The Dow rose again yesterday – up 44 points. Gold went up too – to a new record of $1,114.

Can anything stop stocks and gold?

Trees do not grow to the sky, dear reader. And for every bounce there is a bust.

“It’s amazing, the US is doing everything that Japan did wrong,” said a friend yesterday.

Let’s see… in the 1980s Japan’s corporate leaders thought they were going to take over the world. Investors thought so too. They expanded. They wheeled. They dealed. Prices shot up and they all thought they were geniuses.

In the ‘80s, everyone wanted to be Japanese. Management consultants used Japanese words to describe commonplace insights.

For example, instead of saying that businesses always need to try to do things better, they referred to “kaizen” as if it were the secret of success.

And US economists urged the Reagan Administration to have an “industrial policy” – because that was what Japan had.

Japanese businesses were the envy of the world. Japan was the world’s second largest economy. But in growth and stock prices it was Numero Uno.

It turned out, as it always does, that Japan did not have the secret to everlasting success. Instead, what it had was what comes before a fall.

Click here to read the rest of Mr. Bonner’s article.

He goes on to say, “But this talk will shift soon to the ‘now what’ questions of what to buy when we do reach that magical point.” Here Scott discusses the Mutual Fund’s cousin, the ETF, and how to take advantage of investing in one.

Many will shun individual stocks for the safety of mutual funds. And with the explosion of index funds, we’ve never had a larger variety of options to help us diversify. These index funds are designed to yield a return equal to that of a particular index. They allow you to purchase a variety of assets as a low-cost, passive-investment strategy. And there are a number of indexes that specify sectors, stock indexes and international markets.

It’s a powerful strategy that allows you to slice and dice the global economy in a risk-managed approach. But we don’t like to stop simply at reducing risk and diversification.

There’s another cousin to the mutual fund and index fund families that many investors have heard of but haven’t taken advantage of. If you own mutual funds, indexed or otherwise, you need to know if using exchange-traded funds (ETFs) makes more sense for you. Here’s what you need to know about ETFs, the close relative to your mutual funds…

Exchange-Traded Funds – Index Mutual Funds on Steroids

Exchange-traded funds (ETFs) were first introduced in 1993, and are based on index mutual funds. They use similar principles, but have fewer management and transaction costs associated with them.

Unlike mutual funds, which can be bought or sold only at the end of the day when NAV is calculated, you can trade ETFs throughout the day, just like a share of stock.

• Exchange-Traded Funds are a portfolio of shares that can be bought of sold as a single unit.
• You own a proportionate amount of the shares held, with some ETFs even allowing transfers-in-kind.
• They can range from portfolios that track broad global market indexes all the way down to very narrow industry indexes.
• Exchange-Traded Funds are becoming a preferred way for investors to get all of a mutual fund’s benefits, with none of the downsides.

Think of ETFs as mutual funds on steroids.

Exchange-Traded Funds Becoming More Popular

While exchange-traded funds are becoming more popular by the day, they weren’t always so highly regarded. In fact, the creator of The Vanguard 500 Index Fund was against them and vigorously attacked the possibility of their success. In the end, John Bogle ended up adding a whole series of ETFs to the Vanguard family.

ETF investments quickly competed against indexed mutual funds. By early 2007, over $400 billion was invested in over 300 ETFs in three general classes:

• Broad U.S. market indexes,
• Narrow industry or “sector” portfolios,
• And international indexes.

The first ETF, like the first indexed mutual fund, matched the S&P 500 index and was given the symbol SPDR for Standard and Poor’s Depository Receipt. Many know it by its nickname, the “spider.”

Spiders spawned many new exchange-traded fund products like “Diamonds” that are based on the Dow Jones Industrial Index DJIA, Qubes based on the Nasdaq 100 index, and WEBS based on the World Equity Benchmark Shares of a portfolio of foreign stock market indexes.

The Advantages of Exchange-Traded Funds Over Indexed Funds

A big advantage of an exchange-traded funds over a conventional index fund is that they trade continuously throughout the day. You can buy and sell ETF shares just like a share of stock, while with an indexed mutual fund – where the net asset value is quoted – you have to place an order to buy or sell but that doesn’t transact until after the market.

This can be frustrating if your technical analysis indicates a buy or sell trigger at some point during a trading session but the market moves too far for you to take advantage of it by the end of the trading day.

And unlike mutual funds, exchange traded funds can be sold short of purchased on margin like a share of stock.

When you analyze these factors in light of the fact that options also trade on exchange-traded funds you can place positions in the general market, global market, or industry sectors, where you can:

• Employ protective hedges with puts or calls on your long or short ETF portfolio.
• Use combined buy-write options strategies where you collect premium from the short sell of an option to compensate for the cost the long options – bull and bear spreads, calendar spreads, diagonal spreads, butterflies, iron condors and so on, are all available to you trading ETFs but NOT with indexed mutual funds.

Exchange-traded funds also have tax advantages over mutual funds:

• When large numbers of mutual fund investors redeeming their shares – but you don’t – the fund has to sell securities to meet the redemptions. This creates a capital gains tax that is passed on to the remaining shareholders.
• Which means you end up paying the other guy’s tax obligation!
• In an exchange-traded fund, when somebody else sells, they have to pay the tax, not you.
• And when very large trades redeem their positions in the ETF, the transactions is settled with shares of stock in the underlying portfolio – not triggering a stock sale by the fund sponsor and no bogus tax bill to you.

Using Exchange-Traded Funds: How to Put Your Index Mutual Fund on Steroids

It must now be horribly clear to everybody with an investment portfolio – indeed, to anyone who watches the financial markets – that no country or sector is safe from a bear market of the magnitude of the one we’re suffering through right now. When stocks get marked down en masse, as they have, literally everything drops.

What’s more, there may be very little rationale for which stocks drop — or how much they drop by: When the wave of selling meets very few buyers, good stocks can easily fall more than bad ones.

Does that mean it’s a waste of time to search for a “safe haven?”

Absolutely not. Assuming you have the fortitude to avoid selling during the worst of this mess, the storm will eventually blow itself out. At that point, investors will look around at the wreckage, and start figuring out which stocks represent good value. Good stocks and countries without major economic problems will then bounce – and bounce big.

A few smart cookies that stayed out of the market until it bottomed will buy them and win big. The rest of us – who didn’t see the storm coming, but who invested in “safe haven” stocks – will see the majority of our portfolio value restored fairly quickly, while other investments languish near the bottom, or even drop further, possibly even failing altogether.

It is difficult to assess which sectors will be best able to shrug off the storm (obviously housing and financial services remain highly vulnerable), but we can identify some alluring safe-haven countries by employing several rules. As you analyze markets around the world, look for a country that:

* Hasn’t had a major housing boom during the last few years. Housing-price declines of 30%, 40% or 50% make a huge mess of the country’s mortgage system, and the fallout can reach far beyond the housing sector itself. Apart from the United States, countries like Britain and Spain are to be avoided. In Great Britain, London housing and related real estate became almost as overvalued as 1980s Tokyo property – far outstripping anything that happened here in the United States. And Spain experienced massive overbuilding in resort areas – most of it highly speculative.

* Is competently run from a macroeconomic standpoint, without any great tendency toward huge bailouts or Keynesian deficit-spending projects. Japan qualified on these grounds until recently, but the new Prime Minister Taro Aso wants to increase the already-excessive budget deficit with infrastructure spending (thereby even further increasing Japan’s already-excessive public debt). Deficits are a real problem in a recession: They are difficult to finance, choke off potential private-sector investments, increase interest rates and may require damagingly large tax increases to sort out.

* Does not have a huge balance-of-payments deficit or large international debt – either of which becomes difficult to finance as capital flows decline.

* Has interest rates that are close to – or are above – its rate of inflation. Very low interest rates distort an economy, and generally necessitate unpleasant deflationary action at some point in order to avoid rapidly rising inflation.

Of the major global economies in which a U.S. investor might reasonably buy stocks, the four that really meet these criteria are Canada, Brazil, South Korea and Germany. Let’s take a close look at each one:

* Canada has just re-elected a conservative government, increasing its parliamentary representation. It has low inflation of around 3%, short-term interest rates just above 2%, a modest payments surplus and a modest budget surplus. It had a moderate housing boom, with prices rising about 65% in the 2000-2007 time frame, but its bank bailout was a quarter the size of the U.S. bailout, if measured in terms of gross domestic product (GDP). Canada is a well-balanced economy between commodities and manufactured goods; it will suffer from the U.S. downturn, but represents sound value over the longer term. The TSX Composite Index is down about 42% from its June 2008 peak, about the same as the U.S. market, but the Canadian economic picture appears to be much more sound. One last point: Although this certainly isn’t a make-or-break requirement, it is worth noting that investing icon Warren Buffett has made highly favorable comments about the Canadian economy.

* Brazil has reduced its foreign debt to about 40% of GDP and kept inflation under control at around 6% by running an admirably tight monetary policy, with a short-term rate of 13.75%. Its economy is primarily commodity-based, with a broad range of exports, but it also has a substantial manufacturing sector. The Bovespa stock index is down 62% from its May peak, and Brazilian stocks are distinctly cheap. Provided Brazil avoids a debt default, the bounce here should be a healthy one.

* South Korea elected a pro-business government in February. It is a major exporter of manufacturing goods and importer of commodities, which this year gave it a rare balance-of-payments deficit that should now reverse if commodity prices stay lower. Its banks avoided the U.S. subprime mortgage market, and are generally solid, although domestic lending is rather high. The country has an inflation rate of 5% and short-term interest rates – after an Oct. 27 cut – of 4.25%. Economic growth is around 4%, and the country boasts a budget surplus.  The stock market is down 55% from its October 2007 high, and should bounce significantly if commodity prices stay down.

* Germany is growing slowly – at a slow-but-steady 1% to 2% – but it has a static population, meaning that represents real per-capita growth. It had no recent housing boom (so no major domestic debt problem), and has low inflation, Germany also has improved its cost position considerably relative to its Eurozone neighbors, with a substantial balance-of-payments surplus, and is currently benefiting from the decline in East German restructuring costs, which hampered the economy during the decade and a half between 1990 and 2005.  The DAX stock market index is down 46% from its December 2007 high, meaning many bargains may be available. The main negative: Germany’s banks are quite heavily exposed to Eastern Europe, where several countries appear to have serious debt and balance-of-payment problems. If the problem is as big as some experts are starting to allege, this safe-haven candidate may need to be re-evaluated. But for now, Germany remains on our list.

Source: Four “Safe Haven” Markets For U.S. Investors