We’re scanning markets of the world today and scratching our heads… haven’t we heard this before?
There was a scare at the start of the year – banks were in trouble, the housing market was crashing and unemployment was rising. The S&P fell at a rate unseen in a long, long time. But then,a sucker’s rally! The worst was likely over, they said… stocks were oversold. The U.S. consumer, China and oil companies promised to lead us out of this mess. And of course, the current administration’s new multibillion stimulus plan will kick in any second.

After bottoming in early March, stocks soared well off their lows. With the S&P 500 at break-even for the year, stocks now face an inflection point.

Wait a second… what year is it?

We need not remind you of what happened in the second half of 2008. But it’s not worth worrying about… it’ll be different this time!
Stocks took quite a tumble Thursday. The worse-than-expected jobs report gave traders more than enough reason to be short into the three-day weekend. The S&P 500 fell nearly 3%. Since reaching its 2009 high in early June, the S&P is down 5%.
Major indexes are in trouble again today. The Dow and S&P opened down 0.75%, mostly thanks to sour moods left over from Thursday.
And just as in 2008, the smart money says there is more pain ahead:

“You may have green shoots, whatever you want to call them,” said market sage and author of The Black Swan Nassim Taleb. “You may have temporary relief, but you are still in a world that’s breaking. We’re in the middle of a crash. So if I’m going to forecast something, it is that it’s going to get worse, not better.”

And the root of all our woes, Mr. Taleb? “The monkey on our back is debt.”

Amen. This should be deja vu to our most dedicated readers…Nassim shared a similar sentiment at the 2007 Agora Financial Investment Symposium. We expect equally prophetic forecasts from our speakers this year. If you haven’t signed up to join us, better get on it right now… the show starts in two weeks.
Just like in 2008, the logical move is to sell dollars and buy useful assets, like gold. But just like last year, the current trade du jour is buy greenbacks, sell everything else. After Thursday’s, stock sell-off, the dollar index broke out of its recent range. It had been hovering just around 80 and now goes for 80.7.
“The dollar system or the system based on the dollar and euro have shown that they are flawed,” Russian President Medvedev told the international press today, yet another call from a BRIC nation to ditch the dollar. He’ll meet with President Obama this week. We wonder if he’ll have the stones to bring this up:

“In the long term, we must also think about a single unit of payment such as the International Monetary Fund’s Special Drawing Rights. We cannot be hostages to the economic situation of a single country, as is happening today with the United States.”
“Of the major world currencies, I have to say that Australia’s dollar is my favorite,” writes our currency man Bill Jenkins. “It has an edge because of its commodity-related economies and currencies.

“Now, Canada has the same edge. In fact, you may hear the Canadian and Australian dollars called the CommDolls (commodity dollars) for short. But Canada is inextricably tied to its neighbor to the south (namely, us), and that’s more than just a little problematic.

“Australia, on the other hand, is not tied to the United States. Instead, it’s better placed to trade with another resource-hungry nation — China.

“As China attempts to lift itself up by its own bootstraps, Australia comes into the picture. It has been widely understood that Australia is a little China. Not in culture, custom or language, but in economics. A significant part of Australia’s commodities flow into China, and the more the Chinese move ahead, the better it is for Australia.

“Also, let’s consider that Australia’s central bank is still holding its interest rates at 3%. In a fairly stable country, with a fairly stable currency, that is one heck of an attractive rate. Why, it is downright appealing!

“Indeed, Australia may now become the benefiting member of the next carry trade. After all, if can you borrow money at 0.25% and invest it at 3%, you stand to make a decent haul. And as risk appetite re-enters the market, you can bet your bottom dollar that Australia will likely be a real beneficiary.”

That’s just a snippet from Bill’s latest special report, which his Master FX Options Traders received over the weekend. Only subscribers have access to this report, which includes his provocative new short euro trade. If you want in on the action, click here.
From a technical standpoint, gold looks set for some short-term pain. Just like stocks, the gold chart is taking a page from 2008. Check it out:

When it hit the fan last year, gold failed to deliver the righteous moonshot many had forecast. It certainly was a better place to be than stocks, but gold still suffered. Until further notice, the same playbook appears to be in use today… gold may be the once and future money, but the dollar and U.S. Treasuries remain the ultimate flight to quality when the going gets tough.

After sticking to a tight range the last few weeks, gold fell today along with stocks. The spot price shed $10, to $925 an ounce.
“I see everything coming up roses for gold and those who mine it,” says Chris Mayer, armed with proof he’s not the only value hound with his eye on gold.

“For the first time in a couple of decades, some of America’s most successful, big-name investors are buying gold. David Einhorn, the hedge fund manager who predicted the downfall of Lehman Bros., recently bought gold for the first time.

“And then there is John Paulson, the guy who made billions of dollars by correctly anticipating the housing bust and credit crisis. Paulson just plunked down $1.3 billion for an 11% stake in AngloGold. He’s also got a big position in Kinross Gold.

“Peter Munk, the 81-year-old chairman and founder of Barrick Gold, also offers up his own anecdote about gold’s broadening appeal. ‘I have had more phone calls in the past six months than ever before — from people who have $120,000 inherited from grandmother, and from hedge fund managers with millions,’ he says. ‘I am not saying George Soros, but people of that caliber have told me they are buying gold.’

“You no longer have to be a gold bug to think gold will rise in price. In fact, this buying by some of the world’s greatest investors may be the leading indicator for a quick 116% climb — to $2,000 per ounce or higher. Give gold the cold stare of a professional handicapper and the odds look very good, indeed.”

Chris just gave his Capital & Crisis readers another gold stock for the long haul. He tells us it’s “a miner in a in politically safer area with a growing production profile, falling costs, a good balance sheet and a stock that is cheap on the face of it.” Sounds hard to beat, eh? For access to this pick and the rest of the C&C portfolio, click here.
Oil’s down today, too. The front-month contract is off $2, to $66 a barrel.
The American service industry contracted again in June, the ISM reports today. Their monthly gauge of the service sector scored 47 last month, 3 points below a “growth” reading of 50. At least that’s an improvement from May’s score of 44. In fact, June was the third straight monthly increase… we’ll keep on an eye on this one.
The FDIC closed down seven banks late Thursday, a single-day record for the credit crisis. That brings the total to 52 for the year. Considering the five bank failures the week before, it’s clear the pace of bank busts is accelerating.
Last in today’s deja vu issue, a role reversal that doesn’t remind us of the last 18 months whatsoever. Get this: A struggling bank bailed out a municipality over the weekend.

In an unfortunate sign of the times, many communities across the country canceled fireworks shows for the Fourth. You know the drill… budgets are tight, revenues are down, savings are nil.

New Providence, N.J., was one of those towns, until its local bank stepped in. Investors Savings Bank blew the dust of its wallet and wrote New Providence a $12,000 check to finance the fireworks display. That’s a tiny sum, even for a community bank, and probably equal parts philanthropy and marketing. But good grief… it’s the first such role reversal we’ve heard in a long time.
“How can we expect a heavily debited consumer-based economy to ‘recover’?” asks a reader, with a barrage of rhetorical questions. “When borrowing and spending drives the economy and unemployment soars and credit shrinks, how can we expect an increase in spending? When our goal is to recover and we have issues like this to deal with, can we really get there from here? I don’t see how it’s possible. In my opinion, we have been in a depression for over a year and our path from here is down, not up. What am I missing? How can our consumer economy recover? What will a recovery from here look like?

“By the way, paying a million dollars to have lunch with Buffett, who just lost $30 billion, is beyond stupid. Buffett can make it in good times, but in bad times, do just the opposite of what he does and you will get some of his money!”

The Ghosts of 2008, Gold Stocks, A Currency Play, Bank Role Reversal and More!

No matter which path GM chooses – conventional restructuring or bankruptcy – the U.S. Big Three of GM, Ford Motor Co. (NYSE: F) and Chrysler LLC will have to adjust to the U.S. auto market’s post-financial-crisis “new reality.” Automakers will sell only 10 million cars and trucks in the U.S. market this year, the worst in at least 3 decades – and roughly 38% less than the 16 million vehicles that were sold in the United States annually in recent years before the financial collapse caused an accompanying collapse in auto sales.

Part of the reason for the slump in new vehicle sales is that consumers are increasingly turning to used cars. Pre-owned car sales are up 10% this year over last, as credit availability increases, but buyers focus on affordability. In fact, according to the most-recent report, used-car sales jumped in April, and the trend is expected to continue at least until the middle of the year as pent-up demand for affordable, pre-owned vehicles jacked up the used-vehicle segment of the auto marketplace.

Market Matters

U.S. Treasury Secretary Timothy F. Geithner put his most optimistic face forward in assessing the progress with the bank bailout plan. Geithner pointed out that the 19 stressed-tested banks have already raised $56 billion in capital [including Bank of America Corp.’s (NYSE: BAC) $13.5 billion stock offering] and several could begin to pay back Trouble Asset Relief Program (TARP) money shortly.  He also indicated that the public-private partnership to remove “toxic” assets from banks’ books should be up and running in the next month-and-a-half, a move that may instill greater confidence in the financial markets.

However, an analysis by The Wall Street Journal rained on Geithner’s parade by estimating that small and mid-sized banks could face losses on bad commercial real estate loans of $100 billion by year-end 2010. A Money Morning investigation of the looming commercial real estate crisis predicted that this sector of the real-estate market would pose major problems for the U.S. economic recovery.

Meanwhile, GMAC LLC may be close to receiving a fresh $7 billion in new (bailout) money as the government continues to seek ways to rescue the auto industry.  GM reached an agreement with its main union (UAW) that would reduce retiree benefits and overall labor costs to make them comparable to those of their foreign rivals.

As another negative earnings season comes to a close, investors searched long and hard for a bright spot – any bright spot.  With most Standard & Poor’s 500 Index companies reporting, earnings plunged more than 30% in the first quarter and are on track to fall 13% for the full year, the worst annual performance in six years.

Still, Thomson Reuters PLC (Nasdaq ADR: TRIN) says that a consensus of sell-side analysts projects a 29% increase in earnings in 2010 as cost-cutting measures pay off and relative results begin to look more attractive.

The Lowes Cos. Inc. (NYSE: LOW) reported better-than-expected quarterly profits and raised its outlook for the year, but The Home Depot Inc. (NYSE: HD) saw its numbers disappoint investors who were looking for stronger signs from the home improvement giant.  Likewise, Hewlett-Packard Co. (NYSE: HPQ) reported weaker earnings, and that spawned renewed pessimism for the high-tech sector.

On a brighter note, retailers Sears Holdings Corp. (Nasdaq: SHLD) and Aeropostale Inc. (NYSE: ARO) reported better-than-expected quarterly profits.  Ratings upgrades brought early promise as Citigroup Inc. (NYSE: C) boosted its forecast on homebuilder Lennar Corp. (NYSE: LEN); Deutsche Bank AG (NYSE: DB) raised its views on McDonalds Corp. (NYSE: MCD); and Goldman Sachs Group Inc. (NYSE: GS) made Bank of America a “Buy.”  However, S&P warned it may downgrade the United Kingdom’s debt below AAA due to ongoing economic obstacles, a development that prompted others to wonder if U.S. securities could face similar dire possibilities.

Crude oil surged past $62 a barrel on lower inventory data and gasoline climbed above $2.36 a gallon heading into the Memorial Day holiday weekend, a far cry from the $3.80 of this time last year – although it was 30 cents higher than late April levels.

Economically Speaking

While Geithner was “spinning” the bailout progress in the most favorable light possible, the U.S. Federal Reserve meeting minutes painted a picture of a more sluggish economy than most had predicted just three months ago.  In fact, the policymakers negatively revised their projections for economic contraction and warned that the unemployment rate could push toward 10% by the end of the year.  Still, central bank Chairman Ben S. Bernanke believes improvements are on the way as the impact of the Obama administration stimulus package aids in the recovery over the year’s second half. Furthermore, the Fed stands prepared to buy more U.S. Treasury and mortgage-related securities should such moves be deemed beneficial.

In the “it could be worse” category, Mexico (-21.5%), Japan (-15.2%), and Germany (-14.4%) each reported severe economic declines (as measured by gross domestic product, or GDP), as these three primary U.S. trading partners suffered the ill effects of the lower domestic demand for foreign-made goods and services.

Though the economic calendar was rather light during the week, some positive signs did emerge from deep within the numbers.  While analysts were surprised by a decline in April housing starts, the losses stemmed from a reduction in apartment activity, and single-family construction actually jumped by almost 3%, its second consecutive positive monthly showing.

Additionally, a private survey of the nation’s construction professionals depicted that homebuilder sentiment soared to its highest level in eight months, another sign that the prolonged housing slump may finally be nearing an end.

Finally, leading economic indicators, a predictive index that forecasts activity for the ensuing six months, turned positive after six straight down months.  Unfortunately, labor continued to struggle as the number of folks who have been receiving unemployment benefits for over a week hit a new record high.  While the economy definitely seems to be moving past the dreaded recession, any recovery will be limited as long as the labor picture remains weak and employees hold off on purchases until their job situations become more stable.  And the risk of a “double-dip” downturn remains somewhat high.

Weekly Economic Calendar

Source: As GM Cruises Toward Government Deadline, U.S. Automakers Must Learn to Deal With a Permanently Smaller Market

The package of proposed reductions fills in the fine print of a $3.55 trillion budget outline approved by lawmakers in April that contains Obama’s top agenda items, including a healthcare overhaul, a push for renewable, clean-energy sources and changes in education funding.

The President wants to cut or end a number of programs that he feels are wasteful or ineffective to take the first toward getting spending under control. But the administration’s attempt at bringing fiscal discipline to Washington has already been met with skepticism by analysts.

“Every government program – no matter how wasteful – will be defended by its recipients and congressional champions,” Brian Riedl, a budget expert at the Heritage Foundation, a Washington-based research group told Bloomberg News. “Unless Obama puts the weight of the White House behind his spending cuts, Congress will ignore them.”

The cuts are miniscule compared to the overall budget package and deficits that will be ushered in the next few years. The $787 billion stimulus package Obama pushed through Congress combined with the $700 billion Troubled Asset Relief Program (TARP) bank bailout will come on top of the $1 trillion deficit the administration inherited when he took office in January.

Total savings from the cuts, even if they were accepted by Congress in their entirety, would represent a paltry 0.4% of the overall budget. The Congressional Budget Office projects the deficit will be $1.85 trillion this year, about four times the previous record, and $1.38 trillion in fiscal 2010.

“Even if you got all of those things, it would be saving pennies, not dollars. And you’re not going to begin to get all of them,” Isabel Sawhill, a Brookings Institution economist who waged her own battles with Congress as a senior official in the Clinton White House budget office, told the Washington Post. “This is a good government exercise without much prospect of putting a significant dent in spending.”

Only about 80 of the proposed cuts are new – the others had been previously revealed.  And most of the cuts will be from the “discretionary” budget, avoiding the so-called untouchable “third-rail” entitlement programs of Social Security and Medicare.

Those two programs account for more than 40% of government spending, meaning the more difficult work on deficit reductions has been left for another day.
“More serious efforts at deficit reduction are going to require entitlement and tax reform – that’s where most of the money is.” Marc Goldwein, policy director of the bipartisan Committee for a Responsible Budget, a Washington-based research group, told Bloomberg. “To really get the deficit under control, we’re going to have to start thinking bigger,” he said.

But some in Congress defended the administration’s approach, saying the list of program reductions is just the start of a more comprehensive effort to cut spending and pull the reins on the skyrocketing deficit.

“It depends on what it means over the scope of five and 10 years.” Representative John Larson (D-Conn.) told Bloomberg.  It’s a “deep, cavernous hole where we have been left, we’re looking a long way up but it’s a steady climb” using the budget plan agreed to by Obama and Congress, he said.

Source: Obama’s Miniscule Budget Cuts Face Stiff Opposition

On Tuesday, President Obama signed the $787 billion bailout plan. In a Churchilian moment, he admitted that the end of the war on depression was not at hand, and more sacrifices would have to be made, but “today does mark the beginning of the end.”

At least, he has the whole world behind him. America’s mayors, for example have enlisted en masse. Heeding a call from the White House, they came up with 18,750 projects that are “shovel ready,” meaning, they can begin digging holes within hours after the cash hits their bank accounts. Las Vegas, for example, said it could use $2 million to put in more neon signs. Shreveport, Louisiana, said that if had $6 million, it would put in three new aquatic centers with slides.

Whee! These are the worst of times for many… but they are best of times for some. There is a bull market in claptrap; politicians haven’t had it so good since the New Deal.

In France, the Sarkozy government recently announced a plan to bailout the nation’s auto industry. The government will lend 9 billion euros to Renault, PSA (Peugeot) and their related finance companies. In return, the state hopes to collect interest and requires that the companies continue to employ French voters. Slovakian autoworkers don’t vote in French elections; they can go to Hell. In England, Gordon Brown announced yet another bank bailout this week – 37 billion pounds, he says, will provide a ‘rock of stability’ for the system. Traditionally, gold provides solidity to a banking system. But Gordon Brown, when he was Chancellor of the Exchequer, sold off tons of British gold at barely a quarter of today’s price.

When the going was good, people believed things that weren’t true. Now, they still believe things aren’t true – but in the opposite direction. Where they once believed they could get richer, eternally, by squandering money they hadn’t earned, now, they look to the government to do it.

Depressions are so rare that there is no statistically reliable evidence about them. They are like women who rotate their husbands’ tires while preparing their dinners; they are so infrequently encountered that there is no point in making generalizations or trying to form them up into a baseball team. Each one is sui generis.

Hardly anyone is still alive who remembers the depression of the ‘30s or what the feds’ bailouts wrought. Here at the Daily Reckoning, we have already given our version of the story. A depression is not a pause, we recall explaining, it a time when debt is squeezed out of a saturated economy. Bailouts, handouts, and government stimuli actually retard the process.

But ours is a minority view. Only that great economist Fidel Castro seems to agree with us. The geniuses can’t help, he says; structural change is needed:

“Even if Kant, Plato and Aristotle were resurrected together with the late brilliant economist John Kenneth Galbraight [sic], they would neither be capable of solving the more frequent and deeper antagonistic contradictions of the system.”

But the burden of proof is on us. Which is too bad; Fidel is retired and we have no proof of anything. All we can do is marvel, and guffaw, at things so absurd they take our breath away.

In the bubble era people spent too much money they didn’t have on too many things they really didn’t need. Then came the credit crunch. Now, they hallucinate that if they spend even more money they don’t have, on things they hardly even want, they will get what they really need – jobs, growth and inflation. Even respected economists say they believe in miracles. Resources have been made “idle” by the depression, they claim, like strong backs in an unemployment line. Government spending is just putting them to work. By this reasoning, things that were too expensive even in the boom years miraculously become cheap at any price. And things that weren’t worth spending money on in the fat years become miraculously indispensable in the lean ones. It is like a man who didn’t care for caviar when he had a good job; now that he is unemployed, he must have it every night. They are only taking up ‘idle resources’ that would otherwise go to waste, explain the miracle workers. In their minds, an umbrella is useless unless it is actually raining.

But sometimes capital needs to take a break and hang on coat-rack. Every banker, householder and investor needs a reserve against mistakes. Now, more than ever. Until the crisis is over… and a new economy takes shape… any investment of labour or capital is likely be another mistake.

In normal times, residents of Chula Vista, CA, turned up their noses at spending a half a million on a public park for dogs. But now that the hard times are here, a place where dogs can run off the leash seems a fitting a use for money the town doesn’t have. In the best of times, Lincoln Nebraska was in no position to spend $3 million on an “environmentally friendly clubhouse for a municipal golf course.” But cometh the worst of times, and the golfers suddenly deserve not just a clubhouse, but one that is pals with nature.

Things we used to take for absurd we now take for granted. But it is just one of the wonders of the human race that it is capable of believing anything. The sunny years have passed. Now, there are storm clouds on every horizon. And instead of protecting its precious “idle” reserves… the government turns them into dog runs.

Source: Ready for the Shovels

“I think we can break the back of this thing,” said Ben Bernanke yesterday, as much of a Braveheart-style battle cry as he could muster. If the Fed and U.S. government take “strong and aggressive action,” he assured us, “we will begin to see improvements in 2009.”

That was the height of Mr. Bernanke’s optimism yesterday… here are the forecast highlights from his speech at the National Press Club and the latest FOMC minutes.

• Unemployment will reach 9% by the end of the year, and will stay above 5% until 2012
• The economy will contract between 0.5-1.3% this year. That’s worse than the
• Fed’s previous forecast of a 0.2-1.1% decline
• FOMC participants “generally expected that strains in financial markets would ebb only slowly, and hence that the pace of recovery in 2010 would be damped”
• Inflation should remain tame, around 1.5-2% over the next couple years. (As you know, we think this is a gross underestimation… proof below.)

The stock market reacted nervously to all the Federal Reserve hubbub . We showed you yesterday that the Dow was at a critical crossroads… well, it seems traders agreed, as the index crossed its break-even point 50 times Wednesday before coming to rest with a mere 3 point gain.

So we’re still at the precipice of new credit crisis lows. Today looks like we might step back from the cliff’s edge… with the help of better-than-expected earnings from CVS, Whole Foods and Sprint Nextel, the Dow opened up 50 points. Ironically, the only Dow component to report earnings was HP, which slashed its 2009 outlook after reporting a 13% drop in profits.

“For individual investors with a small-cap focus,” notes our small cap analyst Greg Guenthner, with a helpful list in hand, “there are ways to play the recession and come out on top:

“1) You need to think cheap. No, we’re not talking about fundamentals (although it’s always good to take a look at price to sales, debt and other important metrics before buying a stock). In this case, we mean cheap goods sold by discount retailers. When consumers are stretched thin, cheap stuff rules the roost. Don’t believe me? Just look at Tuesday’s drop. As of 4:00 p.m., only one Dow component had posted a gain: Wal-Mart. For the small-capper, screen for retailers with market caps less than $1.5 billion and you should find some interesting plays related to this idea. And for this screen, avoid specialty retailers and stores that primarily sell big-ticket items.

“2) During tough times, sin wins… Sin stocks are the comfort food of troubled times. A consumer who recently lost his job probably isn’t going to go out and buy a new car. But by the same logic, he isn’t going to give up his beer and cigarettes, either. In fact, the best-performing stocks during past recessions have been tobacco and alcoholic beverages.

“3) Find the necessities. We’ve already talked about the top two recession gainers from the chart above. But what about household products? Yes, families are cutting back. But we seriously doubt they’ll stop buying toilet paper and bleach just because they’re stretched thin. There are plenty of items every family can’t live without. Companies that make the goods should do just fine.”

If you want Gunner to do the legwork for you, check out Bulletin Board Elite.

This week’s commodity trade seems to be on pause today. Gold remains near its recently lofty high, around $980 an ounce. And oil remains suppressed, at $35 barrel.

“Lots of commodities look cheap these days,” notes Chris Mayer, “compared with what prices were before the meltdown started in full swing. Gold may not come to mind as a cheap commodity, because unlike oil or copper, it’s not wallowing near yearly lows.

“Yet on an inflation-adjusted basis, gold is nowhere near its all-time high of $850 per ounce reached on Jan. 21, 1980. To get there, gold would have to rise to $2,306 per ounce. All of which is to say we’ve got a long way to go in this bull market for gold.

“Perhaps the best chart I’ve seen on this is from Casey Research. The folks at Casey note: ‘Last month, the price for a single ounce of gold surpassed the S&P 500 index for the first time in 18 years. Following the last such inflection point that occurred in 1973, gold surged ahead over 600%.’

“There are other reasons for liking gold stocks in 2009,” Chris continues. “The first is the gold miners will enjoy a windfall from falling energy prices. Largely because of lower energy costs, mining costs will fall in 2009. Then there is the currency effect. In many gold-producing countries, the local currency collapsed against the dollar.”

Naturally, Chris found a gold stock for his Special Situations readers with both these assets. Get the ticker here.

Here’s what our colleague Dan Denning says is “the most disturbing story of the day.” Credit spreads and bond pricing in Europe hint of looming defaults and credit downgrades for practically half the continent.

For starters, the market is currently betting on credit downgrades for Hungary, Poland and the Czech Republic. Investors are demanding higher yields for these countries than other nations with the same credit rating.

“Investors are getting nervous about governments in Spain, Ireland, Greece, Portugal and Italy, too,” says Dan. “The spread between 10-year government bonds in these countries and 10-year German bonds is widening.

“What’s more, the credit default swap markets now appear to be factoring in the possibility that certain national governments in Europe may simply default on their debt. Take, for example, Ireland. According to The Times of London, the pledges made by the Irish government to support its banking sector amount to 220% of the country’s GDP.

“The Irish government has promised to bail out its banks. But who’s going to bail out the Irish government? That’s what everyone’s starting to wonder. And that’s why — in addition to the billions in loans made by Western European banks to Eastern Europe — the euro is looking shakier by the day.”

That’s also why “the mighty U.S. dollar is still rolling on!” proclaims our currency man Bill Jenkins. Do we detect… sarcasm?

“I’m looking for more dollar strength in the near term, not because the dollar is stronger, but only because of its relative strength against other major currencies. With the unthinkable drop in GDP by Tokyo, it looks like the USD is challenging all opponents! In the end, what will in the short run appear to be the cure for the dollar (short-term stimulus) will be its fatal death blow (longer-term massive inflation).”

The dollar index roared up as high as 88 yesterday, about half a point below its credit crisis high. Closer to 87 now, we’re seeing some profit taking this morning, especially after this number hit the tape:

Wholesale inflation shot up 0.8% in January, beating the Street’s estimate nearly threefold. The government reports today that its producer price index broke its five-month losing streak last month, led by a 15% boom in gasoline price inflation. Even the core PPI — which the Fed used throughout early 2008 to quell inflation fears — popped up 0.4%.

But we suspect deflation will remain the fear du jour. The Labor Dept. reports wholesale inflation fell 0.9% in all of 2008, the first year of wholesale deflation since 2001.

Elsewhere in the data patch, the number of Americans filing for unemployment benefits has attained a new record high. “Continuing claims” climbed to 4.98 million strong last week, the most since at least 1967, when the Labor Dept. started keeping track. Initial claims — people seeking unemployment benefits for the first time — matched last week’s count of 672,000. That’s just shy of a 26-year high.

But fear not, lowly American, Barack Obama is coming to the rescue. Mr. President unveiled the details of his new housing rescue package yesterday. What was described as a $50 billion program early this week has already morphed into a $275 billion beast.

Essentially, $75 billion goes toward “encouraging” lenders to lower monthly payments or extend the length of loan agreements. The other $200 billion goes straight to Fannie and Freddie, who will refinance loans on their books (also conveniently keeping the two GSEs on life-support).

The mission of the program will be to reduce all American monthly mortgage payments to no more that 31% of the owner’s monthly income. Those who are already in a home they can afford, well, they get reassurance of knowing they did the right thing… and the bill.

Aside from plenty of other concerns, we wonder… what happens five, 10, 20 years from now when the bailed-out homeowners sell their homes? If they’re worth more than the price today, who gets to keep the profits?

And look at this… enterprising homeowners around the country are finding their own ways to stall foreclosure. Here’s our favorite: Just ask to see the original mortgage paperwork.

“During the real estate frenzy of the past decade,” explains the AP, “mortgages were sold and resold, bundled into securities and peddled to investors. In many cases, the original note signed by the homeowner was lost, stored away in a distant warehouse or destroyed.”

We can only imagine the paper trail cluster%*#$ emanating from boom-to-bust mortgage villains like Countrywide and IndyMac. Oy… sadly, this sounds like a decent strategy.

“I guess it didn’t occur to Alan Greenspan and Lindsey Graham,” writes a reader referring to yesterday’s “nationalization” buzz , “that it would have been much less expensive to ‘assume temporary control’ over some banks by letting them go bankrupt, rather than bailing them out? Sheesh… our government at work.”

The 5: Ugh… don’t get us started.

“Your reader slamming the comments about our way-too-expensive military budget sounds slightly insane,” writes another. “Nobody said the military should be abolished. Just that they get too much money and have too much influence. I don’t care how good it is at helping teach people to be leaders. Our economy simply can’t support the combined total of all other countries’ military spending, which is what our military budget represents. It’s a simple fact. That doesn’t mean we should get rid of the military all together, as your overly excited reader seems to think was proposed. I mean, after all, it was a former general, Eisenhower, who coined the term ‘military-industrial complex’ and warned of its power and influence. And I’m sure he knew the value of the system.”

“If not for the military,” writes the last reader, “Uncle Sam wouldn’t be able to execute these stimulus programs and other wealth-redistribution programs. The military is the ‘teeth’ that the government needs to carry out all of its evil deeds, both foreign and domestic. As for speaking German and Japanese, get real! Common military doctrine teaches that to conquer an enemy the invaders need to outnumber the defenders 3-to-1. Let’s say only 100 million Americans owned a rifle. You’re talking about an invading force as large as the current population of the U.S. Sorry if I don’t get misty-eyed about you heroes splattering your guts for Leviathan. To defend a country, a volunteer militia is sufficient. Note the meaning ‘volunteer’ means it is done for free, without leeching off of the taxpayers.”

Source:Small Cap Wisdom, Bernanke’s Forecasts, Gold Stocks, the Foreclosure Mess and More!

But almost forgotten in the headlong rush to devise measures to create jobs and save the financial system is the total cost of the government’s commitment to solving the economic crisis.

Bloomberg News reported yesterday (Monday) that the tally of U.S. government spending could reach as much as $9.7 trillion – enough to pay off more than 90% of the nation’s home mortgages.

Already, the U.S. Federal Reserve, Treasury Department and Federal Deposit Insurance Corp. (FDIC) have lent or spent almost $3 trillion over the past two years and pledged another $5.7 trillion if needed. That adds up to almost two-thirds of the value of the entire gross domestic product (GDP) for the U.S. economy last year.

As astonishing as the number itself is a continuing lack of transparency in how and to whom the funds are being distributed.

“We’ve seen money go out the back door of this government unlike any time in the history of our country,” Sen. Byron Dorgan, D-N.D., said on the Senate floor Feb. 3. “Nobody knows what went out of the Federal Reserve Board, to whom and for what purpose. How much from the FDIC? How much from TARP? When? Why?”

Notably, only the stimulus package currently on the table – along with the $700 billion Troubled Asset Relief Program (TARP) and last year’s $168 billion tax rebate – have actually been voted on by lawmakers.  An additional $8 trillion is in the form of government lending programs and guarantees.

In fact, Bloomberg filed a federal Freedom of Information Act (FOIA) lawsuit against the Federal Reserve Bank Nov. 7 seeking to force disclosure of borrower banks and their collateral. Arguments in the suit may be heard as soon as this month.

Meanwhile, the spending goes on. 

The Senate is to vote this week on a stimulus package totaling at least $780 billion that President Obama says is needed to avert a deeper recession.  If it passes the Senate, it would have to be reconciled with an $819 billion plan the House approved last month.

Treasury Secretary Geithner delayed announcing his new plan for addressing the banking crisis, details of which were reported yesterday in Money Morning.  The tab for that bailout is widely expected to total near $1 trillion. 

But questions remain as to what effects the stimulus package and bank bailout will actually have on the economy, both near and long term.
The nonpartisan Congressional Budget Office reported last week that the measure is likely to create between 1.3 million and 3.9 million jobs by the end of 2010, lowering a projected unemployment rate of 8.7% by as much as 2.1 percentage points.

But the CBO also warned the long-term effect of that much government spending over the next decade could “crowd out” private investment, lowering long-term economic growth forecasts by 0.1% to 0.3% by 2019.

And simple mathematics calls into question assertions that another bailout will rescue banks teetering on the edge of insolvency.

Bank losses from the write-offs of bad loans and faulty derivatives add up to $1.5 trillion so far. Additionally, regulators are forcing banks to account for $5 trillion to $10 trillion worth of off-balance-sheet structured investment vehicles.

Given that banking rules require banks to keep assets on hand equal to 10% of those funds, banks will need as much as $1 trillion in the next year. Adding $1.5 trillion in losses means banks will need as much as $2.5 trillion in new capital to remain solvent under current rules.

“The banking system simply has no capital. All the money that’s been allocated so far has been like pouring water into a bucket with a hole in the bottom.” Satyajit Das, a credit expert from Johannesburg, South Africa, told MSNBC.

So is the $9.7 trillion pledged by the government going to be enough to pull the U.S. economy out of the fire? Who knows?

But here are a few facts:

• $9.7 trillion would be enough to send a $1,430 check to every man, woman and child alive in the world, Bloomberg reported.
• It’s 13 times what the U.S. has spent so far on wars in Iraq and Afghanistan.
• And it’s almost enough to pay off every home mortgage loan in the United States, calculated at $10.5 trillion by the Federal Reserve.

Although economists have been throwing around words like “trillion” like it’s nothing, $9.7 trillion is still is a lot of money.

Source: The $9.7 Trillion Pledged to Fix the Financial Mess Could Have Paid off 90% of America’s Mortgages, Report Says

This dismantling of the so-called “New Federalism” will be readily apparent again this week as the federal government is once again at the forefront of the most-closely watched  crisis-fighting initiatives at hand: With Congress pushing forward on an $827 billion stimulus plan and the Treasury Department planning to unveil its new banking bailout blueprint on Tuesday, economists and other experts say the federal government is taking its biggest role in the economy in a generation.

States that once pushed away from the federal government as part of the New Federalism are now essentially begging it for financial support, banks and Big Business that once viewed near-total deregulation as Corporate America’s Holy Grail are now seeking federal financial aid and new regulatory protections (and in many cases are becoming actual business partners with the government), and individuals are asking for tax relief.

Alan Viard, a Bush administration economist now at the American Enterprise Institute, may well epitomize this reversal of thought: He’s one of the economists who initially rejected the need for a fiscal stimulus, stating that the right size for a government spending bill was “probably zero,” believing that federal interest rate cuts and existing unemployment benefits would be enough to do the trick. But he now sees the package as necessary.

“Things have gotten so bad so quickly,” Viard told The Washington Post. “We have now lost 3.6 million jobs, a stunning loss. But what’s more horrifying is that half that loss has occurred in the last three months. This is a severe recession.”

The exact shape and size of the package matters less than the timing, and any delay will be very damaging, economists say.

“Most of the things in the package, the big dollar amounts, are things that are pretty quick stimulus and need to be done,” Alice Rivlin, who was former president Bill Clinton’s budget director and a critic of aspects of the proposed stimulus, told The Post. “Is it a perfect package? Of course not. But we’re past that. Let’s just do it.”

Signs of the Stimulus

The U.S. Senate late Friday reached agreement on the estimated $827 billion stimulus bill, setting the stage for what’s expected to be some tough negotiations with the House of Representatives over tens of billions of dollars in aid to states and local governments, tax provisions, and programs focusing on education, health and renewable energy.

Congress is pushing hard to complete the legislation this week. But that figures to be a challenge. The House bill was passed without any Republican support, while the Senate version passed Friday night between Democrats and three moderate Republicans.

During a rare floor session on Saturday, Republican opponents continued to criticize the entire stimulus proposal – even though they clearly don’t have the votes to stop it. The bill is expected to be passed in the next few days.

The price tag for the Senate plan is only slightly more than the $820 billion measure adopted by the House late last month. Both plans seek to resuscitate the U.S. economy with similar one-two punch strategies:

• Fast-acting tax cuts designed to jump-start consumer and business spending.
• And longer-term – albeit slower-acting – spending on public works programs and other projects that are projected to create more than 3 million jobs.

Despite these seemingly similar philosophies, the two plans rely on approaches that are very different. The higher-priced House bill emphasizes help to states and municipalities that would otherwise be facing major cuts in services and layoffs of public employees, while the Senate slashed $40 billion of that kind of funding from its version of the bill.

The Senate plan focuses more on tax cuts, lowers a proposed increase in food stamps and provides health-care subsidies for the unemployed that are much less generous than the House version. The Senate plan also creates $30 billion in tax incentives to encourage Americans to buy homes and cars within the next year.

House Speaker Nancy Pelosi, D-Calif., said the emerging Senate cuts to the stimulus program “very damaging” and that she was “very much opposed to them.” But after the Senate reached a deal, Pelosi expressed resolve to complete the legislation in the days ahead.

U.S. President Barack Obama has made the economic recovery effort the centerpiece of his agenda since even before he officially took office. But President Obama now intends to get much more involved, and much more aggressive: He will conduct a “town-hall-style” meeting in Indiana today (Monday), followed by a formal “prime time” White House news conference – the first of his term – tonight.

The president will then pitch the plan again in Florida tomorrow (Tuesday) and again in Virginia on Wednesday.

Senate Majority Leader Harry Reid, D-Nev., said final passage of the Senate bill is expected Thursday, after which congressional leaders say they will hurry to get the House and Senate versions into conference with the hope that a passed bill can be sent to the White House by the end of week, the San Francisco Chronicle reported.

Banking Plan Overhaul Unveiling Tomorrow (Tuesday)

Busy new U.S. Treasury Secretary Timothy F. Geithner last week promised that the Obama administration would unveil its new blueprint for rescuing the U.S. banking system today. Over the weekend, however, the administration said the rollout would be delayed until Tuesday, so that the focus could remain on passage of the stimulus package, Bloomberg News reported.

But that doesn’t mean the banking bailout plan isn’t key.

According to a recent analysis, the Obama administration has a multi-pronged strategy for quelling the financial crisis, including:

• A program to insure banks against extreme losses on mortgages and other loans.
• A new round of investments in banks.
• Help for homeowners facing possible foreclosure.
• The broadening of a U.S. Federal Reserve program to ramp up lending.
• The Treasury Department could also look at purchasing toxic assets from banks – possibly with the aid of private-sector financing.

This would represent an overhaul of the $700 billion Troubled Assets Relief Program (TARP) initiated by the Bush administration. As the name implies, TARP was initially concerned with buying troubled assets – but it quickly evolved into a direct-government investment into the banks.

This new Obama plan reflects Geithner’s personally held view of how governments should respond to financial crises. Geithner believes all available financial tools should be used – and used aggressively. Any such effort would include direct efforts to deal with the financial sector’s massive losses, since that would help renew public confidence in the financial system.

Too small a government response during a crisis poses more risk than too much response, he said during his confirmation hearing.

Many of the details of what Geithner will announce remained in flux, although the broad outlines were becoming clear, published reports state. But one thing is certain: Even the ideas that are continuations of the initiatives started by former Treasury Secretary Henry M. “Hank” Paulson Jr. will have a unique Geithner twist.

One example: The government will almost certainly continue to invest in banks. But past investments consisted of a form of “preferred stock” that granted the federal government no say in how the bank was run, or how the money would be used.

As a Money Morning investigation revealed, that lack of control allowed banks to use taxpayer-provided TARP money as financing for buyouts. And then the banks refused to detail how they spent the money – and why not? They weren’t required to.

Under the new plan, there will still likely be new government investments in banks. But Geithner will likely call for those new investments to be convertible into common stock after some fixed period of time, perhaps seven years. If the banks are unable to raise private capital in that span, government control would escalate.

Banks receiving money also will probably have to report to the government and to the public, and the government is likely to insist that the new capital be used to expand lending.

Geithner has also been looking for a way to bring back the original TARP concept, which Congress passed on Oct. 3. Paulson pitched the plan to Congress as a program to buy troubled assets off of banks’ books, then shifted the plan and opted to invest directly into the banks instead.

Paulson’s chief worry – and the reason that he changed direction – was that asset purchases would involve too many technical complications, meaning it would take too long to enact. And that delay could be costly to a system where banks were teetering on the precipice of failure.

After struggling with those same issues, Geithner and his team appear to have settled on an approach that amounts to financial triage, meant to give investors confidence that banks will not encounter vast new losses so that they are willing to invest private money, The Post reported.

In addition to buying bad assets, the Fed and Treasury in the next few weeks are expected to expand a program that should jump-start lending outside the banking system. In November, the agencies launched a program – the “Term Asset-Backed Securities Loan Facility” – that would devote $200 billion for credit card, auto, student and small-business loans.

That program will be extended to include residential real-estate mortgages and into the commercial real estate sector. Geithner may also announce an initiative that would inject government money into companies known as mono-line insurers. These firms are key players for states and municipalities when it comes time for those state and local government bodies to borrow money. With the implosion of the housing bubble, and the subsequent implosion of the commercial real estate business, mortgage-related losses by the insurers have made it harder for states to issue the municipal bonds that would help them ride out the recession without aggressive tax increases or budget cuts.

Geithner is likely to roll out a plan, worth $50 billion to $100 billion, to encourage the modification of mortgages for homeowners who would otherwise likely face foreclosure. It could be based loosely on a strategy for foreclosure relief engineered by Federal Deposit Insurance Corp. (FDIC) Chairman Sheila C. Bair, when the FDIC took control of the failed bank IndyMac Bancorp Inc. (IDMCQ) last year.

Market Matters

On the corporate front, United Parcel Service Inc. (UPS) posted a profit (though revenue declined) and then announced new cost-cutting measures.  Motorola Inc. (MOT), The Walt Disney Co. (DIS), Time Warner Inc. (TWX), and Costco Wholesale Corp. (COST) reported disappointing results.  Visa Inc’s (V) earnings jumped by 35%, though management warned of tougher times ahead.

Bailout plan recipients have tried to cut back excessive spending (and the associated bad PR) as Goldman Sachs Group Inc. (GS) (Miami) and Well Fargo & Co. (WFC) (Las Vegas) canceled huge boondoggles. Bank of America Corp. (BAC) is selling off corporate jets, and Citigroup Inc. (C) may be attempting to get out of the $400 million marketing deal with the New York Mets.

C-SPAN must be enjoying stellar ratings as investors seem obsessed with the inner-workings of Congress and their debates on the stimulus and bailout.  The markets disregarded much of the dire earnings and economic data (terrible unemployment report…see below) and focused on the newfound optimism that politicos can work together to get the country moving in the right direction.

Economically Speaking

Just how long until a stimulus package starts creating jobs?  That answer can’t come soon enough for the almost 600,000 people who moved to the unemployment line in January, the most devastating month for job losses since 1974.  The unemployment rate climbed to 7.6%, forcing many economists to (upwardly) revise their projections for the rest of the year (and beyond).

Since the recession “officially” began in December 2007, the country has lost more than 3.6 million jobs, with most of the losses coming in the past three months.  The rest of the data released during the week did little to contradict the lousy unemployment picture.  Factory orders fell for the fifth straight month and the ISM index revealed that purchasing managers still look for contraction in the manufacturing sector. Though the services sector showed a slight rebound in its ISM survey, the index reported a fourth consecutive month of declining activity.  Residential construction spending experienced its worst annual decline ever recorded (since 1993), though optimists are hopeful that a stimulus package that focuses on infrastructure growth will prompt a renewal in non-residential building.

With the Fed stuck looking for creative ways to get involved (now that the benchmark Federal Fund rate stands at about 0%), its international counterparts took action (or inaction) of their own. The Bank of England (BOE) cuts its primary lending rate to a record low 1.0%, while the European Central Bank chose to leave its rate unchanged (for now) at 2.0%.

Weekly Economic Calendar

Source: As Stimulus-Package Debate Continues in Congress, New-Look Bank Bailout Plan is Set to Debut This Week

And… action.

Fourth-quarter earnings season is in full swing. Many investors seem to have forgotten over the past few weeks, but American financials still look… umn, bad. Here’s the quick and dirty:

Citigroup, once the world’s second largest bank, is getting dismantled. The pieces are going to the highest bidder, whether the buyer can afford it or not. The mega bank announced yesterday that it has jettisoned Smith Barney into the arthritic hands of Morgan Stanley.

Citi will still hold a 49% stake in the brokerage service. And the Citi/Smith Barney/Morgan Stanley venture will create the world’s biggest brokerage firm — comprised of 20,000 brokers and have over $1.7 trillion under management — but for their sake, we hope they conjure up a catchier brand name.

Still, today, Citi is planning further bust-a-moves. A New York Times article claims the company will soon attempt to split itself in two, separating “core” and “noncore” (aka profitable and notprofitable) segments of the business. Robert Rubin, who among other things helped create this “supermarket” model for Citi, resigned last week. CEO Vikram Pandit will likely follow soon.

Why the mess? Despite selling off its assets and getting over $45 billion from the government’s handout program, Citi is still expected to post a $10 billion loss for the fourth quarter… possibly more.

But the trouble isn’t relegated to Brooks Bros. snoots in New York. HSBC, Europe’s biggest bank, will need to cut its dividend in half and raise $30 billion to stay afloat, analysts at Morgan Stanley predicted today. According to Morgan’s report, profits at HSBC will decline “sharply” this year and not recover until 2011.

HSBC stock fell over 8% in European trading.

German giant Deutsche Bank braced investors today for a $6.3 billion fourth-quarter loss. The bank said it will likely turn in a loss of $5.1 billion for all of 2008.

Even the British bank Barclays, which has been on a buying spree of late, will slash another 2,100 jobs. In part due to its acquisition of a bankrupt Lehman Bros., Barclays said today it will fire about 7% of all its bankers and back-office workers.

The International Monetary Fund (IMF) is even asking for emergency loans, for crissakes.

“The world economic outlook for 2009 will not be good,” IMF Managing Director Dominique Strauss-Kahn warned. The IMF is expected to release its global growth projections for 2009 this week, and Kahn suggested yesterday they won’t be pretty. He predicted a “significant” increase in total global financial losses and write-downs — which have already crested $1.4 trillion.

To combat this worsened forecast, Strauss-Kahn is asking countries of the world to “find an extra $150 billion” to cushion the hit on more impoverished and susceptible economies. The IMF wrote checks totaling $41 billion in November, the biggest monthly bailout tab in its history. If you happen to “find” a couple billion in your couch cushions, let Dominique know.

“Despite a depression unfolding across the globe,” insists Chris Mayer, “emerging economies will still be areas of strength. ‘Emerging economies’ reliance on America is often exaggerated,’ writes The Economist over the weekend. It points to a global share of exports around 20% — a number that hasn’t budged much in a decade. Nonetheless, the longer-term trend is clear: Most of the world’s growth is coming from emerging markets. See this next chart, from The Economist:

“I think this is a trend that will continue. Much of the fast action will happen overseas. Companies without exposure to these economies will simply not grow as fast as those with exposure. All things being equal, I’d rather own a company that makes something Asia needs than one that only caters to North America or Western Europe.

“Also in the emerging market camp’s favor: relatively low debt levels and higher savings rates than the U.S. Not all of them, of course. Some, like Hungary and Estonia and Turkey, have huge debts. But Asia generally shines in this department.”

Back in I.O.U.S.A., we’ve received even more assurance that taxpayer money is in good hands. Tim Geithner, the incoming Treasury secretary and thus head of the IRS, owed over $43,000 in back taxes.

Evidently, he was under the impression working for the IMF makes contributing to Social Security and Medicare an optional affair. What a mess. These guys aren’t even in office yet.

“As America’s economic situation worsens,” notes our small-cap sleuth Jim Nelson, “payday loan shops are cashing in.”

“Many view payday loan shops as corrupt, greedy modern-day loan sharks. In some instances, that’s simply not the case. These loan companies are providing a needed service. No one likes to hear of families being turned out of their houses because of missed mortgage payments. Cash advance businesses offer a solution to these millions of families.

“Instead of eviction, one solution for a working family is to take out a short-term seven- or 14-day payday loan. Obviously, this is the last option. But faced with foreclosure, it’s becoming a more frequently used solution for many who never thought they’d be in that position.

“Many households are taking out payday loans to fund unexpected expenses, too. With more families living paycheck to paycheck than ever before, even paying for the basics is becoming difficult.”

Jim’s found a small company that provides these services, “with a guaranteed flood of business around the corner.” He’s talking about tax refund advances… what should be a frighteningly popular option this year. If you’d like to learn more, check out PSF.

In a similar fold, have you seen this commercial yet?

Hyundai has it bad, but the American consumer has it worse… so the ad execs for the South Korean automaker came up with this clever scheme: Buy a Hyundai today, and if you “lose your income” over the next year, you can bring it back. They call it the “Assurance Program.”

Deflation… bring it on.

In the stock market, major indexes snoozed all day yesterday. The old bats are resting up before the bulk of fourth-quarter earnings announcements hit the fan. The Dow lost a little bit, 0.3%. The S&P 500 finished flat, and the Nasdaq edged up 0.5%. Whatever.

“The U.S. stock market continues to meander in sideways trading action,” notes Wayne Burritt, with some bigger-picture perspective.

“As you can see from this daily chart of the S&P 500 — a good surrogate for the broader U.S. stock market — price action over the last week has unfolded as I anticipated : The market is stuck in a near-term trading range.

“In fact, after hitting an upside range limit of 944 last week, the S&P got busy retreating to the downside. It’s now poised to retest intermediate lows in the 857 area. If that breaks, a move to the lower bound of its intermediate term range — 741 on the S&P — is certainly in the cards.

Now, while that’s surely not the uptrend we’re all looking for, don’t forget that the market has shaped this trading range in spite of simply terrible fundamental news. And that shows uncommonly strong market character, a factor we didn’t see much of last year.

“So where do we go from here? Like a star athlete that’s hit a slump, the stock market is trying its best to wage war and move to the upside. Until we get some positive fundamental data points — especially on the housing front — it’s going to have a tough time breaking out to the upside. And that means that sideways chop will likely hang around for a while.”

This morning, the Dow opened down 150 points, largely because of this:

Retail sales plunged 2.7% from November to December, the Commerce Dept. said today. Factor out auto sales, and it’s a 3.1% fall — the biggest drop in 17 years history, and twice as bad as the Street anticipated.

Year over year retail fell 9.8% — another record plunge.

For all of 2008, retail sales fell 0.1%, the first full year decline since the Commerce Dept. started keeping track in ’92. Retail sales have fallen six months in a row, the longest losing streak on the books.

Yet that little green slip of paper we call a dollar continues to defy gravity. Despite all the gloom and doom sputtering from every corner of the financial press, the dollar index is up another half a point this morning, to 84.5.

Yesterday, we read a review of our book The Demise of the Dollar on the sycophantic syndication site Seeking Alpha, in which the reviewer called comments like the above “anti-dollar.” How, we wanted to ask, can you be against a currency? He then accused us of “hating” the Federal Reserve. How can you hate a bank? Some people, we’ve learned after 16 years in this business, are just idiots.

Gold, which according to the above reviewer we “love,” remains suppressed. The spot price has been stuck at $820 over the last 36 hours.

But oil is bucking the trend. Even though the dollar is still rising, crude has inched back up to $37 a barrel. You can thank OPEC… the cartel is saber rattling again today, and for some reason, the market has decided to listen. We’ve heard a couple warnings from Saudi Arabia lately, all suggesting the country is ready and willing to cut production more than OPEC decided at its last meeting, in December. Leaders from Saudi and Venezuela are reiterating the same today.

Also attributing to the rising cost of energy, it looks like the Russian gas conflict with Ukraine might not truly be over. The two nations signed a deal and made nice in front of the cameras, but the spigots are still running dry. Several regions of the EU are still without Russian gas, now for the seventh day in a row.

Russia says the gas is flowing but the Ukraine won’t open its network of pipelines. The Ukraine says there is no gas to be distributed… grab a beer, kick back and watch from a distance… this one isn’t over yet.

But maybe not that far a distance? Russian President Medvedev suggested yesterday that Ukraine was “dancing” to Washington’s music. The plot thickens…

“I have been doing business,” writes a reader, “in Eastern Europe since 1991 — sales of oil and gas equipment, projects, etc. Some of my customers are intimately knowledgeable (with the carnal type of knowledge) of the purchase of Russian/Ukrainian gas.

“Here in our Western system, when the gas product is passed from one company to the next, we use a protocol known as a ‘custody transfer.’ Gas is measured, often by both sides, using specially approved and calibrated flow measurement devices. In addition, the gas is also analyzed with a gas chromatograph to establish the quality of the gas. Here, we are more interested in buying Btu (or gigajoules) than simply a volume of gas. Producers are paid for what they produce and discounted based on the quality of the gas they sell. High-quality gas commands a higher price that low-quality gas…

“In the Russian ‘system’ — the seller tells you how much you bought, and, further, how much you will pay for the gas that (supposedly) arrives into your country.

“So imagine the scenario: Russia sells gas to Ukraine — Ukraine transports the gas to Western Europe and marks up the product prior to sales. The gas routing passes through several former Warsaw Pact countries or is fed via feeder lines into nearby countries — Romania, Hungary, Bulgaria, etc.

“Imagine further that gas sold to these feeder-line countries have absolutely no say on custody transfer or absolute knowledge of the volume of gas that they are actually receiving. Ukraine will not put custody transfer flow measurement in the cross-border locations. Nor will it allow customer countries to measure the incoming gas and honor the amounts. ‘You pay for what we say you get’ is the approach. ‘And if you don’t like it, get your gas elsewhere!”

“The only likely reason for this insistence on the status quo is the ‘shrinkage’ that is actually occurring inside Ukraine. Who knows what corrupt officials are making a profit off the ‘stolen gas’ — that Romania et al. are paying for?

“So it may be a mistake to accuse Mr. Putin of being the cause of the problem . X amount of gas crosses the Ukrainian border on the Russian side and X minus Y (in-country shrinkage) crosses the border on the other side…

“Of course, this shouldn’t matter to Mr. Putin — if the gas is actually bought and paid for by the Ukrainians prior to being marked up and sold to the European customers. But it certainly matters to the countries that are being held hostage — paying world prices for gas while only getting a partial delivery on their investment… and not being able to do anything about it.”

The 5: Thanks for the insight.

Source:Credit Crisis Sequel, Global Bank Bailout, Emerging Markets Still a Buy?, Gas Wars and More!

The deal’s no surprise to Wall Street, since Citigroup has chalked up $20 billion in losses in the last year and Morgan Stanley needs to leverage its brokerage business by increasing its scale. But recent pressures on both companies from the Treasury and Federal Reserve may also have led to pulling the trigger.

“There’s been a lot of pressure for Citi to monetize some of their more valuable assets, and Smith Barney is certainly one,” Michael Nix, a money manager at Greenwood Capital Associates, told Bloomberg News. “There’s also been a lot of pressure for Morgan Stanley to look at how they can better lever their business units.”

Morgan Stanley is set to pay $2-3 billion in cash for a majority stake in Citigroup’s brokerage unit, Bloomberg reported. Morgan Stanley would also have the option to buy the remaining 49% of Smith Barney over the next three to five years.

But the deal could open Morgan Stanley to criticism that the bank is spending taxpayers’ money on acquisitions rather than kickstarting the economy through lending.  Morgan Stanley and Citi were among several banks to receive large government investments.

As an ongoing Money Morning investigation has demonstrated, billions in U.S. bank rescue funds are financing buyouts worldwide – instead of lending at home. Some of those buyout deals are being done in markets as far away as China. Meanwhile, credit remains tight here in the U.S. market, a situation that could be alleviated if only the banks made the bailout money available to consumers in the form of loans.

But few believe the authorities will raise many objections since the move will serve to strengthen both Morgan Stanley and Citigroup’s financial position, as well as increase their ability to pay back government loans in the future.

Although government officials have been badgering banks to use the federal funds to boost lending, they will probably back the deal since it gives Citi $2.7 billion in much needed capital while strengthening Morgan Stanley’s balance sheet with billions in assets.

For its part, ceding control of Smith Barney in exchange for cash and a sizeable capital gain underlines Citi’s need to bolster its balance sheet. Citi will record a capital gain of up to $6 billion on the difference between the valuation of Smith Barney on its books and the value of its share of the joint venture.

Putting Smith Barney in play represents a change of direction for Vikram Pandit, the bank’s chief executive, only weeks after he pledged that Smith Barney would remain part of Citigroup.  And Pandit is under pressure from the Treasury  and Fed to sell assets and improve capital reserves, according to the Financial Times.

But selling the unit comes at a steep price to Citi’s bottom line. Smith Barney will make $1 billion next year, according to a forecast by Barclays Capital. Citi’s North American global wealth management division, which houses the brokerage, contributed 20% of Citi’s net profit in 2007, up from 6% the previous year, showcasing its ability to perform even in tough times.

On the other hand, Morgan Stanley needs more brokers to turn its wealth management business into a bigger profit engine. The Citi deal would take care of that in one fell swoop, adding more than 15,500 brokers to its current base of 8,000. Brokerage businesses thrive on size as their technology costs can be spread over a larger number of brokers.

The move comes after Morgan Stanley’s recent conversion from an investment bank to a bank holding company regulated by the Fed, limiting its ability to take leveraged bets in its trading businesses. But rather than providing checking accounts to ordinary bank customers, the company will be able to focus more on wealthier individuals, with portfolios of stocks and bonds.

Meanwhile, President-elect Barack Obama made clear that there will be strict controls on the second half of the $700 billion Troubled Asset Relief Program, the government bailout fund originally designed to purchase assets and equity from financial institutions in order to strengthen the financial sector.

“Let’s lay out very specifically some of the things that we are going to do with the next $350 billion of money,” Obama said on the ABC News program, “This Week.” “And I think that we can regain the confidence of both Congress and the American people that this is not just money that is being given to banks without any strings attached and nobody knows what happens, but rather that it is targeted very specifically at getting credit flowing again to businesses and families.”

Source: Fed Pressure Factors into Morgan Stanley/Citigroup Venture

Summers, the director-designate of the National Economic Council, said President Obama has vowed to:

• Use the government’s “full arsenal of tools”to jump-start lending to both consumers and businesses.
• Reform oversight of TARP and any related responses to the ongoing U.S. financial crisis.
• Utilize “smart, aggressive policies”to reduce foreclosures.
• To toughen the requirements bailout applicants would have to meet before receiving any of the taxpayer-supplied federal money.
• And to try and attract private-sector capital in order to accelerate the end of the bailout program.

The Obama team sent the letter to congressional leaders yesterday. Earlier yesterday – even before the letter was sent – President-elect Obama asked the Bush administration to notify Congress of Obama’s intent to use the remaining TARP funds.

“President Bush agreed to the President-elect’s request,”White House Press Secretary Dana Perino said in a statement. “We will continue our consultations with the President-elect’s transition team, and with Congress, on how best to proceed in accordance with the requirements of the statute.”

A Democratic source in Congress told CNN News over the weekend that the Bush administration may soon request the funds, and Money Morning reported that the president-elect might make such a move.

A Rough Ride for TARP

The Treasury Department on Thursday said that it’s so far spent $267 billion buying preferred stock in financial institutions and U.S. automakers. But the agency held back on spending or even committing the remainder, reasoning that with Obama due to take office so soon, it would be better for the new president to disburse the rest of the money.

Late last week, congressional watchdog Elizabeth Warren said the Treasury Department has done nothing to make sure $700 billion in taxpayer-provided bailout money is used to buttress the weak U.S. mortgage market, which has been the key catalyst for the growing global financial crisis. Warren, who heads the Congressional Oversight Panel for the bailout program, told ABC News on Friday that there was no evidence the Treasury had used TARP bailout money to put a floor under the falling U.S. housing market by avoiding preventable foreclosures.

“There’s just no money that’s gone in that direction,”Warren said. “This one’s not even arguable. The TARP funds themselves have not been used in this way despite congressional statutes requiring them to do so.”

The congressional investigation is just the latest in a series of revelations demonstrating the possible misallocation of the taxpayer-provided bailout money. An ongoing investigation by Money Morning has detailed how banks have used the first $350 billion: They’ve used the capital to finance investments in other banks – including an investment in China – and to pay bonuses to executives. Then they audaciously refused to say where the money went, or how it was used, Money Morning has shown.

Ironically, the news that Obama is requesting the bailout money comes just as banks have started lobbying the federal government to go back to its original TARP proposal, under which the Treasury Department would actually buy back troubled mortgage assets. U.S. Treasury Secretary Henry M. “Hank”Paulson Jr. pulled the plug on that idea about two months ago, opting instead for the redesigned strategy under which the agency bought stock directly in the struggling banks, insurance companies and brokerage houses – as well as at least two of the U.S. “Big Three”automakers.

News that Obama was seeking the funds came just hours after President George Bush, speaking at his last regular White House press conference, said President-elect Obama hadn’t made any request for the funds.

“I told him that if he felt he needed the $350 billion, I would be willing to ask for it,” President Bush told reporters yesterday. However, he also “hasn’t asked me to make the request,” Bush told reporters.

Under the bailout legislation approved by Congress in October, the administration must formally notify Congress that it wants to access the second installment of $350 billion, CNNMoney.com reported. Unless Congress passes a resolution rejecting the request within 15 days, the Treasury Department can begin tapping the funds.

Even with the news that Bush will request the funds, the money won’t be available until the Obama administration is in office. Inauguration Day is Jan. 20 – a week from tomorrow (Tuesday).

How the new administration plans to spend the second half of the TARP funding has emerged as a major issue on Capitol Hill – almost as big as congressional concerns over the size and makeup of the Obama administration’s planned new stimulus package, an estimated $800 billion plan that includes tax cuts.

Lawmakers on both sides of the aisle have expressed unhappiness with the way Paulson, the treasury secretary, has deployed the first half of the $700 billion in TARP money. Congressional leaders object to how the Treasury Department made direct investments in banks with few strings attached and no process for tracking how the banks are using the money.

Leading Democrats in Congress have made clear that reducing foreclosures will be among their chief priorities for the use of the second half of TARP funds. In fact, House Financial Services Chairman Barney Frank, D-Mass., has introduced a bill that promises $50 billion of mortgage-foreclosure relief and toughens terms on companies that do receive taxpayer money.

However, after a meeting with key members of Obama’s economic team Sunday, Senate Democrats expressed optimism about plans to more sharply focus the bailout of the U.S. financial-services sector. With that newfound optimism, Congressional Democrats are now trying to drum up enough votes to keep critics from passing a measure that would block lawmakers from releasing the second half of the TARP rescue money, CNN.com reported.

Although a measure opposing the release of that money has been introduced into the House, passage of the bill would require a majority vote.

A Call for a Return to ‘TARP Classic’

Despite criticism of how the first half of the TARP money was deployed, President Bush earlier yesterday defended his administration’s approach to the bailout. He reminded listeners that there was a real concern the U.S. economy was poised for a total financial meltdown – especially back in the Fall, when there were widespread fears that the United States was headed for a reprise of the Great Depression.

What’s more, Bush said there are now signs that the U.S. financial markets are “beginning to thaw”- a sign that the TARP strategy is working. Treasury Secretary Paulson agreed, stating that the financial sector has been stabilized by the capital infusions.

Even so, the overall economy has endured a sharp decline in recent months. Companies have slashed workers at a rate not seen since the end of World War II, credit remains tight and companies and consumers alike have pulled back hard on spending.

And U.S. banks still hold hundreds of billions of illiquid mortgage-backed securities that, if downgraded, could spawn a whole new round of potentially ruinous write-downs. That’s why a number of experts in the financial-service sector are lobbying for a return to the earlier TARP premise – some wags are calling it “TARP Classic”- that would remove “toxic”financial assets from bank balance sheets.

Leading the charge for a return to what some might refer to as “TARP classic” is SIFMA, the Securities Industry and Financial Markets Association trade group that’s based in Washington.

“We need to get the markets moving again,” Tim Ryan, chief executive officer of the Washington-based Securities Industry and Financial Markets Association trade group, told Fortune. “We have no problem with capital injections, but if you do capital injections without taking care of the bad assets, it just causes the problem to go into hibernation.”

Ryan, a one-time U.S. Treasury official, is also a former director of the Resolution Trust Corp. (RTC), the government-created vehicle that cleaned up the savings-and-loan mess of the early 1990s – and did so ahead of schedule and under budget. Ryan said the lesson he learned from that role was that the only way to get banks to lend again is to get rid of the bad assets that keep them too scared to do so.

Others agree. In a whitepaper issued this week, the Organisation for Economic Co-operation and Development said that a study of financial crises over the past three decades suggests that isolating bad assets is a key to a successful response to a major market meltdown, Fortune reported.

Even the Congressional Oversight Panel headed by Warren, the congressional watchdog, criticized TARP for how it handled such initiatives as the government bailout of Citigroup Inc. (C) back in the fall.

Citi received $25 billion of TARP money in October, and the Treasury Department insisted that any bank that received federal bailout infusions were now healthy. Unfortunately, Citigroup’s shares plunged, forcing the government to come to the rescue a second time only one month later. That second time around, the government has to provide an additional $20 billion in return for preferred stock, while also providing a $306 billion loan guarantee.

Source: Obama Requests Release of Second Half of $350 Billion TARP