But the question is – which ones?

In the financial services sector, 2008 was a year of spectacular failures:

• Bear Stearns Cos. and Merrill Lynch & Co. Inc. were absorbed by JP Morgan Chase & Co. (JPM) and Bank of America (BAC), respectively.
• Lehman Brothers Holdings Inc. (OTC: LEHMQ) filed for bankruptcy protection.
• And financial-sector giants American International Group Inc. (AIG) and Citigroup Inc. (C) were both bailed out a vast expense to taxpayers.

If at the start of 2008 I’d written that the entire New York investment banking business would disappear during the year, you’d have thought me a madman. But it has. The two houses still standing, Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS), are both now officially conventional banks, with lower leverage ratios and a changing business mix.

In the New Year, we’ll see less turbulence in financial services than in 2008, if only because it would be almost impossible for it to have more. The dangerous process of de-leveraging becomes less dangerous as leverage itself is reduced, and the capital injections from the Troubled Asset Relief Program (TARP) into the major U.S. banks have hastened their recovery. Solid banks such as Wells Fargo & Co. (WFC), and PNC Financial Services (PNC) are likely to do quite well, gaining market share at the expense of their weaker brethren.

Indeed, Wells and PNC each completed major buyout deals right as 2008 came to a close.

This year, however, will be the one in which banks that have truly done a poor job will be separated out from those who merely made the obvious mistakes of the boom and just need time and some extra capital to work through their problems.

Citigroup, for example, was at the beginning of 2008 a pretty obvious example of financial-sector “roadkill.” A messy conglomerate of banking, investment banking and insurance that had been put together but never properly integrated, Citi had been at the forefront of every major financial disaster in the last 30 years and was not about to miss this one. The fact is that only weeks after receiving a $25 billion capital injection from the TARP, Citi was back in trouble again, this time requiring not only more capital, but a $300 billion guarantee of its liabilities. That’s a pretty good indicator that in a free market, Citi would have slid into corporate bankruptcy and liquidation.

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Obviously, if the government chooses to keep Citi afloat, U.S. taxpayers, as a group, are (just) rich enough to make that happen. But a sensible government will eventually realize that these expensive rescues are pointless. The financial services business – once an economic mainstay – is declining in importance in the U.S. economy, and is probably half its relative size compared to its historic levels from the 1970s. In such an environment, capacity needs to be lost and Citi is the capacity most obviously surplus.

If Citi is propped up by the taxpayer, some other bank may be forced into bankruptcy, instead: My bet would be Bank of America, which made a very foolish acquisition in Countrywide Financial Corp., at the beginning of 2008 and a very dangerous one (because of its size and over-leverage) in Merrill Lynch right at the end of the year.

Countrywide was an enthusiastic participant in the worst excesses of the housing bubble, and hence will have a correspondingly large share of its detritus, while Merrill Lynch itself made what turned out to be a major misstep when it bought a major subprime mortgage lender, First Franklin, at the absolute peak of the bubble in 2006. Merrill had actually prided itself on its aggression in the housing finance business, but ended up having to shut down portions of First Franklin.

Aside from financial services, 2008’s major bailout was in the automobile sector. As is well known, all three major U.S. automakers – General Motors Corp. (GM), Ford Motor Co. (F) and Chrysler LLC – are in financial trouble and could be pushed over the edge by a couple of bad quarters. Given that the government would hate to see a major U.S. manufacturing sector disappear – especially one with the high profile that the car business has – and that the sums of money involved are smaller than in the banking business, I would not expect the automobile companies to be liquidated.

General Motors has world-class engineering and research capabilities that remain of huge value, and is becoming a bigger player in Asia, while Ford is in better financial shape than its competitors and also has good international operations and sufficient scale for its current focused strategy. On the other hand, it’s clear that both companies need to get out from under their past pension obligations, as well as their United Auto Workers Union (UAW) contracts, in order to compete against lower-cost competitors, both internationally and domestically (where a lot of the foreign carmakers now manufacture).

So, either a UAW agreement combined with a government assumption of most pension and healthcare obligations or a Chapter 11 filing (which would void the UAW and pension contracts) is needed. My bet would be on a “prepackaged” Chapter 11 filing – not a disaster for the companies, but I’d still avoid the shares.

As for Chrysler, it is too small to compete properly, has no international presence, and is owned by an overstretched private equity outfit. So hasta la vista, Chrysler!

Another area that’s seen its share of bankruptcies is retailing: Circuit City Stores Inc. (OTC: CCTYQ), Linens n’ Things Inc., Mervyn’s LLC and Sharper Image Corp. (OTC: SHRPQ) were among the biggest names to file in 2008.

That’s not surprising: Consumer spending is down – even in nominal terms – and needs to fall further, as the U.S. consumer rebuilds his savings rate from 2007’s pathetic 0.7% to the 6% to 8% range that was more the norm in the pre-bubble years. The recession will inevitably push more retail chains over the edge, with the highest casualty rate being among high-end and specialty retailers: Saks Inc. (SKS), for example, is taking losses and could be in trouble.

At the bottom end, as a recent Money Morning “Buy, Sell or Hold” feature detailed, Wal-Mart Stores Inc. (WMT) will probably continue to do well as middle class consumers find their budgets pinched and decide to restrict their spending to the land of “everyday low prices.”

If the recession is even longer and deeper than it’s already been, two other victims of middle-class spending cutbacks could be Target Corp. (TGT), which lacks Wal-Mart’s purchasing ability and whose prices are significantly higher than Wal-Mart’s, and The Home Depot Inc. (HD), which over-expanded during the housing boom, replacing traditional hardware stores, and which lacks the service capability to facilitate recession-resistant D-I-Y (do-it yourself) projects.

Producers of luxury goods, as well as retailers, may find themselves in trouble.

Just this Monday, china-maker Waterford Wedgwood PLC, filed for bankruptcy. The Dublin-based company, with more than 200 years of history, was a victim of social change and the move to less formality as much as it was to the global recession.

Like high-end retailers, luxury-goods producers will suffer from a massive decline in their customers’ purchasing power, as Wall Street bonuses disappear and redundancies soar, Middle Eastern oil sheiks cut back amid declining oil prices and the Russian mafia is forced to ask Prime Minister Vladimir Putin for bailouts. Many luxury goods producers are quite small and private, so their disappearance will not affect investors, but even such a giant as LVMH Moet Hennessey Louis Vuitton (OTC: LVMHF) will not find itself immune to the global downturn, and may be in trouble if that financial malaise remains in place for a long stretch.

It’s a rough tough world out there. As investors, corporate bankruptcy should be our No. 1 risk concern in 2009.

Source: Corporate Bankruptcies Will be a Key Investor Concern in the New Year

Zinc meandered around either side of 49 cents, ending up a half-cent, at $0.4893/lb. Aluminum was weak, dropping a penny and a half, to $0.8494/lb., while lead also plunged to its intraday low of $0.5724/lb., down nearly 3½ cents.

Copper tumbled to a three-year low as it led the sector downward amid—cue broken record—deepening gloom about the global economy.

The data are simply offering no relief. Among yesterday’s numbers, along with the October exports figure from China, the U.K. reported that home sales fell to the lowest level in at least three decades.

“Grim recessionary stats continue to roll in from all corners of the world,” wrote Edward Meir, of MF Global. “We do not expect to see any sustainable rallies resulting for a period of time.”

Putting a further damper on any hopes that China will show the way out of a worldwide recession, the vice president of the state-controlled China Nonferrous Metals Industry Association warns that China’s stimulus plan will only have a gradual effect on the country’s base metals industry.

Rising stockpiles are also playing in. Copper inventories monitored by the LME shot higher by 4,625 metric tons yesterday, to 265,475 tons. Stocks are up more than 27,000 tons already in November.

Adding to the carnage, the sharp drop in equities markets yesterday had a negative effect, as commodities tend to correlate with them.

Source: Base metals bomb -  China no longer seen as savior

The European Commission forecast on Monday that the 15-country Eurozone will grow a meager 0.1% next year – at best.

The global financial crisis has hit Europe like Hurricane Katrina flattened New Orleans. And we expect this is a clear indicator of how the U.S. will fare as we approach 2009.

What this means to investors is that the major emerging markets such as China and India may indeed be the place for their money. China and India are certainly down from the commodity supercycle heyday, but their growth far outstrips what we’re seeing (and can expect to see) in Western industrialized economies.

The European Commission said the Eurozone’s largest economies such as Italy, France and Germany will come to virtual standstill with the prospect of 0% growth.

At the same time, second-tier economies including Spain and Ireland will shrink.

And even though the U.K does not use the euro, the European Commission expects that economy to shrink by 1% – putting it in the same league as the struggling former Soviet satellites, Latvia and Estonia.

That was all the good news in a best-case scenario. The 27-member EU warned that the numbers could deteriorate if money gets even tighter – straining government coffers and virtually freezing consumer spending.

Worse, unemployment could reach 8.4% next year from a decade low of 7% at the end of 2007.

At the same time, government deficits could rise from 1.6% in 2008 to 2.3% in 2009. But some countries may suffer deficits of up to 3% including the U.K., Ireland, France, Latvia, Lithuania, Romania and Hungary.

The EU’s bleak future is characterized by unemployment, deficits and recession – the probable hallmarks of the American economy next year.

Sounding quite naïve (or stupid), Joaquín Almunia, the European commissioner for economic and monetary affairs, actually said that the EU’s interdependence of the global economy is “bigger than we thought, leading everybody to suffer.”

It almost makes the EU sound as though they still cling to the belief that that the world is flat.

While the EU’s forecast may not be a direct reflection of the U.S. economy in 2009, we do believe is provides an undistorted view into the impending future.

At the New York close on Friday, the blue-chip Dow Jones Industrial Average Index had plunged 312.62 points (-3.6%), to trade at 8,378.63. The tech-laden Nasdaq Composite Index shed 51.88 points (-3.23%), to reach 1,562.03. And the broader Standard & Poor’s 500 Index dropped 31.45 points (-3.46%), to hit 876.66.

“It’s a bear market on steroids,” David King, a money manager at Putnam Investments, who helps manage about $137 billion, told Bloomberg Television. “It’s very accelerated by the pace of financial markets today.”

Prior to the New York opening bell, pre-market traded futures for all three major U.S. indices fell their maximum allowed daily limit, causing safety measures to kick in and halt futures trading until the market’s open. Dow futures crashed 550 points, or 6.27%, to 8,224. The S&P 500’s futures index plunged 60 points, or 6.56%, to 855.20, and Nasdaq futures skidded 85 points, or 6.20%, to 1,175.75.

But despite the bleak picture futures painted, the U.S. markets recovered from the day’s deeper lows to close higher than originally indicated.

Commodities tumbled on fears of demand destruction from weak economic growth. Gold traded down to $681.00 an ounce from an opening level of $713.30. Oil also declined despite production cuts from the Organization of Petroleum Exporting Countries (OPEC). [For a related story in Money Morning on OPEC’s production cut, please click here.]

“Selling is across all asset classes,” Robin Bhar, a commodities analyst at Calyon in London, told Bloomberg News. “A month ago we were on the edge of a cliff and now we’re in freefall.”

In overseas markets, Japan’s Nikkei Index had an 811.90-point decline to close at 7,649.08, its lowest level in over five years. Hong Kong’s blue-chip Hang Seng Index plummeted 1,142.11 points to close at 12,618.40, its lowest level since August 2004.

“The market is pretty desperate and at a loss. Four days running of big losses, though the turnover is quite low,” Howard Gorges, vice chairman South China Securities, told Reuters, speaking of the Hong Kong markets. The Hang Seng Index has dropped 55% so far this year.

“People are just standing aside. These are dangerous markets to play around with. That’s the main reason for getting into cash,” Gorges said.

In Europe, major indices sunk on news that the United Kingdom’s gross domestic product contracted more than expected with a decline of 0.5% in the third quarter.

“We are obviously not sure exactly how this whole situation will develop. We’ve had some quite deep and severe recessions in the UK before, and hopefully we can avoid that sort of situation in the current circumstances, but the risks of that have increased,” Andrew Sentance, a member of the Bank of England’s rate-setting monetary policy committee, told BBC Radio Leeds.

The FTSEurofirst 300 Index of blue-chip European shares skidded 4.9% to close at 829.73 points, its lowest closing level since May 2003, Reuters reported.

The Paris-based CAC40, London’s FTSE 100, Madrid’s IBEX 35 and the Frankfurt-based DAX all posted triple-digit losses.

At the New York close, the dollar had gained ground against the euro [up 2.46%] and the pound sterling [up 2.02%], but lost ground against the yen [down 2.94%].

Source: Global Sell-Off Takes a Toll on U.S. Equities