Looking for a new emerging market? Try Pakistan! Despite a continued sense of tension with India and open hostility along the Afghan border, the country's bond market is the best in the world, according to data from JPMorgan Chase & Co. (NYSE: JPM). Debt sold by Pakistan has surged 88% this year -- topping the 45 emerging markets that JPMorgan watches and the 19 that Merrill Lynch & Co. (NYSE: BAC) follows.

And, the stock market may be next.

Money managers, according to a report by Bloomberg, believe that the Pakistani equity market could become the next global superstar. The Karachi Stock Exchange 100 Index is only trading at 9.6X earnings, making it the lowest in Asia (excluding Japan) . . . and this follows a 21% increase year-to-date.

New York Times (NYSE: NYT) Columnist David Brooks draws attention to a U.S. economic discussion and reality that's been all-but-sidelined in the past three decades, particularly among younger investors and others who believe that history began in 1981. Namely, that there's been a distinct cyclicality to the nation's economic / public policy history.

Is a new progressive era ahead?

That may come as a surprise to market absolutists and others who see economic history and their view of economic progress as a straight line towards privatization. In fact, periods of economic conservatism and liberalism -- the latter also known as progressive reform -- have cycled for much of the nation's history.

For Brooks, those economic blinders help explain both the market absolutists' befuddlement at the financial crisis around them and their inability to adapt to the electoral demands brought on by the crisis. Market absolutists are in a straightjacket of a party that is ailing and part of a conservatism that is behind the times, he says.

On the cycle's timing, economist David H. Wang argues that the old era ends and the new era begins not when social pressures build from the bottom-up, but when institutions -- like investment banks, mortgage lenders and credit default swap issuers -- fail from the top-down.

The thaw in credit markets continues.

Interest rates for one-week loans in dollars fell considerably early Tuesday, after the United States Government announced it would invest $250 billion in banks, in a recapitalization plan that mirrors those announced by Europe's major powers on Monday.

The London one-week rate for dollar loans decreased 50 basis points to 4.08%, Bloomberg News reported Tuesday. Meanwhile, the LIBOR-OIS spread, a gauge of cash demand, fell 14 basis points to 340 basis points. The TED spread, the difference between what banks and the U.S. Treasury pay to borrow money for three months, fell 12 basis points to 445.

Short-term rates, including overnight rates, are key sources of cash for corporations and other large institutions, which use the cash to pay suppliers, make payroll, roll over debt etc. Hence, very high overnight and short-term rates will discourage corporations from conducting business, restricting commerce and slowing the economy, economists say.

Action seen further reducing banks' anxiety

Economist Peter Dawson told BloggingStocks Tuesday the actions taken this weekend and over the past two days by industrialized nations and their respective central banks will continue to loosen credit markets and decrease anxiety that's tightened the flow of money, globally.

To see the impact of credit market strain in the United States one need not travel farther west than The Bay State.

On Tuesday, Massachusetts, which would rank in the top 100 countries in the world in terms of GDP if ranked as a nation, postponed the sale of $750 million in short-term notes for the second time in two weeks, due to a lack of demand.

However, it should be pointed out that Massachusetts's decision occurred before the U.S. Federal Reserve's decision, announced Tuesday at 9 a.m. EDT, to buy all corporate commercial paper to ease tight credit markets.

Further, although the municipal market differs from the corporate commercial paper market, the Fed's action aimed at easing conditions in the credit market overall, via both guaranteeing debt payment and by moral suasion. Many economists see this as the Fed's attempt to change market psychology via the central bank's enormous financial resources, monetary policy stance, and regulatory powers.

Still, economists caution that the Fed's commercial paper guarantee does not end counterparty risk; it simply eliminates a segment of that counterparty risk. According to economist David H. Wang, more actions by the Fed and U.S. Treasury undoubtedly will be needed to get credit flowing more freely and also reduce perhaps the biggest systemic problem: fear. Commercial paper is about a $1.5 trillion market, while states and local governments borrow about $2.8 trillion, Wang said.

Oil surged back over $100 Friday after traders sensed the U.S. Treasury / U.S. Federal Reserve's plan to stabilize the financial markets by buying-up distressed / bad mortgage debt could very well boost inflation, increasing the attractiveness of oil as an inflation hedge.

Oil rocketed up $4.91 to $102.79 per barrel Friday morning. The other major energy commodities also jumped Friday. Unleaded gasoline rose 9 cents to $2.57 per gallon, heating oil climbed about 10 cents to $2.88 per gallon, and natural gas gained 11 cents to $7.72 per million BTUs.

Energy Trader Jim Dietz told BloggingStocks Friday slowing global economic growth that's likely to slow the increase in global oil demand is the oil market's long-term concern, but short-term the focus is on inflation.

"I haven't seen the details of the [U.S.] Government's plan yet but there's three ways we can pay for it. We can increase government spending, print money, or sell government bonds," Dietz said. "The first two can increase inflation quickly, the last one, not as quick, but either way, there will be some increase in inflation, which is why traders are buying oil. Inflation now will jockey with global growth concerns to determine the direction of oil's price."

As of midday Monday, the Dow had rebounded off early-session lows, but if investors / readers are thinking about entering this market now, caution is advised, for several reasons.

First, those familiar with technical analysis know that the Dow's rebound to a loss of 180 points to a level of about 11,233, up from a loss of more than 300 points, could be just short-covering.

Second, major unknowns exist regarding the financial system. And I mean major.

The fate of American Interational Group (NYSE: AIG) remains an enormous question mark. The largest insurer of assets, AIG may face a downgrade that would trigger a collateral call from debt investors who bought credit default swaps, a form of insurance for bonds. Further, if hedge and other institutional investors sense those swaps are not in force, they may seek swaps elsewhere and/or sell assets to reduce market risk / raise capital. That could spark a new round of stock selling. AIG's shares fell $5.33 to $6.81 in late Monday morning trading.

Oil plunged more than $8 to about $136 Tuesday at mid-day after Fed Chairman Ben Bernanke's indicated the risks to U.S. growth have increased as a result of credit market losses, Bloomberg News reported Tuesday.

Oil fell $9.26 to $135.92 per barrel before recovery slightly. Oil hit a record of $147.27 per barrel on July 11.

The other major energy commodities, likewise, plummeted on the news. Heating oil plunged almost 15 cents to $3.91 per gallon, unleaded gasoline sank almost 17 cents to $3.39 per gallon, and natural gas plunged 44 cents to $11.51 per million BTUs.

"Oil in free-fall"

Energy trader Jim Dietz said "a mini selling frenzy" hit the oil market after Bernanke indicated the U.S. economy was likely to slow further.

"We did have some support for an oil-long trade earlier as an investment when few other investments are working, but that sentiment was quickly wiped out by Bernanke's comments," Dietz said. "We had oil in free-fall for about an hour. The market put 'two and two together.' We had the Fannie Mae and Freddie Mac bailout news yesterday [Monday] and Bernanke's bearish comments today. That led a lot of people to conclude we're going to see a slowdown in oil demand growth, which means lower prices."

"It's like that wave approaching the shoreline that you see in the distance and don't think is big, and then it's 100 feet in front of you and you realize it is."

That's how London-based economist Mark Chandler described Europe's perspective on the potential 'latest wave' of the housing crisis -- the research report by Lehman Brothers (NYSE: LEH) that Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) may have to raise up to $46 billion and $29 billion in additional capital, Bloomberg News reported.

Europe is concerned that the pair's announcement "signals another round of write-downs here in England and Europe as well as in America" Chandler told BloggingStocks Tuesday, with negative consequences for the stock market, and, equally significant, for business and consumer confidence, he said.

Europe's major stock markets decline

Indeed, Europe's major stock markets did not react favorably Tuesday to the Lehman report. London's FTSE fell 66.70 points to 5446.00, Germany's DAX declined 104.49.35 to 6,291.71, and France's CAC 40 fell 78.22 to 4,263.37 in Tuesday afternoon trading.

U.S. home foreclosures reached another record high in Q4 2007, the Mortgage Bankers Association announced.

A record 0.83% of mortgages were entering the foreclosure process in the last three months of 2007, compared to 0.54% for the same period in 2006, the MBA announced.

In addition, the delinquency rate reached 5.82% in Q4 2007 -- the highest level since 1985 -- up from 4.95% in Q4 2006.

Standard & Poors, a division of McGraw-Hill (NYSE: MHP), has joined Moody's (NYSE: MCO) and Fitch in announcing reforms in the wake of the criticism for their role in the subprime fiasco.

S&P says it will hire an ombudsman to investigate conflicts of interest and bring in an outside firm to look at compliance and ethics-related issues. Lead analysts will be rotated from time to time and the company will consider a slew of new factors: liquidity, volatility, correlation and recovery, and "worst-case scenarios."

But New York Attorney General Andrew Cuomo isn't buying it: "The supposed reforms announced today by Standard & Poor's and by Moody's on Tuesday are too little, too late. Both S.&P. and Moody's are attempting to make piecemeal change that seem more like public relations window-dressing than systemic reform."

From an investor's standpoint, I'm inclined to agree with Mr. Cuomo. Moody's carries a market cap of nearly $10 billion, but its entire business depends on the willingness of investors to take its ratings and analysis seriously.

But over the past year or so, the "work" of the ratings agencies has been exposed as pretty much a joke. It will take a lot more than this to recover the company's reputation.

The proposed Super SIV may end up being considerably smaller than the original outline, as banks and other SIV-owning institutions either write-down or find other ways to dispose of problematic SIV assets, The New York Times reported Monday.

Conceptualized following a request from the U.S. Treasury, the Super SIV is designed to facilitate the orderly sale of high-risk packaged mortgage loans and assets held by SIVs, but not to rescue those SIVs.

As presently configured, beginning in January/February 2008 the Super SIV will lead a coordinated, gradual purchase-and-resale of these assets, which, officials say, will avoid a "mad rush to the door" of SIV asset sales. The latter would further depress prices, and create another round of credit market turmoil, with negative consequences for the U.S. economy. The Super SIV will raise money from financial institutions to fund itself.

November's 94,000 added jobs statistic is likely to tip the scales in favor of a quarter-point cut in short-term interest rates instead of a half-point cut, economists and analysts say.

"The November job creation number, while not outstanding, is more than enough to quell the half-point hawks," economist Steve Affinito told BloggingStocks Friday. "The Fed will cut interest rates by one-quarter point next week."

Affinito said the November 2007 jobs report was "the sole bright spot" after a string of negative economic data recently reported for the U.S. economy. That data points to a slow-growing U.S. economy (or possibly worse) through Q1 2008, many economists agree.

"If we can register 2% GDP growth in the first quarter of next year, that would be acceptable at this point, and I would take it," Affinito said, adding that Q1 could conceivably show a contraction. For Q4 2007 Affinito estimates that the economy will have slowed to 2.3-2.6% growth.

San Francisco Federal Reserve Bank President Janet Yellen is on the wires again, becoming the latest Fed governor to note that the U.S.'s economic slowdown is bigger than she expected, Bloomberg News reported Tuesday.

Last week Fed Chairman Ben Bernanke and Vice Chairman Donald Kohn also noted that credit market woes fed by subprime mortgage and related asset defaults tipped the scales toward 'the downside risks to growth.'

Yellen said recent data on retail sales and consumer spending were not that encouraging, Bloomberg News reported.

U.S. Treasury Secretary Henry Paulson is negotiating an agreement with banks and other lenders to limit the surge in foreclosures by fixing interest rates on loans to subprime borrowers, people familiar with the Thursday meeting said, Bloomberg News reported.

"We've all agreed that there should be some sort of standardized approach to reaching more homeowners faster," U.S. Treasury Department spokeswoman Jennifer Zuccarelli told The Associated Press.

Subprime mortgages worth about $362 billion are expected to reset to higher interest rates in 2008, according to BusinessWeek magazine.

Market chatter Friday speculated on the plan's form, with no consensus readily emerging so far. Some Wall Street analysts expect Paulson's plan to focus on middle-income loans, excluding higher-income borrowers on the belief that they will able to obtain better terms themselves, and excluding lower-income borrowers who would not be able to afford their mortgage, even after a refinancing. Other analysts suggested that the plan may be more encompassing -- "capping" or limiting interest resets to predetermined rates.

It looks like the Super SIV roadshow is about ready to start, with the Bank of America apparently taking the lead.

Left unanswered -- at least for the immediate future -- are compelling questions related to the fund's transparency, effectiveness, and cost.

The Bank of America (NYSE: BAC) announced Monday that it will lead efforts by Citigroup (NYSE: C) and JPMorgan Chase (NYSE: JPM) to convince smaller competitors to help finance an $80 billion bailout of the short-term debt market, Bloomberg News reported Monday, citing two sources with knowledge of the matter.