Reading daily about write downs on Subprime related losses, now totaling some $45 billion, you may be wondering how this whole mess got started. How can it be that simple real estate loans have the power, when improperly used, to negatively affect some of the largest financial institutions in the world?

An anonymous reader submitted this hilarious video clip analyzing how a Subprime mortgage ends up as a SIV (Structured Investment Vehicle) on Wall Street. The British actors are superb in their interpretation of Wall Street investment bankers, and I like to thank the anonymous reader for submitting it so that you too can be exposed to Wall Street’s infinite wisdom.

My latest No Load Fund/ETF Tracker has been posted at:

http://www.successful-investment.com/newsletter-archive.php

The bears had a feeding frenzy this week as the major indexes took some heavy hits.

Our Trend Tracking Index (TTI) for domestic funds/ETFs has moved to +4.25% above its long-term trend line (red) as the chart below shows:



The international index slipped -0.09% below its own trend line, keeping us in neutral territory.



For more details, and the latest market commentary, as well as the updated No load Fund/ETF StatSheet, please see the above link.

News on continued problems in the Subprime area seem to pick up speed almost every day. The most recent articles point to Washington Mutual (WaMu) considering to set aside some $412 million to $2.1 billion in extra reserves because of a lawsuit brought on by New York’s state Attorney General.

The suit alleges that First American Corporation and eAppraisalIT colluded with WaMu to inflate the appraisal of homes. This is a serious charge which apparently goes way beyond subprime loan issues and focuses on appraisals of all kinds.

The potential repercussions could be grave indeed. If the suit holds up, poorly performing securitized loans could be put back to WaMu from bondholders on the basis of fraudulent appraisals. That means that WaMu would be forced to put the bad loans back on its balance sheet and then mark them to market.

Let’s look at some numbers. During the period in question, WaMu originated some $275 billion of real estate loans, of which some $172 billion were sold as mortgage backed securities. The article estimates that about some $33 billion could be put back to WaMu, which then might require some $412 million to $2.1 billion in reserves.

The latest figures released yesterday showed that credit losses could amount to $2.7 to $2.9 billion and WaMu did not expect much growth but higher expenses in the next year. Their most recent financial statement as of 6/30/07 showed assets of $312 billion and liabilities of $288 billion, which leaves equity of some $24 billion.

While that is a decent equity cushion, I am not sure how long that will last as Subprime exposed companies are moving through a time where obligations and/or losses seem to change by a few billion dollars on a weekly basis.

Worries about the extended impact of the Subprime debacle had the markets retreat and then recover over the first two trading days of the week.

Below please find the link to the most recent ETF Master list, which has been updated with yesterday’s closing prices. This will enable you to work with more recent data. You can download the file at:

http://www.successful-investment.com/SSTables/ETFMaster110607.pdf

Our domestic Trend Tracking Index (TTI) moved higher from last Friday’s close, while the international one moved slightly lower. However, both remain in bullish territory with the domestic and international TTI having moved above their long term trend lines by +6.81% and +3.43% respectively.

The Fed’s decision to cut interest rates by ¼ point has raised numerous discussions as to whether more reductions are a possibility or if that was it for the near term.

Michael Shedlock’s article “Rate Cuts: Is It Two and Done?” examines the effects of the rate cut on the economy, and he offers his thoughts on why he believes that more cuts are to come, but not for the generally accepted reasons.

Mortgage rates have not helped borrowers one bit, and he quotes Professor Linden as saying that it is now easier to arrange a golf outing with Tiger Woods than to get a mortgage. Don’t believe it?

Read this latest article in MarketWatch titled “Unprecedented tightening in lending standards.” Since the pendulum always swings from one extreme to another, I was not surprised to learn that even borrowers with the best credit have to jump through hoops to get approved.

If that trend continues, real estate sales will slow down to a crawl, prices will further decline and the economy and job growth will be affected very negatively. As always, Michael’s article provides good insight and is a must read.

Over the past few days, I received several e-mails from readers voicing their concerns about a variety of issues which might affect their investments. The topics ranged from anticipating a worsening of inflation to diversifying into Canadian funds and when to shift assets into better performing areas.

Reader Scott’s email is typical. He writes:

Are you optimistic for the long-term health of U.S. markets? I see several trends that make me pessimistic: demographic trends indicate larger numbers of retirees and fewer numbers of workers; political trends indicate larger government therefore higher taxes; greater worldwide demand for raw materials, especially petroleum; declining strength of the U.S. dollar. It seems like all the elements of the perfect financial storm.

And if such a storm were to hit, how can the small investor find safe harbor?

Sure, all if his concerns are valid and you certainly could add a host of others including the scandals I referred to in yesterday’s post. The problem is that you don’t know if and when those events come about and what effect they might have.

This only way to observe potential changes is by following trends as they happen. That does not mean trying to forecast, it means to actually track various investment orientations as I do with my weekly StatSheet. Since all funds/ETFs are now ranked, it’s easier than ever to observe which investment classes move up and which move down in the ranking food chain.

As time goes on, you can easily see which funds/ETFs are worthy of your attention by the position they occupy. If you use these rankings to make your investment choices and combine that with our recommended sell stop discipline, you will have the best of both worlds without having to guess how future events may impact market behavior.

This will also limit your risk at the same time and, should the market go against you (and it will), you know exactly when to exit and either stand aside or re-invest in a sector that is moving up.

My point is that all the uncertainties that impact your investment life ranging from inflation, deflation, deficits, scandals, high oil prices, wars and many others will be immediately reflected in the price of the affected or underlying stock/mutual fund/ETF. That is reality, which you can measure and track without having to resort to guessing, anticipating or forecasting.

Forget worrying about the perfect financial storm, it may or may not happen. Learning to follow trends and acting upon them might be the only thing to keep you sane in an insane investment world.