Following hot on the heels of an amazing surge in both its economy and stock market, 2008 was not a good year for this country.

As equity prices slumped by 66% – one of the worst emerging market selloffs ever – the swift downturn took some folks by surprise. Folks who merely expected the boom to continue unabated, that is.

Smarter investors, however, knew that what goes up inevitably comes back down again, and our sister publication – the Xcelerated Profits Report (XPR) – was there to capitalize. By playing the iShares FTSE/Xinhua China 25 Index (NYSE: FXI), the ETF that tracks the price and yield performance of China’s top companies, we grabbed profits ranging between 56% and more than 100%.

How did we do it? We simply bought put options on the ETF.

Why did we do it? Well, 2008 was the Year of the Rat! Seriously, though, we shorted China because the market had got ahead of itself, with companies trading at dotcom multiples.

As Strong As An Ox In 2009

One of the core truths about investing is that stocks and markets will always return to their mean. That’s exactly what happened in China last year. Question is… what does 2009 have in store for investors looking to play this emerging market?

Who says investing is a non-emotional exercise? This year is the Year of the Ox – and Chinese pundits couldn’t be happier.

We believe Chinese stocks will close the year higher – and in XPR, we already have exposure to the country through a closed-end fund that is trading at a 20% discount to its Net Asset Value (NAV) and is run by one of the most successful emerging market investors. Nothing like buying a dollar’s worth of shares for less than 80 cents. Talk about being undervalued.

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Madoff Made Off With Billions… But Where Did The Money Go?

Without going into the sordid details about Bernie Madoff’s shady Ponzi scheme, we simply ask the question: Where exactly did Bernie’s billions go?

I know several people in the industry who work at funds that invested with Madoff. They say that many people who think they have no exposure to it are in for a surprise because they haven’t yet received their post-Madoff statements yet.

Turns out that you didn’t need to invest with Madoff directly to lose your shirt… just in one of the funds that “invested” money with him. As for Bernie’s booty, he’s been using the mail service to send more than $1 million worth of jewelry to relatives. He claims it was before his arrest. Um, yeah, like he didn’t know?

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Gold Is Rolling… But Here’s A Better Commodity Trade

As skittish investors continue to flock towards the traditional safe haven of gold amid an increasingly inflationary environment, the yellow metal continues to hold strong.

But there may be a better play than gold…

Used every day in jewelry and in manufacturing, platinum is trading almost at parity with gold. This is a very rare occurrence, since it usually trades at twice the price of gold.

However, slower auto sales and production, coupled with decreased jewelry demand, has presented savvy investors with an opportunity to make a bet on inflation and economic recovery at the same time.

We’ll cover platinum in more depth in an upcoming issue. Don’t miss it.

Speaking of auto industry woes, here’s Martin Denholm with news on how the gloom has spread to Toyota…

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Toyota Puts The Brakes On

As Detroit’s automakers have tanked, savvier firms like Toyota (NYSE: TM) have swooped in and stolen a march on them with a business model that includes more emphasis on fuel-efficient and hybrid cars.

But news today that Toyota is extending its mandatory three-day production cut by an additional 11 days doesn’t bode well for an already battered industry. In addition, Toyota will also shut down truck production at two U.S. plants for a three-month period.

With sales in both the U.S., its biggest market, and overseas declining, the cutback – scheduled for January and again in February and March – is designed to allow them to maintain jobs in the long run, while saving on costs in the short-term. Toyota, which hasn’t posted a single loss as a public company (but warned in December that it will do so for 2008), also hopes to reduce its stock of unsold vehicles.

The initial 3-day production halt will affect all 12 of the company’s directly operated domestic plants, including four vehicle-assembly facilities, plus factories in charge of making transmissions and engines.

Meanwhile, Chrysler, General Motors (NYSE: GM), and Ford (NYSE: F) continue their freefall. December sales at Detroit’s so-called “Big 3″ tanked by 53%, 31%, and 32% respectively over December 2007.

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Brit Sale: 16% Off A House

As I know from my brother and some of my college friends back in the U.K., taking that first step onto the British real estate ladder has proved to be very difficult over the past few years.

First-time buyers have found themselves squeezed out, as home prices have shot to historic levels. But in a mirror image of the situation in the U.S., there may finally be some relief for house-hunting Brits – at least price-wise.

The Nationwide building society reported today that with a further 2.5% in December (the 14th straight month of declining prices), the average U.K. home price dropped by 15.9% in 2008. A home now costs an average of £153,048 ($222,584) – down £29,000 from this time last year and prices are down around 20% from their peak in October 2007.

Nationwide’s report comes just a week after the Halifax bank also said that house prices fell 16% in 2008. Describing 2008 as a “year of turmoil,” Nationwide’s chief economist Fionnuala Earley said the size and speed of the tumble came as a surprise – hardly a statement that inspires confidence.

Indeed, sales and prices are probably set to worsen further, given the alarming lack of mortgage lending due to the stifling credit conditions.

But that’s not the only surprise…

Crank Up The 2009 Spin Machine

Both Nationwide and Halifax are trying to sprinkle a little magic dust on the situation, arguing that it isn’t as bad as it seems.

Their theory? That the precipitous drop is flattening out, rather than accelerating, with Nationwide saying the quarter-over-quarter fall really only equates to a 4.2% loss. Great… so that’s only a 17% slump over the course of a year then.

Indeed, if you also annualize the 2.5% December price decline, that’s a 30% tumble. Heck, even home auction prices have dropped 35% from their peak.

Add in some inflation (it’s fallen sharply in Britain recently, but the Bank of England is projected to cut interest rates again on Thursday), a rapidly deteriorating job market, and many would-be buyers holding off on buying until they see the bottom of the market… and you’ve got a recipe for more declines in 2009.

That’s it for today’s edition.

Karim Rahemtulla & Martin Denholm
Smart Profits Report