will help. Clever traders will always find ways to game the system and their supervisors will unwittingly encourage this behavior by maintaining the outrageous bonus structures and payouts for which Wall Street is now synonymous.

The old adage, "where there’s a will, there’s a way" is unbelievably true when it comes to the financial markets.

We think regulation is a moot point: The markets will eventually sort this out on their own, with the winners and losers ultimately self-selecting in a form of financial Darwinism.

News and Related Story Links:

• Money Morning:
  This $900 Million Bet Has Global Traders Talking

• Money Morning:
  The ‘$900 Million Conspiracy’ Trade That Wasn’t?

• Money Morning:
  Rogue Trader Costs Societe Generale $7.2 Billion

By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report

Many investors are so scared by the wild gyrations the stock market has seen of late that they’ve jettisoned everything – including the kitchen sink – in their search for safety.

Not only is this a massive mistake from a timing standpoint, it’s also a major misstep because of all the dividend income those folks are going to forego. Taken together, investors who have embraced this kind of "abandon-ship strategy" will find that they’ve dealt themselves a one-two knockout punch that will put their portfolios down for the count.

Let me explain …

Dividends are the Key to Profits

Giving up dividend income is never smart, but it’s an especially egregious error during messy markets like the one we’re navigating now. Research shows us why. For instance, studies show that:

• Dividend-paying stocks tend to be more stable than their non-dividend paying brethren – particularly during rocky stock markets. In other words, stocks that have income streams attached are treated better, especially when the going gets tough.
• Dividend-paying stocks outperform non-dividend paying stocks by even more in down markets than they do in up markets.
• By consistently reinvesting dividends during down markets, investors can substantially expand their asset base, which puts them way ahead of the game when markets recover and stock prices soar – as they always eventually do.

The concern, however, is that we’re swirling down into a recession. Maybe we are. Maybe we’re not.

Either way, we’ve been here before. And this malaise – no matter how bad it gets – will pass. Just think about where we’ve been: There was the Price/Earnings (P/E) Ratio peak crash of 1901; the Great Crash of 1929, the "Black Monday" stock market crash of October 1987, the Asian Contagion of 1997, loan defaults in South America and Russia, and even then 9/11 terrorist attacks.

Each of these ultimately passed.

And each time, dividend-paying companies led the way higher. And the savvy investors who owned them watched as their own portfolios easily outperformed the market averages, and roundly trounced the returns of portfolios that were light on dividend-paying shares, or that excluded those income-oriented shares altogether.

The Numbers Tell the Story

According to Ned Davis Research, dividend-paying stocks provided returns of more than 10% a year from 1972 to 2005 [and keep in mind that this research study started at the worst possible time in the past 40 years – just prior to the "bear market" of 1973-1974, which dragged on for 21 months and caused shares to lose 48.2% of their value. Non-dividend paying stocks, in contrast, posted gains of just 4.1%.

Think of it another way: An investment of $1,000 in a portfolio of dividend-paying shares during the period covered by the study would have turned into $2,629; that same $1,000 invested in non-dividend-payers would have turned into $1,598. In other words, the dividend-paying portfolio was 65% larger than the non-dividend paying portfolio.

When separated into three groups – rising-dividend-payers, static-dividend-payers, and non-dividend-payers – the difference is even more dramatic over the timeframe in question.

The returns on stocks that are boosting their dividends were more than four times the returns of non-dividend-paying stocks. The rising-payout shares also outperformed the static-dividend payers by 136%.

According to Yale University’s Robert Schiller, Wharton Business School’s Jeremy Siegel and other noted researchers, the advantage that dividend-paying stocks can have over non-dividend payers can be as much as 25:1, depending upon the time frames studied. Dividends can account for as much as 97% of a stock’s total return.

To understand the advantages dividends can provide an investor during a down market, let’s take a look at the implosion of the dot-com bubble in 2000.

According to Morningstar research, the Standard & Poor’s 500 Index lost 9%, while dividend-oriented mutual funds – including high-yielding stocks in the financial-services, mutual-fund and real-estate sectors – gained anywhere from 10% to 30%.

Fast forward again to include both the dot-com decline and the subsequent recovery through last summer:  Once again, dividend-paying stocks continued to outperform non-dividend-paying stocks by a wide margin.

There’s a very good explanation for this out-performance: Dividend-paying stocks feature a much lower "beta," meaning that they are less volatile than the overall stock market. Granted, the downside to this is that dividend-paying stocks don’t accelerate as fast as, say, non-dividend paying growth stocks in a broad-based bull market. But unless you’re a hard-core stock trader, that’s a fact you really don’t need to worry about.

During a 35-year-period that included some really big market downdrafts and bear-market cycles – as well as some highly bullish stretches – a $100,000 investment in static dividend payers in 1972 would today be worth $3.2 million. That same hundred grand invested in dividend-growers would be worth $4 million.

The same investment in non-dividend-paying stocks would be worth a paltry $240,000.

Again, the period in question started at one of the most inopportune times investors have been forced to face in modern history – just before the start of the ’73-74 bear market.

The Moves to Make Now

Regardless of how appealing this strategy sounds, you don’t want to rush into anything -not even dividend-paying stocks.

The key reason: It’s very possible that the current stock-market downdraft will continue.

Therefore, it makes sense for you to ease your way a little at a time into dividend-paying shares – and any other specialized investment vehicles that we detail for you in the stories and investment reports we present here in Money Morning. One of the simplest ways to accomplish this "steady-as-she-goes" strategy is to simply to allocate your capital into equal parts and invest it in equal amounts over the next three months to six months.

And there are some excellent investment candidates. Two of the best are the PowerShares International Dividend Achievers Fund (PID) and the Alpine Dynamic Dividend Fund (ADVDX), two exchange-traded funds (ETFs) that we like a great deal.

The PowerShares International Dividend, or PID, fund is a global-income portfolio that can help you spread your risk, while also earning income. The Alpine fund is a more-specialized fund that uses a "dividend-harvest strategy" that can boost the fund’s yield.

Both funds invest in companies that have survived countless business cycles, and that are likely to survive this downdraft, too.

Because dividend-paying stocks tend to be downdraft resistant, portfolios with higher yields tend to last longer and pay stronger. That’s something that’s important to all of us, but especially to investors who are nearing retirement, or who have already retired.

News and Related Story Links:

• Wikipedia:
  The 1997 Asian Financial Crisis.

• Wikipedia:
  Black Monday Stock Market Crash of October 1987.

• TaxFreeGold.co.UK:
  Why Buy Gold? Headlines From History.

• Wikipedia:
  The Great Crash of 1929.

• CNNMoney.com:
  What’s the Definition of a Bear Market?

• Money Morning:
  A Dozen Ways to Beat the Dow: Twelve Ways to Profit No Matter Which Way the Market Swings. 

By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report

We didn’t get the 500-point drop in the Dow Jones Industrial Average that we appeared headed for yesterday, but that doesn’t mean we’re out of the woods.

The U.S. Federal Reserve is of the opinion that an emergency-rate cut of three quarters of a percentage point will help slow or even stop the gut-wrenching drop we’ve seen in recent days.

Many professional investors – myself included – aren’t so sure that’s true. That uncertainty among the pros is why the markets remained volatile for the rest of the day yesterday. It’s also why we think the rebound from the early morning lows smacks of a "dead-cat bounce" – the kind of temporary rally that can sucker investors back into the fray before it picks them clean when the downward trend resumes.

Given that it was cheap money that started this whole speculative frenzy that we’re now paying the price for, we happen to think that the Fed is making a mistake by creating even cheaper capital here. It’s tantamount to providing crack for a crack addict: Sooner or later we’re going to have to pay for this, but that’s a story for another time.

More immediately, the markets have suffered back-to-back triple-digit drops in recent weeks, and stocks have been falling for months. Barring some surprisingly solid earnings reports and some highly upbeat economic data, share prices could continue to fall – if for no other reason than it can take months for an interest-rate cut to work its way through the economic system.

I know that sounds bad. But it’s actually a good thing, and is why we urge readers with strong stomachs to take advantage of the market’s misbehavior and add to critical positions right now.

Four Rules to Live By

Here are four rules to help guide your investing decisions during these topsy-turvy times.

First, zig when other investors zag. Studies demonstrate time and again that investors who buy when the markets are well off their highs – just as they are now – tend to achieve dramatically higher results over time.

Let’s face it: We were overdue for this correction. Since 2003, stocks have performed well, but many of the most-promising companies had become greatly overvalued, making them more of a downside risk than an investment opportunity.

Second, queue up on quality. With the steep global sell off we’ve seen, many markets are showing only slivers of strength. Some observers have labeled this as a "flight to quality." We’re calling it the "buying opportunity of the decade." Think of it this way: There’s a lot of money out there and it’s going to chase the relatively small number of quality stocks. That should provide one heck of a liftoff for the stocks of companies with accelerating sales growth and expanding earnings.

Third, grab the "Global Titans." Many of the companies I just described are either located in, or focused on, overseas markets that remain poised for growth – even if the U.S. market slows down. We call those companies "Global Titans," because they usually derive a hefty portion of their sales and profits from outside U.S. borders.

The old adage [and worry] that "when the U.S. economy sneezes, the rest of the world catches a cold" is becoming increasingly less valid, due to an economic process known as "decoupling." This means that – eventually – such economies as China and others will be able to show respectable growth, even if the U.S. economy slows down or even drops into a recession.

In the immediate term, even the partial decoupling we’ve seen means that these other economies could continue to grow, even if we get mired down by the housing meltdown, subprime crisis and ensuing credit woes. While those markets may take a near-term hit because of the maladies of the U.S. economy, their longer-term growth is much less dependent than ever before on the U.S.-centric model of the global markets.

And fourth, dial up discounts. The throngs of investors who have already rushed for the exits have jettisoned all but the kitchen sink from their portfolios in their haste to "get clear."

We’ve seen this so many times before: Investors throw in the towel at precisely the wrong time. This means that many holdings – especially closed-end funds related to energy and income – are trading at steep discounts to their net asset value.

Putting it in plain English: They’re on sale and continue to produce a healthy income that won’t be affected by the short-term market swings we’re watching right now. And when the markets rebound and head north – as they will – those discounts will narrow, adding to your profits.

Savvy investors can capitalize on this with choices such as the Nuveen Quality Income Municipal Fund Inc. (NQU), which offers potential double-digit returns with relatively low risk. And the hefty 5.1% yield doesn’t hurt, either.

So how else can investors capitalize on what I’ve detailed here?

Here are three moves to make now.

How to Outfox the Bear

 First, make certain a good slice of your money is in investments that offer both safety and balance. We call that category our "Base Builder" investments, and one of our favorites is the Vanguard Wellington (VWELX). Since 1929, it’s captured 80% or more of the market’s upward moves [including many of the years where there were market gains of 20% or better], even with a "safety-first" balanced blend that’s about 60% stocks and 40% bonds. This asset mix maintains your ability to gain in bull markets, while minimizing your risk during more-bearish trading seasons.

Second, include a hefty dose of income in your portfolio but limit it to the Global Titans or dividend-harvest strategies.

PowerShares International Dividend Achievers (PID) or the Alpine Dynamic Dividend (ADVDX) are logical choices to meet both criteria. Not only is the income they kick off reinvested over time, but during low-ball market conditions like we’re experiencing now, the compounding effect will ensure you are dramatically ahead of the game when it gets going to upside again because they can appreciate wildly as the markets recover. Plus, the exposure to international markets helps diminish the risk associated with a Fed that’s hell bent for leather on benign neglect when it comes to our dollar.

And third, throw in a few inverse funds like the Rydex Inverse S&P 500 Strategy Investments Fund (RYURX), which appreciates as the Standard & 500 Index drops. Not only can specialized investments such as this one protect your portfolio from some of the damage inflicted by falling stock markets, they can add to your upside without forcing you to first dismantle your portfolio.

And that’s really what this game is about.

Make these moves now. And when the coffee break conversation at the office turns to the stock market, you’ll be able to display a relaxed grin, while your co-workers are reaching for the Pepto-Bismol.

News and Related Story Links:

• Investopedia:
  The Dead Cat Bounce: A Bear In Bull’s Clothing?

• Money Morning Investment Commentary:
  Four Ways to Profit Even if the Bush Stimulus Plan is a Bust

• Money Morning News:
  World Indices Nosedive; U.S. Markets Could Follow

By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report

Show me an effective Bush Administration economic stimulus package and I’ll show you a finger-friendly Cuisinart.

Who does President George W. Bush think he’s kidding?

The $600 bucks he wants to hand out isn’t going to do squat – and the securities markets know it, which is why they’re selling off so steeply as of late.

As much as I’d like to put the blame on Bush for the financial-markets mess we’re dealing with now, it really wouldn’t be fair. Instead, everything points to former Federal Reserve Chairman Al "Irrational Exuberance" Greenspan as being the key cause of this toxic financial soup. This puts his former sidekick and eventual successor – Fed Chairman Ben S. Bernanke – in the unenviable position of having to bring the country in from the rain.

Unfortunately, he can’t do it.

Government Inflation Stats Need Inflating

Despite the party line about so-called "core inflation" holding the line, Washington is badly out of touch with reality, and has been for a long time now. It’s bad enough that the core inflation figures factor out "volatile food and energy prices," as the reports always state. That’s almost a ludicrous thought: After all, the higher costs of food, gasoline, heating oil, air conditioning and electricity hit us squarely in the wallet, too. But, as we’ve been saying for years, even the core inflation numbers the government has been relying upon have understated the true effects of inflation.

Thanks to Greenspan – and years of cheap capital – the home equity market has been pillaged like a band of Vikings ran though it. The average family carries $8,500 to $12,000 in consumer debt, scattered across six to eight credit cards. Breakfast costs 60% more now than it did at this same time a year ago. Oil has nearly doubled, and medical costs are skyrocketing.

Then there are the soaring default rates and bankruptcies, which are escalating at rates we haven’t seen in years.

Unfortunately, Team Bernanke may be out of aces, which is why investors must take matters into their own hands.

Without subjecting you to a lecture on the finer points of economic theory, let me just say that taking the stimulus package the Bush Administration is currently contemplating and bringing it to bear on the current economic conditions is tantamount to bringing a knife to a gunfight. It’s outdated and is the wrong tool for the battle at hand.

Here’s why: The Fed’s current tactics presume that healthy financial institutions will be able to counter inadequate consumer demand. This is why the central bank has been working so hard to keep such "big boys" as Citigroup Inc. (C) and Merrill Lynch & Co. Inc. (MER) afloat.

However, using the words "healthy" and "financial institutions" in the same sentence is perhaps the ultimate oxymoron, because it was the financial institutions that got us into this mess, and they’re anything but healthy right now.

At best, some of these players are turnaround candidates.

But, healthy? No way…

Personally, I’m livid that my tax dollars are being deployed to bail out some of these financial institutions, when the markets clearly want to let them die a painful death. Nor am I happy that big companies are using tax loopholes and other financial maneuvers to dodge hundreds of millions of dollars in state and federal income taxes. That’s money that you and I will have to make up.

But what really burns my jets is that Wall Street paid out some of its biggest-ever bonuses for last year. Now the newly flush members of the Armani Army are shopping for homes in Aspen and the Hamptons, while many working- and middle-class homeowners are struggling to avoid defaulting on their subprime mortgages. The rest of us are trying to figure out what we’re going to do with the $600 we’re each going to get from the Bush anti-recession stimulus plan.

Don’t get me wrong: The money’s nice; but it won’t help much.

Clearly, the money rules have changed. And getting rich is the best revenge even as our esteemed leaders muddle around in a politically charged stupor.

Here’s how…

Profit Plays to Make Now

First, build a base. Invest as much as 50% of your assets in a category of investments we refer to as "Base Builders." That’s one of three asset classes – the other two being "Global Growth" and "Rocket Riders" – whose names are self-explanatory. Invest as much as 40% in Global Growth and up to 10% in the more-speculative Rocket Rider investments.

These are holdings that not only provide a significant potential upside, but also have automatic safety brakes built in. The Vanguard Wellington Fund (VWELX) is my favorite example. Since 1929, it’s captured most of the market’s upside, including a fair number of years with returns of 20% or better. But the fund has avoided replicating the worst of the downturns because of its 60-40 split between stocks and bonds.

Second, dial up dividends. Studies show that dividend-paying stocks are less volatile, and the consistent reinvestments along the way can build up a thick layer of financial armor that will actually boost your returns when the markets eventually do recover – as they will.

Certainly, dividend-paying stocks such as General Electric Co. (GE), Johnson & Johnson (JNJ) and Bristol Myers Squibb Co. (BMY) are great, but a dividend-harvest strategy like that utilized by the Alpine Dynamic Dividend Fund (ADVDX) can dramatically accelerate the process in down markets.

Third, run the reverse. Include at least a small percentage of "inverse" mutual funds or exchange-traded funds (ETFs) in your portfolio mix. In case you’re not familiar with inverse investments, these are funds that appreciate in value as the broader market drops. Not only can they help stabilize your portfolio during the increasingly volatile stretch like the one we’re attempting to navigate now, they can also really put a smile on your face when the going gets rough. One of our favorites is the Rydex Inverse S&P 500 Strategy Investment Fund (RYURX).

And fourth, and last, grab some "Global Titans." Make sure that you are focusing the more-conventional portions of your portfolio on the so-called Global Titan stocks that we’ve discussed with you so many times before. Companies such as Yum! Brands Inc. (YUM), PepsiCo Inc. (PEP) and The Boeing Co. (BA) derive big portions of their revenue from overseas. Not only can these securities overcome the weak U.S. economy, they can capitalize on the faster growth of key overseas markets as China.

It’s a formula for double-barreled profits that will clearly have a bigger benefit than a capital-infusion plan that nets each of us $600.

News and Related Story Links:

• San Jose Mercury News:
  Stock Markets Plunge Worldwide.

By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report

Every president has a defining moment when the American people, and indeed the world, recognize that he’s badly out of touch with some aspect of reality.

I can’t help but think that President George W. Bush ["Dubya"] has just had his moment as I watch him muddle around an unsympathetic Middle East this week, pushing for lower oil prices.

The market just isn’t going to let this happen.

Turning on the petroleum spigots as he’s requesting isn’t going to solve the problem. Indeed, we don’t even believe that a solution exists.

Here’s why.

The oil markets right now face a situation known as "backwardization." This theory holds the future prices of a commodity will tend to rise over the life of the contract. The upshot: Near-term contracts trade at a higher price than the longer-term contracts. With oil, that means that near-month delivery contracts are priced more expensively than distant-month contracts. When this happens, market sellers have every incentive to sell as much as they can as soon as they can to maximize profits, since they know that future prices will be lower.

What this suggests is that no matter how much pushing, prodding or – in this case – begging Bush does, the markets are still likely to push prices higher in search of profits. The Saudis will want to sell all the oil they can at the current high price, and will do nothing to risk sending prices lower.

That means: No production increase.

Let’s walk through an example to illustrate how this works.

The February 2008 oil contract closed Tuesday at $91.65 per barrel, while the December 2008 contract settled $2.90 a barrel lower, at $88.75. Accordingly, the markets are telling oil sellers that it’s better to sell oil now than it is to sell it later.

At the same time, however, the market also is telegraphing to buyers that they can risk purchasing later at lower prices. But – and here’s the important part – the discounted price could push far higher as the delivery month draws closer.

When the markets exist in this state, it is in the seller’s interest to sell as much oil as they can as soon as they can, which makes what Bush is asking all the more absurd.

In 2006, Saudi Arabia produced 10.72 million barrels of oil per day. For purposes of illustration, let’s assume they sell it for February delivery. At $91.65 a barrel, that sale would result in a staggering $982.5 million in revenue. If they waited and sold it at the December 2008 contract price of $88.75, they’d receive $31.1 million less per day, or $951.4 million for their efforts.

You can do the math as easily as we can. Over the course of a year, that would net out to an "opportunity loss" of $31.1 million a day, or a net revenue shortfall of $11.3 trillion per year if the Saudis elected to sell later.

This means that by asking the Saudis to increase production in an effort to lower oil prices, President Bush is effectively suggesting that they shoot themselves in the proverbial foot to the tune of trillions of dollars in lost revenue – which is why we think there’s a not a snowball’s chance in Hades that anything other than a short-term reprieve might be possible.

But, just to play devil’s advocate for a minute, let’s assume that the Saudis decided to play ball.

Could they?

We don’t think so.

The massive Golar oil field, along with many of their fields, is in decline, and anecdotal evidence suggests that the Saudis have already reached their peak. Not only are they pumping massive amounts of salt water into their oil fields to sustain production, they’re also drilling enough wells in the region to make it look like a giant piece of Swiss cheese from the air. Add in the fact that the Saudis haven’t had a major new discovery in half a century, and we have all the ingredients for still-higher-higher prices – and that’s assuming they actually have what they say they do in the way of reserves.

However, there’s an increasing body of evidence suggesting that the Saudis have falsified their reserve counts since the 1970s, a scenario that author Matthew R. Simmons outlined in his book, "Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy."

We’ve been talking for years about how this reality would ignite upward pricing pressure in the petroleum markets, but the possibility that the Saudis might not have been telling the truth and may actually be unable to meet global demand is something that the masses have only recently started to consider.

And trust us, when they do, the fear that there may not be as much oil as previously thought will send it up to the high-$100 price point I’ve been predicting faster than you can blink. And the price may go even higher than that.

Then there’s the Organization of the Petroleum Exporting Countries (OPEC). The Saudis risk upsetting the apple cart if they move in a direction contrary to other decidedly anti-U.S. OPEC members who want prices as high as possible for as long as possible. Many people think of OPEC as one big happy family. But the truth is that it’s often no better than a den of thieves who would just as soon cut one another’s throat as cheat on production quotas in search of still more profits.

So the bottom line is that Bush can saber-dance his way through the Middle East all he wants, but his machinations are likely to be viewed within the context of history as too little, too late. Perhaps he could have done something about this the last time he met with Saudi’s King Abdullah, and oil was still at $50 a barrel.

But now that oil is north of $90… forget it.

The Saudis, like other OPEC nations, have gotten used to higher oil prices and the global wealth that goes with it. They’ve also finally figured out that oil can be as much a political weapon as it is an economic one. For them, controlling the petroleum flow is better than having an army to field when it comes to assuming a more-important place on the world stage.

That makes it even less likely that they’ll lower oil prices out of the goodness of their hearts.

And that spells higher oil prices for years to come… even if by some stroke of luck we actually do find that snowball in Hades, and get a temporary respite.

News and Related Story Links:

• ABC News:
  Bush Asks Saudi King to Open Oil Spigots; Makes Personal Appearance After Public Rejection

• FinancialDictionary.com:
  Backwardization.

• Amazon.com:
  Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy

By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report

On Jan. 1, six Gulf states joined together – Saudi Arabia, Qatar, Bahrain, Oman, the United Arab Emirates (UAE) and Kuwait – to form a single common market, not unlike the European Union (EU), which has served as its model. The common market, valued at $715 billion, is the first step toward common banking, common exchanges, and even increased ties between the nations.

But will it increase international investment in the region?

We think so. But for it to really work, there’s going to have to be a single currency at the end of the day.

I’ve been following this story for years and, in fact, first suggested that a shared currency would play an important role in opening the Middle East region to U.S. investors. At the time, many people thought my remarks were among the craziest things they’d ever heard.

But as the old adage goes, reality is often stranger than fiction.

It turns out that many prominent Middle East investors have quietly advocated just such an approach for years. Now it appears as if it will become a reality.

With regard to timing, there is still some debate. Some, including prominent proponent Abdul Rahman ibn Hamad al-Attiyah [who serves as the Secretary General of the Riyadh-based Gulf Cooperation Council (GCC)] believe a common currency could be possible in as little as two years from now – in 2010. Others think 2013 is much more realistic, since Oman, in particular, appears to be having problems ahead of the transition. But the Oman government has firmly stated that it will make the transition eventually.

So this is a question of "when," rather than "if."

What’s in it for the region?

Everything. Most of the regional currency is presently pegged to the U.S. dollar. This means that, as the dollar has lost value, so has the region’s clout. On the heels of inflationary pressures against the dollar, the region’s central banks are struggling to contain their own economies, particularly when it comes to regional inflation, which is a big worry right now.

And that’s really what’s driving much of this. Under normal conditions, Middle Eastern central bankers would be raising rates to stave off inflationary pressures. But, thanks to the Ben S. Bernanke-led U.S. central bank turbo charging its greenback printing presses, that’s not an option. Instead, Middle Eastern banks have had to reluctantly follow along by lowering rates almost in lockstep with U.S. Federal Reserve policymakers – simply to mitigate the risks they face as they relate to the dollar.

In other words, as long as the Arab states’ currencies are pegged to the dollar – and as long as those states cannot float their own currencies – the region remains highly dependent on how our Fed handles itself in the current financial crisis. And, lately, that’s not something the central bank has done very well.

As a result, many Middle East business leaders and investors want a united, floating currency that’s independent of the international community in general – and the United States in particular. Not only do those Middle East insiders believe that it would remove risks associated with the dollar, they also think that it would facilitate cross-border cooperation in the region, which has arguably been one of the biggest benefits the EU has reaped from its own integration.

And that brings us full circle with regard to our money.

An integrated currency will facilitate international investment in the region on a scale that’s never been seen before. Couple that prospective development with the financial-market consolidations already under way worldwide [and Middle Eastern involvement in that process] and you have the potential for some very impressive growth – if for no other reason than it would help solidify a newly established currency.

The so-called "Global Titans" that we follow are logical beneficiaries, particularly when you consider that the Middle East is poised for high single-digit economic growth for the foreseeable future. And when you also consider the fact that the region is literally flooded with liquidity – thanks to record high oil prices at a time when American and European markets are staggering – and you have the potential for some real winners in the next few years.

We’re actively looking at several investment choices right now and will tell you about them as the region’s currency consolidates in what we expect to be short order.

News and Related Story Links:

• AFP:
  Gulf states launch GCC common market

• Wikipedia:
  Cooperation Council for the Arab States of the Gulf

Editor’s Note: This is the 15th Installment of an Ongoing Series Highlighting the Global Investing Outlook for 2008.

By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report

Following a spectacular run up last year, many investors are wondering what’s next in Asia.

We are, too.

The steady stream of news so far this year has only seemed to make things worse. And the current market volatility, which began with last summer’s U.S. credit crisis, seems set to derail U.S. economic growth. Throw higher oil prices, inflationary concerns and a dollar that’s turning out to be more like Rodney Dangerfield than Sean Connery into the mix, and you’ve got what seems to be a real mess.

Fortunately, though, if you take a look behind the headlines, Asian markets are holding up just fine and, although they are likely to continue to be volatile during 2008 [along with the rest of the world's markets], they’re full of promise for decades to come.

Much of that promise is obviously due to the region’s growth. But increasingly, it’s also a function of the combined strength of the area…as it relates to China.

A Repeat Performance with a Different Star

If this sounds familiar, it should. For the 50 years immediately following World War II, the region centered on Japan. And investors who went along for the ride went straight to the top on the back of a Nikkei exchange and regional trading alliances that knew no downside…until the late 1990s when the bottom dropped out.

As usual, those who were focused on the short-term got badly burned and have yet to recover, with the Nikkei still trading at merely a quarter of where it was at its peak. Alternatively, safety-focused investors who made intelligent choices did well.

Today, Asia faces a similar situation only this time with China at the helm. And many investors are sitting at a similar cross roads. Like Japan before it, China has experienced a whopping run-up, which makes it all the more tempting for people who missed that initial surge. But China is a riskier investment than ever before.

This combination makes us suspect that now is the time to get serious.

Balancing Risk and Returns

There’s no question the region will continue to grow for decades. Yet, in contrast to the record growth of the past few years, which was driven largely by speculative liquidity, the longer-term growth in the region will increasingly be China-centric.

To cash in, investors will have to do two things:

• Make smarter, "safety-first" choices that diversify – and don’t concentrate – risk.
• And limit investment choices to companies that are poised to capitalize on international exposure in the region.

Here’s why.

Large-cap companies, particularly those with global operations, can build business within the region – and with far less risk than those local companies engaged exclusively in a domestic-focused business. This helps ensure stability. Plus, many of these companies pay dividends, which are vitally important at the moment, because they help offset the elevated risks we take when we invest in the China region.

Further, by concentrating on the so-called "Global Titans" doing business in the region, we mitigate a "split-personality problem" that eventually will end up clobbering most investors who don’t adopt the safety-first philosophy we advocate.

I’ve been involved with Asia investments for more than two decades. And I’ve seen it time and again. The reality is that 99% of all investors seeking profits in the area don’t understand that there are differing investment views when it comes to local money and international money.

For instance, in Asia, managers tend to focus almost exclusively on top-line [revenue] growth, whereas Western managers and investors all tend to focus on bottom-line profitability. Obviously, those two objectives don’t always align. And that creates a potential mismatch that can wipe out unsuspecting investors who are out seeking a "quick buck" profit.

Profit Plays for a Potential Slowdown

Bigger-company shares – like those we prefer – will keep their edge longer, even if there is a China-induced slowdown during 2008. We think such a slowdown is unlikely. But given the high-valuations that remain after last year’s big run-up, it’s a possibility, nonetheless.

With regard to favorite choices that meet our regional criteria, some at the moment include Zurich-based ABB Ltd. (ABB), which provides electrical power infrastructure in the region. China Medical Technologies Inc. (CMED) and Huaneng Power International, Inc. (HNP) fit the "Global Titans" model, too, but in reverse. Both firms focus on China, but also have important international operations with great potential outside of Mainland China.

If a broader holding is more your speed, without a doubt the best in class in our opinion is the China Region Opportunity Fund (USCOX), a mutual fund run by San Antonio-based U.S. Global Investors Inc. (GROW). And U.S. Global, itself, is not a bad play on international growth. It manages some of the best emerging-market funds, and natural-resources funds, in the business. As global growth fuels global investments – and it will – U.S. global will see more money pour into its funds, boosting the management fees it collects, as well as its profits and stock price.

The bottom line on Asia in 2008 is that we expect global volatility to sweep through the region, even though it is awash with liquidity. We see China leading the pack for decades to come, just as Japan did a half century ago. Yet, in the longer-term, we don’t see a direct correlation between regional economic growth and equity valuations. And that suggests that a safety-first approach – with a focus on large-cap companies that are globally diversified – is the strategy to follow if you want to maximize your profits from Asia.

Money Morning‘s "Outlook 2008" series last covered Agricultural Commodities.  Next up: Biotechnology.

By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report

A longtime investor in Japan who is familiar with how closely the companies there work with their government "minders" recently asked me if the same thing was true in China.

It’s absolutely true, but the level of direction – rather than cooperation – makes Japan positively appear laissez-faire by comparison.

Consider the 2003 book entitled "Practical Manual for Party Propaganda Work" published by Red Flag Publishing House. It’s a thinly veiled policy statement aimed at doing business with foreigners and serves as the de facto guide to how China’s Communist Party wants things done when it comes to presenting China in a most-favorable light.

Here’s a summary of the advice as assembled by noted China analyst David Cowling. Not only does it speak volumes about what China wants presented to the world; it also details what it wants achieved.

Consider these tips:

• Speak simply, [even] oversimplify if necessary. Deliver a message easiest for the foreigner to receive. This will vary according to what country or region they are from.
• Never use slogans. Propaganda with foreigners should be less direct than domestic propaganda. Present facts, let them draw their own conclusions.
• Arrange interviews for friendly foreign journalists.
• Through Xinhua [the state-run news service] if appropriate, arrange for articles by Chinese to be published by foreign media.
• When scheduling tour groups, strive to arrange a schedule that will give the best impression of China. When these people return to their countries, they can help form a positive impression of China in the minds of the people of the world.
• Attend to programs shown on the television systems of hotels frequented by foreigners so that a positive impression of China will be given.
• Arrange for tour guides and interpreters to subscribe to PRC foreign language publications.

This all sounds pretty innocuous until you realize the forward is by none other than Hu Jintao – as in China President Hu Jintao.

In Western terms, this would be like President George Bush issuing a national press directive regarding what can and can’t be reported – with guidelines for the content that actually makes it into print or out onto the air.

On the surface, it’s enough to make a free-press society foam at the mouth, but to longtime Asian observers like ourselves, it’s simply a roadmap – for global success.

[In an interesting side note, at a time when there's more of a need for global communication and understanding than ever before, every country in the world except one is either cutting back on - or ending outright - their government-sponsored international shortwave broadcasts. That includes Great Britain's vaunted BBC and the U.S.A's Voice of America.  The one exception is China, which is actually boosting its broadcasts of news, documentaries and propaganda to the rest of the world.]

All of this – from the directives to the boosted world band radio broadcasts – provides a clear and intimate look at how China intends to do things. In one sense, it’s a game plan focused on victory – measured as global economic success. In another, it’s a lot like a poker "tell" in that it reveals a great deal about China’s intentions and future courses of action.

And, as is always the case when it comes to investing, that inside insight can lead to significant profits at an acceptable level of risk if you search out companies positioned to profit "because of" China.

Consider this point: Many Chinese, including leading party members, want a more democratic society. Yet, they fear that modernization will spark social unrest.

Therefore, they place great emphasis as a nation on controlled growth, which to us suggests that infrastructure investments are a solid play. The reason: Having a solid infrastructure is one of the easiest ways to prevent the social strife that has destroyed so many civilizations throughout history.

The trick is that many companies inside China are in the wrong place at the wrong time. Despite their rush to get a stock listing and their seemingly unstoppable potential, they’re actually merely biding time before they are plowed under by more-modern, better-capitalized and better-managed overseas rivals.

Yet there are other firms – such as Huaneng Power International Inc. (HNP), China Southern Airlines Ltd. (ZNH), Vale, formerly Companhia Vale do Rio (RIO), and ABB Ltd. (ABB) that stand at the crossroads of potentially lucrative government contracts that will provide these firms with solid growth for years to come.

Furthermore, by virtue of their involvement with key elements of China’s infrastructure, these firms will either drive additional growth, or benefit directly from it, creating further investment gains from the raging growth created by an emerging middle class that’s 300 million strong – and growing.

And that brings us full circle.

In its attempt to control state media and set the standard for external communication, China’s government is telegraphing where it intends to take things.

Not surprisingly, that’s just where we want to be as investors.

And in the weeks and months to come, we’ll take you there.

News and Related Story Links:

• Money Morning Investment Analysis:
  China’s Economy Is 40% Smaller Than Thought – So What!

• Money Morning News:
  Chinese Insurance Companies Bulk up on Infrastructure Investments.

By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report

Here’s a headline investors probably never expected to see: The United States and China have agreed to cooperate on the management of the two countries’ strategic oil reserves.

We don’t know whether to find this story – first reported by China’s state-run Xinhua News Service – amusing, or downright terrifying.

So for now we will think logically about the possible reasons why such an unlikely alliance would be formed, and ponder what we should do about it.

Let’s talk about the why first.

Ostensibly, this agreement is about curbing oil speculation in the international markets. By including China, the consortium of international members who report their oil-reserve plans through the International Energy Agency in Paris, not only get a look at China’s current inventory, but also at that country’s potential future energy needs.

Considering it’s the United States that’s shepherding China through the admissions process, we suspect this is what’s really driving the agreement.

China’s growth is unprecedented. But as a Communist nation, its workings are all too often closed off to the rest of the world. Having international disclosure of China’s oil reserves and future stockpiling plans will theoretically provide advanced notice to other nations of higher oil prices in the event one or more nations makes a run on the markets.

Knowing how secretive Chinese traders can be – and the potential competitive advantages they are giving up in the interest of international cooperation – we’re more than a bit stunned over the prospects of a China that would be willing to disclose this information.

As for how we might use this agreement to create bigger profits in the years ahead, that’s a crucial point to consider.

Our sources suggest that China is slated to spend between $300 billion and $500 billion in the next five years on energy conservation and environmental protection equipment. And that’s in addition to the $1 trillion or more that nation already has apportioned to energy production and other petroleum-related matters. Therefore, any storage and demand figures can conceivably be utilized to develop better investment intelligence on where it plans to spend its money and in what order.

Indeed, now that the OPEC crowd has finally conceded that the global supply outlook for petroleum is nowhere near as serene as they’ve tried to have us believe for years, this kind of market intelligence becomes all the more valuable to investors.

And given that $300 billion to $500 billion represents nearly 30% of the total global market for such conservation and protection equipment, this could be a powerful indicator when it comes to future profits. With regard to energy production, that’s more of a wildcard. But since oil remains priced in U.S. dollars, the potential demand figures carry a highly correlated relationship to the strength – or weakness – of the greenback.

Moreover, given that much of this equipment – as well as China’s reserves – come from the United States, China’s participation in the IEA consortium could serve as important political antacid when it comes to reducing China’s trade surplus, which has been a major point of controversy in Washington.

News and Related Story Links:

• Chinagate.com:
  China, U.S. to Cooperate on Use of Strategic Oil Reserves

• Money Morning Commentary:
  Investors Will Clean Up From Beijing’s Toxic Mess for Years to Come

• Money Morning News:
  Oil Hits $100 a Barrel on Global Political Tension and Supply Concerns

By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report

Many car buffs look to Europe or Japan to see what the future holds, particularly when it comes to the latest in alternative fuels.

The reason is simple: Gasoline costs more than $7 a gallon in both those places.

Of course, in Japan – where I spend part of each year at our home in Kyoto – I always enjoy the added bonus of three to five hardworking service-station employees who swarm my car like they’re part of an F1 pit crew, but that’s merely a nicety that helps me feel better about the money I’m literally pouring into my gasoline tank.

In Europe, I don’t get the pit crew, but I do get diesel. And thanks to tax breaks in many of the countries there, diesel can be cheaper than gasoline. No wonder, then, that more than 50% of the vehicles sold in the European market are diesel powered.

Could we see a similar shift here in the United States market?

Perhaps. But there will first have to be some mighty big changes. And, ironically, they’re many of the same changes that have to take place to clear the way for such other alternative-fuel technologies as ethanol or hydrogen to be fully commercialized. In the face of a trillion-dollar "pork fest" – courtesy of the U.S. government – this really chafes my hide as both a taxpayer, and as a consumer.

Diesel and the Democratic Socialist Republic of Oregon

For instance, only 45% of the nation’s service stations have diesel fuel available for sale, and most of them – not surprisingly – are concentrated along our freeways and highways, leaving suburbanite commuters and behind-the-wheel city dwellers in a lurch. This means that I can own any diesel vehicle I want, but am effectively limited as to where I can drive it.

It’s the same with ethanol.

Then there’s the cost. Right now, diesel is selling for only 20 cents less than a gallon of gasoline. In years past, diesel was actually a great deal cheaper than gasoline. Now, however, diesel is likely to get far more expensive as demand for this close cousin to gasoline escalates even more.

Part of that heightened demand will come from newer diesel vehicles. But, ironically, much of the demand increase will come from government legislation related to ethanol production that requires output to increase from 4.7 billion gallons a year in 2007 to 7.5 billion gallons a year by 2012. Here’s why: The bulk of the machinery used for ethanol production – as well as the machinery used to harvest the corn used to make ethanol – is diesel-powered.

Talk about a paradox.

Still, with the fuel consumption of European vehicles averaging 36 miles per gallon, versus only 22 miles per gallon here in the U.S. market, this might be a moot point, since many of the world’s top "clean diesel" cars – such as the 74 mpg Volkswagen AG Polo – aren’t even available here. Nor will they be anytime, soon.

And that’s a literal "crying shame," considering that many of them can be much more environmentally friendly than the current crop of "hybrids" that are all the rage among U.S. consumers.

But where it really gets frustrating for me – especially as I stand at the gas pumps here in what I like to call the "Democratic Socialist Republic of Oregon," where my family and I live when we’re not in Kyoto – is that, according to the U.S. Environmental Protection Agency, if just 33% of U.S. drivers switched to diesel vehicles, this country could cut oil imports by more than 10%. What’s more, consumption would plummet by a staggering 1.5 million barrels of crude per day.

That should make you sit up and take notice.

How to Play the Alternative Fuel Trend

One interesting long-term play that the Money Morning staff has uncovered of late is agri-biotech giant Monsanto Co. (MON), which just last week released a quarterly sales-and-profit report that eclipsed anything Wall Street had anticipated [To read Money Morning's recent analysis of Monsanto's business prospects and financial position, please click here. The report is free of charge].

Once largely a moribund chemical company, Monsanto in recent years has moved heavily into the agricultural-biotech field with its genetically engineered seeds and its "Roundup" branded herbicide. Monsanto is already seeing a benefit from the growing demand for food and other agricultural commodities as Third World economies continue to emerge. And investors can expect that to continue.

But Monsanto is also benefiting from the move to alternative fuels, such as ethanol. And if you think about that, it makes perfect sense. Genetically engineered seeds improve crop yields. And since ethanol is produced using either corn or sugar, soaring worldwide energy demand will pressure producers of alternative fuels to be as efficient as possible.  That need for boosted crop yields will further stoke demand for Monsanto’s seed products, as well as its herbicide.

If funds are more you style, consider some of the better-quality exchange-traded funds (ETFs) that focus on "clean" energy technologies – which include alternative fuels. One of the top names is PowerShares WilderHill Clean Energy (PBW).

These are some of the better profit opportunities that exist now. Let’s hope our leaders wise up; if they do, additional profit opportunities will emerge.

News and Related Story Links:

• Money Morning:
  Ethanol’s a Farce and We’re Our Own Worst Enemy When It Comes To Energy Alternatives

• Wikipedia:
  Formula 1

• Web site:
  Barrett-Jackson Auto Auctions

• Money Morning Investment Research Report:
  Outlook 2008: Alternative Energy Companies Will Power "Green" Profits in the New Year

• Money Morning Investment Report:
  Monsanto Reaps Huge Rewards From Its Blossoming Seed Business