We’re going to finish what we started last month, quick as we can, so we can all get to our family feasts.

Let’s jump right in where we left off last month:

• How Some People Will Be Caught in the Frightening Reversal of Today’s Biggest Trend
• Who Will Make a Fortune — Instead of Losing Their Shirts — When the Trend Reverses

And before we sign off for Thanksgiving, we’ll take a quick look at one of today’s hot topics: emerging markets.

Last month we identified what’s been missing since the markets imploded in 2008: great values. Our focus was more on stocks, currencies, commodities and gold. But this month, we’ll tackle the hottest item out there today: bonds.

Over the last two years, over $400 billion has poured into bond funds. That’s an astounding — and frightening — number. Frightening because all those folks may have jumped into what’s looking more and more like the third phase of a bull market. And that third phase is the one where the retail investor piles into an item — almost manically — only to be caught in the tragic collapse in prices that marks the end of great bull markets.

And the thing is, bonds have been in a great bull market trend since around 1980 — just about the time of the beginning of the great bull market in stocks. By 2000, that stock bull turned bearish, but bonds kept going. Coincidentally, gold started its great bull market rise around 2000, and still seems to be going strong. But whereas the gold bull appears fit and ready to continue pushing prices up, we’re not so sure about that bond bull.

With that in mind, let’s see if we can’t find a way to determine whether bonds are indeed ready to collapse, or whether, as some respected analysts like David Rosenberg and Gary Shilling claim, bonds are fated to continue their great bull market for the foreseeable future. We’ll use last month’s ideas about values andtrends and see what we come up with. Let’s start with values.

Think about it. Where’s the Dow these days? Around 11,000. How about gold? Around $1,350.

So what about bonds? See, there’s no easy “index” or current price you can check with bonds. What we talk about when we talk about bonds is interest rates. You may not know the price of the 30-year treasury bond, but you may know that it pays around 4.25% right now.

So should we all be checking the price of bonds? You could. But, as opposed to any other item, when the U.S. government or a corporation issues bonds, they’re all priced the same: 100. So what makes each bond different is the interest it pays. While you can check in on the price of other items to see if they’re going up or down, you can’t really do that with bonds. Again, you check the interest rate.

Even then, it’s a little tricky. See, the price goes down when the interest rate goes up — and vice-versa (when interest rates rise, bond prices drop). In other words, bond prices and bond interest rates have an “inverse” relationship.

If you’re a professional bond trader, of course, you deal with this all day. But, for a lot of people, this can make it tough to really understand the value of bonds. Not impossible, but certainly tougher.

As for checking the general trend of bonds, even that’s not so easy. The thing about bonds is that bond trends are long — really long — compared to any other item. A stock market bull trend might last a few years, maybe a bit more. The recent historic bull market in stocks that lasted about 20 years was, by any measure, exceptional.

Not so with bonds. Right now, the bond bull market that was born around 1980 is about to turn 31 years old in 2011. And that’s not even long by bond trend standards. The typical bond trend goes 30 — 60 years. Think of it this way: people could have lived their entire lives during a bull or bear bond trend.

Now, if you remember from last month, you can use the price and an understanding of the long-term trend of an item to get some perspective on its relative value. And if something’s selling at a good price you can feel confident putting your money into it.

But if you don’t understand bond prices (vs. their interest rate) — and the trends are so long it’s hard to know what stage of the trend you’re in — you can probably see why it may turn out to be a big problem if you’re one of the millions out there pouring money into bonds these days.

But wait. Didn’t we just go through this whole explanation of why it’s hard to figure out whether bonds are a good value? We did. But that doesn’t mean we don’t have an opinion. And here’s where we tell you why we think bonds aren’t going to stay in a bull trend. It’s got to do with — just like we talked about —interest rates and the trend.

Interest Rates

Bond interest rates have been low and getting lower. And that means the price of bonds has been getting higher. (Remember: when interest rates go down, bond prices go higher; when interest rates go up, bond prices go lower.)

But that’s not all. You see, interest rates are always moving around. And we’ve always found that one of the worst approaches you can take to investing in bonds is to make decisions based on whether you think interest rates are going up or down.

And you shouldn’t. On the other hand, when interest rates get as low as they’ve been, you have to wonder how much lower they can go. And if interest rates can’t go any lower, bond prices can’t get any higher. Okay so far?

Well, before we sign off on our thesis, there’s still that possibility that interest rates go even lower and bond prices go even higher. Sure enough some pretty respectable folks say that’s just what’s going to happen. They tell us that we’re in a deflationary trend. That trend will push interest rates even lower. Maybe they’re right. Of course, we’re right back to predicting interest rates, aren’t we? And that’s not something we’re really comfortable with — like we said.

The Trend

So it all comes down to that third phase of the bond bull market trend we mentioned at the beginning of the letter. Where do we go from here? How do we back up our view that bonds aren’t at good values — and that people pouring all that money into bond funds may be looking at significant losses going forward?

We turn to those “phases” of bull and bear market trends we discussed last month. And here’s what we see: we’re very possibly in the third, “manic” phase of that long bond bull market – the one where the retail investor piles into an item only to be caught in the tragic collapse in prices that marks the end of great bull markets.

Can we prove it? No. So when we’re not sure, we ask ourselves: What happens if we’re wrong? Then we ask ourselves: What happens if we’re right?

What happens if we’re wrong?

It means interest rate stay low or go even lower. Bond prices go up. People make some money. How much? Not a lot. With low interest rates, you don’t make much on the interest from your bonds. What about the price of your bonds? If rates stay where they are, prices stay the same. If rates go lower, prices go up.

Does this sound really appealing to you? Is this an investment you want to put a lot of your money into?

What happens if we’re right?

If we’re at the end of the bond bull market, interest rates will go up. When? We don’t know that. But if they go up soon and by a lot, the value of your bond funds will drop like a rock. That’s how some people will be caught in what could turn out to be a frightening reversal of today’s biggest trend.

If they go up slower, the value of your bond funds will just drop slower. Instead of taking a hit right away, you’ll probably watch while prices do what’s known as the “slow sink.” If you’ve never experienced the “slow sink” we suggest you keep it that way.

So we repeat: Does this sound really appealing to you? Is this an investment you want to put a lot of your money into?

We know what we think. For the most part, we’ll hold off on bonds. But what about our other point:

Bottom line:

1) Why put lots of money into what may be a dying trend; worse, one that may be in its third stage — the stage where the typical investor loses his or her shirt?

2) Whether you do it now, or at some point in the future, people who strategically invest in a way which benefits from rising interest rates and falling bond prices stand a good chance of making a lot of money — over time.

Sure, emerging markets present opportunities for investors. In Asia, countries like Thailand, Vietnam and Korea — never mind Taiwan and China — are growing faster than the U.S. Ditto for Brazil, Peru and Columbia in South America — and who knows who’s next.

All we’ll say now is that those trends we talked about last month apply to investing in emerging markets. Identifying primary trends has provided a pretty good way take advantage of bull trends, as well as avoiding bears. Why should it be any different for emerging markets?

What that means is simply this. We’re not going to bet the farm on “emerging markets” unless we feel we’re in — or going into — a primary bull market. These markets will experience the same bull and bear trends that we’ve experienced in the U.S..

And that’ll have to do for now. Thanksgiving is here. And that means you’re doing one or more of the following: traveling, preparing for visitors, preparing your feast, or — depending on when you read this letter — just about ready to pop the turkey into the oven. So it’s time to wrap up.

So there I am at Trader Joe’s, list in hand, with visions of our upcoming Thanksgiving dinner pushing me up and down the aisles while I snag a basic item here, a special treat there, getting ready for the gang that starts arriving at our home even before the Big Day. All of a sudden it hits me: it’s too easy.

Not that I’m complaining about TJ’s. I’m all for their hummus, salsa, frozen breaded cod (surprisingly good), jarred artichoke hearts, and all those other relatively healthy, prepared treats. But then you start thinking, “Who needs home-made? When something’s good, not much more expensive, and oh-so-easy…well, what’s the point of cooking from scratch?” That’s OK sometimes; just not for Thanksgiving. “Easy” doesn’t cut it for Thanksgiving dinner.

And just so you know, I’m not one of those conservative types who shun technology, hate progress and think the best of times were “the old days.” (I basically agree with P.J. O’Rourke’s assessment: “…if you think that, in the past, there was some golden age of pleasure and plenty to which you would, if you were able, transport yourself, let me say one single word: “dentistry.”)

Which brings us to the Book of Kells. (Stay with me here; it’ll all make sense in a minute.) What’s the Book of Kells? It’s an illuminated book of the Gospels and has been called the finest of Ireland’s national treasures. (Lest you think this is a bit obscure, there’s a new animated movie out, The Secret of Kells. I haven’t seen it yet, but I hear it’s absolutely wonderful.)

The monks who created these manuscripts around 800 AD didn’t know anything about Thanksgiving, turkeys or sweet potatoes. What they did know about was how it takes time to make good and beautiful things, like with the Book of Kells. They carefully and lovingly copied the words of the Gospels onto parchment by hand. (Remember, printing wouldn’t be invented for another 700 years or so.) But they didn’t stop there. Besides accurately writing down the words, they illustrated the manuscripts.

The only way medieval monks could produce those beautiful illustrations was by taking the time — a long, long time. And please don’t think for a minute that they could somehow “afford” to spend all that time as opposed to us moderns. Running a monastery was no easy or simple task in the 8th century. Just getting a meal on the table for dozens or even hundreds of monks a couple of time a day was no mean feat. (And, of course, there were no Trader Joe’s!)

Musician Jeffrey Tucker puts it well. He calls these manuscripts a “light unto all…Words alone would have served the functional purpose but there was more to functionality than mere words. There were also considerations of excellence, skill and beauty.”

So what’s all this got to do with Thanksgiving? I mean, no matter how perfectly my turkey with all the trimmings comes out, we won’t be looking at anything as good or beautiful as the Book of Kells.

But if you start from scratch and mix in some “excellence, skill and beauty,” you’ll wind up with something more than just what satisfies your appetite. Add in family and/or friends and you get one of those small slices of the Good and the Beautiful that will make your Thanksgiving dinner the stuff of legends — or at least family lore.

Maybe it’s not a national treasure like the Book of Kells; maybe your Thanksgiving feast won’t be around seven centuries from now. But I’ll bet it becomes one of those family treasures that will always bring a smile to your face, along with warm, happy memories for a long, long time.

If you can, start from scratch and take your time. But whatever you do, have a Happy Thanksgiving!

P.S. — We’re going into the “most wonderful time of the year.” In spite of all the excitement and anticipation of the next few weeks, I’m planning some interesting posts athttp://rickesposito.blogspot.com. If you haven’t taken a look lately, you can check in by just clicking here. Lately I’ve been spending more time on what’s going on right now in the markets — especially the gold market. There you may not find good food for your Thanksgiving feast, but I know you’ll find some good food for thought.

Richard S. Esposito, ChFC
Lighthouse Wealth Management LLC
405 Lexington Avenue, 26th Floor
New York, NY 10174
Tel: 212-907-6583/Fax: 866-924-1952

Email: resposito@lighthousewm.com