U.S. stocks were set for a mixed open on Wednesday, which ends one of Wall Street’s worst years and raises hopes that a new year and fresh policy initiatives will stave off a deepening recession.

The Federal Reserve on Tuesday pushed forward with its effort to drive down mortgage costs, setting a target of buying $500 billion in mortgage-backed securities by mid-2009.

The move could bolster optimism as investors have been heartened by signs that the Fed is fighting aggressively to cushion the downturn, including dropping interest rates to near zero.

“Things haven’t improved but at least the Fed has stopped things from appreciably worsening,” said Barry Ritholtz, chief market strategist at Fusion IQ in New York.

“Clearly most investors this year were not prepared for what happened and I think there’s a sigh of relief from those that were blindsided that the year is finally over.”

The number of workers filing new claims for jobless benefits fell much more than expected to 492,000, but seasonal factors likely contributed to the drop and the labor market remains very soft.

S&P 500 futures rose 3.40 points and were above fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones industrial average futures climbed 14 points, while Nasdaq 100 futures were off 3.25 points.

The broad S&P 500 looks set to end 2008 down about 40 percent for the year, though it has recovered almost 18 percent since hitting an 11-year low on Nov. 20.

Markets around the world have been pummeled as the collapse of the U.S. housing market evolved into a global credit crunch and economic slowdown which infected everything from financials to automakers to retailers.

The U.S. casualties include the bankruptcy, acquisition or government takeover of such household names as Bear Stearns, American International Group , Washington Mutual, Merrill Lynch and Lehman Brothers.

AIG, which was rescued by the government soon after the collapse of Lehman, is prepared to ask the Federal Reserve to relax rules on its more than $60 billion disposals program to allow bidders to use a greater proportion of shares to pay for its assets, the Financial Times reported.

On the housing front, demand for U.S. mortgage applications was unchanged during the Christmas holiday week, holding the highest levels in more than five years with loan rates near record lows, an industry group said on Wednesday.

Bernard Madoff, alleged to have run a decades-long $50 billion Ponzi scheme, faces a Wednesday deadline to tell regulators how much he is worth and where his money and other assets are.

The Madoff scandal, which came to light earlier this month, has added to already negative sentiment in the markets. Scores of wealthy people, banks, universities and charities around the world say they are victims, but so far the exact amount of money lost is not known in what could be the largest fraud in Wall Street history.

On Tuesday, stocks climbed after the government expanded its bailout of the auto industry, encouraging hopes policy-makers will continue to take steps to minimize the severity of the year-long recession.

NEW YORK, Dec 31 (Reuters)

Oil fell towards $45 a barrel on Friday, after the collapse of a $14 billion rescue for U.S. automakers caused heavy losses across global financial markets and Goldman Sachs predicted oil could fall to $30 a barrel.

U.S. crude oil for January delivery was down $2.95 at $45.03 a barrel by 1119 GMT.

Prices rallied more than $4 on Thursday to a session high of $49.12 a barrel before dropping back in late trading.

Oil sank to $40.50 last Friday, its lowest in 4 years.

London Brent crude was down $2.98 at $44.41.

The plight of the big U.S. auto firms, including General Motors Corp and Chrysler, illustrates the severity of the global economic downturn that has hit demand for oil.

“The collapse in world oil demand in the fourth quarter of 2008 as the global credit crunch intensified, now threatens to push oil prices below $40 a barrel in the near term,” Goldman Sachs said in a research note.

“The impact of the global economic recession has swung the oil market from pricing demand destruction in 2008 to pricing supply destruction in 2009.”

The U.S. investment bank, which earlier this year had predicted $200 per barrel oil, virtually halved its 2009 price forecast for U.S. crude to $45 and said the price could fall to $30 in the short term.

Goldman analyst Arjun Murti, who predicted a super-spike in oil to $100 in 2005, said prices would hit a trough in the first quarter.

The bank said a cut of an extra 2 million barrels per day was needed from OPEC, which meets next on Dec. 17 in Algeria.

French bank BNP Paribas cut its 2009 price forecast to $53 a barrel from $75 previously.

Crude has shed two-thirds of its value over the last five months, down about $100 from a record of $147.27 in July.

It rebounded more 10 percent on Thursday in anticipation of a big supply cut from the Organization of the Petroleum Exporting Countries.

OPEC’s President Chakib Khelil has called for more “severe” supply cuts at next week’s meeting.

Russia’s President Dmitry Medvedev has also weighed in, saying the country was ready to work with OPEC on possible oil output cuts.

Japan’s Nippon Oil said it expected OPEC to agree to cut 1.5-2.0 million bpd next week.

“Chances for a 2.5 mln bpd cut are possible, but that would put increased criticism on OPEC amidst the economic slowdown, so I think the likely cuts are up to 2 mln bpd,” Kazuyoshi Takayama, Nippon Oil’s general manager, told reporters on Friday.

Jane Merriman, Jennifer Tan, Osamu Tsukimori
LONDON, Dec 12 (Reuters)

Oil prices steadied on Friday, after falling more than 7 percent the day before, as stock markets recovered from early lows caused by continuing economic gloom.

U.S. crude fell 13 cents to $49.29 a barrel at 12:08 p.m. EST (1708 GMT), after earlier hitting $48.25, its lowest level in three and a half years. London Brent crude gained 53 cents to $48.61 a barrel.

U.S. stocks recovered slightly after falling into negative territory on Friday as shares of financials, including Citigroup , declined and investors worried about the deepening economic slump.

Slumping demand in the United States and other top oil consuming nations has sent crude prices plunging from record highs above $147 a barrel in mid-July.

On Thursday, oil fell more than 7 percent on gloomy economic data, to settle at its lowest since May 2005.

“Obviously, we are reluctant to call a bottom to this dramatic price decline that is now approaching 4-1/2 months. The attachment between the oil and stock markets will likely remain valid, at least through month’s end,” said Jim Ritterbusch, president of Ritterbusch & Associates in Galena, Illinois.

JP Morgan said on Friday it expected world oil demand in 2009 to decline by 500,000 barrels per day as the global credit crunch continues to rack the world economy.

Members of the Organization of the Petroleum Exporting Countries will meet in Cairo next week, but may not take any decision to reduce output to defend prices.

“In Cairo we will not have the complete data about the market,” OPEC President Chakib Khelil said. “It’s very possible that we will not take a decision until we will see the impact. This impact will not likely be seen until December.”

OPEC will meet on Dec. 17 in Oran, Algeria.

Industry consultant Petrologistics estimated OPEC oil production will fall by 1.22 million barrels per day in November.

OPEC agreed in October to cut output by 1.5 million barrels per day from Nov. 1, but the move has failed to stem the decline in oil prices.

One of Obama’s prime campaign planks has been his promise to mercilessly raise taxes on the “rich,” a group initially defined as those making more than $250,000 per year. This was later dropped to $200,000 per year, and more recently has been defined as those Americans making more than $150,000 annually.

Setting aside the precipitous downward slide in the definition of “rich,” there is ample reason to suspect that Obama’s tax changes portend much higher, if not confiscatory, taxes on the most productive Americans. Obama has strongly argued for higher taxes as a way of employing government to alter the pre-tax distribution of income, which he believes has concentrated too much of the gains from productivity in recent years in the hands of the very rich.

He seems to think that the “very rich” are a closed caste of more or less fixed membership, which changes little from year-to-year. This figures in his concept of “fairness,” which supposes that it is perfectly just to burden a small fraction of the population with a majority of the costs of running the Federal government. This was detailed in a New York Times article on “spreading the wealth” by David Leonhardt. He wrote of Obama:

“He would then pay for the cuts, at least in part, by raising taxes on the affluent to a point where they would eventually be slightly higher than they were under Clinton. For these upper-income families, the Tax Policy Center’s comparisons with McCain are even starker. McCain, by continuing the basic thrust of Bush’s tax policies and adding a few new wrinkles, would cut taxes for the top 0.1 percent of earners – those making an average of $9.1 million – by another $190,000 a year, on top of the Bush reductions. Obama would raise taxes on this top 0.1 percent by an average of $800,000 a year. ‘It’s hard not to look at that figure and be a little stunned. It would represent a huge tax increase on the wealthy families. But it’s also worth putting the number in some context. The bulk of Obama’s tax increases on the wealthy – about $500,000 of that $800,000 – would simply take away Bush’s tax cuts. The remaining $300,000 wouldn’t nearly reverse their pretax income gains in recent years. Since the mid-1990s, their inflation-adjusted pretax income has roughly doubled.’

“To put it another way, the wealthy have done so well over the past few decades, with their incomes soaring and tax rates plummeting, that Obama’s plan would not come close to erasing their gains. The same would be true of households making a few hundred thousand dollars a year (who have gotten smaller raises than the very rich but would also face smaller tax increases). As ambitious as Obama’s proposals might be, they would still leave the gap between the rich and everyone else far wider than it burdensome on the young entrepreneur who was making his first millions as it would on the aging plutocrat who actually had enjoyed the prosperity of the past-quarter century since Reagan cut marginal tax rates.”

An October 13 editorial in The Wall Street Journal clarifies the mysterious arithmetic of Obama’s sweeping claims to cut income taxes for millions who currently have no income tax liability and pay no taxes:

“For the Obama Democrats, a tax cut is no longer letting you keep more of what you earn. In their lexicon, a tax cut includes tens of billions of dollars in government handouts that are disguised by the phrase ‘tax credit.’ Mr. Obama is proposing to create or expand no fewer than seven such credits for individuals:

“- A $500 tax credit ($1,000 a couple) to ‘make work pay’ that phases out at income of $75,000 for individuals and $150,000 per couple.

“- A $4,000 tax credit for college tuition.

“- A 10% mortgage interest tax credit (on top of the existing mortgage interest deduction and other housing subsidies).

“- A ’savings’ tax credit of 50% up to $1,000.

“- An expansion of the earned-income tax credit that would allow single workers to receive as much as $555 a year, up from $175 now, and give these workers up to $1,110 if they are paying child support.

“- A child care credit of 50% up to $6,000 of expenses a year.

“- A ‘clean car’ tax credit of up to $7,000 on the purchase of certain vehicles.

“Here’s the political catch. All but the clean car credit would be ‘refundable,’ which is Washington-speak for the fact that you can receive these checks even if you have no income-tax liability. In other words, they are an income transfer – a federal check – from taxpayers to nontaxpayers. Once upon a time we called this ‘welfare,’ or in George McGovern’s 1972 campaign a ‘Demogrant.’ Mr. Obama’s genius is to call it a tax cut.

“The Tax Foundation estimates that under the Obama plan 63 million Americans, or 44% of all tax filers, would have no income tax liability and most of those would get a check from the IRS each year. The Heritage Foundation’s Center for Data Analysis estimates that by 2011, under the Obama plan, an additional 10 million filers would pay zero taxes while cashing checks from the IRS.

“The total annual expenditures on refundable ‘tax credits’ would rise over the next 10 years by $647 billion to $1.054 trillion, according to the Tax Policy Center. This means that the tax-credit welfare state would soon cost four times actual cash welfare. By redefining such income payments as ‘tax credits,’ the Obama campaign also redefines them away as a tax share of GDP. Presto, the federal tax burden looks much smaller than it really is.”

After all the sloppy definitions are parsed, one point remains clear. The top 5% of U.S. income earners, who presently pay 60.14% (2006 figures) of all income tax, are destined for a huge federal tax increase under Obama.

One of Obama’s specific proposals is to raise the capital gains and dividend taxes to 25%, which will sharply increase capital confiscation as increasing percentages of “gains” will reflect inflationary depreciation of the currency. In the U.S., an investor must pay tax on the difference between the sales price of an asset and it purchase price, with no adjustment for inflation. Consequently, when the tax rate and inflation are high, a large portion of the “capital gain” is illusory. Any asset that appreciates by less than the rate of inflation will result in its owner losing purchasing power and having to pay taxes on the illusory gains. At Obama’s higher tax rates, (he has suggested that capital gains and dividend taxes should be hiked to as much as 25%,) capital confiscation would result from modest levels of inflation.

And the Great Credit Crunch implies that inflation will be far higher than in recent experience.

Setting aside whether it is moral or equitable to force a small fraction of the population to essentially pay for the whole cost of government, much of which entails the shuffling of checks to purchase votes of various aggrieved groups, there is a bigger question. Can it be wise for the whole fiscal regime to stand on the shoulders of a small group, like a pyramid tottering on its point, so that any tribulation which undermines the prosperity of those who pay would promise to bankrupt the state?

It is a worthwhile question to ask if you have considerable assets. In light of the worldwide credit crunch, which has deflated assets of all kinds, the prospect of burgeoning prosperity at the magnitude required to enable one-in-20 Americans to become “Super Rich” benefactors of Big Government is vanishingly small. There won’t be enough rich people to fill the role assigned to them in Obama’s scheme. The result to be expected, in addition to confiscatory taxation, is a dramatic shortfall of revenues. This, in turn, implies surging deficits and deficit financing requirements that will rapidly swamp the capacity of the Treasury to borrow.

Source: Playing the Tax Credit Card

“As recently as a month ago,” says Justice Litle in Taipan Daily, “Erin Callan was on top of the world.”

The WSJ did a glowing piece on her rise through the ranks. Condé Nast’s Portfolio magazine dubbed her the most powerful woman on Wall Street.

If you don’t recognize the name — and don’t worry, most won’t — Erin Callan is the chief financial officer of Lehman Brothers (LEH:NYSE).

Or was the CFO, rather, because Ms. Callan holds that title no more. She was ousted this morning, along with chief operating officer Joseph Gregory, as a result of Lehman’s nearly $3 billion loss. Someone had to take the fall. She and Mr. Gregory were offered up to the volcano.

Ten days or so ago, Taipan Daily tagged Lehman Brothers as a downside bellwether. (You can read it here.) Watch LEH and watch the Philly Bank index, we said. Now they are both in the tank — and the markets are, too.

“On Wall Street, after Bear Stearns fainted, the other financial firms took smelling salts,” says Bill Bonner in The Daily Reckoning.

But some of them are beginning to look a little woozy, nevertheless. Lehman Bros. is said to be looking for $3 to $4 billion in new capital. The company has nine times as much in level 2 and level 3 assets as it has in tangible equity. And it’s not the worst. Merrill Lynch’s level 2 and level 3 assets equal 2,565% of its tangible equity.

And dear readers, be aware: “There’s another Bear Stearns out there,” say our friends over at The Motley Fool. “You may already own it. And just as with Bear Stearns, chances are you won’t see the collapse coming until it’s too late.”

Colleague Dan Amoss, over at Strategic Short Report, has pinpointed the next Bear Stearns – and warns that there is another credit crisis ready to jam the pipeline.

“Right now,” he tells us, “this company is desperately scrambling to dump more of its weak, illiquid assets…while laying off employees by the thousands…in a desperate bid to ‘fix’ its Wall Street profile, keep its ’shameful secret’ under wraps, and protect its stock.”

But that won’t work, Dan continues. “Buried deep in this firm’s mysterious ‘Level 3′ assets, where banks have regularly hid their riskiest mortgage-backed securities, this one company already has one very large multibillion-dollar real-estate-based asset that – just by itself – could be worth nearly 30% less than it was when this firm bought it.

“When this firm is forced to beef up earnings by selling this one asset, you’re already looking at billions in write-down losses right there. And that’s just where the unraveling begins.”

“Don’t buy shares of financial service companies with ‘Level 3′ assets of more than their capital,” says Martin Hutchinson in Money Morning.

That’s all the “Big Four” investment banks including Goldman Sachs, Merrill Lynch & Co. Inc. (MER), Morgan Stanley (MS) and Lehman Bros. Holdings Inc. (LEH), and most of the big commercial banks, too. Those Level 3 assets are probably worth very little in a real downturn, because there is no market for the assets and everybody else will be trying to sell them too.

Jennifer Yousfi in Money Morning gives some background and examines strategies for recession proof investing:

U.S. Federal Reserve policymakers cut the benchmark interest rate by less-than-expected three-quarters of a percentage point at their last meeting, a move that was designed to energize a badly flagging economy without causing inflation to spike or exacerbating the greenback’s decline.

When central bank policymakers reduced the key Federal Funds rate from 3% to 2.25% on March 18, it was the sixth time in seven months the closely watched benchmark had been reduced. Many analysts had been expecting a reduction of a percentage point – or even more – as such recent events as the near-collapse and subsequent Fed-led bailout of U.S. investment bank The Bear Stearns Cos. Inc. (BSC) stoked fears that the U.S. financial system was ready to seize up.

The policymaking Federal Open Market Committee (FOMC) has now cut the Fed Funds rate six times and slashed the Discount Rate for direct loans to banks eight times since August, when the subprime mortgage market collapsed and created a global credit crisis.

While the FOMC made it clear that inflation has grown as a concern, it still says that economic worries remain the biggest problem and emphasized that it was ready to act again if need be.

“Today’s policy action, combined with those taken earlier, including measures to bolster market liquidity, should help to promote moderate growth over time and to mitigate the risks to economic activity,” the FOMC said in its March 18th statement. “However, downside risks to growth remain. The committee will act in a timely manner as need to promote sustainable economic growth and price stability.”

But while the Fed is definitely looking to do what it can to avoid a contraction in the U.S. economy, central bank Chairman Ben S. Bernanke faces a second – equally troubling – challenge. And no matter which route he chooses to take, the solution to one problem will exacerbate the second.

For that reason alone, the Fed has demonstrated some caution with regards to interest-rate reductions.

During the 1970s, the United States was afflicted with stagflation – crippling inflation coupled with stagnant economic growth and high unemployment. Until stagflation appeared, economists believed it to be an almost-impossible combination. Today, investors of a certain age remember the high fuel costs and long gas lines – along with the headlines about rising unemployment and a stalled U.S. economy that refused to be jump-started.

Read on here for Jennifer’s downturn strategy: the best investments in a recession.

As the impact of the global credit crunch rumbles on, we’re seeing a very interesting divergence in the performance of the Asian economies. The countries that are still bound to the American eagle are heading for the doldrums. But the ones that have chained themselves to the Chinese dragon are roaring ahead.

You see, despite all the babble about a global economic slowdown, China is still booming. Its economy grew by a white-hot 10.6% in the first quarter of this year. And that’s despite all the efforts of the Beijing government to slow things down…

So, the commodity-rich Asian countries that supply China’s industrial machine, like Malaysia, Indonesia and Thailand, are surviving the global economic downturn well enough. In fact, they’re seeing exports boom…

But not every Asian country is benefiting. The Asian countries that rely on electronics shipments for the bulk of their exports, like Singapore and the Philippines, are being hit by the US slowdown.
The numbers say it all

Just look at the figures. This week, Malaysia announced a 21% jump in exports in April from a year earlier. What are they selling to the rest of the world? Let’s see…palm oil exports are up by 71%, crude oil exports by 53% and exports of natural gas by 26%. Electronic-component exports were up by just 12.5%. The electronics industry used to be the crown jewel of Malaysia’s export industry. And most of those components used to go to the U.S. We’re seeing a massive shift in the centre of economic gravity here.

Same thing in Thailand. The country’s exports jumped 28% from a year earlier. And a good part of that comes down to the soaring prices of rice and other agricultural products.

Indonesia’s monthly exports have just hit a new record of $11.9 billion in March, as well. No prizes for guessing what they’ve been selling…crude palm oil (Indonesia is the world’s biggest producer), natural gas, timber, coal…

Indonesia’s coal story is something that I’ve written about recently. Coal is the new gold. And Indonesia has some of the most exciting coal companies on the planet. We’re watching that situation very carefully…looking for a chance to get in…

And then India has reported a 32% rise in exports… The gist of this story is that if you’ve got what China needs right now, you’re in the money.

And The Dragon isn’t just dragging along a bunch of small Third World economies either. Even developed economies like Japan are getting a boost from China’s rise. The Japanese have sold so much industrial machinery and parts to China that their economy grew by 3.3% in the first three months of this year from the year before.

But here is the bit that really excites me: what China is doing for Asia, it’s now doing for Africa as well. It’s locking the Dark Continent into its economic orbit. And Profit Hunter readers have bought into this boom right on the ground floor.

From basket-case to oil exporter…

It has already invested $30 billion in Africa’s oil and gas industry. And most of that has gone to places that most Western investors would never have touched: Sudan, Chad, Equatorial Guinea, Angola, Nigeria….

Now it plans on investing $5 billion in the West African country of Niger. This is one of the poorest countries on earth. It ranks in the bottom five on the United Nations’ human development index. And the country is battling an insurgency by the magnificently blue-cloaked, be-turbaned, camel-riding Tuareg nomads in the north of the country. But the Chinese don’t seem remotely concerned. They plan to pump the country’s first barrel of oil next year. And to get it out of the country, they are going build a 2000-kilometre oil pipeline and a refinery with a capacity of 20,000 barrels a day.

Here’s another country about to become an economic annexe of the Middle Kingdom…

The new king of the African oil patch

While we’re on the African oil industry, here’s a bit of very interesting news. Angola has now dethroned Nigeria as Africa’s biggest oil producer. Nigeria has held the top spot for decades. But militant attacks in the oil rich Niger Delta and worker strikes have undermined the country’s oil industry. In April, Angola produced 1.87 million barrels of oil per day. Nigeria produced 1.81 million barrels.

We aren’t in Nigeria. But our brilliant African play puts us in the thick of Angola’s booming economy. It owns airlines in the region and is setting-up a massive logistics centre in the country’s capital, Luanda.

Source: China Invests Billions In Africa And We’re Set To Book a Massive Profit

The report predicts that UK house prices will crash by 10% by 2010 and that, with consumer spending slowing, the Bank of England will eventually need to cut interest rates by three-quarters of a percentage point to 4.25% next year.

Ben Traynor in The Daily Reckoning explains how a house price crash in the UK will affect the country’s economy…

It never rains, it pours. Hot on the heels of the Bradford and Bingley saga, we wake up today to the news that mortgage lending has hit a record low.

Just 58,000 loans were made last month. That compares with 64,000 in March and 113,000 in April 2007. House prices will keep falling. But they’ll take their time — the market is drying up, with many would-be sellers pulling out of deals rather than dropping their prices.

It’s like a massive staring contest between buyers and sellers. Who will blink first? My money’s on the sellers — once they realise prices aren’t recovering any time soon, they’ll bite the bullet and drop them. Just a little bit… Then a little bit more…

So what’s the upshot for the housing market? A ‘soft landing’ or a short, sharp shock? And what about the economy?

Let’s start with housing. Fundamentally, houses are too expensive. But it’s hard to say how far and how fast they’re going to fall.

It all comes down to affordability. In theory, it should be easy to calculate the ‘correct’ level for house prices. How much do people earn, and what multiple of that can they affordably borrow? Run the numbers, and you get an idea of where house prices ‘should’ be.

But here’s where it gets tricky. We can get wage data pretty easily. But many would-be buyers have other capital to draw on. First-time buyers regularly rely on borrowing from parents, for example.

And besides, many current homeowners have demonstrated they’re all too willing to buy at a price considerably above what they can afford. Who’s to say the rest have learned from their mistakes?

Both of these factors make it hard to say exactly how far house prices need to fall to be ‘affordable’. But the good news, from our perspective, is that it doesn’t really matter. We’re confident we know which way they’re going, and that tells us a lot when it comes to where we should (and shouldn’t) invest.

Let’s move onto the wider economy. If house prices are coming down slowly, does that mean a ‘soft landing’ for the economy too? And is this preferable to a short, sharp shock?

Again, I think it’s going to take its sweet time sorting itself out. And here’s the kicker — the longer it takes, the greater the likelihood of a recession. I’ll explain why in just a second.

First, I want to answer the question of which we should be rooting for — the gentle decline or the brutal shock. My terminology is deliberately chosen to reflect the way I suspect the Government will view it.

The argument against a short shock can be summarised in one word — hysteresis. Hysteresis is the economic phenomenon of path dependency. A shock, so the argument goes, sets in train a series of events that can become self-sustaining.

An example would be long-term mass unemployment. If a large number of people are put out of work in one go, not all of them will find alternative employment quickly. Those that don’t will become deskilled, demotivated and will find it harder to get back into work. The shock, therefore, delivers its own persistent structural problem.

I think this argument has a lot of merit. But I still believe facing the inevitable, and quickly, is the preferable course of action. It all comes down to our irascible, temperamental friend Sentiment.

The longer this uncertainty drags on, the more entrenched negative sentiment will become. This will make a recession not only more likely, but more difficult to get out of.

Sadly I reckon this is exactly the scenario we’re facing. A long, drawn out recession. A few false dawns, with everyone, their confidence battered, scurrying for cover again at the first wobble.

The investment lesson is clear. Avoid companies with a high level of exposure to the British consumer. This would include most banks and retailers.

Put your money with firms whose profits aren’t wholly dependent on the spending habits of Mr and Mrs UK.

Because Mr and Mrs UK are about to go into hibernation…

Shares in the Wall Street powerhouse tumbled 31% last month on the NYSE on expections of heavy Q2 losses and the likelihood that the bank will have to raise cash to cover subprime-related writedowns. However, unlike rival Bear Stearns, the word on the Street is that Lehman will survive.

“On Wall Street, after Bear Stearns fainted, the other financial firms took smelling salts,” says Bill Bonner in The Daily Reckoning.

But some of them are beginning to look a little woozy, nevertheless. Lehman Bros. is said to be looking for $3 to $4 billion in new capital. The company has nine times as much in level 2 and level 3 assets as it has in tangible equity. And it’s not the worst. Merrill Lynch’s level 2 and level 3 assets equal 2,565% of its tangible equity.

And dear readers, be aware: “There’s another Bear Stearns out there,” say our friends over at The Motley Fool. “You may already own it. And just as with Bear Stearns, chances are you won’t see the collapse coming until it’s too late.”

Colleague Dan Amoss, over at Strategic Short Report, has pinpointed the next Bear Stearns – and warns that there is another credit crisis ready to jam the pipeline.

“Right now,” he tells us, “this company is desperately scrambling to dump more of its weak, illiquid assets…while laying off employees by the thousands…in a desperate bid to ‘fix’ its Wall Street profile, keep its ’shameful secret’ under wraps, and protect its stock.”

But that won’t work, Dan continues. “Buried deep in this firm’s mysterious ‘Level 3′ assets, where banks have regularly hid their riskiest mortgage-backed securities, this one company already has one very large multibillion-dollar real-estate-based asset that – just by itself – could be worth nearly 30% less than it was when this firm bought it.

“When this firm is forced to beef up earnings by selling this one asset, you’re already looking at billions in write-down losses right there. And that’s just where the unraveling begins.”

“Don’t buy shares of financial service companies with ‘Level 3′ assets of more than their capital,” says Martin Hutchinson in Money Morning

That’s all the “Big Four” investment banks including Goldman Sachs, Merrill Lynch & Co. Inc. (MER), Morgan Stanley (MS) and Lehman Bros. Holdings Inc. (LEH), and most of the big commercial banks, too. Those Level 3 assets are probably worth very little in a real downturn, because there is no market for the assets and everybody else will be trying to sell them too.

Why exactly has this happened? Especially when commodity prices are soaring pretty much across the board. Aren’t the explorers supposed to show leverage to the underlying resource prices to which they seek?

History demonstrates typical long term leverage with exploration stocks. If gold goes up 20% you can reasonably expect the gold shares to perform at a multiple of that figure. At the present times the “juniors” aren’t even keeping up with rising commodity prices.

The ongoing global credit crunch is a primary reason for this disparity. The appetite for speculation has waned. Global players have sold off winning positions in order to create liquidity. Some suggest that hedge funds may be shorting the explorers. Whatever the reasons are, the anomaly won’t persist indefinitely.

Either commodity prices must fall or junior miners must rise and close the gap. I don’t see commodity prices falling significantly from present levels. They stand as protection against currency debasement which happens to be a growth industry these days. The US dollar remains at the epicenter.

Opportunities abound. Let’s look at a simple example in a company called Amera Resources (AMS:Toronto).

This portrayal is for demonstration purposes only. I personally own this stock. It is not in the Resource Windfall Speculator portfolio and this is not a buy recommendation.

That’s an ugly chart. The stock is going down on exceedingly low volume (15,000 shares this day). Amera’s 52 week high is $.41. It’s near its 52 week low of $.11. Amera has 34.5 million shares outstanding. At $.14 Canadian, that gives them an overall market cap of a miniscule $4.83 million.

Surely something must be fundamentally flawed with this company. But that’s not the case. They have money, excellent management and exceedingly promising projects in mining friendly South American countries. I wrote a series some time back on “The Perfect Resource Exploration Stock”: The Perfect Resource Exploration Stock, The Perfect Resource Exploration Stock: Part II, The Perfect Resource Exploration Stock Part 3: Anatomy of a Ten-Bagger.Amera fits the majority of the qualifications for such a title.

Buying high quality speculative stocks with a market cap of $5-$10 million is pretty much a “no brainer” from the perspective of savvy resource investors. It’s called ultra cheap lottery tickets. Say they prove up an asset valued at $300 million, for example. That would be 60X the current market cap level.

There are zero assurances of such an event transpiring. That’s why it’s called speculation.

Lots of market participants would be much more comfortable buying stocks at annual highs instead of annual lows. Low prices freak them out and they end up capitulating. Capitulation is pretty much rampant these days. I believe that’s what shows clearly on the Amera chart.

When the last sellers give up their shares the market then becomes dominated by buyers. The bottom is in. The market then heads back towards the next extreme. The fear/greed cycle is inherent within all markets. All the more so in the junior explorers. Some companies are selling at prices close to their cash on hand value.

Summers are typically dreary times for the juniors as well. Buyers are more interested in their tans and exotic travel than following stocks. Will the sector go even lower during this vulnerable time? It’s entirely possible.

Still, the downside seems dwarfed by the upside potential. It’s likely to be an historic opportunity for accumulation. What’s your long term view on commodity prices?

Invest Resourcefully,

Rusty

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Source: They’re Giving Away Resource Stocks