What a wild two weeks it’s been!

The United States financial crisis has caught the attention of just about everyone around the world. The effect it’s having on the global economic picture is truly astounding. And it will definitely go down in the history books as one of the worst financial crises of all time.

First, rewind and take a look at last week: In the first three trading days of the week, the global financial system was threatened by the collapse of investment bank Lehman Brothers, the possible collapse of insurance giant American International Group (AIG) and the poor financial condition of former Wall Street giants Merrill Lynch and Citigroup.

While all of these events are detrimental to the financial system, the situation at AIG had me worried the most. With over $1 trillion on its balance sheet, AIG was a key player in the credit default swap (CDS) market, and it’s the largest insurance company in the world. So if it failed, a domino effect of failing financial institutions would ensue, putting the global financial system on the brink of collapse.

Thankfully, the Treasury Department and Federal Reserve stepped in, recognizing the systematic risk and bailing out the world’s largest insurer with an $85 billion bridge loan (see also, “Profit from the Market Meltdown“).

While AIG was spared a complete collapse, the events of last week took their toll on the global markets. Volatile is the only way to describe the drastic swings higher and lower. And unfortunately, I don’t think we’ll see the end of this volatility any time soon.

A Historic End to Wall Street

Now fast forward to this week. After last week’s events, investment banking giants Morgan Stanley and Goldman Sachs found their shares under pressure. So on Sunday night, both concluded there was no future in investment banks, and with the Federal Reserve’s approval, Morgan Stanley and Goldman Sachs became banks (see also, “Time to Buy Goldman and Morgan?“).

In additions, the Fed increased these financial institutions ability to take out direct loans from the central bank and to be more flexible in account for some assets. The Fed noted that this ability to access direct loans will "provide increased liquidity to support these firms as they transition to managing their funding within a bank holding company structure."

While the Fed’s decision saved these two securities from demise, it also marked the historic end of Wall Street. That’s because Morgan Stanley and Goldman Sachs were risk-takers, and now that they are bank holding companies, the two firms will no longer be able to take the same level of risk as they had in the past. That means the profitability of these two firms will likely decrease.

The survival of Morgan Stanley and Goldman Sachs is critical to the stability of the global financial system and stock markets everywhere. Without their influence, we cannot have a major stock market rally. But now that both appear back on a path towards a more successful future, we’re likely to see more market improvements in the weeks to come (see also, “Why the Treasury Hit the “Reset” Button“).

I actually think things are looking up already…

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Market fundamentals are now better than they were just last week, and Congress just agreed on Secretary Paulson’s $700 billion bailout plan.

As you probably already know, the $700 billion plan is designed as a comprehensive approach to remove the devalued mortgage-linked assets that are the root of the financial crisis. There have been Congressional hearings all week to discuss this plan, and Thursday morning President Bush brought presidential Candidates Barack Obama and John McCain into the negotiations.

After much Congressional debate, Congress finally agreed on the $700 billion plan on Thursday. So now, we’re simply waiting on the Bush administration’s approval—which,  given the urgency of the matter, I think we’ll see a decision reached in the next few days.

If the $700 billion package is indeed passed, it will greatly reduce overall financial market systematic risk and help rebuild the mortgage securities marketplace. And although, this plan is not perfect, I think it should work.

Where Do We Go From Here?

After all of these history-making events of the past two weeks, the bottom line is that, as I said above, we are in a better position now than we were just one week ago. And it may even be time to start buying shares in market sell-offs. But don’t just buy any companies—right now, we still need to be cautious and only pick up the best opportunities for our money.

Where are these opportunities right now? In China stocks.

Due to the U.S.’s financial troubles, emerging market stocks are very oversold right now. And that’s even after Asian stocks biggest one-day gain in 10 years—which occurred last Wednesday. As global central banks pumped cash in money markets and worked on various plans to shore up the falling stock markets, all markets in the Asia-Pacific region advanced last Friday.

And that included some impressive gains in China: Hong Kong’s Hang Seng index jumped 9.6%—the most since January 23—while the H-Share China index advanced a record 15.5% and China’s CSI 300 index surged a record 9.3%.

The reason that China’s markets were the biggest movers last week was because the Chinese government slashed interest rates and eliminated the stamp tax for buyers. China reduced its one-year lending rate by 27 basis points to 7.2% and lowered the reserve-requirement ratio for banks by 1% to 16.5%. This marked the first time in six years that China eased its monetary policy.

And it was the right move, at the right time.

Going forward, I expect the Chinese government to come up with more loosening measures to boost the economy in the coming weeks and create a year-end rally. In fact, I expect the Chinese stock markets to be the first of the emerging markets to turnaround, and I think they will actually lead other emerging markets higher (see also, “How to Profit in Emerging Markets“). The Chinese stock markets have led the past two global market moves, and I look for it to do this same this time.

But please note that this will not be a new bull market—the coming rally will be a rebound. Considering the significant turmoil that we’ve experienced this year, it will take a lot for market to move back into bull market territory.

Even though we won’t likely see a complete market turnaround this year, I’m still expecting a strong fourth quarter and a decent market move off the current bottoms in the next six to nine months. A move that I like to call "the worst is over" rally.

What You Should Be Buying Now

To start preparing for this upcoming rally, the best opportunities to buy will be during market sell-offs. Emerging market stocks are quite cheap and will continue to be so even after a market rally.

But as I advised earlier, you still need to be cautious in your investments. Not every stock will move higher in the upcoming rally, and there’s sure to be bumps along the way. That’s why I’m advising my China Strategy subscribers to only invest in fundamentally strong companies that are offering great values right now.

Actually, my favorite pick and top buy is a Chinese medical devices company that has shown great resilience during the market turmoil this year. It’s handed my subscribers a nice 129% gain since I recommended it, and it’s definitely a stock you should be buying during market sell-offs in preparation for the upcoming rebound. To learn more, join China Strategy today. Plus, if you act now, you’ll save up to 38% on a risk-free trial and receive up to five FREE stock guides.