By Keith Fitz-Gerald
Editor, Geiger Index
Investment Director
Money Morning Investment News/The Money Map Report

If you’re like many investors, you are probably sitting on the sidelines right now, unsure of what to do. If you want to buy, you may be thinking “let’s wait a little longer.” If you want to sell, you might be concerned about “missing out.”

Either way (and even if you don’t plan on making either move anytime soon), having a sense of what got us here can keep you from repeating the same mistakes and even help you make smarter financial decisions – particularly when it comes to repairing your portfolio and even growing it in the years ahead.

When it comes to understanding exactly “what got us here,” I find it helpful to review some of the key bits of advice that Wall Street kept pitching to retail investors, a series of widely accepted investment adages that somehow became gospel and that I refer to as “Wall Street’s Biggest Whoppers.”

Let’s take a couple of minutes to look at the Big Five – the five worst offenders from a list that I assure you is actually quite a bit longer:

Wall Street Whopper No. 1: Buy and Hold – It was supposed be a simple proposition. Consistently put money to work in the markets, let it ride – and laugh all the way to the bank. The thinking was that you couldn’t go wrong because the markets would go up 10% to 12% a year – each and every year (It’s actually more like 4% to 6% – on average – but that’s another story for another time.

What’s important to understand is that “Buy and Hope” is the greatest myth foisted upon the American public in the last 200 years – the need for American International Group Inc.’s (AIG) retention bonuses, notwithstanding. As millions of investors have found out the hard way, the markets can – and do – frequently go through tremendous periods of readjustment.

This means that timing, as they say, really is everything. And “they” – the brokerage firms, hedge funds, ratings agencies and others that together make up “Wall Street” – don’t want you to know that. Wall Street wants you all the way into the game all the time. It doesn’t care whether you win or lose, just as long as you keep playing. So the collective “they” work together to pitch you whatever’s hot, and then move on when that investment has run its course.

And don’t even get me started about the conflicts of interest. The supposedly independent ratings agencies that rubber stamped everything from derivatives to high-grade debt have been in bed with the companies they’re supposed to be regulating for years. Consequently, millions of investors thought they had the “green light” to invest in supposedly safe institutions that have proven to be anything but during the past 24 months.

Where the rubber meets the road – especially during the down years like we’re living through now – is that the risks of outliving your money go up dramatically if you have to get out. In fact, if you achieve annualized returns of zero or less for the first five years after you retire, your odds of running out of money in the next 30 years more than double from 26% to 57%, a study from T. Rowe Price Group Inc. (TROW) reported recently.

And that’s proving to be a tough reality for millions of investors who thought they had this handled. Which is why I was not surprised to see data from the Employee Benefit Research Institute quoted in Money Magazine showing that more than 30% of near-retirees, or those in the early years of their retirement, had more than 80% of their money invested in stocks at the onset of this crisis.

Many of those investors have undoubtedly sold off assets to finance living expenses while waiting for the market to reverse. And that’s created a “double whammy” of sorts: Not only did they lose money on the way down; but those losses and the subsequent forced sales could well mean that their portfolios won’t be big enough to benefit from the next upturn when it does arrive.

What to Do Now: As I have long espoused, the notion of being able to take on more risk simply because you have more time isn’t what it’s cracked up to be. Instead, it is far more appropriate to make choices based on the certainty of returns, especially now.

And that should start with how you think about dividends and reinvestment. In short: Boring never looked so good. Data from Wharton’s Jeremy Siegel and Yale’s Robert J. Shiller – not to mention from my own research – shows that dividends and reinvestment can be far more stable contributors to overall wealth creation than capital appreciation.

Looking ahead in uncertain times, the best choices remain those businesses with solid management, plenty of free cash flow, and an increasing dividends that are backed up by unstoppable global trends. Not overpaid, arrogant Wall Street executives who engineer risk under the guise of safer returns.

There are still plenty of choices available if you do your homework. And it’s not too late to begin buying them selectively right now. In fact, as I wrote recently, history suggests we’re nearing a once in a lifetime buying opportunity so the odds of an upside move could arguably outweigh additional downside…even if you don’t quite get the bottom right.

Wall Street Whopper No. 2:  Some Debt is Good (aka: The Careful use of Debt is an Appropriate Wealth-Building Tool) – This is one of Wall Street’s biggest and most dangerous whoppers, and yet I almost hesitate to include it because of the e-mail I know it’s going to generate. But at the risk of sounding like a broken record, if you owe somebody money, you’ve still got to pay it off one day. That means any growth you attribute to debt until it’s paid off in full exists only in fantasyland. Ask General Motors Corp. (GM), Lehman Brothers Holdings Inc. (OTC: LEHMQ), or any one of the dozens of world banks that are now coping with the aftereffects of growth through the supposedly “intelligent” use of debt.

And this is just as true on a personal level as it is on a professional and governmental level. I wish our leaders understood this, although – in their defense – they finally seem to be getting the picture in recent weeks. Better late than never, although I would just as soon not have seen millions of investors taken on a white-knuckle ride to begin with.

Perhaps the saddest thing of all – and one of the most important lessons we can learn – is that the lessons we grew up with no longer seem to apply. We were taught that if we worked hard and acted responsibly, we would flourish. But now, even if we were responsible, we’re finding out that we’re now liable for the “other” guys’ debts, too.

What To Do Now: From an investing standpoint, confine your choices to those companies with little or no debt. Steer clear of the ones that are on the U.S. Federal Reserve’s IV drip. Yes, those companies probably have upside, but the real test will be what happens when they are forced to wean themselves off their Fed-administered drugs and operate without the crutch of government financing. History suggests that many will fail – despite the government’s unprecedented efforts to save them.

On a personal note, borrow conservatively and only if you have to. Pay off your credit cards each month or shift to a cash-only, “pay-as-you-go” spending plan if you can’t keep that spending under control. Refinance your house before interest rates begin rising dramatically to cope with the almost-certain after-effects of current stimulus spending. And by all means make sure that whatever debt you take on is debt you can afford to pay off.

Wall Street Whopper No. 3: It Pays to Diversify – The conventional wisdom used to be that if you spread your money around, you’d somehow be safer. This is no more effective than rearranging the deck chairs on the Titanic. It’s better to get off the boat.

In uncertain times, it’s how you concentrate your money that matters. This is an important adjunct to “investing with certainty in uncertain times,” and I’ve long advocated the benefits of stability and consistency as a means of getting ahead of the game – and staying there.

The proprietary 50/40/10 (Base Builders/Global Growth & Income/Rocket Riders) portfolio structure we utilize in our monthly newsletter, The Money Map Report, is a terrific example of what I mean. Not only does this portfolio strategy instill a discipline that forces investors to adhere to a “safety-first” philosophy, it has also proved itself to be far more stable than the broader markets since the credit crisis began. It kicks off higher-than-average income, demonstrates lower-than-average volatility – and still generates all the upside you can handle.

This safety-first discipline, with its dual emphasis on high current income and long-term appreciation, has generated some truly impressive returns.

And t his brings me to a key point: Far too many investors don’t understand how the game must be played right now. They think that investing in rocky times is an all-or-nothing equation.

It’s not.

Instead, it’s about the continual adjustment of positions to reflect changing assumptions related to risk – especially now that the risks of stock ownership have changed.

What To Do Now: In an era of simultaneous collapse, when then stock, bond, housing and credit markets have cratered at the same time, there’s simply no excuse for not hedging your portfolio at all times, not just when it’s popular to do so. Nor is there any reason why you shouldn’t be thinking safety first. That way you have the freedom to screw up on speculative bets instead of being dependent upon them to regain what you lost on foolish moves made during the downturn.

And by all means, learn how to use any of half a dozen specialized tools – like inverse funds, or options – to make low-risk, but-often-spectacularly-profitable choices, even under current market conditions. That way you can plan for the worst , yet still obtain the best of what’s out there.

Wall Street Whopper No. 4: Your Home is an Investment – No, it’s not. At best, it’s a roof over your head that keeps you from being priced out of the local rental markets. At worst, it’s a money pit that provides you with the illusion that you’re doing something sensible with your hard-earned money – despite the fact that an entire industry would have you believe otherwise.

Research from Shiller, the Yale economist, shows that, since 1900, home prices have run sideways or even declined for long periods of time. That means that – except for two steep run-ups – one after WWII and the other as part of the late 1990s lending binge – real estate hasn’t been the winning investment everyone claims it to be. And millions of people are learning the hard way that real estate can, and does, lose value. Seems they’ve conveniently forgotten the lessons Texans in the oil patch learned in the early 1980s or that Japan experienced in the 1990s.

Wall Street Whopper No. 5: Shop ’till You Drop and Save the Economy – The U.S. government wants you to spend money. And Wall Street, together with the credit card companies, want you to save their sorry hides by helping you do just that. That’s why so much of the stimulus planning – if you can call it that – revolves around tax cuts and handouts. It’s all window dressing.

Nothing – and I mean nothing – will matter until the banks start lending again.

Period.

What To Do Now: Keep your powder dry. History shows that the ebb and flow of money has never been smooth. Ever.

So to talk as if what’s happening now is an enigma is to ignore the past. We’ve been here before. There was the Panic of 1873 (sometimes called the “real” Great Depression), the Great Financial Crisis of 1914, and the B anking C risis of 1931, for example. The reason what we’re living through now feels different now is that those events are simply beyond the living memory all but a precious few people.

But take heart, for there are some bright spots to look to.

America’s safe-haven mantra – misguided though our policies may be – is an important indicator that savvy investors should plan for an eventual rebound – even if we’re destined to test new lows in the months ahead, and even if we have to look outside our own borders as a part of that process.

[Editor's Note: The ongoing financial crisis has changed the investing game forever, making uncertainty the norm and creating a whole set of new rules that will quickly and painfully determine the winners and losers out in the global financial markets. Investors who ignore this "New Reality" will struggle, and will find their financial forays to be frustrating and unrewarding. But investors who embrace this change will not only survive - they will thrive.

In fact, Money Morning Investment Director Keith Fitz-Gerald has already isolated these new rules and has unlocked the key to what he refers to as "The Golden Age of Wealth Creation." His key discovery: Despite the gloom brought about by the ongoing financial crisis, we may actually be standing on the precipice of the greatest investing opportunities we'll see in our lifetimes. To capitalize, today more than ever, investors need to employ the correct tool.

In his newly launched Geiger Index investing service, Fitz-Gerald feels that he's found that needed device. Geiger Index, developed after more than a decade of work, is a new, computerized trading model that's based on a mathematical concept known as "fractals." This system allows Fitz-Gerald to predict price movements of broad indexes, or of individual stocks, with a high degree of certainty. And it's particularly well suited to the "trendless" markets that are the norm today. Check out our latest insights on these new rules, this new market environment, and this new service, Geiger Index.

And look for Fitz-Gerald's next Geiger Index"Webinar," which will be held Tuesday (March 24) at 4 p.m. For more information on Fitz-Gerald's Web summit, please click here.].

News and Related Story Links:

• BusinessWeek.com:
  AIG’s Liddy: ‘I Asked for Bonus Givebacks.’
• Wikipedia:
  Panic of 1873.
• Money Morning:
  How Dividend-Paying Stocks Can Help You Tame the Bear.
• The Journal of Higher Education:
  The Real Great Depression.
• Princeton University Press:
  When Washington Shut Down Wall Street: The Great Financial Crisis of 1914 and the Origins of America’s Monetary Supremacy.
• Cambridge.org:
  The Credit-Anstalt Crisis of 1931.

By Keith Fitz-Gerald
Editor, Geiger Index
Investment Director
Money Morning Investment News/The Money Map Report

For many investors, the last 12 months have felt like a cross between Dante’s “Ninth Circle of Hell” and Mr. Toad’s Wild Ride.

Even so, after Tuesday’s market action – which saw the Standard & Poor’s 500 Index rebound from a 12-year low to gain 6.4%, and the Dow Jones Industrial Average jump 5.8% – many investors are no doubt wondering if it’s time to pile in.

It could well be. But then again, it just as easily could be a precursor to another financial drubbing – the kind of bear-market “head fake” that I’ve correctly warned investors against on a number of occasions during this financial crisis. Given that perspective, I continue to believe the game we’ve been forced to play as a result of the credit crisis is still far from over.

In short: One day does not a rally make.

And that’s why Tuesday’s almost-euphoric run-up in stock prices seems less like a testament to savvy bailout strategies than it is a revelation of how desperate investors are right now for any glimmer of hope. The notion that a single bank – even if it is Citigroup Inc. (C) – could single-handedly cause this kind of an upside rout on a leaked note from its embattled CEO is absurd.

For a true rebound to take place, two things have to change. The first is sentiment. And the second is business conditions. When it comes to igniting a truly sustainable rally, history demonstrates time and again that those two catalysts go hand in hand.

That’s not to say we couldn’t see a rally of 20% or more from here, or that this mini-rally couldn’t last for a while. Bear-market rallies have a nasty habit of doing that just long enough to draw in additional investors, only to chew up their money and leave them with big losses when the rally rolls over.

Bear-market rallies are actually more common than most people realize and the one we experienced late last year is a great case in point. It started on Nov. 21, and advanced a total of 20% in the subsequent seven weeks. Then it headed south again.

Obviously, I don’t know everything and I expect I’ll hear about it if I’m wrong here. But in a market as unpredictable as this one, and with the insights I wish to share with you, I am less concerned with short-term rallies than I am with long-term investing success. That’s why – if you’re thinking about getting in right now – I urge you to first carefully review both sides of the argument.

Five Reasons Tuesday Could Be a Bear Market Rally

In the “no-way-this-is-real” department:

• Major institutions – such as Bank of America Corp. (BAC), JPMorgan Chase & Co. (JPM) and Citigroup, among others – are functionally insolvent. While Citi CEO Vikram Pandit’s leaked note revealing that Citi has achieved two months of profitable operations may conform to generally accepted accounting principles, supposedly so, too, did the trillions of dollars worth of derivatives the banking giant accumulated. Show me $45 billion in government aid and I’ll show you a good time too. Nobody ever went broke on accrual accounting. Show me the cash and perhaps I’ll change my tune. 
• The credit markets remain substantially locked up. According to the U.S. Federal Reserve’s January survey of senior loan officers, 60% percent of domestic banks reported reduced demand for commercial and industrial loans. That’s up fourfold from the October survey, when only 15% of banks reported reduced loan demand. Even now, the banks and players like American International Group Inc. (AIG), which have accepted – in some cases, begged for – billions in taxpayer aid are refusing to detail just where the money went. For now, though, the closely watched London Interbank Offered Rate (LIBOR) is trading at its highest levels since Jan. 8 – and, in case you don’t recall from past columns on the subject, the higher the LIBOR rate that banks charge each other, the tighter credit markets actually are. If you take all of these bits of evidence together, it hardly makes a case for a healthy financial system. In my mind, the real proof would be when financial institutions willingly wean themselves from the central bank’s IV hookup. 
• Hedge funds are still selling. In times of business expansion and real recovery, hedge funds buy like there’s no tomorrow. Yet, for the most part, these stealthy operators are still swamped with redemption requests and a cycle of forced selling to meet them. 
• The sentinels of the U.S. financial system haven’t changed. I have a hard time believing that the same career government officials, regulators and ratings agencies that were asleep at the switch when the financial crisis began suddenly and miraculously understand how to fix those problems – especially when most of those folks haven’t got a clue about how the financial markets actually work and most of them have never worked in them. 
• Business conditions stink. There are very few companies that have not been materially affected in one way or another by this crisis. Profits are falling and dividends are being cut. Unemployment is rising, personal debt defaults are cascading through the system, and consumer confidence is in the cellar. Sustained recoveries require consumers who actually have money, have jobs and who feel confident.

Four Reasons the Bull Has Awakened From His Slumber

We’ve carefully studied the reason Tuesday’s updraft may be nothing more than a bear-market rally. Now let’s look at the other side.
In the “this-might-stick” category:

• We’re finally experiencing some good news. Pandit’s Citi memo has provided the first real glimpse of hope in months – fancy accounting aside – and could ignite a rush into stocks as investors fear getting left behind. That could turn into a self-fulfilling prophecy, because… 
• Investors have trillions of dollars in cash on the sidelines. According to some studies, there may be as much as $3 trillion to $5 trillion on the sidelines, held by investors who are just aching to get back into the market. It is widely assumed that this money will come roaring in and that it will somehow help the markets recover faster than they would otherwise. (Personally, I have to be honest and say here that I just don’t see it; the estimated $50 trillion that’s been wiped from the face of the planet during this crisis did not go into some magical holding tank. Those losses are permanent. But that’s another story for another time). 
• Technically speaking, the markets were primed for a rebound. And they remain so by many technical measures. As of Tuesday morning, stocks were nearly 35% below their 200-day moving average and we’ve only seen that on two prior occasions: In 1974 and 1982, both of which were followed by serious reversals that presaged important rallies. 
• From a psychological standpoint, the depth of this market decline begs the question: “How much further can it go?” History shows that the 1929 crash took approximately 80% off the top while the 2000 crash took approximately 80% off the Nasdaq Composite Index. Now key sectors, such as the financials, for example, have fallen more than 80%. It seems to indicate that we’ve arrived at levels that, in the past, suggested enough is enough and that there may be enough upside to begin nibbling again. Of course, one could argue that the overall markets are only down about 50%, meaning there’s more bloodletting to go. And that’s a valid point. But since we’re really focusing here on the possible catalysts for a rebound and rally, let’s focus on the fact that the risks this time around were largely concentrated in financials, which from a numerical standpoint have been suitably punished. That might just be enough.

Corporate Earnings: The Final Arbiter

Going forward, the biggest issue to watch is corporate earnings. Many investors don’t realize it, but the final quarter of 2008 marked the very first time in history that the S&P 500 reported negative quarterly earnings. So, despite all the catalysts we’ve detailed for you, where we go from here will likely be determined by who earns what and when they earn it.

And just where is “here? ” Even after Tuesday’s manic rise, we’re now sitting just above the market’s 12-year lows. History shows we’ve been here twice before: Once following the Great Crash of 1929, and once in the early 1970s. Both cases turned out to be the kind of phenomenal long-term buying opportunities that I said this financial crisis will turn into once the carnage stops.

What’s important now is to maintain perspective and to really decide if you are a speculator in search of short-term gains that can help you recover your portfolio, or a true “investor” who is seeking long-term gains. If you decide you’re the former, you may be sadly disappointed in the months ahead. But if you’re looking for the latter – and you’re willing to ride out the ups and downs that are certain to come – it’s probable that there’s more potential upside available now that we’re at these 12-year lows than there is still more downside.

Moves to Make Now

As regular readers of Money Morning know very well, I’m an advocate of having a disciplined and well- thought- out investment plan that right now ought to incorporate the following elements:

1. Make a wish list of stocks you want to own. Logically these will include companies with strong cash positions, low or no debt, experienced management and attractive valuations. These are the types of companies we’ve written about extensively in the past 12 months and which we write about regularly in our sister publication, The Money Map Report. Obviously, the charts aren’t going to be compelling, but that’s to be expected when hunting for bear-market-rally candidates. 
2. Scale in. Don’t bet the farm on an all-or-nothing assumption that “the” bottom has been reached. For some strange reason, most investors are programmed to jump in with both feet when it’s clearly time to just put a toe in the water. We could just as easily see another thousand-point drop from here as we could a similar increase. 
3. Make the markets “prove it.” In order to break the current downward spiral, we’ll need to see a move above 740.61 on the S&P 500 and several closes above that level to demonstrate consistency. 
4. Don’t confuse the desire to make up losses with an actual long-term investing perspective. If you’re anxious to jump the gun and get in, make sure you’re doing so because you’re going after your “A” list of companies – and aren’t merely trying to recoup losses that require you to take on more risk than you’d otherwise be comfortable with.
   Remember, the reason most people have gotten hurt so badly is that they came into this mess by having too much in stock and, consequently, too much risk. Those investors learned the hard way – and that’s a lesson best not repeated the next time around.

[Editor's Note: The ongoing financial crisis has changed the investing game forever, making uncertainty the norm and creating a whole set of new rules that will quickly and painfully determine the winners and losers out in the global financial markets. Investors who ignore this "New Reality" will struggle, and will find their financial forays to be frustrating and unrewarding. But investors who embrace this change will not only survive - they will thrive.

In fact, Money Morning Investment Director Keith Fitz-Gerald has already isolated these new rules and has unlocked the key to what he refers to as "The Golden Age of Wealth Creation." His key discovery: Despite the gloom brought about by the ongoing financial crisis, we may actually be standing on the precipice of the greatest investing opportunities we'll see in our lifetimes. To capitalize, today more than ever, investors need to employ the correct tool.

In his newly launched Time Trader Pro investing service, Fitz-Gerald feels that he's found that needed device. Time Trader Pro, developed after more than a decade of work, is a new computerized trading model that's based on a mathematical concept known as "fractals." This system allows Fitz-Gerald to predict price movements of broad indexes, or of individual stocks, with a high degree of certainty. And it's particularly well suited to the "trendless" markets that are the norm today. Check out our latest report on these new rules, this new market environment, and this new service, Time Trader Pro.]

News and Related Story Links:

• Money Morning Market Analysis:
  A Currency Conundrum: Beware of the U.S. Dollar’s “Head Fake” Rally.
• Money Morning Special Report:
  Special Report: Are We Now Running With the Bulls, or Just Following More Bear Tracks?
• Wikipedia:
  Ninth Circle of Hell.
• Wikipedia:
  Mr. Toad’s Wild Ride.
• Money Morning News Analysis:
  Citi Reports Profit, But Some Analysts Advise Further Caution on Big Banks.
• FASAB.gov:
  Ggenerally accepted accounting principles.
• SeekingAlpha.com:
  Citigroup’s Derivatives Reduce Bailout to a Non-Event.
• Wikipedia:
  Great Crash of 1929.
• Money Morning Special Investment Research Report:
  Goldilocks, Gloom or Doom? Three Views of a U.S. Recovery.
• Wikipedia:
  Technical Analysis
• Money Morning News Analysis:
  Hedge Funds Have Another $200 Billion to go to Complete Their “De-leveraging.”
• Money Morning News:
  Job Losses Continue to Mount in February, Unemployment Rate Soars to 8.1%.
• Wikipedia:
  London Interbank Offered Rate.

By Keith Fitz-Gerald
Editor, Geiger Index
Investment Director
Money Morning Investment News/The Money Map Report

If you want a real look at what’s headed this way, ask Hideko Toyotomi.

When Japan’s so-called “Lost Decade” began with a bang in the early 1990s, she was an “OL” – an office lady – working in one of Japan’s mightiest corporations and she kept her job, despite the downturn.

She was one of the lucky ones. Her employer was a mainstay electronics producer and a key exporter, meaning the company’s business remained reasonably healthy.

This time around, she’s a housewife and mother. And she’s worried. Her husband, Masao, works at a local manufacturer that’s cut back production to only four days a week. He’s taken a part-time job, schlepping boxes overnight at the local convenience store, to make up for the reduced pay. Their son, Daiki, is headed for college – and for an uncertain future.

“I don’t know if I have the strength to go through this again,” she said. “This time, it’s worse,” noting that Japan never really recovered from its “Lost Decade.”

Anatomy of a Lost Decade

Having spent a substantial amount of time in Japan over the past 20 years, I agree and I’m struck with a tremendously foreboding sense of déjà vu that I just can’t shake no matter how hard I try.

What happened in Japan is being replayed in the United States – in exquisite detail, and with a bit of agony, too. Since 2001, I’ve been warning anyone who would listen that the Japanese experience was only a precursor to what we could experience here.

Naturally, that’s been a controversial view, particularly since it’s virtually unthinkable for an entire generation of politicians and financiers who thought they “knew better” and that it could never happen to us.

But lately, it’s not so unthinkable. In fact, if I were to take the names out of the Japanese experience, the story could easily be the one that’s unfolding now.
In the late 1980s, Japanese companies ran the planet. A strong currency, solid work ethic and close government connections created an unstoppable growth machine – referred to by the U.S. media as the “Japanese juggernaut,” or the “Japanese Superman.”

In the interest of additional growth and financial modernization, Japan deregulated its financial markets and began lowering interest rates. Not surprisingly, the Nikkei 225 stock index more than tripled in less than five years, companies blossomed and the use of debt skyrocketed.

Sign up below… and we’ll send you a new investment report for free: “Credit Crisis Report.”

Sound familiar?

Then all hell broke loose.

At the same time, real estate values began to waver, the government figured out that the entire Japanese financial system was a house of cards leveraged against collateral that didn’t exist and that wasn’t properly valued in the first place. And the Nikkei has collapsed to where it stands today – at one-fifth the value it had attained in 1989.

Once-stalwart companies began defaulting on loans and many went out of business entirely. Individuals couldn’t repay their debts. Real estate values fell dramatically and today remain as much as 50% below their 1989 peak. People simply turned over the keys to their homes to the banks or, like the family immediately behind our house in Kyoto, simply disappeared in the middle of the night, never to be seen again.

Unemployment rose to an unthinkable 5.5%. Suicides soared. And homeless camps, which Japan had never seen before in the post-war era, go-go years, dotted the banks of the rivers that wind their way through major cities like Tokyo and Osaka. In our neighborhood, the Kyoto city government built a brand new bathroom building for the children’s playground only to watch as a troop of six homeless men moved in – and refused to leave for the next four years. We also watched ubiquitous, blue-tarped “houses” appear under each bridge spanning the scenic Kamo River.

They disappeared when Japan’s economy improved in the late 1990s, or early this decade. They’re back now.

Making matters far worse, at the same time all of this was happening, deflation set in with a vengeance and brought matters full circle. Lower prices meant lower margins. Lower margins meant lower production and the need for lower production, in turn, created the need for smaller work forces.

Fast forward to today.

A Painful Replay

This same downward spiral that played out in Japan in the early 1990s seems to have taken hold here in the United States. Economists called this “excess” capacity and said that a short period of readjustment would be followed by new growth. But instead, they’ve gotten just more misery punctuated by a few fits and starts of economic recovery. And the resultant record job cuts hardly point to an imminent turnaround.

Even so, many people here in the United States remain in denial. They simply cannot accept that what happened in Japan appears to be replaying itself out here. They reason that our government is taking more aggressive action than the Japanese government did, that our corporations are better managed, that somehow they’ll pull through based on demand and, my personal favorite, that our bubble simply wasn’t the same as Japan’s.

They’re right … it’s worse.

According to a report in the Global Mail, in 1989 the Japanese economy needed a mere three yen of credit to make one yen of national income. Here in the United States, we’ve needed $8 dollars of credit for every $1 dollar of national income. And we may need more. In Japan, the “bubble” grew for only a few relatively intense years from 1985-1991. Here in the United States, it’s been allowed to fester for 30 years.

When the Japan’s bubble broke, it was a creditor nation, which means, overall, there was more money flowing into Japan than out. At the time, Japan had $1 billion surplus on any given day.

When the U.S. financial crisis started, this country was running a $2 trillion deficit, meaning we’ve spent that much more than we earn as a nation. Now, factoring in the stimulus plans and all sorts of bailouts, we’re arguably approaching $14 trillion.

In 1990, the Japanese were saving 17% of their income. At the moment, Americans have practically no savings to fall back upon and our savings rate has, in fact, gone negative several times in recent years (however, some reports indicate that U.S. savings rates have risen in recent months).

But what really makes me stop and think twice is this: At the time Japan’s bubble burst, the island nation still had extensive trade with its partners, and consumers around the world were spending. So there was a cushion. This time around, spending has ground to a halt and there literally is no safety buffer.
Just last week, in fact, Money Morning reported that Japan’s exports were cut nearly in half last month as the global downturn crushed demand for the country’s electronics and automobiles, a development that increases the odds that the Japanese yen could be poised for a tumble.

That, more than any reason is why the U.S. government – right or wrong – has stepped in to become the risk taker of last resort.

While that may actually be a good thing from the standpoint of intent, it hasn’t been great from an execution standpoint.

In as much as the U.S. stimulus programs being enacted by central bankers around the world will eventually take hold, that suggests that investors should continue to invest – albeit super selectively – throughout this mess in a couple of areas:

• Bond markets are especially overbought and I can’t think of more spectacular profit potential particularly at the long end of the spectrum. The U.S. government may borrow as much as $3 trillion dollars in 2009 alone, and it’s likely rising rates are not far behind.
• The Japanese yen itself seems ripe for a fall, so shorting both the Japanese markets and the yen itself may wind up being an outstanding choice, especially once the reality of falling global demand sets in.
• And, of course, infrastructure. Despite the fact that the world is pulling in its horns, the infrastructure we use is not getting any younger particularly with regard to electricity. Even if expansion plans are put on hold, existing grids will require repair and constant upkeep. The last thing any government will let happen is a complete collapse of the power grid, because it would mean the end of civilization as we know it, thanks to the social chaos that would ensue.

[Editor's Note: Money Morning Investment Director Keith Fitz-Gerald is the editor of the new Geiger Index trading service. As the whipsaw trading patterns investors have endured this year have shown, the ongoing global financial crisis has changed the investment game forever.

Uncertainty is now the norm and that new reality alone has created a whole set of new rules that will help determine who profits and who loses. Investors who ignore this "New Reality" will struggle, and will find their financial forays to be frustrating and unrewarding. But investors who embrace this change will not only survive - they will thrive. With the Geiger Index, Fitz-Gerald has already isolated these new rules and has unlocked the key to what he refers to as "The Golden Age of Wealth Creation." The Geiger Index system allows Fitz-Gerald to predict the price movements of broad indexes, or of individual stocks, with a high degree of certainty. And it's particularly well suited to the kind of market we're all facing right now. Check out our latest report on these new rules, and on this new market environment.]

News and Related Story Links:

• Money Morning News Analysis:
  Japan’s Exports are Halved by Crisis, Boosting the Odds for a Drop in the Yen.
• Money Morning News Analysis:
  Will the Yen Lose its “Safe Haven” Status as Japan’s Economy Deteriorates?
• Money Morning News Analysis:
  U.S. Making Same Mistakes that Led to Japan’s Lost Decade, Say Analysts
• Money Morning News Analysis:
  The Lost Decade: How the U.S. Financial Crisis Resembles Japan’s Ten Years of Misery – And How to Play it

By Keith Fitz-Gerald
Editor, Geiger Index
Investment Director
Money Morning Investment News/The Money Map Report

Historically speaking, the Japanese yen has proved to be a safe haven against global turmoil. Right now, however, Japan’s economy is among the worst hit of all the global powers. It is ill prepared to weather the global storm and it’s falling like a rock.

That’s why, this time around, as Japan’s economy falls away, I think there’s a very good chance the yen could drop as well.

Obviously, this would be very bad news for the huge numbers of speculators and institutions that have literally bet their existence on yen-based hedging strategies. But while a freefall in the yen would be a surprise to those institutional players, it would be about par for the course in my book, given the current state of the ongoing global financial crisis.

As Money Morning has reported, hedge funds have so far unwound gold, real estate, easy-to-sell stocks and other asset classes – so why shouldn’t they unwind currencies at some point, too? The same can be said for banks and other financial institutions currently embroiled in the global financial fiasco. With redemptions mounting, continued malfeasance like the $8 billion Stanford Financial scandal coming to light, and the credit markets still essentially locked-up tight, it’s not an unreasonable expectation.

Traditionally, analysts have looked to current-account balance statistics as a guidepost of sorts when the going gets tough. Specifically, analysts like to study surpluses on net foreign assets because those figures have historically indicated which currencies are expected to perform better during times of crisis.
The theory is that the higher the surplus, the more incentive a nation (and the companies in it) have to “repatriate” assets – that is, to bring them home. Therefore, traders tend to go “long” on the strongest, while simultaneously abandoning the weakest – or even shorting them outright.

And they have in record numbers. According to the Bank of Japan (BOJ), the yen remains near the highest nominal trade-weighted level it’s posted since November 2001. And while you’d think there would be some reduction in this “safety first” view of the yen – especially given recent U.S. announcements regarding the stimulus package – the fact is that there really haven’t been any serious reductions in the net-long yen position.

Indeed, the latest data from DanskeBank A/S shows that, in recent weeks, speculative investors have only reduced net long Japanese yen positions to some $6 billion dollars. It also reflects that traders tracked by the U.S. Commodity Futures Trading Commission (CFTC) remain net short all other major currency pairs which directly contradicts what Washington thinks and is telling the public about a recovery.

Sign up below… and we’ll send you a new investment report for free: “Credit Crisis Report.”

In fact, data drawn from the CFTC suggests that not only is the yen still viewed as a safe-haven currency, but that traders don’t buy into a U.S. recovery. In fact, traders are actively betting against a global recovery, at least as far as the major currency trading pairs are concerned.

There’s no similar data available from China, since its currency is partially blocked at the moment, but I’m hearing from traders all over the world that they’re assembling large-scale positions in China’s renminbi (yuan). If that’s true, this development will support my long-held contention that China is the real key to solving this mess, and my belief that China’s currency is poised to become every bit as viable as the dollar or the yen – if not more so, given the current global financial crisis.

The problem is that money is still flowing out of Japan and into foreign equities and bonds when it should still be flowing in. Consequently, some people like the institutional traders and speculators who have assembled the more than $6 billion in long positions in the Japanese yen argue that this is a temporary happenstance and one that, in fact, creates an even greater incentive to eventually repatriate the assets.

But I’m not so sure.

For one thing, the fact that “everybody” expects a stronger yen is the sort of contra-indicator that raises the hair on the back of my neck. Anytime the markets have such unified, blanket expectations, the unthinkable becomes possible, particularly if what everybody believes appears in print.

To illustrate what I mean, allow me to turn to the vaunted “magazine cover-story indicator,” which actually has a statistical basis as a contrarian warning.
Two of my favorite examples include the 1999 Economist cover story, “Drowning in Oil,” which stated that crude oil would fall to between $5 and $10 a barrel, and remain there for the next decade, and the infamous 1979 Business Week cover story, “The Death of Equities.” Less than a year later after the former was published, oil was trading at more than $25 a barrel. As for the latter, it preceded one of the greatest bull market run-ups in history.

Then there’s the fact that the Japanese economy is suffering its worst economic contraction in 35 years, and a recession that may be the worst in 50 years. According to Japan’s Ministry of Finance, the country’s industrial production is tanking to the tune of 30% this year, while its gross domestic product (GDP) may plummet 12% in a mere 12 months.

While this is unfolding, exports plunged thanks to non-existent overseas demand for the cars and electronics that have long been the mainstay of Japan’s industrial might. Overall, shipments to the United States – long Japan’s trading partner of choice – have plunged a staggering 34%.

The Wall Street Journal recently reported that Japan is running its first trade deficits in a generation – five months in a row at last count. This is especially problematic because Japan and China – together with South Korea – are the world’s largest purchasers of U.S. debt.

So at a time when the United States is trying to save its financial system and jump-start its economy by pumping trillions of dollars into the world financial system – and desperately needs global buyers to buy this new debt so that it can forge ahead with its rescue plans – Japan may not have the financial wherewithal to help make this happen. And China and South Korea may simply elect not to buy any more.

By all accounts, the fallout of all this turmoil is staggering. Japan’s economy may contract by 4.6% in 2009, Kyohei Morita, chief economist for Barclay’s Capital (ADR: BCS), told BusinessWeek recently.

Toyota Motor Corp. (ADR: TM) is projecting a worsening situation and a string of mounting losses that will be the first since 1938. Every single digit of yen appreciation is projected to cost the company an additional $450 million in operating losses.

According to The Tokyo Shinbun, more than 30% of Japan’s prefectures (governmental bodies larger than cities, towns, and villages) have already implemented emergency economic measures of their own. Overall, unemployment rose to 4.4% in December, the worst such figure recorded in 42 years. Tent cities are growing and many public parks are now overflowing with homeless people – something I recall seeing during the depths of Japan’s last “Lost Decade.”
My friends tell me that factories in the normally highly industrialized Osaka area have shifted to 15-day-a-month production schedules, and many salarymen (Japan’s iconic office superheroes) are being encouraged to seek “arubaito” – or part-time work – to make ends meet. And those are the people who are still fortunate to have jobs. My mother-in-law tells me that it’s becoming increasingly common to see these workers serving noodles or working in department stores, doing jobs that have historically been done by college kids.

Things are so bad that Prime Minister Taro Aso has an unprecedented approval rating of less than 10% and many normally respectful Japanese, including my ultra-reserved father-in-law, refer to him as an “uneducated blockhead.”

I could go on, but I think you get the picture. It’s bleak and getting worse by the day in a nation that I have lived in during much of the last 20 years and come to love.

That’s why shorting the yen may wind up being one of the most fundamentally successful – and admittedly contrarian – investment choices we can make in today’s mad markets.

I’ll be home in Kyoto in a few months and look forward reporting what I find immediately.

News and Related Story Links:

• Money Morning:
  Financial Crisis May be Creating the Best Investment Opportunities of our Lifetime, Money Morning Expert Says.
• News Analysis:
  Hedge Funds Have Another $200 Billion to go to Complete Their “De-leveraging.”
• Wikipedia:
  Prefectures.
• Money Morning News Analysis:
  Stanford Scandal Ignites Bank Runs in Latin America.
• Wikipedia:
  current-account balances.
• Money Morning:
  Massive China Stimulus is Viewed by China Expert as a Key Attempt to Help the West.
• The Financial Analysts’ Journal:
  Are Cover Stories Effective Contrarian Indicators?
• Money Morning Special Report (Part I of II):
  The Lost Decade: How the U.S. Financial Crisis Resembles Japan’s Ten Years of Misery – And How to Play it .
• Wikipedia:
  Taro Aso.
• Money Morning Special Report (Part II of II):
  The Lost Decade: How the U.S. Financial Crisis Resembles Japan’s Ten Years of Misery – And How to Play it for Profit
• Products:
  Keith Fitz-Gerald – Time Trader Pro

By Keith Fitz-Gerald
Editor, Geiger Index
Investment Director
Money Morning Investment News/The Money Map Report

Commodities may be down, but they’re not out – and they shouldn’t be out of your portfolio, either.

As the investment director for Money Morning, I’m invited to a large number of speaking engagements each year. It’s something I enjoy, and it’s quite useful, too, for the questions that I get tell me a great deal about investor sentiment and the general tenor of the financial markets. The same is true for the questions I receive daily from our readers.

Lately, the most intriguing questions have dealt with the price of oil and other key commodities. It’s a topic that’s clearly on a lot of people’s minds so I thought I’d share some of them with you today.

Q: With crude oil prices down more than 75% from their record high set in July, do I really need to worry about “peak oil.”

A: Let me be blunt. Producers are operating near maximum capacity every day with 89.5 million barrels per day. We’re using 89 million barrels per day. That means there is essentially no excess capacity anywhere – period. If you factor in war, routine maintenance of pipelines or refining facilities, and diminishing supplies, we’re probably already running at a deficit even though current data does not yet reflect that. There is a very high probability that in the near future demand will outrun supply – and by that I mean permanently outrun supply.

I don’t think this is “just” peak oil. But I do think it’s the investing opportunity of our lifetime.

Q: That sounds alarmist. What about other commodities?

A: There’s a difference between being alarmist and being prepared – and, in this case, we’re talking about the latter especially when it comes to potential profits.

We are in the initial stages of a fight to the death for energy supplies and many other commodities – most notably potable water.

As I’ve noted for years, and as Money Morning detailed yet again in an analysis just last month, China, among other countries, is using its huge currency reserves – and the financial weakness of rivaling other global players – to lock up long-term supplies of commodities. By any stretch of the imagination, I don’t think this is the last we’ll see of this kind of thing.

The bottom line is that the outcome of this battle will affect every nation on earth. Absent truly fungible substitutes, it’s reasonable to expect to see oil nationalized at some level within our lifetime, and the first armed conflicts over water somewhere on the planet possibly as soon as 10 years from now. Certainly there is going to be economic conflict over those two things and on a level that is presently unimaginable. Depletion is happening at a far faster rate than most people realize.

Q: But oil’s still cheap.

A: It’s always been cheap – cheaper, in fact, than a cold soda or bottled water. But at a time when market forces are inevitably diminishing the supply, even as demand continues to grow, we’re looking at a one-way trip over time.

The average American uses two times the amount of oil used by each European, four times the amount used by each Japanese consumer, 12 times their counterpart in China, and 30 times the amount used by the typical consumer in India. And that’s at a point in time when nearly 4 billion people live in complete poverty without the stuff we take for granted…like oil and water.

Supplies are destined to shrink.  And until we can find replacements, we’re stuck with what we’ve got – there’s no more of it.

Q: Isn’t the world working on substitutes as fast as they can – having been shocked by record prices of $150 a barrel?

A: Yes. And they’re making good progress. However, even if substitutes were found tomorrow, we still have to replace trillions of dollars worth of manufacturing and infrastructure processes that have to be changed completely. Some studies I’ve seen suggest that oil is used in more than 60,000 manufacturing processes and it’s much the same with water, in particular.

Even the most wildly optimistic estimates suggest that changing to new technology may take another 30 to 50 years to work through. In the meantime, oil is set to run out 35 years from now using the highest-reserve-level calculations available – and that assumes no demand growth and no population change. It’s even worse when it comes to water. Some predictions suggest that by 2050 nearly 7 billion people will live nearly waterless lives.

Q: That’s pretty forceful thinking.

A: I’ve always operated under the philosophy: “If not now, then when? If not you, then who?”

As the investment director of Money Morning, my job isn’t to “force” anybody to think a certain way, or to take a certain action. It’s to analyze the best data available to me, to make the appropriate recommendations, and to provide you with the insights you’ll get nowhere else.

Sign up below… and we’ll send you a new investment report for free: “Credit Crisis Report.”

I think we have the opportunity to invest in a group of “real assets” (which I define as oil and other key commodities) at a point when supplies are declining as demand is escalating. That combination suggests very rapid appreciation as demand eventually overwhelms production in the next few years. It’s a rare combination, and that’s why I say it may be the “profit opportunity of a lifetime.”

This reminds me of a conversation that I had with my colleague Jim Rogers, not too long ago, when the legendary investor observed that “real assets represent real wealth.”

I agree. And you will, too.

[Editor's Note: The ongoing financial crisis has changed the investing game forever, making uncertainty the norm while simultaneously creating a whole set of new rules that will help determine who wins and who loses. Investors who ignore this "New Reality" will struggle, and will find their financial forays to be frustrating and unrewarding. But investors who embrace this change will not only survive - they will thrive.

As his short essay on long-term profit plays today illustrates, Money Morning Investment Director Keith Fitz-Gerald is constantly on the lookout for ways to turn these seeming negatives into positives that can create market-beating profits. In his new service, the Time Trader Pro, Fitz-Gerald details investment recommendations based on a proven quantitative system of analysis that was previously only available to the so-called "uber-rich." The strategy allows him to recommend positions that simultaneously reduce an investor's risks, as well as his purchase-price points - all of which boosts the investor's returns.

While most investors lament the damage the financial crisis has wrought, Fitz-Gerald says that his research into "chaos theory" and his on-the-ground analysis of investment plays in fast-growing China has made him realize that we stand on the precipice of "The Golden Age of Wealth Creation." And the strategy that he's deploying is perfectly suited to the kind of whipsaw market we're facing today. Check out our latest report on these new rules, and this new market environment.]
News and Related Story Links:

• Wikipedia:
  Peak Oil.
• Money Morning Market Analysis:
  What Companies Are Profiting From China’s Commodities Crusade?
• Energy Bulletin:
  Why does fungibility matter (and where did it go)?
• Google Definitions:
  Potable Water.
• Investopedia:
  Real Assets.

• Money Morning Exclusive Jim Rogers Interview From Vancouver (Part I):
  Exclusive Interview: Jim Rogers Predicts Bigger Financial Shocks Loom, Fueling a Malaise That May Last for Years.
• Money Morning Exclusive Jim Rogers Interview From Vancouver (Part II):
  Exclusive Interview: Jim Rogers Continues to View China as the World’s Best Long-Term Profit Play.
• Money Morning Exclusive Jim Rogers Interview From Singapore (Part I):
  Jim Rogers: More Pain for the Greenback, and the Failure of the Federal Reserve.
• Money Morning Exclusive Interview From Singapore (Part II):
  Jim Rogers: China’s Economic Advance is All But Unstoppable
• Products:
  Keith Fitz-Gerald – Time Trader Pro

By Keith Fitz-Gerald
Editor, Geiger Index
Investment Director
Money Morning Investment News/The Money Map Report

For many investors, the concept of an equity indexed annuity (EIA for short) – which establishes a guaranteed minimum rate of return, and the ability to capture the upside of the next bull market with no risk of loss – is proving irresistible. That’s especially true at a time when the Standard & Poor’s 500 Index is still down nearly 45% from its 2007 high of 157.52 and new U.S. President Barack Obama’s stimulus plan has yet to be finalized.

But at the risk of receiving more than a few sharp emails from industry professionals who sell EIAs, let me tell you that you can achieve virtually the same degree of financial security using nothing fancier than a certificate of deposit (CD) and the SPDR Trust (SPY), which trades on the American Stock Exchange.

 Here’s what you need to know.

First created on Feb. 15, 1995, equity indexed annuities are insurance products that typically promise a set minimum income level or rate of return, plus the ability to capture market gains without any risk of losing money. Theoretically, they’re easy to understand.

You invest a lump sum for a fixed-time period – often 10 years or more – and in return receive a guaranteed minimum rate of return, plus the market upside, with none of the losses if it goes down.

If the market to which an EIA is indexed – like the S&P 500 – rises by more than the minimum promised return, your money is supposed to grow proportionately. In exchange for making the investment, the insurance company offering the EIA guarantees that your money will never drop in value.

The devil, as they say, is in the details.

In reality, the paperwork that explains equity-indexed annuities is one of the toughest financial documents of all to decipher and understand. Not only are the sales documents filled with legalese, but assuming you can get through the 40 to 60 pages of stuff that comes with an EIA, chances are you’ll find a wide range of conditions, restrictions and terms that frequently change over time. There are guaranteed minimums, performance adjustments, participation rates, interest-rate caps and spreads to contend with, for instance. And that’s just a sampling.

In addition, many EIA’s also cap the returns you can achieve, no matter how far the markets rise, which would seem to defeat the purpose of investing in one of these things in the first place. And that means, more often than not, that you’ll be left in the dust if the markets really take off.

Sign up below… and we’ll send you a new investment report for free: “Credit Crisis Report.”

To put this into context, if you invest in an EIA with a performance cap of 10% and the markets actually rise 20%, you’ll leave over 50% of possible gains in the insurance company’s pockets … not yours.

Then there are the associated fees and charges, which are quite hefty. In fact, various studies suggest that the purchase of an annuity typically results in a wealth transfer of as much as 15% to 20% from the investors who buy them to the insurance companies and the sales forces who sell them. That’s something not a lot of folks realize when they consider purchasing one of these specialized investments.

Despite these shortcomings, sales of EIAs are better than ever. According to Jack Marrion of Advantage Compendium Ltd. (www.indexannuity.org), investors have plowed more than $123 billion into equity indexed annuities. He added that “more than 90% of EIAs are sold by independent agents,” like one I spoke with who privately told me that sales are “up 25% in the last 6 months alone.”

Another insurance company representative, who also wished to remain anonymous, told me that “fear rules the day, and we know that, so it’s only logical to assume that we’ll sell more EIAs when people are scared.”

Sad but true.

Many investors I’ve talked to over the years tell me that they find it especially frustrating that no two EIAs are exactly alike, which is why apples-to-apples comparisons are next to impossible.  The same is true for performance comparison, even if two competing offerings are tracking an identical index, such as the S&P 500.

The bottom line on EIAs is that the returns you think you’ll be getting if the markets rise may be nothing more than an illusion once all the contractual details are netted out. They’re basically being sold as alternatives to stocks, when the reality is that they’re much more of a bond-related instrument.

In the interest of fairness, EIAs have outperformed the S&P 500 over the last nine years, something Miguel Herce of CRA International points out in the January 2009 issue of Money magazine. But over time – 63% of the time since 1926, to be specific – the markets would have beaten EIAs.

Various studies reinforce this notion. One, in particular, conducted jointly by Dr. Craig McCann of UCLA and Dr. Dengpan Luo of Yale University, reflects that investors would be better off in a simple portfolio of U.S. Treasuries and large cap stocks – a whopping 97% of the time.

Boston University Economics Professor Laurence J. Kotlikoff summed it up nicely, noting in Money that “some of these products might pay off, but even a PhD in finance can’t tell you if it’s worth it because the returns are almost entirely at the discretion of the insurance company [that's offering the EIAs].”

Which is why we’ve never been big fan of these things.

But if the notion of a guaranteed return and all the market’s upside strikes you as compelling right now – like it does us – here’s a dramatically simpler and far less expensive way to achieve financial tranquility.

• First, visit CostCo.com (or your local bank). When I checked, the company was offering Federal Deposit Insurance Corp. (FDIC) insured seven-year CD paying 5.05% APY through Capital One Financial Corp. (COF). Assuming you’ve got $20,000 to invest, you’ll need to plop down ~$14,166.34 now to have $20,000 in seven years. (You can run whatever numbers you want using financial calculators available on the Internet).

• Second, take the remaining $5,833.66 and buy the SPY exchange-traded fund (ETF), which tracks the S&P 500.

That’s it. No extravagant fees. No surrender charges. And, most importantly, no upside-performance caps.

Plus, your investment is now guaranteed by the FDIC, which strikes me as a whole lot safer than a comparable EIA, which incidentally is only as good as the insurance company backing it. And lately, that’s suspect to say the least.

Worst case scenario, you get your $20,000 back in seven years. Best case, if stocks recover from here and achieve 7% annually for the next seven years, you’ll earn an additional $9,367.58, making your grand total $29,367.58.

What’s more, because there’s no complicated contract involved, you will understand what you’re getting into from the get go, and will get to keep 100% of the potential gains to boot.

In closing, it’s worth noting that EIAs are frequently touted as tax-advantaged investments in an attempt to make them more appealing. But if you simply buy the CD and the SPY in your IRA, you’re achieving the much the same thing – but without the 9% commission.

[Editor's Note: Money Morning Investment Director Keith Fitz-Gerald is the editor of the new Geiger Index trading service. As the whipsaw trading patterns investors have endured this year have shown, the ongoing global financial crisis has changed the investment game forever.

Uncertainty is now the norm and that new reality alone has created a whole set of new rules that will help determine who profits and who loses. Investors who ignore this "New Reality" will struggle, and will find their financial forays to be frustrating and unrewarding. But investors who embrace this change will not only survive - they will thrive. With the Geiger Index, Fitz-Gerald has already isolated these new rules and has unlocked the key to what he refers to as "The Golden Age of Wealth Creation." The Geiger Index system allows Fitz-Gerald to predict the price movements of broad indexes, or of individual stocks, with a high degree of certainty. And it's particularly well suited to the kind of market we're all facing right now. Check out our latest report on these new rules, and on this new market environment.]

News and Related Story Links:

• Wikipedia:
  Equity indexed annuities.
• Wikipedia:
  Laurence J. Kotlikoff.
• Products:
  Keith Fitz-Gerald – Time Trader Pro

By Keith Fitz-Gerald
Editor, Geiger Index
Investment Director
Money Morning Investment News/The Money Map Report

Despite what you might be hearing about a global recession, consumer capitalism is alive and well in China.

And it’s still fueling growth.

Take a stroll through Beijing’s trendy Wangfujing area, a quick walk south of Tiananmen Square or the six-story Shin Kong Place in Beijing’s Dawanglu area, and you’ll find more than 100 top international designer brands on sale, including Prada, Gucci, Bvlgari, Dolce & Gabbana, and others. While you’re on the prowl, don’t forget Xidan Market, which the locals prefer. It’s also bursting at the seams from countless stores, fashionable-clothing shops and, of course, the ubiquitous and ever-present Starbucks (SBUX).

In contrast to other global markets, like the Ginza, Beverly Hills’ Rodeo Drive or London’s Oxford Street, for example, where a heavy silence hangs over the once-bustling shopping areas, the sounds of commerce are everywhere.
Literally.

Cash registers clink and clank, and credit-card machines whiz, but not where most people would predict.

With the deepening of the global recession, throngs of Chinese consumers and expats no longer willingly stand for 40 minutes to get into stores selling Gucci, Vuitton and other top-end items. Instead, they’re pushing their way into places with names like Uniqlo (pronounced “uni-clo”), Lavinia, and Blur – all of which were once regarded as the illegitimate children of yuppie-dom, because of their bargain-based orientation.

Lately, though, they’re the unsung heroes. That might strike you as strange because Uniqlo hails from Japan, while Lavinia comes from Italy. Only Blur is a native Chinese operation. But all three specialize in providing high quality at super reasonable prices.

It’s always fun for me to shop at Uniqlo, in particular, since my family and I shop there each year when we’re home in Kyoto. Just to be unique, I often pick up something for my wife and kids from China’s Uniqlo stores. The service is top notch and I can’t help but chuckle over the fact that I can buy several shirts for less than I would ordinarily pay for just one in Europe, or here in the United States.

Locals – like my friends Hao Jun and Hairong Zhao – tell me the situation is much the same among China’s yuppies, or “Chuppies,” as they’re now known.
“We’re still buying what we like, if we can afford it,” Hairong says.

And judging from the latest figures, which said China’s domestic consumption advanced at a mind-boggling 28% in 2008, there’s lots to like.

Depending on which studies you believe, Chuppies account for slightly more than 7% of the population. That doesn’t sound like much, but that puts the number of Chuppies at more than 100 million – every one of them with a middle class income, appetite and purchasing power that can be expected to grow.

Granted, China’s overall consumption is slowing and 2009’s domestic growth could slow to the mid-teens, but that’s still more than double what we’re likely to experience here in the United States, or in Europe.

For some, this slowdown is the end game. But others understand that this is just the beginning. I’m in that latter camp, having spent considerable time in the region over the past two decades – more than enough to watch several boom-and-bust cycles in both Japan, and China, and to understand how they work and what to look for.

“While it’s clear that Chuppies can’t replace a drop in Western consumerism [all] on their own,” said my good friend and noted China expert, Robert Hsu, “they’re still spending in many sectors – like education, for example. And the government is still spending on the infrastructure that enables financial growth.”

That’s a mantra I’ve spent years encouraging investors to take to heart, if for no other reason than there will be growth “because” of Chinese policy that’s not just limited to the growth taking place “in” China. And that, in turn, leads to some appealing investment opportunities – particularly now that the markets have beaten the share prices of so many superb companies down so significantly.

Assuming this strategy is correct, history suggests there are two potential ways to profit. Clearly the results won’t be immediate, nor will they be straight up – like the returns we saw a few years ago, during China’s earlier period of frenetic growth.

Nevertheless, the payoffs to come could well be the best we see for a generation or more.

First, savvy investors in sync with Chinese buying patterns can target companies that sell to Chuppies, like New Oriental Education & Technology Group Inc. (EDU), the Beijing-based provider of private-educational services, and YUM! Brands Inc. (YUM), the well-run global operator of the KFC, Pizza Hut and Taco Bell fast-foot-restaurant chains. Both companies are enjoying superb year-over-year sales growth in China – even in the face of worsening global economic conditions. [For Money Morning's recent report on Yum Brands' successes in China, please click here. The report is free of charge.]

Second, investors who believe that infrastructure is the way to go can easily choose from dozens of companies engaged in China’s great economic build-out, including choices related to rail, air and construction.

Third, still another choice is to invest directly in the Chinese Yuan (Renminbi). Not only is China’s currency continuing to appreciate and gather strength; it’s likely to emerge as one of the world’s most powerful currencies, once both the dollar and euro are eviscerated.

Undoubtedly, a good number of people reading this will take issue with my assessment. And I don’t blame them. On the surface, it appears that China may be all washed up.

However, at a time when our own economy is sliding into a deep, dark hole, China’s relentless march forward suggests that this Asian country not only has a more promising future; it will emerge as an important economic and political force to be reckoned with.

Not to mention a powerful investment opportunity.

[Editor's Note: With the U.S. financial markets in tatters from the global credit crisis, Money Morning and its affiliated monthly newsletter, The Money Map Report, have trained their profit-seeking sights on markets outside U.S. borders. Of all those markets, one dwarfs all the others put together. And that's China. As his intriguing and insightful columns on China demonstrate, Money Morning Investment Director Keith Fitz-Gerald has a network of contacts in China, Japan and other key markets that gives his readers advantages that other investors never enjoy. That makes Money Morning a "must read" each day. Our monthly newsletter, The Money Map Report, is even better. To get you to give it a try, we're willing to give you a free copy of investing icon Jim Rogers' best-seller, "A Bull in China" for subscribing. The book is filled with top-level investing intelligence on the top companies - and best stocks - in China. Check out our new report, which shows you how to get a free copy of this book. Just click here.]

News and Related Story Links:

• VirtualTourist.com:
  Wangfujing.
• Wikipedia:
  Tiananmen Square.
• CityWeekend.com (Beijing):
  Shin Kong Place.
• Beijingvisitor.com:
  Dawanglu.
• VirtualTourist.com:
  Xidan Market.
• International Herald Tribune:
  New Rules for Expats in China.
• U.S. News and World Report:Chuppies, China’s Yuppies.
• Money Morning Market Analysis:If You Want a Forecast for China’s Economy, Ask a Hairy Crab.
• Money Morning News Analysis:
  Massive China Stimulus is Viewed as an Attempt to Help the West.
• Money Morning Hot Stocks:
  Hot Stocks: Fast Food Restaurateur Yum! Brands Making China its Main Course

By Keith Fitz-Gerald
Editor, Geiger Index
Investment Director
Money Morning Investment News/The Money Map Report

Many investors have given up on oil, fearing that a fall from grace precludes a rise in price from the ashes. But it’s worth noting that the oil markets are right now in a rare state of  ’super contango,’ which suggests that the markets expect far higher prices by next year.

Here’s what you need to know.

In case you’re not familiar with the term, ‘contango‘ denotes a normal and very specific condition associated with futures contracts in which the price of oil for distant delivery months from now exceeds the price of oil being traded right now on the spot market. Typically, the price difference is related to the cost of storing and insuring the oil itself.

An example might help. On Tuesday, oil traded at $38.81 a barrel on the New York Mercantile Exchange (NYMEX) spot market. So if we bought a barrel and put it into storage for the next five months, and assumed that would cost us 90 cents per barrel per month, under normal market conditions, we’d expect the June crude oil contracts to be priced roughly at $43.31 ($38.81+ the cost of storage for five months = $43.31).

However, according to the New York Mercantile Exchange, June crude oil contracts settled at $52.14 on Tuesday, which represents a state of ’super contango’ – and an excess potential profit of $8.83 per barrel ($52.14 – $43.31 = Excess Potential Profit of $8.83). But only for traders who can buy oil now and store it until then.

There are obviously wrinkles, of course, depending on where the oil is stored and how it is priced for delivery. But, in general, the spreads we’re seeing now are at, or near, their highest levels since April 2004, when the government started collecting Cushing data. Cushing is the delivery point for all NYMEX futures.

Super contango is a rare situation that causes most traders to drool – myself included – because it signals an arbitrage opportunity that’s literally too good to pass up if you’ve got the means to capitalize on it.

But, as usual, there are all sorts of unanticipated consequences – including a phenomenon we don’t see very often – hoarding at sea.

Tanker rates are skyrocketing as companies literally top off very large crude carriers with the 2 million gallons they’re designed to carry – and then park them offshore until prices rise. In the meantime, they’re also selling the June futures and locking in profits above and beyond what it costs them to buy and store their stash of this ‘black gold.’

Of course, with every tanker that’s stuffed to the gills as a storage container, there’s fewer of the big boats in circulation. And that’s caused benchmark supertanker rental rates to rise more than 56% since Jan. 1. But the perceived profit potential is so high right now, that even investment banks, which are hardly in the market for super tanker rentals under normal circumstances, are getting into the game.

Sign up below… and we’ll send you a new investment report for free: “Credit Crisis Report.”

According to recent reports by Bloomberg News, Phibro LLC, the commodities trading arm for Citigroup Inc. (C), has booked two supertankers to hoard crude oil supplies. Phibro recently stationed the 1-million-barrel carrier ‘Ice Transporter’ off the coast of Scotland and the ‘Ashna’ waits patiently on the U.S. Gulf Coast. Assuming they capture the entire $8.83 a barrel in excess profits we cited in our example, that’s a cool $8.8 million in the bank, just from the Ice Transporter cargo alone.

Based on my experience, traders tend to run in packs, so it’s highly likely that all the usual suspects are involved including most notably Morgan Stanley (MS), which owns half of tanker group operator Heidmar Inc. and Goldman Sachs Group Inc. (GS), which executes commodities trades and structures related deals through J. Aron & Co.

As many as 80 million barrels of crude are being stored at sea around the globe, according to Frontline Ltd. (FRO), the world’s largest owner of supertankers. That’s nearly enough to supply the entire world’s demand for a day.

As for what caused the super contango, the most common and widely accepted argument is that falling global demand has caused a current glut in supply that will be rectified by production cuts by the Organization of Petroleum Exporting Countries (OPEC) later this year. That’s certainly plausible and there is no shortage of data to support this contention.

‘That’s really what they’re betting on,’ said Opportunities in Options‘ Paul Forchione, a veteran trader with 30 years in the commodities markets. ‘A significantly higher price for the deferred contract month in excess of storage and insurance costs typically means traders expect demand to grow in the future.’

In his experience, Forchione said that ‘this situation is hardly the panacea that everybody thinks it is because it’s hard to put a limit on how far out of whack prices can get.’

However, there’s also another plausible explanation that seems entirely likely, based on conversations I’ve had with traders, officials and company officers in the oil business all around the world.

Basically, the super contango we’re seeing now could suggest that future pricing is as much about the fear of supply interruption as it is about present demand dropping. And that’s entirely logical given the constant state of warfare in the Middle East, threatened production in Africa, an unsteady South America, and China, which is structuring oil-supply deals with rogue nations as fast as it can.

I know from having addressed crowds of investors all over the world that this seems impossible, but at a time when China and India, for instance, are doing everything they can to stave off a global recession, it’s certainly not inconceivable. Moreover, if this is even remotely true, as a growing trail of evidence suggests, then the present super contango could also imply that traders believe oil will be increasingly hard to find, refine and transport in the months ahead. That, too, suggests higher prices to come

Now for the million-dollar question: What can investors do about it?

The most obvious choice for investors who think prices will indeed be higher come next June is to buy any of the half dozen oil-related ETFs. That includes The United States Oil Fund LP (USO) or iPath S&P GSCI Crude Oil Total Return ETF (OIL).

The problem, of course, is that the spreads companies are counting on for profits could drop rapidly between now and then. This would force companies currently hoarding oil to begin dumping it, thereby reinforcing even lower prices going forward. There is also the possibility that OPEC production cuts never happen, or are ineffective, which would also point to lower prices.

History suggests that far safer bets include mid-process transportation companies like TeeKay Corp. (TK) or land-based alternatives like Kinder Morgan Energy Partners LP (KMP). Both pay healthy dividends that can help stave off a personal recession no matter what happens with oil prices. That’s always important in rough markets.

For futures-savvy investors, there’s an even more direct bet. Data shows that ‘mean reversions’ are particularly powerful phenomena when it comes to commodities, so the fact that spreads have risen to all-time highs suggests that it’s only a matter of time before they reverse. One way to potentially capture that would be to buy March futures while selling June futures.

Risk management is paramount, regardless of which path investors choose. Super contango sounds to good to be true and we all know the old adage: If it sounds too good to be true …

[Editor's Note: Money Morning Investment Director Keith Fitz-Gerald is the editor of the new "Geiger Index" trading service. As the whipsaw trading patterns investors have endured this year have shown, the ongoing global financial crisis has changed the investment game forever. Uncertainty is now the norm and that new reality alone has created a whole set of new rules that will help determine who profits and who loses. Investors who ignore this "New Reality" will struggle, and will find their financial forays to be frustrating and unrewarding. But investors who embrace this change will not only survive - they will thrive. With the Geiger Index, Fitz-Gerald has already isolated these new rules and has unlocked the key to what he refers to as "The Golden Age of Wealth Creation." The Geiger Index system allows Fitz-Gerald to predict the price movements of broad indexes, or of individual stocks, with a high degree of certainty. And it's particularly well suited to the kind of market we're all facing right now. Check out our latest report on these new rules, and on this new market environment.]

News and Related Story Links:

• Money Morning Outlook 2009 Economic Forecast Series:
  Why Crude Oil Will Present Investors with a Golden Opportunity in 2009.

• Money Morning News Analysis:
  Oil Prices Could be Ready to Rally if History is Any Indication

• Bloomberg:
  Frontline Says Ships Storing the Most Oil in 20 Years

• Bloomberg:
  Citigroup’s Phibro Hires Second Tanker to Store Crude Oil.

• Wikipedia:
  Contango.

• Wikipedia:
  Spot Market.

• Phibro.com:
  Corporate Web Site.

• Star Tribune:
  Oil consumption at the tipping point in U.S.?

By Keith Fitz-Gerald
Editor, Geiger Index
Investment Director
Money Morning Investment News/The Money Map Report

This is the time of year in which many investors really start to study corporate earnings, jobless statistics and all sorts of other state data in an effort to divine what’s next for China.

But I simply prefer to head for the Wan Chai Street Market in Hong Kong, or the Temple Street Night Market across the harbor in Kowloon, and check on hairy crab prices as we approach the Lunar New Year.

These delectable little guys are usually served steamed, with a splash of soy sauce. When China’s booming like it was in recent years, shoppers are hard-pressed to find a store that can keep them on the shelves. And at 720RMB, or $420HK (about $60 U.S.), that’s no small feat for a palm-sized morsel. They’re expensive, and taste great.

A hairy crab, if you’ve never seen one, is usually a bit smaller than the Dungeness crabs many Americans are more familiar with. These freshwater crustaceans start to fatten as soon as the autumn chill cools the Yangtze River Delta. That adds to their taste and desirability.

When China’s feeling pinched, hairy crab sales drop and prices plummet. At the moment, hairy crab prices are off by more than 80%, which is a steeper drop than during the Asian Financial Crisis a decade ago, or during the SARS epidemic in 2003. After the best sales in history last year, that’s significant because of what falling hairy crab sales imply about the state of China’s economy at a time when it is struggling to stave off the effects of a global recession and growth may drop to the slowest pace China’s seen in nearly a decade.

Since hairy crabs are a luxury both in the home and at restaurants, the falling prices suggest that people are “eating cheaper.” Rather than ordering up haute cuisine – including hairy crabs – at such restaurants as Cuisine Cuisine in the International Financial Centre (IFC) Tower, or the famous Jumbo Floating Restaurant in Hong Kong Harbor, most Chinese are eating “cheap” and seem to prefer smaller, more modest places these days.

They’re also apparently “shopping cheap,” too. Call it a Chinese version of the “Wal-Mart Effect” (WM), but that’s what’s happening as savvy Chinese consumers downshift. They’re still spending – as reflected by Chinese retail sales figures, which suggest year-over-year growth of 21% in 2008 – but they’re spending differently.

Nowhere is this change more evident than in those stores where luxury items are sold. Shanghai and Hong Kong store managers I’ve spoken with recently told me privately that such big-ticket brand names as Dior, Chanel, Hermes and others aren’t moving as fast as they were a year ago.

Knock-offs, of course, are still flying off the shelves.

On a related note, many Chinese merchants are actually refusing to take credit cards these days, at least from Chinese consumers. Don’t think for a minute this is limited to convenience store items, either. Big-ticket items like tours and holiday excursions that have long been paid for on credit are now cash or check only as many travel companies – like Hong Kong’s Sincere International Travel Service Co. Ltd. – look to avoid getting caught short.

Many merchants say that banks are hoarding cash and delaying payments on personal credit cards. While no banks would comment officially in response to my inquiries, it’s clear that Chinese lenders are dumping riskier credit-card holders just like their Western banking brethren. Only faster.

Unlike their Western cousins, for whom credit has been a bonanza, Chinese banks have only relatively recently gotten into the credit game after being so cash-centric that the rest of the world’s bankers viewed China’s lenders as antiquated. But now that generation of cautiousness is paying off.

Chinese banks are apparently also going the extra mile to ensure they don’t get burned. Lenders are making credit-card transactions as unattractive as possible for the merchants who process the charge slips and they’re doing so by using the most effective tool of all – delayed payments.

Sign up below… and we’ll send you a new investment report for free: “Credit Crisis Report.”

Only a year ago, most banks paid credit-card transactions in 14 days. But now, according to reports by CNN and other news outlets, it’s not uncommon for a merchant to have to wait 20, 40 or even 90 days to get paid. And that obviously affects cash flow at a time when luxury businesses in China are already under pressure.

This all speaks to something we at Money Morning have talked about repeatedly over the past 12 months: Investing in China is not about luxury as so many investors have mistakenly thought. It’s about the basics. To be sure, luxury items and top-shelf brands have enjoyed a heyday in China that coincides with the dramatic growth spurt the country has experienced in recent years. But luxury brands are hardly the key to steady growth and profits over the long term.

That mantle, instead, belongs to much more basic industries, such as power-generation, railway-and-infrastructure construction, water filtration, and pollution control. All will benefit substantially from China’s $583 billion stimulus package, which is designed to fuel growth that not only benefits the economy, but also staves off social unrest, which is what Beijing’s power elite fears the most. To China’s Politburo, running out of power is a far more significant risk than running out of Gucci.

So for investors who are interested in grabbing the best that the Red Dragon offers while avoiding the risks there, hairy crabs are yet another harbinger of where and how to invest in China in 2009.

[Editor’s Note: Money Morning Investment Director Keith Fitz-Gerald will be personally leading our 7th annual Chinese investment tour this April and invites anybody who wants to sample hairy crabs to join him. It’s a great way to see firsthand how and why China is critical to the global economic recovery and to our individual investing futures – not to mention that it’s also a great opportunity to sample some truly spectacular food. Please click here to learn more.
Fitz-Gerald is also the editor of the new “Geiger Index” trading service.As the whipsaw trading patterns investors have endured this year have shown, the ongoing global financial crisis has changed the investment game forever. Uncertainty is now the norm and that new reality alone has created a whole set of new rules that will help determine who profits and who loses. Investors who ignore this "New Reality" will struggle, and will find their financial forays to be frustrating and unrewarding. But investors who embrace this change will not only survive - they will thrive. With the Geiger Index, Fitz-Gerald has already isolated these new rules and has unlocked the key to what he refers to as "The Golden Age of Wealth Creation." The Geiger Index system allows Fitz-Gerald to predict the price movements of broad indexes, or of individual stocks, with a high degree of certainty. And it's particularly well suited to the kind of market we're all facing right now. Check out our latest report on these new rules, and on this new market environment.]

News and Related Story Links:

• 12HK.com (The Unofficial Guide to Hong Kong):
  Wan Chai Street Market.
• Hong Kong Voyage:
  Temple Street Night Market.
• Money Morning News Analysis:
  Massive China Stimulus is Viewed as an Attempt to Help the West.
• SFGate.com (The San Francisco Chronicle):
  It’s a Hairy Crab Extravaganza.
•  Wikipedia:
  Asian Financial Crisis.
• TripAdvisor.com:
  Cuisine Cuisine Restaurant.
• Wikipedia:
  The Politburo of the Communist Party of China.
• Money Morning Outlook 2009 Series:
  China’s Red Dragon Turns Financial Crisis into Opportunity.
• Money Morning Buy, Sell or Hold Series:
  Buy, Sell or Hold: For a Defensive Stock, Wal-Mart Plays a Great Offense.

By Keith Fitz-Gerald
Editor, Geiger Index
Investment Director
Money Morning Investment News/The Money Map Report

Judging from recent reports that JP Morgan Chase & Co. (JPM) Chief Executive Jamie Dimon and Citigroup Inc. (C) board member Robert W. Rubin will forgo bonuses this year, it appears that at least some U.S. executives are starting to change their habits, as we’ve long suggested they should.

Just yesterday (Monday), in fact, U.S. heavy-equipment giant Caterpillar Inc. (CAT) announced it was cutting executive compensation by as much as 50%, because of weakening global demand.

But let’s be very clear: U.S. corporate leaders still have a long way to go, and many lessons to learn.

In fact, American executives could learn a thing or two from some of their counterparts abroad. Just look at Haruka Nishimatsu, CEO of Japan Airlines Corp for example (OTC ADR: JALSY).

Each morning, Nishimatsu gets down to business immediately after his morning commute to the office – on a city bus.

His desk – like those of all the other Japan Airlines employees – sits in the middle of an “open office.” I know this from personal experience, having sat at a desk just like that when I’ve worked in Japan over the years. He eats lunch in the company cafeteria and hopes – like all Japanese employees – that he’ll have time to eat his meal before it gets cold as he stands in line waiting to pay, says CNN’s Kyung Lah.

This hardly sounds like the life of a corporate CEO, especially when you consider that JAL is one of the world’s top airlines. Nor does the fact that when JAL cut back and asked many of its employees to take early retirement, Nishimatsu first eliminated every one of his own corporate perks, including his own pay – which, at a mere $90,000 (U.S.), is below what JAL’s pilots get paid.

Nishimatsu noted in the CNN interview that many of the affected employees were about his age, 60, so he “thought he should share the pain with them.”

Obviously, that’s very different than in the United States, where top executives regularly make tens of millions of dollars a year, and where some compensation packages actually eclipse the hundred-million-dollar threshold. And some of the top earners are the very same executives who “managed” their companies into financial oblivion – and who took their trusting shareholders along for the ride.

Sign up below… and we’ll send you a new investment report for free: “Credit Crisis Report.”

If you want to see the latest example, just watch the parade of corporate-jet-riding, custom-suit-wearing corporate “beggars” that have been appearing (hat in hand) before the House Financial Services committee lately and you’ll see what I mean.

The pay gap between the boardroom and the factory floor – already a longtime topic of controversy here in the United States – has widened to the point that it’s become absolutely staggering. According to a survey conducted by the non-profit group, United for a Fair Economy, CEOs of large corporations made an average of $10.5 million in 2007, which is 344 times the wages of the average U.S. worker. The Economic Policy Institute puts it at only 275 times higher, which is still outrageous when you consider that the average working stiff won’t see in his lifetime what these guys have made in a year lately [To see how that disparity has grown over the past four decades, look at the accompanying chart, “Leaders vs. Workers”].

Capital One Financial Corp. (COF) CEO Richard D. Fairbank took home a cool $73.1 million last year, which is 1,456 times the median household income of $50,233 for taxpayers footing Capital One’s $3.55 billion bailout, according to The Corporate Library.

In Japan – and throughout much of Asia, for that matter – there’s a much more balanced approach, with CEOs more commonly making only 10 times to 15 times more than their base level employees.
“Businesses that pursue money first fail,” Yoshichika Terasawa, a Singapore-based managing director for the Japan External Trade Organization (JETRO) told me when we spoke at his home in that Southeast Asia city-state earlier this year. “Companies that have their employees in mind tend to do better longer and recover faster. We learned that in Japan during our own bubble economy.”

The numbers seem to bear out Terasawa’s assertion. According to a USA Today study, the 10 best-paid CEOs made more than half a billion dollars collectively. Yet, half the members of this stratospheric club were actually heading companies whose profits shrank dramatically.
The poster boy for this club could well be General Motors Corp. (GM) CEO G. Richard “Rick” Wagoner Jr., who closed four plants and posted a $39 billion loss in 2007, a period in which his company’s stock cratered 19%. But in the face of this financial mess, Wagoner’s compensation jumped 64% to reach $15.7 million.And GM apparently had a little something set aside; after all, Wagoner was able to take a corporate jet to Washington to plead for a taxpayer-funded bailout [For a breakdown on the top-earning CEOs of 2007, take a look at the accompanying graphic, “Top of the Charts.”]
.

The numbers, when they’re in for 2008 will probably be more egregious.
JAL’s Nishimatsu clearly understands what his U.S. corporate brethren do not. As the global economy has worsened in recent months, the Japanese executive recounted how he’s dug into his savings like the rest of us have had to, in order to deal with life’s challenges.
“The air conditioner broke, the water heater … and my car,” Nishimatsu said. “My wife is still telling me this is all your fault.”
We can certainly sympathize with him. But clearly, he can sympathize with us. Making the effort to relate to what employees and customers are feeling during such a difficult stretch is very important: It fosters pride in the work force, loyalty from customers and in long long-run, will also win over investors. My guess is that we’ll all be the most sympathetic and supportive of companies led by CEOs like Nishimatsu.
And that might be just what’s needed to get out of this mess. [For additional coverage of the executive compensation controversy, check out this related story in today’s issue of Money Morning that details how the 116 banks that are receiving billions in taxpayer-provided bailout money this year actually paid out $1.6 billion in compensation and benefits to their top executives last year].

[Editor’s Note: The ongoing financial crisis has changed the investing game forever, making uncertainty the norm and creating a whole set of new rules that will help determine who wins and who loses. Investors who ignore this “New Reality” will struggle, and will find their financial forays to be frustrating and unrewarding. But investors who embrace this change will not only survive – they will thrive.
Money Morning Investment Director Keith Fitz-Gerald has already isolated these new rules and has unlocked the key to what he refers to as “The Golden Age of Wealth Creation.” But Fitz-Gerald brings more than a realization – and an understanding – to the table, here. After a decade of work, he’s also developed a new computerized trading model based on a mathematical concept known as “fractals.” This system allows him to predict price movements of broad indexes, or individual stocks, with a high degree of certainty. And it’s particularly well suited to the kind of market we’re all facing right now. Check out our latest report on these new rules, and this new market environment.]

News and Related Story Links:

• Reuters:
  JPMorgan CEO Dimon to decline a bonus – source.
• United for a Fair Economy:
  CEO Pay.
• Economic Policy Institute:
  Executive Summary, “The State of Working America: 2008” – See “Wages” Section for Details on CEO Pay Disparity.
• Money Morning Special Report:
  The Lost Decade: How the U.S. Financial Crisis Resembles Japan’s Ten Years of Misery – And How to Play it.
• Japan External Trade Organization:
  Web Site.

• Money Morning Exclusive Jim Rogers Interview From Singapore (Part I):
  Jim Rogers: More Pain for the Greenback, and the Failure of the Federal Reserve.

• Money Morning Exclusive Interview From Singapore (Part II):
  Jim Rogers: China’s Economic Advance is All But Unstoppable

• Money Morning News Analysis:That $25 Billion in Loans America’s “Big Three” Automakers Had Sought … It’s Now $34 Billion.
• Yahoo! Finance:
  Caterpillar scales back executive pay in 2009.
• The Corporate Library:
  Web Site.
• Yahoo! Finance Ticker Symbols:
  JP Morgan (JPM); Citigroup (C); Caterpillar (CAT); Japan Airlines (OTC ADR: JALSY); General Motors (GM); Capital One Financial (COF).