More Choices to Target Big Gains in Grains
(and Other Commodities)

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

Dear A-Letter Reader,

Investing in commodities has been a hot ticket for investors in 2007, no doubt about it. Crude oil has surged about 44% this year, while wheat prices have nearly doubled in 2007!

Over the last several years, some of the biggest moves in the commodities complex have come from the "headline commodities, like oil and gold. In fact, crude oil alone has jumped 215% just since the beginning of 2001. Gold isn't far behind, with 201% gains since '01.

The industrial (or base) metals have also performed very well thanks to a strong global economy and robust construction activity earlier this decade. For instance, copper prices jumped over 300% in the past five years. In fact, copper even outperformed crude oil over that stretch.

Gold Has Chased Oil Right to the Top This Decade

But base metals have corrected sharply in recent months, due to concerns over potentially slowing global growth. Copper prices alone have fallen about 20% since early October. Crude oil and gold may also be subjected to more profit-taking pressures ahead in 2008.

Time to Get Selective with Your Commodity Plays

In the current commodity bull-market cycle, the time has come for you to be more selective with your commodity plays. A "shotgun" approach won't work as well in 2008 and beyond. Instead, you should consider a "rifle-shot" strategy for investing in commodities to target the biggest gains.

Fortunately, the ever-growing landscape of exchange traded funds (ETFs) gives you a great opportunity to zero in on some specific sectors of the commodity market, to zero in on potentially bigger gains. Let's take a quick look at the growing lineup of commodity ETFs...

Barclays Bank is already one of the global leaders in ETFs with its popular iShares family of funds. This ETF innovator recently launched eight new exchange traded notes (ETNs) that track individual commodity sub-indexes.

What Separates an ETF from an ETN

I should digress briefly to mention that ETN shares DO NOT represent fractional ownership of the fund's underlying assets.

By contrast, ETFs DO allow you to hold fractional ownership. For example, the iShares Dow Jones U.S. Energy Sector ETF (symbol: IYE) holds shares of Exxon Mobile in its portfolio. So if you own IYE, you are in essence a fractional owner of Exxon.

In fact, ETFs are structured in such a way that if you own enough shares of IYE (we're talking very large numbers of shares) you can actually contact Barclays and ask them to redeem your IYE position for individual shares in all of the portfolio's underlying stocks. Big institutional investors do this all the time. This is the reason why ETF market prices stay so close to the underlying net asset value of its holdings (unlike closed-end funds).

Instead of offering partial ownership of a fund's portfolio, Barclays ETNs are debt securities. So a Barclays ETN is essentially a bond issued by Barclays Bank. However, you don't receive a fixed return like a bond does. Instead, your ETN is linked to the performance of the underlying index, minus Barclays' management fees of course.

ETNs Have a Shorter Life Span and
Face Potential Credit Risks

Also ETFs have an indefinite life span, whereas ETNs have a stated maturity date (just like bonds), usually around 30 years. If you're the type of investor who plays a market trend over a period of 6 -months to a year or more, then ETNs maturity date isn't really a big deal.

ETNs also involve more risk than ETFs. Not only are you assuming market risk (there's always a chance that the underlying index may go up or down); you are also assuming credit risk by owning an ETN. It's just like owning any other bond.

In other words: Will Barclays pay up when your ETN matures? Frankly, it's not that big of a concern with large, A-rated banks like Barclays. These banks have reputations to protect, so they're likely to stand behind their ETNs. But still, you should be aware that it is a "potential" added risk to owning an ETN.

Now that you know the ins and outs of ETNs, here are some of Barclays most interesting new funds targeting specific commodity sectors that might be worth watching in 2008...

Which Commodity-Backed ETFs Are
On the Way Up in 2008

As mentioned above, wheat prices have been on fire this year, along with soybeans and corn. If you think the "grains" will continue to perform well in 2008, then Barclays has a new ETN for you. It's called the iPath DJ-AIG Grains Total Return Sub-Index ETN (symbol: JJG). This ETN gives you indirect exposure to all of the leading soft commodities in a single transaction.

Perhaps you're more of a meat-eater than a fan of the grains, well Barclays has also rolled out the iPath DJ-AIG Livestock Total Return Sub-Index ETN (symbol: COW). You've gotta love that ticker symbol!

There are other new iPath offerings that target copper (JJC), nickel (JJN) and all the industrial metals as a group (JJM). But the one I've got my eye on for a big potential move over the next few months is the iPath DJ-AIG Natural Gas ETN (GAZ).

If Old Man Winter would just cooperate with some frigid weather in January and February!

MIKE BURNICK, Senior Editor & Global Markets Analyst

P.S. The wide world of ETFs and ETNs keep expanding by the day, and they're offering today's global investor more choices than ever before. In fact, I just recommended a NEW ETF to my subscribers in Global Market Investor that tracks all of the red hot agriculture commodities in a single fund. To find out more about this ETF that's poised to soar in 2008, and all of my Global Market Investor picks, click here to test-drive Global Market Investor NOW!

Communists Bailout Capitalist J.P. Morgan Part I

Up in snowy Cedar Hill Cemetery in Hartford, Connecticut, the late, great J.P. Morgan is probably rolling over in his impressive tomb.

Last week, Morgan Stanley posted a stunning 4th quarter loss, after the firm's larger than expected US$9.4 billion in write-downs. The impressive debacle was all due to bad sub-prime housing investments.

Worse still, what's left of the House of Morgan, sold a whopping US$5 billion stake of the firm to China Investment Corp, to bolster its faltering capital situation. China Investment Corp. is the sovereign wealth fund of the Communist People's Republic of China.

In last week's A-Letter, I posed the question of whether official sovereign wealth funds (SWFs) bailing out two major banks by buying shares of their banks, didn't constitute financial fascism.

For instance, Singapore's official SWF, Temasek bought a large US$11.5 billion stake in UBS. Abu Dhabi's SWF invested US$7.5 billion in the troubled Citibank. As a result, these foreign governments will at least partially influence both banks and their policies from now on. It's similar to historic fascist dictators and their economic policies. Many of these dictators took state control of banks and other means of production.

There is a supreme irony in a totalitarian Communist regime rescuing the House of Morgan. After all, it was J.P. Morgan who rescued the U.S. government (and the American economy) in 1895.

In the Panic of 1893, the U.S. economy fell into a major depression caused partially by a run on the gold supply. In those quaint days the dollar was actually backed and redeemable in gold. The Panic was the worst economic crisis to hit America to date. Over 15,000 companies and 500 banks failed and 20% - 25% of the workforce had lost their jobs by the Panic's peak.

In 1895, at the depths of the Panic, the U.S. Treasury was nearly out of gold. There was no Federal Reserve or Alan Greenspan in those days. (One might say, thank God).

Democrat President Grover Cleveland asked J.P. Morgan for help. In response, J.P. put together a private syndicate on Wall Street to supply the U.S. Treasury with US$65 million in gold. Half of this gold came from Europe. This allowed the government to issue U.S. bonds that restored the Treasury to a surplus of US$100 million.

Morgan's daring action saved the U.S. Treasury but hurt Cleveland with the agrarian left wing of his Democratic party. This became an issue in the 1896 election. Banks came under withering attack from William Jennings ("Cross of Gold") Bryan. Morgan and Wall Street bankers donated heavily to Ohio's Governor, Republican William McKinley, who was elected in 1896 and reelected in 1900 on a gold standard platform.

But in those long ago days, America had the financial brains and leadership to pull off a J.P. Morgan bailout, even though some of the needed cash came from abroad. Today, Morgan's heirs must sell the shop to keep afloat...

Tune in tomorrow to find out exactly what this questionable bailout plan means for the modern House of Morgan.

BOB BAUMAN, Legal Counsel

Currencies

Be Aware When Volatility Changes

When you're trading currencies, it's critical to know how volatile a currency pair is - so you know how risk will affect your trades. This volatility also affects exactly where you should set your stop-loss, so you can prepare just in case volatility swings the other direction.

For example, say you were trading the EUR/USD just five months ago successfully with a 60 pip stop. Your trading was thriving, because the EUR/USD wasn't moving more than 60 pips a day. But now, it's a whole new story. Formerly, what was a day's worth of volatility away is now only half a day's volatility away. That means you're getting stopped out of your trades more often.

As we get closer to the year's end, expect volatility to increase even more. Why? Because the market will have less volume from the big inter-banks as they wind down their year. Less volume equals wider spreads and more volatility. So you'll want to be a bit more selective about your positions, trade less and have wider stops.

Trading tip: The carry-trade thrives in low volatility environments with increasing interest rates. Right now we've got many countries either holding rates steady or lowering rates. Volatility is on the increase. So you should plan on avoiding the most popular carry-trades like the EUR/JPY, GBP/JPY, NZD/JPY, etc.

SEAN HYMAN, Currency Director

P.S. Today's currency comment is a small excerpt from this past Monday's My Two Cents. Don't receive our FREE currency E-Letter yet? Click here to receive all our currency insights, trading tips and dollar predictions five days a week - FREE.