Trends I'm Watching

Best Performing ETFs for the Past Week

Trend: FocusShares ISE Homebuilders Index (SAW) led the one week performance (+24.7%, +1.45% for 4 weeks, N/A for 13 weeks). iShares Dow Jones US Home Construction (ITB) and Ultra Real Estate ProShares (URE) were the second and third best performers.

The 20 ETFs with the best 1 week performance through 1/25/2008 tracked by Morningstar are highlighted below.

Source: MSN Money Exchange Traded Funds (ETFs) Performance Tracker

Name	Ticker	Category	Holdings	Morningstar	Last Price*	1-Wk	4-Wks	13-Wks	YTD	52-Wks	3-Yrs	5-Yrs
FocusShares ISE Homebuilders Index	SAW	Specialty - Real Estate			$51.68	24.76	1.45	N/A	2.34	N/A	N/A	N/A
iShares Dow Jones US Home Construction	ITB	Specialty - Real Estate	holdings		$17.99	19.80	-2.54	-13.29	1.25	-55.95	N/A	N/A
Ultra Real Estate ProShares	URE	Specialty - Real Estate	holdings		$31.52	15.71	-16.19	-29.71	-8.64	N/A	N/A	N/A
Ultra Financials ProShares	UYG	Specialty - Financial	holdings		$35.75	15.29	-17.89	-31.44	-13.96	N/A	N/A	N/A
SPDR S&P Homebuilders	XHB	Specialty - Unaligned	holdings		$19.82	15.23	-0.20	-10.68	2.43	-46.33	N/A	N/A
KBW Regional Banking ETF	KRE	Specialty - Financial	holdings		$35.65	12.04	-7.98	-10.80	-3.86	-22.34	N/A	N/A
KBW Bank ETF	KBE	Specialty - Financial	holdings		$42.55	11.33	-5.15	-13.60	-2.30	-23.39	N/A	N/A
iShares Dow Jones US Regional Banks	IAT	Specialty - Financial	holdings		$37.49	10.86	-2.79	-11.01	-0.37	-24.38	N/A	N/A
Ultra S&P SmallCap600 ProShares	SAA	Equity-Income	holdings		$52.00	10.80	-19.21	-25.05	-13.45	-23.03	N/A	N/A
Regional Bank HOLDRs	RKH	Specialty - Financial	holdings		$127.58	10.32	-5.46	-10.88	-2.93	-20.85	-2.31	4.52
UltraShort Health Care ProShares	RXD	Specialty - Health	holdings		$75.50	10.22	19.35	16.29	15.09	N/A	N/A	N/A
PowerShares Dynamic Banking	PJB	Specialty - Financial	holdings		$18.86	10.16	-4.29	-8.58	-1.72	-21.23	N/A	N/A
Ultra Basic Materials ProShares	UYM	Specialty - Unaligned	holdings		$81.26	10.08	-17.92	-15.12	-14.46	N/A	N/A	N/A
Adelante Shares RE Value ETF	AVU	Specialty - Real Estate	holdings		$19.84	9.95	-2.55	-15.88	2.58	N/A	N/A	N/A
iShares FTSE NAREIT Real Estate 50	FTY	Specialty - Real Estate	holdings		$37.75	9.72	-6.12	-14.21	-3.65	N/A	N/A	N/A
Rydex S&P Equal Weight Financials	RYF	Specialty - Financial	holdings		$38.28	9.37	-7.81	-14.59	-7.09	N/A	N/A	N/A
iShares FTSE NAREIT Residential	REZ	Specialty - Real Estate	holdings		$40.49	9.30	7.15	-10.11	3.11	N/A	N/A	N/A
iShares Dow Jones US Financial Services	IYG	Specialty - Financial	holdings		$96.58	9.10	-7.92	-16.81	-5.51	-26.01	-1.74	6.54
iShares FTSE NAREIT Mortgage REITs	REM	Specialty - Real Estate	holdings		$30.14	9.03	-2.17	5.59	2.36	N/A	N/A	N/A
iShares FTSE EPRA/NAREIT North America	IFNA	Specialty - Real Estate	holdings		$44.60	8.93	-3.51	N/A	-4.01	N/A	N/A	N/A

Disclosure: We may own any EFT above at any time.

Please verify the performance of any ETF before investing.

BCA Predicts Recession and Bear Market

Trend: The BCA editors predict that the stock market will fall by 20% this year (we have already seen a 15% drop just in the last three weeks).

Gary Halbert reports that The Bank Credit Analyst editors have changed their outlook, saying that the US is headed into a recession this year, a major change in their outlook. Excerpts below.

Link: InvestorsInsight : Forecasts & Trends.

BCA has changed it view on the US economy and now forecasts a recession in 2008. They believe the recession is unfolding now and will last for apprx. one year, with GDP averaging negative 2% for the next 12 months or so, with the economy rebounding sometime in 2009.

While the editors continue to maintain that the US economy is on solid footing, they believe that increasing problems in the housing slump/subprime mortgage dilemma/credit crunch will continue to undermine consumer confidence to the point that we will go into a recession this year, contrary to their advice over the last year.

The BCA editors now predict that the stock market will fall by apprx. 20% this year, but they note that we have already seen a 15% drop just in the last three weeks. So, in their view, much of the damage has already been done. In any event, they see the US stock markets bottoming by mid-year.

Home Equity Crisis Looms

Trend: Banks that avoided the subprime fallout face losses from home-equity loans based on homes now at risk.

Mara Der Hovanesian at BusinessWeek Magazine describes another offshoot of the subprime disaster. Excerpts below.

Disclosure: We currently own shares of UltraShort Financials (SKF).

Link: The Home Equity Crisis Ahead, BusinessWeek, Jan 16, 2008

Subprime mortgages have taken a lot of blame for banks' big losses. But there's another problem lurking behind the mess: home-equity lending.

Buoyed by rising prices, borrowers increasingly tapped into the equity on their properties to finance a new car, renovations, or even a down payment, making equity a key source of consumers' strength. But with the housing market in disarray and prices plunging, the business of home-equity lending is souring. At least $14.7 billion in loans and lines of credit were already delinquent through the end of September—the highest level in a decade.

A lender on a mortgage has the first claim on the underlying property. In the case of foreclosure, it can sell the property and recoup some money. The bank with the home-equity piece has no such collateral and is usually out the money.

Credit default swaps: The Next Financial Crisis

Trend: Monoline insurers that jumped into the mortgage-backed security markets could trigger the next leg of the subprime crisis.

John Mauldin at Thoughts from the Frontline describes the next financial crisis (John's track record is excellent on this issue; he predicted the subprime crisis early in 2007 — see this post). Excerpts below.

Disclosure: We currently own shares of UltraShort Financials (SKF).

Link: Thoughts from the Frontline.

I said three weeks ago that the big story for 2008 would be the counter-party risk for credit default swaps. That story is coming faster and larger than I thought. Bill Gross of Pimco suggests that the ultimate cost could be another $250 billion dollars on top of the $250-plus billion in subprime losses. That means we have only seen the tip of the iceberg in write-offs in the financial sector.

The real problem is the "monoline insurers" like ACA, Ambac, and MBIA. Here's a quick primer on how they work. Let's say you are a small municipality and want to borrow $10,000,000 for a bond offering to build a road or a water treatment plant. If you went to the market with your credit rating, it would be a low rating and the cost of the money would be high. But if you get one of the seven monoline insurers to guarantee your bond, then you get whatever their credit rating is. The fees for such insurance are lower than the savings you get on the bond, so everyone wins.

But over the years, most of the monocline insurers went from boring municipal bonds and jumped into the mortgage-backed security markets, selling credit default swaps that significantly juiced up their earnings. But it also added a lot of risk that they clearly, in hindsight, did not understand.

Preparing for a Bear Market

Trend: Some optimistic market experts are saying that a recession and bear market are inevitable.

Tobin Smith of ChangeWave Investor describes how to adapt to a bear market / recession.

Link: 10 reasons why a recession is coming - MSN Money.

1. Take risk much lower. That means shedding most high-price-to-earnings stocks (with ratios over 35-40) or high-risk/blue-sky stocks. They will get crushed in the P/E contractions that precede a recession.
2. Build significant cash to take advantage of compelling opportunities.
3. Lower your buy prices for the most solid secular growth stocks that have earnings and revenue growth locked-in due to worldwide changes: alternative energy leaders, Apple, biotechnology plays and cost-cutting medical products/services.
4. Add additional cost-cutting health care/medical product growth plays, the one part of the economy that because of demographics will substantially outgrow overall economy.
5. Add agriculture companies whose demand curve is foreign-based.
6. Continue to short most exposed home builders and financial services.
7. Shift to stocks that benefit from recessions -- for example, bankruptcy services.
8. In general, be prepared for the worst. But always expect and hope for the best.

Best Performing ETFs for the Past Week

Trend: iPath MSCI India Index ETN (INP) led the one week performance (+19.9%, +12.7% for 4 weeks, 44% for 13 weeks). Market Vectors Gold Miners ETF (GDX) and iShares Silver Trust (SLV) were the second and third best performers.

The 20 ETFs with the best 1 week performance through 1/14/2008 tracked by Morningstar are highlighted below.

Link: MSN Money Exchange Traded Funds (ETFs) Performance Tracker

Name	Ticker	Category	Holdings	Morningstar	Last Price*	1-Wk	4-Wks	13-Wks	YTD	52-Wks	3-Yrs	5-Yrs
iPath MSCI India Index ETN	INP	Growth	holdings		$104.62	19.90	12.73	44.45	18.84	117.09	N/A	N/A
Market Vectors Gold Miners ETF	GDX	Specialty - Precious Metals	holdings		$51.21	8.68	22.36	13.45	16.34	43.05	N/A	N/A
iShares Silver Trust	SLV	Specialty - Precious Metals	holdings		$158.34	8.15	18.49	18.49	10.77	27.39	N/A	N/A
PowerShares DB Silver	DBS	Specialty - Precious Metals	holdings		$29.93	7.51	17.76	16.89	10.23	24.91	N/A	N/A
iPath DJ AIG Copper TR Sub-Idx ETN	JJC	Specialty - Precious Metals			$46.12	7.50	14.99	N/A	10.40	N/A	N/A	N/A
Ultra Health Care ProShares	RXL	Specialty - Health	holdings		$72.32	7.29	-0.33	-0.09	4.55	N/A	N/A	N/A
PowerShares DB Agriculture	DBA	Specialty - Natural Resources	holdings		$36.58	6.65	14.59	28.24	10.31	36.19	N/A	N/A
iShares MSCI Taiwan Index	EWT	Pacific Stock	holdings		$14.73	6.61	2.75	-12.53	-2.40	4.17	10.75	11.15
HealthShares Infectious Disease	HHG	Specialty - Health	holdings		$19.75	6.25	4.38	-7.24	6.25	N/A	N/A	N/A
United States Natural Gas	UNG	Specialty - Natural Resources			$39.41	6.12	16.81	3.78	11.39	N/A	N/A	N/A
iShares MSCI Malaysia Index	EWM	Pacific Stock	holdings		$13.69	6.06	14.38	16.59	10.05	52.43	27.23	24.78
iPath DJ AIG Natural Gas TR Sub-Idx ETN	GAZ	Specialty - Natural Resources			$51.42	5.99	16.88	N/A	10.95	N/A	N/A	N/A
PowerShares DB Precious Metals	DBP	Specialty - Precious Metals	holdings		$33.01	5.73	14.42	18.99	8.46	37.12	N/A	N/A
streetTRACKS Gold Shares	GLD	Specialty - Precious Metals	holdings		$87.99	5.63	11.24	20.04	8.59	44.02	28.38	N/A
iShares COMEX Gold Trust	IAU	Specialty - Precious Metals	holdings		$88.25	5.57	13.97	20.68	8.73	44.13	N/A	N/A
PowerShares DB Gold	DGL	Specialty - Precious Metals	holdings		$33.63	5.44	13.44	19.55	8.11	40.60	N/A	N/A
iPath DJ AIG Grains TR Sub-Idx ETN	JJG	Specialty - Natural Resources			$62.08	5.37	7.30	N/A	8.10	N/A	N/A	N/A
HealthShares Dermatology & Wound Care	HRW	Specialty - Health	holdings		$23.19	5.31	2.47	-3.32	3.30	N/A	N/A	N/A
HealthShares Enabling Technologies	HHV	Specialty - Health	holdings		$32.52	5.21	4.47	2.98	3.33	N/A	N/A	N/A
WisdomTree Emerg Mkts High-Yielding Eq	DEM	Foreign Stock	holdings		$51.51	4.93	2.51	-2.76	1.27	N/A	N/A	N/A

Disclosure: We may own any EFT above at any time.

Please verify the performance of any ETF before investing.

The 5 Stages of Market Grief

Trend: Denial and anger about the substantial impact of bad subprime mortgages is ending while acceptance is still down the road. This suggests that the stock market decline will continue.

Barry Ritholtz at The Big Picture describes the process of acknowledging the impact of subprime problems on the economy and the stock market.

Link: The Big Picture | 5 Stages of Market Grief.

It was introduced by Elisabeth Kübler-Ross in her 1969 book "On Death and Dying". This has become well-known as the "Five Stages of Grief". They are:

1. Denial
2. Anger
3. Bargaining
4. Depression
5. Acceptance

Reviewing recent market commentary, it appears that the investors, traders and pundits alike have been working their way through each of these 5 stages. Consider:

1. Denial: For the longest time, the consensus was that Housing issues wouldn't impact anything else. Classic denial was demonstrated by the insistence that first Housing, then the credit crunch, was "contained."

2. Anger: The details of this were personified by Jim Cramer's now infamous Fed rant. After spending the prior year discussing that Housing was fine (February 2007), and pointing out each bounce in the home builders (November 2006) was proof the Housing bottom was in, Cramer's incredible meltdown was stark evidence that the denial stage was over, and the classic anger stage was beginning.

3. Bargaining: I believe we are now at the bargaining stage. This is reflected in the increased expectations of a 50 bps rate cut (If the Fed cuts aggressively, stocks will be fine).

Resilient ETFs: Cream of the Crop

Trend: Three ETFs — OIL, USO, and GLD — show exceptional resiliency for 1 week, 4 week, 13 week, and 52 week performance (as of 12/31/2007).

Last week, in a post on Resilient ETFs, we analyzed the performance of the 643 ETFs tracked by Morningstar from the MSN Money Exchange Traded Funds (ETFs) Performance Tracker. We identified 21 ETFs without a loss in the 1 week, 4 week, 13 week, and 52 week periods. 

In this post we've used that data to identify the top Resilient ETFs from the 21 selected, using a simple above average strategy.

First, we calculated the average gains for the 21 Resilient ETFs in the the 1 week, 4 week, 13 week, and 52 week periods.

Then we identified the EFTs with above average gains in all of the four periods to select the cream of the crop of Resilient ETFs.

Above Average Resilient ETFs for 1 week, 4 week, 13 week, and 52 week performance (through 12/31/2007)

Name	Ticker	Category	1-Wk %	4-Wks %	13-Wks %	52-Wks %	1 - 52 Week Resiliency*
iPath S&P GSCI Crude Oil Tot Ret Idx ETN	OIL	Specialty - Natural Resources	2.84	8.85	21.09	47.37	80.1
United States Oil	USO	Specialty - Natural Resources	2.45	8.37	21.12	46.82	78.8
streetTRACKS Gold Shares	GLD	Specialty - Precious Metals	2.89	6.65	12.18	31.1	52.8

*1 -52 Week Resiliency is the sum of the percentage gains of 1 week, 4 weeks, 13 weeks, and 52 weeks.

Disclosure: We may own any of the EFTs above at any time.

Note: Verify the performance of any EFT before investing.

Best Performing Rydex ETFs for the Past Week

Trend: The Rydex Inverse 2x Russell 2000 (RRZ) led the one week performance (+10.5%, +1.8% for 4 weeks), reflecting the continuing weakness in small-cap sector.

The 20 Rydex ETFs with the best 1 week performance through 1/2/2008 tracked by Morningstar are highlighted below.

Link: MSN Money Exchange Traded Funds (ETFs) Performance Tracker

Name	Ticker	Category	Holdings	Morningstar	Last Price*	1-Wk	4-Wks	13-Wks	YTD	52-Wks	3-Yrs	5-Yrs
Rydex Inverse 2x Russell 2000	RRZ	Growth			$80.67	10.50	1.79	N/A	3.73	N/A	N/A	N/A
Rydex Inverse 2x S&P MidCap 400	RMS	Growth			$79.55	7.09	2.85	N/A	3.47	N/A	N/A	N/A
Rydex Inverse 2x S&P 500	RSW	Growth			$79.88	6.36	2.71	N/A	1.70	N/A	N/A	N/A
CurrencyShares Japanese Yen Trust	FXY	Income			$91.40	4.34	1.49	5.78	1.77	N/A	N/A	N/A
CurrencyShares Swiss Franc Trust	FXF	Worldwide Bond			$89.96	2.94	1.42	5.52	1.34	10.59	N/A	N/A
CurrencyShares Swedish Krona Trust	FXS	Worldwide Bond			$157.09	1.74	-0.11	2.48	0.92	9.92	N/A	N/A
CurrencyShares Euro Trust	FXE	Worldwide Bond			$147.68	1.39	0.63	4.86	0.60	15.23	N/A	N/A
CurrencyShares Australian Dollar Trust	FXA	Worldwide Bond			$88.06	0.57	0.04	0.74	0.41	18.06	N/A	N/A
Rydex S&P Equal Weight Energy	RYE	Specialty - Natural Resources	holdings		$69.74	-0.27	10.65	10.19	1.20	41.86	N/A	N/A
CurrencyShares British Pound Sterling Tr	FXB	Worldwide Bond			$197.50	-0.53	-3.68	-2.15	-0.72	6.17	N/A	N/A
CurrencyShares Mexican Peso Trust	FXM	Worldwide Bond			$91.61	-1.16	0.06	1.13	-0.29	5.26	N/A	N/A
CurrencyShares Canadian Dollar Trust	FXC	Worldwide Bond			$101.11	-1.50	0.69	1.18	-0.16	21.85	N/A	N/A
Rydex Russell Top 50	XLG	Growth	holdings		$109.52	-1.96	-0.73	-3.24	4.49	4.49	N/A	N/A
Rydex S&P Equal Weight Materials	RTM	Specialty - Unaligned	holdings		$55.08	-2.28	-2.00	-7.05	-2.11	8.19	N/A	N/A
Rydex S&P Equal Weight Technology	RYT	Specialty - Technology	holdings		$48.90	-2.43	0.17	-5.85	0.98	0.98	N/A	N/A
Rydex S&P 500 Pure Growth	RPG	Growth	holdings		$37.48	-2.59	-0.74	-4.32	-0.84	5.56	N/A	N/A
Rydex S&P Equal Weight Health Care	RYH	Specialty - Health	holdings		$55.82	-2.60	-3.02	-2.36	-0.84	9.45	N/A	N/A
Rydex S&P Equal Weight Utilities	RYU	Specialty - Utility	holdings		$60.65	-2.68	-1.46	-0.80	-1.31	8.56	N/A	N/A
Rydex S&P 500 Pure Value	RPV	Growth	holdings		$30.67	-2.74	-2.79	-6.91	-4.27	-4.27	N/A	N/A
Rydex S&P Equal Weight Consumer Staples	RHS	Specialty - Unaligned	holdings		$51.42	-3.15	-2.84	-0.02	-2.51	6.20	N/A	N/A

Disclosure: We may own any EFT above at any time.

Please verify the performance of any ETF before investing.