Are emerging markets the next bear market casualty?

The theory that emerging markets could decouple from U.S. financial turmoil has officially been culled. The index is now in the midst of its worst draw-down since 2002 with major constituent index weightings in Korea, Russia, Taiwan, China and Brazil in a freefall.

All assets typically overshoot on the way up amid investor euphoria and greed, and equally plunge in extreme terms when the primary trend reverses as gloom and fear prevail.

This might be the last shoe to drop for world markets ahead of a major bottom sometime in early 2009. But the “last shoe” usually drops the hardest and investors are scrambling to government bonds this week ahead of more pain for equities and commodities. The bad news is that history strongly suggests we’re not even close to the bottom.

Co-founded by Dwight Anderson in 2004, Ospraie Management made its way into the history books this month following the announcement of shockingly large losses. The hedge funds’ flagship product lost $1.3 billion dollars, or 39%, this year with most of that sum occurring in July and August as commodities crashed.

On Monday, Ospraie announced it would close the Fund. The group still manages another $4 billion in assets, though I suspect a good chunk of that capital will find its way out the door as nervous money flees.

Central banks are notorious for their ill-timed investments. The latest such trade was conducted by several Chinese banks in August as they reduced their combined positions in Fannie Mae and Freddie Mac debt.

It looks as though gold is getting ready to make a comeback and once again move higher. After a violent decline of over two hundred dollars in the price of an ounce of gold, it appears as though we have finally put in a short term bottom. The result of this downturn has created incredible buying opportunities in gold and, especially, in gold stocks.

I still like U.S. stocks compared to most foreign markets over the next 12 months. A competitive currency makes American assets one of the best bargains in the world following a drubbing in equity and non-government fixed income markets since the onset of the subprime crisis last August. Plus, a strengthening dollar is bullish since it stabilizes asset markets and encourages cash-heavy global investors to assume more risk-taking.

According to the Federal Deposit Insurance Corporation (FDIC) a total of nine banks have failed this year with five folding since July alone. At this rate, many more banks will fail in the United States as the real estate and credit crisis continues to strain bank coffers to the point of financial exhaustion.