Bear funds don’t always behave as one might expect.

Gary Lucido, 52 years old, an active investor for 25 years, learned that the hard way. In late December, Mr. Lucido bought the UltraShort FTSE/Xinhua China 25 ProShares ETF, which aims to give twice the inverse of the daily performance of FTSE/Xinhua index, which tracks 25 large Chinese stocks trading in Hong Kong. However, when he checked in early February, he found that while the index was down 15%, the ETF was up only 17%, instead of the 30% he expected.

“This was a big eye-opener to me,” Mr. Lucido said. ProShares gave him an explanation that also appears in its literature: The fund only aims to double the return on a daily basis, but due to the effect of compounding and volatility, over a period of time the return may be more or less than double.

Indeed, some of the biggest users of bear-market funds and ETFs are financial advisers and money pros who see them as an easy way to bet against the market, or sometimes just to hedge positions. Previously, they had to ’short’ individual stocks or ETFs, selling borrowed shares with the hope they could buy them back in the future at a lower price.

However, shorting can get complicated and has the potential for huge losses if markets rocket up. Closing a short position can potentially raise the price of a stock because short-sellers must buy shares to cash in on their bets — which may force even more short-sellers to close out their bets by buying, in a spiral called the short-squeeze. Short funds, on the other hand, can be easily bought and sold like regular mutual funds, and losses for fund investors are more contained because they don’t face a short-squeeze.

Not all bearish funds are gaining this year. For instance, one ETF that bets against the oil’s price, MacroShares Oil Down Tradeable Shares, is down around 40% over one year through this past Tuesday because of buoyant oil prices during the period.

Bear-market ETFs have other wrinkles. They aren’t as tax efficient as plain-vanilla stock ETFs for various reasons. For instance, they often invest cash obtained from the short positions into money-market or debt investments, which generate taxable income passed on to investors.

A handful of bear-market mutual funds have been around for more than a decade. Rydex Investments started the first such fund in 1994, now called the Rydex Inverse S&P Strategy fund. Direxion Funds introduced the second one in November 1997, followed a month later by ProFunds Group’s first bearish fund. Today, ProFunds is the leader, with $14 billion in bear-market funds and ETFs, while Rydex and Direxion hold $1.8 billion and $250 million in such products, respectively.

In the last two years, ProFunds rapidly built its lineup of such ETFs under the ProShares brand by starting 36 ETFs, including one this week. These include ETFs, which bet against technology companies, real-estate companies, and an emerging-market index.

Rydex also is looking to introduce more funds and ETFs that will bet against foreign stocks in specific countries as well as stock sectors, said David Reilly, director of portfolio strategies.

While the new funds increasingly are based on narrow indexes, there are some actively managed funds in which managers can make bearish bets as they see them. David Tice, manager of the $1.2 billion Prudent Bear fund, shorts stocks or market indexes he thinks will fall, while also buying some gold and mining stocks that tend to do well in market downturns.

Mr. Tice has managed to prevent the fund from falling too much, even in an up market. But there’s a cost. The fund has gained 5% so far this year, about half as much as the average bear-market fund. Still, it is in positive territory during the last three, five and 10 years.

Wall Street Journalmod=todays_us_nonsub_money_and_investing

>

If you trade Apple you want to see the video and find out what what Adam Hewison has to say about the immediate prospects for AAPL, and what he has to say about Apple’s secret weapon that will likely keep the company and the stock out in front of the market for some time to come.

In response to the threat of the U.S economy falling into recession, President Bush signed a new economic stimulus package into law February 2008 which will provide more than 130 million Americans with a little extra money. The first checks are scheduled to go out in May. Yet, some taxpayers are confused about how they can get their money from Uncle Sam.

To get a clear understanding of the rules and how the phase-outs work, here’s a listing of how eligibility is structured:

Tax Rebate for Singles –
* If you earned at least $3,000 (and paid taxes), you’re eligible to receive $300;
* If you earned more than $3,000 (and paid taxes), you’ll receive $600;
* If you have children, you’ll receive an additional $300 per child under age 17 (your child’s Social Security number is a requirement);
* The phase-out reduction begins with those who have an Adjusted Gross Income (AGI) of $75,000 and ends at $87,000 – at a reduction of five percent per $1,000 over the lower limit. If you’re single and earned more than $87,000, you will not receive a rebate check.

Tax Rebate for Couples –
* If you and your spouse earned more than $3,000 but you didn’t pay taxes, you’ll receive $600;
* If you and your spouse earned more than $3,000 and you paid taxes, you’ll receive $1,200;
* If you have children, you’ll receive an additional $300 per child under age 17 (your child’s Social Security number is a requirement);
* The phase-out reduction begins with those couples who have an AGI of $150,000 and ends at $174,000 – at a reduction of five percent per $1,000 over the lower limit. If you are a couple who earned more than $174,000, you will not receive a rebate check.

Also important to note is that $300 payments will go to seniors, veterans and veterans’ widows who showed $3,000 in veteran’s disability or Social Security benefits.

Many Americans are asking, “If I hold off on filing my 2007 tax return until April, will I get my tax refund and rebate on one check?” and “Do I have to file a tax return to get a rebate check?”

“To ensure you receive a rebate check that may be due to you, taxpayers must file a 2007 tax return. For those Americans who don’t earn enough income to normally file, a simplified filing process using Form 1040A has been rolled out by the IRS,” says Stephanie Behrends, spokeswoman for 2nd Story Software — makers of popular TaxACT tax software.

“However, whether you file your tax return in January or April, taxpayers who are expecting a tax refund will not receive a consolidated check representing their refund and stimulus rebate. In fact, rebate direct deposits and paper checks will be issued by the IRS based on the sequence of your Social Security Number.”

If you are a one-time stimulus filer, you can opt to prepare Form 1040A-3 the old fashioned way (by hand) and mail it in to the IRS. Another option for stimulus filers is to file electronically by visiting the Free File Program hosted by IRS.gov. For 2008, taxpayers filing their 2007 tax return and one-time stimulus filers may qualify to use the IRS’ Free File Program providing your Adjusted Gross Income does not exceed $54,000. Taxpayers are, however, encouraged to weigh their options carefully as some Alliance Partners place restrictions on the type of income and deductions taxpayers can claim while using the Free File Program.

4:20 pm : On Thursday, the stock market closed the shortened week on a high note. The major indices surged more than 2% in heavy trading, and finished near their best levels of the session. Financials led the way higher, thanks to a pair of upgrades and news that the Fed is expanding its previously announced plan to increase liquidity.

The financial sector (+6.9%) was the driving force behind this session’s strength. It got off to a strong start after Fannie Mae (FNM 34.30, +3.59) and Freddie Mac (FRE 32.58, +2.68) were upgraded to Outperform from Market Perform at Keefe, Bruyette & Woods.

Financials, and the market, got a further boost after the New York Fed announced modifications to its new Term Securities Lending Facility (TSFL). The TSFL auctions will now allow schedule 2 collateral, instead of the schedule 1 collateral previously proposed. Schedule 2 collateral will now include collateralized mortgage obligations (CMOs) and AAA rated commercial mortgage-backed securities

In other words, the Fed will be lending banks highly liquid Treasury securities in exchange for less liquid assets. Banks will now be able to use a wider range of collateral than previously announced. The first auction will take place on March 27 with an offering size of $75 billion for a term of 28 days. Up to $200 billion in loans have been authorized. This is a positive development as it temporarily relieves holders of the difficult to trade securities.

The thrifts & mortgages group (+10.3%) was a standout for the third day in a row. The group has spiked 53% from its low on Monday. Investment banks & brokerages was also a leader with a 11.2% gain. Yahoo Finance

Some parts of the country will get hit a lot harder than others, and it will take them longer to recover.
By Jerome Idaszak, Associate Editor, The Kiplinger Letter

We’re forecasting a mild, short contraction ending well before the year is out. With housing and lending industries hurting, factory production and retail sales falling, employment shrinking and consumer incomes slowing, there’s no question that a recession is under way. But relief is already in sight.

Still, some parts of the country will be hit a lot harder than others. In states that led the housing boom, including Florida, Nevada and Arizona, as well as Southern California, thousands of jobs in construction and real estate services are disappearing as home values fall. Frost Belt states are in pain, too, especially Michigan and Ohio because of troubles in the beleaguered auto manufacturing industry.

But look for a turnaround soon, with expansion returning in the second half of this year. The fiscal stimulus from Washington and the accumulated interest rate cuts by the Federal Reserve plus other moves will translate into a 2.5% growth in the economy for the third quarter and a similar pace in the fourth quarter. Next year, though, we expect a tepid 2% or so gain in gross national product, and it may feel even slower to some. John Silvia, chief economist with Wachovia Corp., says, “We’re still working through the housing crisis, and we’ve got credit problems to deal with.”

The Roadmap Chart has served as a pretty good indicator of the trend parameters for more than 4 months. Johnny-Come-Latelys haven’t had too many late entry opportunity as we haven’t seen an upper channel touch for some time. The Master Time Calculator indicates that March 23-March 25 is the next window in which to look for a reversal or change in trend.

“The Fed’s failure to expand the set of institutions it deals with reflects failure to adapt to the new world of financial intermediation. Previously, lending was dominated by banks, which meant the Fed could address liquidity shortages threatening the supply of credit by providing liquidity directly to banks. Today, lending is increasingly separated from banks. First, banks sell many of the loans they originate so that the ultimate lender is not a bank. Second, many originating lenders are non-bank firms. That means the credit supply is vulnerable to disruptions among these other lenders.” Preventing a Financial Crash

The columnists in the AsiaTimes are an unending source of analysis and most often criticism of the American financial system. Sometimes you can’t help get the impression that it’s a wonder our polity has managed to survive without the guidance of these ever so prescient journalists.

Hopefully, the Fed, and other Central Bankers when needed, will keep liquidity at the top of the priority list. Inflation and a battered dollar will no doubt result but those evils as bad as they can be are not fatal.

The individual Alternative Minimum Tax (AMT), implemented in 1969, is a parallel income tax system that was created to prevent 155 wealthy Americans from aggressively using tax credits, deductions, and legal tax shelters as tools to help them avoid having to pay federal income tax. The idea was simple: Create a minimum tax that ensured everyone pays Uncle Sam his due.

Fast forward to present day and you’ll find millions of middle-income Americans are now getting snared by the AMT. The main reason the AMT now reaches into the pockets of the middle-class is because regular income tax brackets are indexed for inflation but the AMT thresholds are not. The result has been the steady expansion of households who find themselves hit by the AMT — especially households with a large number of children, education credits, residential energy credit and/or state and local taxes.

Why haven’t Americans been clamoring for an immediate overhaul to the AMT? Thus far, the full effects of the AMT have been deferred by Congress enacting a series of temporary patches — boosting the amount of the AMT exemption.

The last temporary fix to increase the exemption, however, expired at the end of 2006. If Congress fails to ratify another provisional one-year increase in the next few months, the number of households paying the AMT will escalate exponentially from approximately 4 million in 2006 to nearly 23 million for 2007.

To determine if a taxpayer owes tax under the AMT, filers must calculate their taxes under both the regular tax and AMT systems — making the “Alternative Minimum Tax” tax a bit of a misnomer considering taxpayers must pay the higher of the two. The biggest factor impacting AMT filers is that they are no longer eligible to claim certain deductions and exemptions (i.e. education credits, child care credits, and the deduction for state and local taxes).

Sound complicated? It can be if taxpayers don’t plan ahead and use the tools that are available to them as a significant portion of taxpayers may be surprised when they are suddenly hit with a big tax bill, plus possible penalties come next April. Some planning tools are even free, such as the tool offered by 2nd Story Software, Inc., makers of the popular tax program TaxACT.

“It seems unlikely that lawmakers will fail to pass another patch to serve as a quick fix to hold down the reach of the AMT. Guessing wrong, however, could prove costly. Unfortunately, there are a vast number of factors that will trigger the alternative tax for any given taxpayer,” says Stephanie Behrends, spokeswoman for 2nd Story Software.

“TaxACT Preview is a taxpayer’s ally, allowing users to perform what-if scenarios to determine their estimated tax liability,” she says. “Users simply need to step through the TaxACT interview entering their forecasted income and deductions for the tax year by answering simple questions in layman’s terms. TaxACT simultaneously calculates your projected tax with the regular tax system and the AMT system based on the taxpayer’s tax bracket and the most recent tax information available.”

Visitors need only to complete the site’s free online registration to gain access to TaxACT’s Online Deluxe Preview version. The tools available at www.taxact.com allow users to generate a forecasted federal and state income tax refund or liability amount – which will provide valuable insight into their tax situation. Once the final version of TaxACT releases in early January 2008, users can easily finalize their tax return and print and/or e-file their federal tax return for just $9.95.

Do you have more questions regarding the AMT and how it may impact you? More information is available at www.IRS.gov — just enter keyword “AMT” or “Alternative Minimum Tax”.