The Sharks Are Circling on Wall Street...
Looking for a Year-End Snack

Today's comment is by Mike Burnick, Senior Editor, Global Markets Analyst and editor of Market Shock Trader.

Dear A-Letter Reader,

Yesterday was another sub-prime related wipeout on Wall Street. The big banks and brokers tumbled again, due to ratings downgrades from their own kind. This is a sign that the credit-crunch market shock is entering a new and more dangerous phase.

Citigroup, the largest bank in the U.S. as measured by assets, dropped to fresh four-year lows. That was after Citigroup's Wall Street "colleague" Goldman Sachs downgraded the stock. Goldman said that credit-market losses may cause Citigroup to report US$15 billion in additional losses and asset write-offs over the next two quarters.

But Goldman was still on the warpath - looking for other scalps besides Citigroup. Merrill Lynch and Morgan Stanley also slumped toward new lows after a Goldman analyst cut the share-price estimate on both stocks. Once again, Goldman sighted more sub-prime fallout ahead for these two brokers.

Blood in the Water on Wall Street
Won't Affect Year-End Bonuses

When Wall Street's elite firms begin attacking their own like a pack of hungry sharks smelling blood in the water; you just know that the credit crunch is taking a turn for the worse. I expect more market shocks dead ahead.

Now contrast that story with this reported by Bloomberg news yesterday; the headline says it all: "Wall Street Plans $38 Billion of Bonuses as Shareholders Lose."

Investors in the financial sector are taking it on the chin this year, with big banks and brokers slumping the most since 2002. In fact, firms in the securities industry have lost US$74 billion of their combined stock market value this year, according to Bloomberg. But that "won't prevent Wall Street from paying record bonuses, totaling almost US$38 billion" this year.

Yes, you read that right. Wall Street fat-cats will still enjoy huge bonuses this year - despite growing sub-prime related losses!

Bonuses Equal Four-Times the
Average American's Income

In fact, the "average" bonus paid on Wall Street this Holiday season is likely to be about US$201,500 per person. That's "more than four times the US$48,201 median household income in the U.S. last year, according to U.S. Census Bureau statistics."

Wall Street is swimming in red ink thanks to nearly US$50 billion (and counting) in losses and asset write-offs so far due to the credit crunch. Ah, but booming M&A activity earlier this year should provide plenty of year-end bonus money for the Wall Street fat-cats.

But don't be fooled. Once the books are finally closed on 2007, and those hefty year-end bonuses are paid and cashed in - that's when you'll begin seeing the real financial damage caused by the credit crunch.

Just as soon as this year's bonuses are safely paid, that'll be the signal to clear-the-decks with even more asset charge-offs and losses in early '08.

Whatever you do: Please don't pity the Wall Street investment bankers this time next year when you read about skimpy 2008 bonus awards. Just remember the fat paychecks they cashed in December 2007 - on the backs of billions in investor losses - and still growing!

MIKE BURNICK, Senior Editor & Global Markets Analyst

EDITOR'S NOTE: While Wall Street firms earn billions in bonus money, in spite of the ongoing credit crunch, here's a way that you can cash in too - and earn big potential gains from the ongoing Wall Street market shocks. In his new VIP investment service, Market Shock Trader, Mike has been recommending specific call and put options to play the financial bloodbath unfolding in the markets. Turning the market's rising volatility to his subscribers' advantage, Mike's recent trade recommendations have resulted in gains of 107%, 117%, and up to 131% for subscribers! Click here to find out how he did it.

So Much for Freedom of Travel...

The United Nations Universal Declaration of Human Rights states: "Everyone has the right to freedom of movement and residence within the borders of each state. Everyone has the right to leave any country, including his own, and to return to his country."

Nevertheless, almost every nation - including both dictatorships and democracies - has systematically violated these so-called "rights" of free movement, travel and residence. The United States and the United Kingdom are among the worst violators. Both countries have violated these rights when it suited the government in power at the moment.

Now a new outrageous government action is blocking freedom of international travel. This time these violations are "down under" in the supposedly free nation of New Zealand.

Chris Kalin, the executive director of Henley & Partners AG in Zurich, (www.henleyglobal.com) called to my attention an official New Zealand government website of the New Zealand Ministry of Justice (www.payorstay.govt.nz/). This website proclaims: "UNPAID FINES COULD STOP YOU TRAVELLING OVERSEAS!"

"NZ Justice" goes on to warn Kiwis that: "If you have an unpaid fine or owe reparation, you may be stopped and even arrested on arrival or departure at any New Zealand international airport. So pay what you owe immediately and then you can travel just like everyone else."

Under New Zealand law, an unpaid fine could be as insignificant as a parking ticket. "Reparations" are defined broadly as any court judgment against you or your assets. Apparently in this wonderful computerized age, all four million plus New Zealanders, their traffic citations and court orders have been cross indexed to the passport system. That means they can get you coming or going.

Not to be outdone, the United States government restricts foreign travel for so-called "dead beat" parents who have not paid up on their court ordered child support.

Section 51.70 (a) (8) of Title 22 of the Code of Federal Regulations outlines this mandate. This section states that if you are certified to U.S. State Department Passport Services by the U.S. Department of Health and Human Services (HHS) to be in arrears of child support payments in excess of US$2,500, you are ineligible to receive a U.S. passport.

If this applies to you, Passport Services strongly recommends that you contact the appropriate State child support enforcement agency to make payment arrangements before applying for a passport. If you already have a passport, it will be suspended for non-payment.

The State agency must certify to the US HHS that acceptable payment arrangements have been made. Then, HHS must notify Passport Services by removing your name from the electronic list HHS gives to Passport Services. (Passport Services cannot issue a passport until HHS has deleted your name.)

So much for freedom of movement.

BOB BAUMAN, Legal Counsel

P.S. To find out all about the possibilities of foreign residence, second passports, dual citizenship and travel, click here.

Wealth

The Best Hedge in 2008: The Japanese Yen

Right now, all three investment editors here at The Sovereign Society adamantly agree on the same bullish trend.

Since last winter, we've all grown increasingly bullish on the Japanese yen - the primary funding currency for the infamous "carry-trade."

At this month's Offshore Advantage Academy, Mike Burnick, Sean Hyman and I continued to recommend the undervalued Japanese yen. We all agree it's one of the best risk-adjusted currencies to own in 2008.

The yen remains extremely cheap versus most major currencies, especially compared to the euro. But more importantly, the yen plays a major role in defending your global portfolio against more volatility.

Risk Rises, the Yen Rises

The yen is an optimal hedge against falling stock markets. It's a better hedge than any other currency and most other asset classes.

The yen rallies on any given day the stock market declines. And of course, the yen drops when the stock market rallies. This means it's simply the most cost-effective and liquid trade to defend your portfolio against a bear market or against additional sub-prime shockwaves.

The way I see it, the low volatility environment we've enjoyed since 2003 is now over. It ended with a "bang" last February when sub-prime problems first surfaced.

The CBOE Volatility Index, or VIX, which measures options-trading sentiment on the S&P 500 Index, has surged 124% this year. It's skyrocketed 151% over the last 12 months from multi-year lows!

The VIX will continue to rise next year. It will rise as global economic expansion begins to slow, credit markets suffer more hits and bankruptcies and defaults rise. It's fair to assume that although stocks will head higher in 2008, volatility will continue to rise along the way.

The best way to hedge your stock portfolio from rising volatility is to simply own the Japanese yen. The Japanese currency is a great investment right now with overvalued euro and most foreign currencies, and to a lesser extent, U.S. dollars.

Investors can purchase the yen through EverBank (FDIC protected up to US$100,000) or through most offshore banks and exchange traded funds.

In 2008, go long the yen.

ERIC ROSEMAN, Investment Director