Crystal is a single mother with three great kids.  Two years ago her mail box was stuffed with credit card offers.  Credit was so easy to come by then.  All she had to do was sign her name and mail back the application in the little postage-paid envelope.  A week or two later, her shiny new credit card arrived.

Crystal is a great mother, and her children are her pride and joy.  She owned her own home and always paid her bills on time… until she lost her job.

You see, Crystal had already tapped out her home-equity line of credit.  And the only way she could feed her kids was to buy groceries on her credit card.

Crystal’s credit card company was easy to work with… until she missed a payment.  That’s when she got hit with a $39 late-fee and her rate was raised to 29.4%.  Crystal wanted to pay her bills but she did the right thing instead, she fed her kids first.

The credit card company unleashed a vicious collection agency on Crystal that would harass her family and call at all hours of the night.  It got so bad that she had to file for bankruptcy to get the frustrating calls to stop.

In the bankruptcy, Crystal’s credit card debt was “discharged” by the judge, meaning the credit card company took the full hit and Crystal didn’t owe them any money.  At this moment, the good news is that Crystal still owns her home, her kids are great and she just landed a new job…

Stories like this are quite common in America today.  In fact, U.S. credit card defaults rose to a record high in May.  Consumers remain under severe stress and credit card losses across the industry are on pace to surpass 10% this year which would lead to write-offs of over $70 billion for credit card issuers.

Unemployment hit 9.4% in May, which is at the highest level since 1983.  If people don’t have jobs they can’t pay their bills.

Real estate prices have dropped so people can’t borrow against their home anymore–therefore they tend to run up their credit cards.  In fact, American households have been loading up on credit card debt like crazy, with balances rising 75% since 1999.  The average credit card debt per U.S. household is now well over $8,000.

Credit card issuers are attempting to protect themselves against defaults by lowering people’s credit limits and closing accounts.  They have also been hitting consumers with higher interest rates, jacking up fees and canceling reward programs.

But Uncle Sam is putting his foot down.  The U.S. government recently passed a law limiting credit card fees and interest rates.  This will stop credit card companies from socking-it to the American consumer.  But it will be even harder to get a credit card once this law goes into effect–and will increase defaults as consumers find it more difficult to refinance their debts.

Bottom Line:  Credit card issuers are doomed!  How can you play it?

Put options on the goliath credit card issuer Capital One could deliver you some hefty gains as their stock goes down.

You see, Capital One is still losing money hand over fist.  They had a net loss of over $111 million in the first quarter of 2009.  And they lost $46 million in 2008.

I expect Capital One’s revenues to continue to fall, due to slowing consumer spending and a troubled U.S. economy.

The company is in big trouble as a result of a continuing rise in delinquencies and charge-offs in Capital One’s credit card and home equity lines businesses.  Its credit card default rate rose to 9.41% and lower real estate prices have crushed their home equity line portfolio.

Plus, top rating firm Reuters has Capital One rated “Underperform”, and Standard & Poor’s rates the stock a “Sell”.

From a technical perspective, the 200 day moving average is falling which is bearish.  Furthermore, the Up/Down volume pattern indicates that the stock is under distribution, which means investors are offloading the stock.  See the chart:

Buy Put Options on Capital One Financial.

Please keep in mind that option trading is speculative.  Of course I can’t guarantee profits and losses are entirely possible. You should only invest funds you can afford to risk.

The high-powered, strictly limited-risk option I suggest trades under the symbol (YFNME).  I say limited risk because you can’t lose more than your initial investment.

One options contract will give you the option to sell 100 shares of the Capital One Financial stock (COF) at $25 per share.

This options contract (YFNME) gives you the right to sell (COF) until January 15th of 2010 at $25 per share.  If Capital One stock drops to $15 per share then you will have a minimum gain of 67%.  If it drops to $10 per share your gain would be 150% at the very least.

Here are the details for the option recommendation:

Option: January 2010 – 25.00 puts (YFNME)
Underlying symbol: COF
Breakeven point at expiration: $25.00 – $6.00= $19.00
Estimated Cost: $1,200 (2 contracts x 100 Shares x $6.00 premium)
Expiration date: January 15, 2010 at 4:00pm EST

After you have done your homework and if you agree with my recommendation, enter the trade online or call your stock broker and say:

“I want to BUY 2 contracts of Capital One Financial Corp. January 2010 Put Options, with a strike price of 25.00, symbol YFNME, at 6.00 points or less, to open.  This order is good ‘til cancelled.”

Close the position if the option trades 50% below your entry price.

Sell the first half of the position if the option trades 100% above your entry price.

Let the second half ride for maximum profits.

If you buy this position and the option is in the money you should exit this position on or before January 15, 2010.

Stock options give you the leverage you need in today’s fast moving markets.  I give 2 to 4 new options picks like this every month in my new options newsletter the Options Power Trader.  Click here if you would like to learn more.

Source: Capital One Is Doomed, Buy Put Options

We have to pinch ourselves occasionally…and remind ourselves that it is real.

Yes, after the real estate bubble burst, we thought the fun might be over. But no! In come the feds. As you know, what brought about the housing bubble was a sort of madness that caused people to do the damnedest things with their money. But now, the feds are doing even stranger and crazier things!

Actually, we were happy to see the bubble blow up. Spending more than you make is hardly a formula for wealth-building. All in all, we figured our countrymen would be happier, over the long run, if they started saving their money rather than squandering it. Besides, we liked seeing Wall Street getting whacked – those clowns deserved it.

The savings rate in the United States is rising quickly. We reported the falling balances in credit card debt last week. And the last figure we saw showed the savings rate had jumped from about zero to over 3%. Our guess is that it is headed back to about 10%. That’s about where it is “supposed” to be.

But thank God for the feds. While the imperial citizens sober up…their government builds a still. While citizens save 3% of GDP, their government spends 15% – and more.

The feds’ budget deficit for March alone would have been enough for an entire year during Reagan’s…or even Bush’s…term. At $196 billion, it is the monstrous fruit of crashing tax revenues and soaring government expenses.

Just a few months ago, we were talking about a $1 trillion budget deficit. When the discussion began, most people refused to believe it. How could the government – in good conscience – spend $1 trillion it didn’t have? Here at The Daily Reckoning, we guessed that the deficit would go to $2 trillion. Not that we’d done any calculations…it just seemed to us that people consistently underestimated both the downward pressure from the bear market and the upward pressure from the politicians. The bear taketh away. The jackasses giveth. Well, at least they’re trying, right? Of course, we’d all be a lot better off if they didn’t do anything. But then, it wouldn’t be so much fun to watch.

The total committed to this bailout campaign is now said to be about $13 trillion. Let’s see, that’s more than $100,000 per family. Better start working on your own ‘personal bailout’ sooner, rather than later.

It’s the “Theft of a Nation” says Stewart Dougherty:

“The United States of America, or, more precisely, the American people, are said to own 261 million ounces of gold, supposedly stored in the same Fort Knox vault that Goldfinger found so appealing. At $1,000 per ounce, the people’s gold has a value of $261 billion dollars. TARP 1 alone has cost 270% of the entire value of that singular, tangible American asset. The total $13 trillion bailout cost thus far is 4,980% of the value of America’s gold asset. Fort Knox has been robbed…”

They’re squandering $13 trillion…or nearly 49 times the U.S. gold supply. But heck, it’s worth it. The whole thing is very entertaining now…and will be hugely instructive in the future. When this is over, the next two are three generations are sure to say: well…we won’t do THAT again!

And with that, we turn to Addison, who tells us of a strange new trend for the greenback:

“Last week, stocks capped off their best rally since 1933,” writes Addison in today’s issue of The 5 Min. Forecast.

“The S&P 500 rose for the fifth straight week, now 27% off its low in early March. You’ll have to go back to the Great Depression to find a 23-day rally that sizable.

“Thursday alone, the Dow ended up 3.1% – back above 8,000 for the first time since early February.

“And with this historic run, we see a peculiar new trend for the US dollar. Observe:

“On Thursday, however, the dollar rallied big right along with stocks. Today, the Dow opened down 100 points…and the dollar index dropped nearly a point. It’s a curious trend developing with this ‘sucker’s rally’. When it sputters…and the dollar plays along…look out below.”

Each weekday, Ian and Addison bring readers the The 5 Min Forecast, an executive series e-letter that provides a quick and dirty analysis of daily economic and financial developments – in five minutes or less.

And back to Bill, with more thoughts:

We are still a bit stuck on the $13 trillion price tag for these bailouts.

Makes you wonder where former Fed chairman Paul Volcker, who was tapped back in November by Obama to head the President’s Economic Recovery Advisory Board, is in all this.

Our friend Barry Ritholtz was pondering the same thing in a post on his blog, The Big Picture.

“If you want to know why the administration’s approach to the credit crisis has been lacking, and why the Obama bailouts looks surprisingly like the Bush bailouts, consider this: No Volcker.”

Barry mentions an interesting WSJ piece that points out that Paul Volcker was put at the head of an advisory board that has yet to meet. Says the WSJ:

“‘Paul was surprised’ at the failure to consult him, particularly on issues of financial rescue after his dominant role in resolving financial crises in the 1980s, says one person who has spoken to Mr. Volcker recently.”

“To review,” writes Barry, “You have access to the greatest Fed chief in history, and you are choosing not to use him during the greatest crisis since the Great Depression.”

Our sentiment exactly.

A dear reader poses a question:

“…if you were a single mom, with a little cash & metal in a QRP, who had cut her expenses very, very low, who is staying home to take care of her own children and do contract work to get by AND save a little…what else should I be doing? Move to the country or should I move out of the states?

“Invest in shoes and underwear for my kids now pre-inflation, prepare for self defense, food storage, learn to grow vegetables…I am doing these things, but I just can’t get myself to feel ‘safe.’ I am scared witless because I am afraid, not of a depression…that I can survive…I grew up really poor, but I am scared of the chaos that will ensue and the political/military escalation that will follow that…now that is what keeps me up at night

“What would you tell your Mom or your sister to do? I am really not feeling very well about all of this. How can I get to where I feel safe? I am thinking maybe the Appalachian Mountains or something. The government terrifies me.”

What would we say? “Hmmm…” we would probably begin. “As to the financial crisis, we can provide some ideas.”

But our reader seems to have already gotten the gist of them already. For the benefit of other readers, the central banks of the world have failed to do their jobs – to provide the world with sound, reliable money. This means that we each have to be our own central banker – stocking a supply of gold against the inevitable collapse of paper currencies. It is as if we couldn’t trust the power company to provide electricity. We have to have a portable generator on hand – just in case. We like to have some gold…just in case.

But our reader has an even deeper fear: that we can’t trust our government to provide security either. Security is the main reason governments exist – that, and larceny. Nevertheless, they don’t always do a good job of providing security. In fact, they tend to fall down on the job often – usually when security is most needed. Most of the time, not much security is called for. People get along, more or less. Most people wouldn’t kill their neighbors – even if they thought the cop on the beat could be bought. But occasionally, they get an evil urge and you need someone to step in with a blackjack and a pair of cuffs.

But government can be a source of insecurity, too. One security team attacks another from time to time. And occasionally, the security providers attack the people for whom they are supposed to be providing security. Here in Argentina, for example, there have been few genuine threats from the outside – at least not since the emperor of Paraguay, goaded by his Irish mistress, made a mad bid for control of the country in the mid-19th century. But in the 1970s, the government decided it had quite a few people it would rather not have. They were “disappeared.” No doubt, many who were not disappeared were glad to be rid of them. They were troublemakers. But our reader seems to be afraid that she may among those who are disappeared from the United States in the next go-round of violence…or maybe just that she will be caught in the crossfire.

The odds are probably against it. But who knows?

“America: a super-power no more,” says a headline at the Christian Science Monitor. Empires come and go. They don’t always go easy.

Lately, we’ve been thinking: There are only three important decisions you make in life: what you do; whom you do it with; and where you do it.

Buenos Aires is a big city with many different neighborhoods. Your editor is staying in the Palermo Soho area.

We have lived in many different places and visited many more. We don’t recall ever seeing a place that seemed so delightfully lively and convenient. The cobblestone streets are flanked by buildings of only one or two stories. Some have Belle Epoque or classical facades. Most are more modern with all manner of style – but leaning towards the contemporary chic. It’s a neighborhood blessed by a lack of urban planning. Houses, apartment building, high-fashion shops, bars, supermarkets, restaurants, auto repair garages – you can find them all in a single block. The sidewalks tend to be rough; they’ve been patched, neglected, repaired, and overlooked for many, many years. There are also many trees – from the stately old sycamores on Thames Street, to many smaller, newer varieties we can’t identify.

Within a block or two of our hotel there are dozens of eateries – from simple pizza parlors to very serious restaurants. The weather is perfect this time of year, so people sit outside all day long. They take their coffee in the morning…then lunch slides into mid-afternoon…and dinner slips all the way to 10 PM. Nightclubs open after midnight. By the time your editor is waking up, the revelers are still wandering the streets.

We went to lunch on a street corner near the hotel. The place was what Argentina is famous for – a steak restaurant. The restaurant had put a roof over the sidewalk and placed tables and chairs under it. We dined on white tablecloths…and watched people ambling along…mostly families with young children and some tourists. It was so agreeable…we wondered why we remained in Europe, where it is twice as expensive…and the weather is twice as bad.

Day and night, people walk the streets…shopping…going to cafes and art galleries…

This morning we heard a flute. It sounded like Pan calling to the water nymphs. A man rode slowly down the street on a bicycle onto which he had fashioned a grinding wheel for sharpening knives. The flute was his way to let people know he was in the neighborhood.

A woman washed the sidewalk on the other side of the street. She has a shoe store, with a big blue arch on the roof. The window displayed what we would call “tennis shoes,” even though they’re not really for playing tennis. They’re replicas of the kind of shoes we wore in the ’50s and ’60s…Keds…or Chuck Taylor’s All Stars…with rubber soles and canvas uppers. Now, they must be in demand. Every shoe store has thousands of them, in all colors – from fuchia to silver lame.

“Why not move to Buenos Aires?” we posed a loaded question to Elizabeth. It went off immediately.

“Are you crazy? We moved from the United States to Europe. We’ve already gone through that once. Have you forgotten how hard it was to figure everything out? Finally, after all these years, we have friends…we have things to do…we have things set up the way we want. Well…almost the way we want. Even after 15 years, we’re still not totally settled.

“Why would you want to go through all that again?”

“I’ll get back to you when I have a good answer,” we said in retreat.

One final thing. We’re headed up into the mountains. You won’t hear from us for a week, but we leave you in the hands of Kate Incontrera and the rest of the DR contributors.

Source: The Feds Keep Spending Alive

Our old friend, Marc Faber, says he expects a 10% drop in the stock market before the rally resumes.

Maybe. This rally is going to end sometime. But it probably has a ways to go. There are still a lot of suckers who haven’t been drawn in.

Another old friend, Rick Ackerman, thinks the problem with this rally is capitulation…or rather, the lack of it. There’s been no capitulation, says he. And you can’t have a real bottom without it. No capitulation, no bottom.

The news from the economy is bad and getting worse.

Credit card debt has just taken its biggest plunge in 32 years…maybe ever. Credit card balances fell at a 9.7% annual rate. And the number of open credit card accounts is going down too.

What happens when people can’t pay down their loans?

“Mortgage delinquencies soar in the US,” says a Reuters article. Remember, delinquencies are the beginning of the process. Then come foreclosures and auctions – all eventually driving housing prices down further.

And when property prices fall, so does the collateral behind the banks’ and other financial institutions’ assets. So, their troubles aren’t over. The worst is still ahead of us, not behind us.

But despite the bad economic outlook, investors think the worst is past for the stock market. Markets look ahead, they say, beyond the immediate economic forecast. True, but they have an adorable habit of seeing only what they want to see.

“In January 2008, when the S&Ps were in the early stages of what was to become a devastating collapse,” explains Rick Ackerman, “domestic equity mutual funds were worth about $6.5 trillion. Lo, a little more than a year later, in February 2009, we see that the value of these funds had fallen by about 48%, to $3.4 trillion. But guess what: Over that time, net redemptions totaled only 2%, or about $100 billion! What that means, explicitly, is that mutual fund investors have stuck with this bear market throughout the decline.”

Investors didn’t give up on stocks – despite the huge decline in stock market prices. What that means is that there’s still a lot of selling to be done.

“This bear market will end,” he continues, “like every other bear market in history, with a wholesale dumping of stocks at prices that will make current values seem exorbitant in comparison.”

That’s why you use trailing stops. You want to be sure that when the selling begins your stocks get sold first – long before most investors finally capitulate.

More news on how to play this bear market from Addison and The 5:

“If you’re shorting stocks, this might be of use,” writes Addison Wiggin. “Now that the easy targets are long gone (big banks, homebuilders, AIG) and the bear market rally is in full swing, short sellers are setting their sites on some more diverse organizations.”

“Hmmm… pretty all over the board, eh?” Addison notes. “There’s a mobile tech biz, several real estate players, home healthcare, a bank and a popular chain of sandwich shops. What’s the connection?”

“Most of the stocks on this list,” answers our resident short seller Dan Amoss, “are characterized by at least one of these three facets: Shorting the stock is a current fad, the company is using ‘creative” accounting methods that traders think is fraudulent, or the company is a high risk for insolvency.

“Regardless, bulls beware… when you see short interest that high (as a % of outstanding shares), you rarely see sustainable short squeezes.”

And back to Bill with more thoughts:

It’s amazing how much credibility some people have. Seems almost infinite. No matter how bad their advice…or how little they understand…people still ask their opinions.

Or, to put it another way…it’s amazing what most people will believe.

You’d think – after $50 trillion in losses – that people would be careful whom they listened to. Who would take Alan Greenspan’s thoughts seriously, for example? Yet, the newspapers still report his remarks with a straight face.

And what about all the economists who claimed that since the “U.S. has the world’s most flexible, dynamic economy” you couldn’t go wrong buying U.S. stocks? And what about the market timers who urged investors to buy “bargains” when the Dow was only 10% below its peak? And how about the regulators – such as Tim Geithner – who completely missed the biggest Ponzi scheme of all time, taking place right under their noses? And the economists who thought derivative debt made the financial world safer by “distributing risk more widely?” And those, such as Hank Paulson, who thought the sub-prime crisis was “contained” at $100 billion in losses? (Current cost of the bailouts – $12.8 TRILLION!)

As our friend Nicholas Taleb says, it’s as if these guys had wrecked a school bus – while they were driving drunk.

But instead of putting them in jail – they’re given a new school bus to drive!

Kevin Phillips, author of Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism warned of a the pending explosion of a 25-year “multibubble.”

The bubbles began in the 1980s, he says, when the financial sector accounted for 10 percent to 12 percent of the U.S. economy had grew to an “arguably crippling” 20 percent to 21 percent of GDP by the middle of this decade.

Who’s to blame? Henry Paulson, he says…and Ben Bernanke…and Alan Greenspan.

The Reuters report: “Phillips calls Paulson a Wall Street insider who was looking out for his own, and Bernanke an academic misguidedly trying to refight the 1930s Great Depression. Together they formed the wrong team at the wrong time whose ad hoc approach threw away hundreds of billions of dollars and more than doubled the Fed’s balance sheet, he says.

“What you’re seeing Bernanke do is he’s trying to create a bailout reflationary bubble, which he can’t describe as a bubble, just as Greenspan couldn’t describe the housing mortgage bubble as a bubble. What we’re seeing by Bernanke is a covert attempt to rebubble,” Phillips told Reuters.

Meanwhile, Nouriel Roubini – who’s been mostly right about the crisis – says that [Jim] “Cramer is a buffoon.”

“He was one of those who called six times in a row for this bear market rally to be a bull market rally and he got it wrong. And after all this mess and Jon Stewart he should just shut up because he has no shame…He’s not a credible analyst. Every time it was a bear market rally he said it was the beginning of a bull and he got it wrong.”

Roubini warned two years ago that the United States faced its worse recession in four decades. He points out that the current rally on Wall Street merely follows the pattern of other major downturns.

“Once people get the reality check than it’s going to get ugly again,” he says.

Finally, as promised in yesterday’s issue: What can we learn from Argentina?

In the ’30s, Argentina suffered along with the rest of the world. Until then, it was roughly as rich as Europe and rivaled America in some ways.

“As rich as an Argentine,” was an expression in England. Marrying one’s daughter to an Argentine planter was the dream of many down-at-the-heels English aristocrat.

But something went very wrong on the pampas. Instead of Franklin Roosevelt’s New Deal, the Argentine’s got a raw deal from Juan Peron. Both programs were frauds. Both made things worse. But Peron’s program stuck. Americans soon came to their senses and forgot Roosevelt. Between Franklin Roosevelt and Barack Obama were Eisenhower Republicans and Carter Democrats. But Peronist politicians have dominated the Argentine political landscape since the ’40s.

Every problem demands a government solution. And every Peronist solution makes things worse.

Source: A ‘Rebubble’ Attempt

“Geithner plan welcomed,” says the headline story in today’s Financial Times.

“Stocks rally on news of toxic assets proposal,” continues the commentary.

Stocks did indeed rally. The Dow rose 497 points…putting some bounce back in the bounce. We’ve been expecting a healthy rebound. Normally, after such a long and steep sell-off, you can expect a rebound that recovers 30%-50% of the losses. We have not had such a rebound…yet. Maybe this is it.

Otherwise, the financial news is mixed. House sales in February were unexpectedly high. Then again, prices continued to fall.

AMEX looks like it is going to be downgraded…as credit card debt now looks as though it could be heading in a subprime direction.

The dollar continues to fall, (to $1.36 yesterday) and gold continues to stay in the same place – around $950.

But let’s focus on the big news: the Geithner Plan.

The gist of the story is that the government will create a public-private fund to buy up to $1 trillion in the banks’ mistakes. These assets will be auctioned off – in a market sustained and supported by public money. This is a “win – win –win” situation, says Bill Gross of PIMCO, the world’s largest bond fund. We didn’t see the rest of his analysis so we’ll have to guess. It’s a win for the banks because they get to clean out their refrigerators. It’s a win for investors because they get to buy the throwaways at huge discounts – with government guarantees – and then they’ll discover that it doesn’t all have fuzz on it. And it’s a win for the government, because it finally gets rid of that nasty odor coming from the kitchen.

We have neither the time nor the stomach to look closely at this program. But we don’t have to; even from a distance, it stinks.

Why? Because there’s not that much ‘win’ to share out. The assets are worth what they’re worth. By all accounts, they’re worth a lot less than the banks thought they were worth originally. In a better world, the bankers would take their losses, admit their mistakes, and blow their brains out…or at least change careers. In fact, we have a suggestion: they should go into government; there they can make as many mistakes as they like and no one will notice.

But this is not a better world; it’s a world that is full of sin and sorrow…one with a fool on every corner…and an ace up every sleeve.

There won’t be three winners from Mr. Geithner’s plan. There will only be one. Whatever the toxic assets are worth, they will be sold for either more or less than that amount. If they are sold for less, investors will realize a profit. The banks – and their government backers – will lose because they will have given up an asset for less than it was really worth. On the other hand, if the toxic assets are sold for more than they are worth, it is investors who will lose.

Investors’ objective is clear: they want to make money. And they won’t invest unless they think they’re getting the assets for less than they are worth. Bankers’ and the government’s motivations are more complex. Mostly, they just want the problem to go away. So, we’ll put our money on the buyers of the toxic assets, not the sellers. Most likely, they will be the only winners. They will buy the more palatable pieces of meat at good prices; they’ll leave the most toxic pieces for the government. Most likely, the government will be an even bigger loser than it is now.

But the government will lose twice. First, it will lose money in the poker game with private investors. Then, it will lose again when its expensive flimflam fails to restart the economy.

The banks will be better off once they’ve cleaned out their cupboard. No doubt about it. They will be ready to lend again, right? But to whom?

The problem the bank bailout is designed to fix is only a piece of the larger problem…and not the essential piece. Banks have had plenty of money to lend – despite their own toxic assets. The Fed has been willing to give them the most elastic line of credit in history. The problem was not that they didn’t have the money to lend, it was that they didn’t have a creditworthy borrower to lend to.

Take the case of mortgage lending. In their vaults, they have billions of dollars’ worth of mortgage-backed assets. They know that those assets are ‘toxic’ because homeowners can’t pay their mortgages and the value of their collateral is going down. So, those mortgage-backed assets are getting marked down to what investors think they might really be worth.

But what bank wants to take on more mortgage debt? Housing prices are still falling. And homeowners are still in trouble. Toxic assets are being marked down in ANTICIPATION of the poor homeowner going broke. He still has to go broke…and get back on his feet…before he’s a good credit risk. And that logic applies to the entire economy. Businesses, homeowners, and investors need to clean out their cupboards too, before the credit cycle can turn up again. And that is a very long process….

More thoughts to follow…but first, let’s check in with our team in Baltimore…

“In the markets, the buying fervor of this bear trap has reached historic proportions,” writes Addison in today’s issue of The 5 Min. Forecast.

“You’re looking at the best 10 days for the Dow since 1938.

“After yesterday’s 6.8% shot, the index is up 18.8% in the last two weeks of trading. If history does in fact rhyme, the Dow might be sitting pretty for a while:

“The last time the Dow rallied over 18% in 10 days, it held on to most of those gains for over a year.”

“In fact, the Dow at 110 in 1938 ended up being a long term level of resistance,” continues Addison. “The market traded flatly for the next four years, briefly dipped below during the worst of WWII, and then staged a sure and steady rally for the next 30 years.

“So all we have to do is fight and win another global war, pay down our debts and ignite another phase of industrial production… then we’ll be fervently buying, too.”

The 5 Min Forecast is an executive series e-letter that provides a quick and dirty analysis of daily economic and financial developments – in five minutes or less.

Back to Bill, reporting from London…

According to Frank Rich in the International Herald Tribune, President Obama may be having a “Katrina moment.” The storm caused by AIG bonuses just keeps blowing out windows and taking off roofs. Bailouts are stupid and corrupt, of course. But they play a key role; they help divert the public’s attention…like a guy who picks a fight in front of a liquor store, while his friends rob it.

So far, a poll found that Obama himself has avoided the public’s anger. But the poor AIG executives are being hounded, even at home. Employees are “living in fear,” says one press report, as “busloads” of protesters arrive in front of their Connecticut homes.

Then, the TV cameras catch these poor schmucks as they tell their sad stories. “My husband lost his job at the carwash…and now I have to see these crooks living in houses that I could never even begin to dream about.”

Here at The Daily Reckoning, we do not envy the AIG crew. Nor do we have any desire to take their money away. They stole it fair and square, as far as we’re concerned. But the lumpen are much less open minded.

The House of Representatives actually passed a resolution imposing a 90% tax on AIG bonuses. The measure looks clearly unconstitutional to us. It’s a penalty tax…a Bill of Retainer, specifically outlawed by the Constitution. You’re not supposed to be penalized, after the fact, without due process of law. But who cares? Members of Congress never read the Constitution anyway. And it’s probably better that they don’t. If they took it seriously, they’d have to punish themselves.

But while all this wind was passing through the press, the important story was highlighted at Salon.com: “Economists agree: Print. Money. Now.”

What worries us is that this is all too obvious and too predictable. The economists agree, because they see no alternative. The real problem is not a lack of money for the banks to lend – they can borrow all they want from the Fed at near-zero interest. The real problem is too much debt. And printing money will help ease the debt burden. On paper, people will owe as much as ever, but it will be a whole lot easier to pay with the dollar going down by 10% …or 20%…per year.

So, print…money…now…is just what the Fed is doing. Bernanke said so. And he says he’ll keep doing it as long as necessary.

This unsettles the Chinese, of course. They’ve got $1.4 trillion in dollar assets. They told the United States that they expected it to protect the value of the Chinese holdings.

But how can the feds do that? Quantitative easing is an increase in the QUANTITY of money. Generally, an increase in the quantity means a decrease in the QUALITY of it. That’s how it works. And that’s exactly what the feds want.

So, the poor feds! Out of one side of their mouths, they had to reassure their biggest creditor that they’d protect the value of the dollar…while out of the other, they have to reassure the markets that they will create enough inflation to get the economy moving.

They are caught between Scylla…and Charybdis…on the one hand the rock of deflation…on the other, the Chinese. What can they do?

Our guess it that they are aiming to muddle through…with just a little bit of QUALITATIVE decline in the dollar – not enough to cause the Chinese to panic – but enough to get U.S. consumers, investors and businessmen to loosen up.

Good luck to them.

But there’s no such thing as a controlled “run on the dollar.” Once investors start running for cover, it’s every man for himself. And who knows where it will end up? Foreigners are already exiting U.S. agency debt. It wouldn’t be very surprising that they suddenly rush for cover from all U.S. dollar debt.

Therefore, is it not obvious that the dollar will fall? And bonds will be crushed? And gold will rise?

Almost too obvious. Still, we now have taken down our “Crash Alert” flag for the stock market. But we hoist another one: a Crash Alert flag for the dollar.

The horror! The French leftist newspaper, Liberation, convened a forum of intellectuals to discuss how to get the world economy out of its funk. University professors, social workers, journalists – hundreds of them. We’ll wager that not a one of them had a clue about what is going on…and every suggestion they made would make the situation worse.

Meanwhile, we were surprised to see that the leftist English newspaper, the Guardian, actually shares our critique of the bailout efforts. “The rich need a dose of capitalism,” writes Andrew Lilico. “Capitalism punishes those who invest in companies that fail.”

Well…that’s the way it’s supposed to work. But the meddlers, improvers, and chiselers are out in force.

And what’s happening in that heart of financial darkness, Zimbabwe? The Guardian also reports that children are eating rats to survive. For many, only gold is keeping them from starving.

Unfortunately, they don’t have much gold. The Zimbabwe inflation rate is still running around 230 million percent, despite recent reforms (we don’t know what happened after the government took 13 zeros off its currency; maybe it’s putting them back). So, the only reliable money is either foreign currency – or gold. Many people are panning for gold in the few streams where it is present.

Source: Another Day, Another Trillion Dollars

Uncle Sam is now a shareholder at many of the nation’s top banks. He recently gained the authority to tell the nation’s largest manufacturers how to run their businesses. And now he is about to gain the ability to dictate your home’s value and how much you pay for it each month.

As you probably know, Congress is working on legislation that allows bankruptcy judges to rule on payment terms for distressed mortgages. If passed, judges will have the ability to reduce the amount of principal due on an existing mortgage. It is a scary and dangerous power.

Under current Chapter 13 bankruptcy laws (which force troubled borrowers to continue paying off their debts), judges have the power to modify credit card debt and car loans, but cannot touch first mortgages. Home lenders could stay out of court. But that may be changing.

Citigroup (NYSE:C) originally opposed the new legislation, saying it gives unfair power to courts. But after receiving more than $45 billion from Washington over the past few months, it has had a not-so-surprising turnaround. It is now officially in favor of the legislation that could force it to lose money on court-altered loans. Many of its competitors remain in opposition.

Don’t worry, we will save you

This is just the latest attempt from Washington to secure votes and ensure Americans remain addicted to its socialized teats. We “saved” the banks. We “saved” Detroit. Now we have to “save” the homeowners. How many votes are left to buy?

Borrowers made risky bets. Betting that home prices would continue to soar, they got themselves into loans they knew they could not afford. Now that their arrogance is working against them, they are expecting the government to come to their rescue.

A signed contract used to have a sacred obligation between two entities. Now it is viewed as little more than guidelines when it comes time to re-negotiate.

We all know the government’s short-term goals with this proposed legislation. Congress wants to get the economy back on track and look like a saving grace.

But what are yet to be seen are the long-term ramifications of our government’s constant meddling in the world of free markets. The Federal Reserve has hurriedly lowered interest rates in a last-ditch effort to spur the economy. It wants mortgage rates to reach as low as 4.5%.

If Congress expects lenders to expose themselves to the mercy of the bankruptcy courts, it cannot possibly demand them to do it without charging a premium. According to some mortgage-industry insiders, that premium will likely come in the form of interest rates at least 1% or even 1.5% higher.

By allowing the courts to write their own mortgage contracts, our elected officials are putting many more Americans at risk. Not only will the action slow the housing market even further (lenders won’t lend and buyers will not be able to afford to borrow), but it will drastically increase one of the nation’s most important industries exposure to political risk.

If the goal of the new administration truly is to redistribute the nation’s wealth, it is doing a fantastic job. It is destroying the American prosperity one bill at a time.

Source: Need a mortgage? Call a judge

This from Money Morning:

U.S. consumers are already losing their jobs at an accelerating rate.

The same thing is now set to happen to their credit lines.

But with so many Americans already losing their main source of income – their jobs – at an ever-spiraling rate, will an economy that derives two-thirds of its power from consumer spending end up mired in its worst funk in decades because those same consumers are now losing their charge accounts?

Before you dismiss the possibility, consider this: The U.S. economy weakened across all regions since the middle of October as it became tougher to get loans and demand for credit shrank, the U.S. Federal Reserve said in its regional economic survey report yesterday (Wednesday). The so-called “Beige Book” report – published just two weeks before central bank policymakers are to meet and consider interest-rate changes – said that retail sales, tourism spending and manufacturing declined in most places, labeled housing markets as “weak” and concluded that the commercial real estate sector “weakened broadly,” Bloomberg News reported.

“We are looking at an economy that is not only in a recession, but a recession that is deepening rapidly,” former Fed Governor Lyle Gramley, now senior economic adviser at Stanford Group Co.,
told Bloomberg Television. “It certainly is a gloomy report, but not, I guess, worse than what you would expect given the data [we’ve seen] coming in.”

The United States has already been in a recession for a year, the National Bureau of Economic Research (NBER) reported this week. This economic one-two punch could generate a much-bigger financial crisis “aftershock” than many experts realize. Only two of the last 10 recessions to take place since the Great Depression have lasted a full year. But this one could last well into 2010.

$2 Trillion in Credit Lines on the Chopping Block

More than $2 trillion in consumer credit could be cut in the next 18 months, as credit-card companies pull back credit lines in anticipation of credit funding problems and regulatory changes, said Meredith Whitney, an Oppenheimer Holdings Inc. (OPY) banking analyst who’s well-known for her gutsy and prescient (and ultimately correct) market calls.

Throughout the week, Whitney has warned that the entire mortgage market will contract for the first time ever in the months ahead. More importantly, however, Whitney says the credit card market will be 18 months behind, as credit-card companies pull back more than $2 trillion in credit lines, taking away consumers’ second major source of liquidity, following jobs.

“What you haven’t seen yet digested by the market is banks pulling lines from consumers,” Whitney said in an interview with CNBC. “And across the board you saw the big banks that command so much of the market share of key products like mortgages and credit cards start to pull lines in the third quarter and that’s going to continue in the fourth quarter. And that’s going to continue into 2009.”

Although some experts note that consumers reduce their spending during recessionary periods — and, needless to say, after they lose their jobs — it’s important to not confuse spending and credit. During dire times, many consumers can boost their use of credit even as they cut overall spending, using the credit cards, home-equity lines and other forms of borrowing as a lifeline to tide them over. For those consumers, a credit line cut can be disastrous personally, and can aggregate into an even-steeper downturn in spending.

Roughly 70% of U.S. households have access to credit cards, and 90% of those people use those credit cards as a cash-flow management vehicle, or revolve payments at least once a year, Whitney says.

A surprisingly small number of national companies dominate the major lending arteries – including credit lines, mortgages and credit cards – that have sustained the U.S. consumer for so long, including mortgages and credit cards. Mortgages have already hit a wall with the collapse of the U.S. housing market and wave of subprime defaults. But credit cards could be next as companies raise interest rates, tighten lending standards, cut credit lines, and even close millions of accounts in an effort to insulate themselves from consumer defaults.

Bank of America Corp. (NYSE:BAC), Citigroup Inc. (NYSE:C), and JPMorgan Chase & Co. (NYSE:JPM) – which controlled more than half of U.S. credit-card lines at the end of the third quarter – have all discussed reducing their credit-card exposure or scaling back growth, according to Whitney.

“You’re going to start to see the consumer get really strained on their credit card lines,” said Whitney. “People think the next shoe to drop is the credit card credit costs – the charges going up. No, it’s the credit card lines being pulled by bank lenders in anticipation of worsening credit funding problems, and then regulatory changes on the horizon.”

Whitney expects the credit-card market to begin to shrink by mid-2010, a time when the unemployment rate could be as high as 9.0%.

“Just when the consumer is losing their job that’s their first source of cash, their first source of liquidity, then they lose their second big source of liquidity, which is their credit card line,” she said.

Indeed, as unemployment rises, so too will credit-card delinquencies. David W. Nelms, chief executive of Discover Financial Services (DFS), told Reuters that card write-offs could be in the mid-5% range in the fourth quarter and near 6% in the first quarter of 2009.

Delinquencies “will tend to track with unemployment,” Nelms told Reuters after a speech to the Executives Club of Chicago. “Most agree that things will tend to get worse next year.”

Lenders, still reeling from losses tied to subprime mortgages, can’t afford another round of defaults on credit cards. So they’ve begun pulling lines of credit, leaving the consumer out in the cold. And it’s only going to get worse, Whitney says.

Crisis Expert Sees Change in Consumer Psychology

Investment expert R. Shah Gilani – a retired hedge fund manager who’s been chronicling the credit crisis as a Money Morning contributing editor – isn’t surprised by Whitney’s predictions.

“This is already happening in a big way,” Gilani said referring to Whitney’s assertion that credit lines have been put in jeopardy. “I have already talked to people who have had their credit lines reduced, even cut in half. So I wouldn’t be surprised if $2 trillion turns out to be an accurate figure.”

And according to Gilani, the evaporation of $2 trillion in credit could be the death knell for the American consumer.

“A number that high makes you gasp, just considering the quantitative effect on consumer spending,” Gilani said. “There’s a strong chance that the American consumer is not just down on the canvas, but has been knocked out of the ring.”

American consumers cut spending by 1% in October, the biggest drop since the last recession in 2001, the government said last week.

U.S. retail sales plunged 2.8% in October – the largest monthly drop since the Commerce Department began tallying monthly retail sales in 1992. The sales drop marked the fourth consecutive monthly decline and the first retrenchment since 1992. And few have any hope left for the Christmas season as consumer confidence is also waning. The Reuters/University of Michigan consumer sentiment index clocked in an ultra-low 55.3 for November, down from 57.6 the month before.

The reading fell well short of the projected 57.7, Reuters said, and – even worse – had deteriorated since the middle of the month, even though lower gasoline prices were seen as a bright spot for consumers. The University of Michigan confidence index dates back to 1952. Its record low was 51.7, which it hit in May 1980.

Once again, jobs, liquidity and confidence were the key issues, the survey report said.

“Consumer confidence fell in the last half of November due to mounting job losses, falling incomes and the evaporation of household wealth,” the report said. “Consumers were unanimous in their recognition that the economy was in recession, and nearly three-in-four expected the recession to deepen in the months ahead.”

However, Gilani, who is also editor of the Trigger Event Strategist – a trading service specifically designed to help investors maneuver through this economic malaise – also believes that what investors are witnessing is yet another “aftershock” of the ongoing global financial crisis.

“What is actually taking place is a shift in consumer psychology that has been driven by factors such as the socioeconomic climate – as well as the environment – and that’s now being compounded by credit conditions,” Gilani said. “This is about banks and credit companies de-leveraging and forcing the American consumer to do the same.”

The trouble is, he said, this can become a cycle that’s hard to stop once it takes hold.

“Whether Americans have lost confidence in the market or simply can’t afford to repay loans, money flows have simply dried up” Gilani said. “So banks have been forced to raise their lending standards to a point that many Americans are now unable to meet. It becomes a vicious cycle.”

PS. This is an excerpt from the latest installment in Money Morning series on the “financial aftershocks” of this crisis.

Source: Will the Loss of Consumer Credit Serve as the Next Economic Aftershock to Further Fuel the Financial Crisis?

• It’s official: The United States has been in a recession since December 2007, the National Bureau of Economic Research said yesterday (Monday). Already 12 months into it, this recession is longer than eight of the 10 recessions the U.S. has experienced since World War II, CNNMoney reported. Should it continue past the June 2009, it will be the longest.

• U.S. Federal Reserve Chairman Ben Bernanke said the central bank could buy long-term Treasury securities to help revive the economy. “This approach might influence the yields on these securities, thus helping to spur aggregate demand,” he said in a speech yesterday (Monday) in Austin, Texas, Bloomberg reported.

• A report from JP Morgan Securities (JPM) predicts the U.S. Federal Reserve will lower its benchmark federal funds rate to 0% and hold it there at least until the end of 2009. The current rate is 1.0%, and many analysts predict the Fed will lower it to 0.5% at its December 15-16 meeting, Reuters reported.

• Pilgrim’s Pride Corp. (PPC), the largest U.S. chicken producer, filed for Chapter 11 bankruptcy protection after four consecutive quarters in the red fueled by rising grain costs. The company is the poultry supplier to Wal-Mart Stores, Inc. (WMT) and Kentucky Fried Chicken, a subsidiary of Yum! Brands Inc. (YUM), Bloomberg reported.

• The U.S. credit-card industry could pull back more than $2 trillion of credit lines over the next 18 months due to risk aversion and regulatory changes banking analyst Meredith Whitney said yesterday (Monday). “Already, we have witnessed the entire mortgage market hit a wall, and we believe it will, for the first time ever, show actual shrinkage over the next few months,” she wrote. The credit card market will be 18 months behind the mortgage market and will begin to shrink by mid-2010, Whitney said.

• Light, sweet crude for January delivery yesterday (Monday) fell $5.15, more than 9%, to settle at $49.28 a barrel on the New York Mercantile Exchange. Reports showing declines in both manufacturing activity and construction spending also contributed to the decline.

• Johnson & Johnson (JNJ) said yesterday (Monday) that it would buy cosmetic-product and breast-implant maker Mentor Corp. (MNT) for $1.07 billion. J&J will start a cash tender offer for $31 per share – almost double Mentor’s Friday closing price of $16.15 a share.

Global Investing Roundups, Tuesday, December 2nd, 2008

Well… Nothing has changed since I left you last Wednesday. The awful economic data just keeps piling on, and the dollar gets bid up on safe haven purchases. We did see the Eurozone and Japan announce that they are in a recession… Chris was kind enough to leave me the following, so here’s some more Chris….

“The dollar weakened slightly after the US Industrial production numbers showed a rebound in October. The 1.3% monthly gain sounds great, but it followed September’s drop of 3.7% due to the Gulf Coast hurricanes. After adjusting for the effect of the hurricanes and a strike at Boeing, output dropped .7 percent during each of the past two months. The trend continues to be very weak, and the recession which currently grips the US is now expected to last through 2010.

The US was rescued from the last two recessions by US consumers, who continued to borrow and spend right through the previous slowdowns. But we can’t count on consumers to pull us out of this one. Plummeting home values, dwindling incomes and the near disappearance of credit have proved a potent mixture for the US consumers. The number of personal bankruptcy filings jumped nearly 8 percent in October from September. Filings totaled 108,595, surpassing 100,000 for the first time since the bankruptcy laws were changed in 2005. The number of filings were up nearly 34 percent from October 2007, and are expected to total over 1.2 million for the year.

Not only are bankruptcy filings up, but most filers have much more credit card debt than in years past. A recent study found that the typical family who filed for bankruptcy in 2007 was carrying about 21 percent more in secured debt, and about 44 percent more in unsecured debts like credit cards than those that filed in 2001. Don’t count on US consumers to rescue us this time, so who will? Pelosi and President elect Obama are already talking about increasing government spending to try and borrow and spend our way out, but any stimulus or massive government projects will only add to the overall debt and increase the deficits. We are already being crushed by our debt load, and increasing it won’t be a long term positive for the US. The dollar continues to be propped up by safe haven purchases and the global deleveraging, but this dollar strength can’t continue. Once we return to the underlying fundamentals, the dollar will fall.”

OK… Thanks once again, Chris!

The BIG NEWS today should come in the form of a testimony by Treasury Sec. Paulson, regarding his TARP… This should be interesting folks… You see there is a whispering campaign to withdraw the “blank check” that lawmakers gave to Paulson and Fed Chairman, Big Ben Bernanke, and any attempt to not fully disclose the details of what has been given out to date, or… Any more changing of horses in the middle of the stream, could cause a ruckus. It could also cause the safe haven boys and girls to go “all in” on their safe haven purchases, because, it will be just like last week, when Paulson did change his course for the $700 Billion bailout money, and the blanket of “unknown” was cast upon the markets, and the risk takers ran for the hills.

In other words… The Trading Theme that is in place that rewards the dollar when things look darker in the U.S. will be working overtime, buying dollars…

For the sake of honesty… And not that I’m cheerleading the currencies (I get real tired of this… Recently I’ve had some readers turn on me and accuse me of “knowing nothing” and being nothing more than a “cheerleader”) Come on! Can’t you see the forest from the trees? This is simply telling it like it is… WE have a HUGE deficit problem, and unless you are willing to begin paying taxes that amount to about 75% of your income to pay the deficit down, then we need to get the dollar weaker now, for that’s the only way we’re going to be able to pay down the interest alone on these debt obligations is with a cheaper dollar! So, yes, I push for that dollar to get weaker now, so that the tax obligations of my kids and grand kids aren’t oppressive!

OK, sorry but I had to get that off my chest… So, for the sake of honesty, let’s hope Paulson comes to the lawmakers with a cup of honest, and let the chips fall where they will. Oh! And yesterday, the Wall Street Journal reported that Paulson is unlikely to launch new bailout (the used “rescue” but we all know what it is!) programs, saving his unused horde of cash to hand over to the new Treasury Sec. and say, “here you go, spend it wisely, but just between you and me, this isn’t enough to help anything”

Judging from happened in the overnight stock markets, with the risk takers nowhere to be found, the consensus being the overnight markets don’t believe Paulson will deliver the goods, and stocks sold off in Asia and early Europe… I suspect that the U.S. market will take a cue from those overnight markets as well, at least until Paulson talks… And the Dow only has 273.58 points to give before falling below 8,000… UGH!

All those “Safe Haven buyers” must really be “scaredy cats” because as I look at the bond screens, I see that you will get 13 basis points for a 3-month T-Bill, and 80 basis points for a 6-month T-Bill… By the time the broker takes his fee or commission you are left with nothing! So, that’s the same as putting the money under your mattress or stuffing it in coffee cans and burying it in the back yard! And, if you want to talk long notes and bonds… Well, you’ll have to go to the 30-year bond before you can get yield that comes near to covering the inflation rate! Uh-Oh! Negative real earnings for the “safe haven buyers”…

How long can that continue? How long… Can this be going on? How long… Can this be going on? How long are these guys and girls going to accept negative real earnings? That’s the $64 question… But, I have to believe that once these “safe haven buyers” decide that they’ve had enough, the unwinding will go very quickly, and the whiplash we’ll receive from watching yields turn around will hurt!

And, with the unwinding of the “safe haven buys” one would think that the dollar gets put on it ear once again… That is unless there’s a new “hoola-hoop” for investors to move into… But since there’s no “hoola-hoop” to speak of, and probably won’t be, given the fact that the regulators will be scrutinizing “new instruments” to make sure they “don’t get fooled again”…

Did you see the news yesterday that Citgroup plans to cut 50,000 jobs? That’s just awful! And if true, will be the latest jolt to Wall Street! Chief Executive Vikram Pandit addressed employees in a town hall-style meeting Monday morning, giving them the bad news. These job cuts won’t take place overnight… And that they plan to be finished with them by the 3rd QTR of 2009.

The data cupboard today will give us a look at the Producer Price Index (PPI) (wholesale inflation), which is expected to fall from previous printings, as Oil prices have fallen faster than anyone and I mean anyone could have imagined. We’ll also see the TIC Flows (net security purchase by foreigners) for September… This data should see some improvement, but remain well below the figure needed to finance the current account deficit.

Yesterday, Capacity Utilization printed for October, and improved (on first glance, wait for the revision) on September’s revised downward figure of 75.5%… Capacity Utilization has long been a fave piece of economic data of mine due to the fact that it is one of the very few / rare pieces of data that is forward looking. Capacity Utilization weakness was one of the factors I used in calling the recession in the U.S. back in January. Capacity Utilization and the ISM Index (manufacturing)…

So, how about that stirring communiqué’ from the G-20 crowd! I was moved! The chills went down my spine, my eyes filled with tears of joy, it was something to behold! Oh? They didn’t do all that? I must have been dreaming, eh?

What a joke! These leaders from around the world met and didn’t come up with anything other than rhetorical direction only? Fire them all! Throw the bums out! This is ridiculous! It just shows me that they are probably more interested in pointing fingers than actually agreeing to work together to deal with this global problem.

So… Look for more of the Trading Theme today, folks. The deeper, darker, more dangerous clouds are moving back in over the U.S. economy.

Currencies today 11/18/08: A$ .6465, kiwi .55, C$ .8115, euro 1.2635, sterling 1.5040, Swiss .8345, ISK 182, rand 10.2850, krone 7.0180, SEK 8.0425, forint 214.40, zloty 3.0475, koruna 20.4280, yen 96.10, baht 35, sing 1.5270, HKD 7.75, INR 49.65, China 6.8280, pesos 13.22, BRL 2.3215, dollar index 87.07, Oil $54.80, Silver $9.35, and Gold… $736.75

Source: TARP Testimony Today

We finally had some data releases here in the US which look to steer the markets, so I’ll just get right to it.

The dollar continued to strengthen yesterday after another round of bad weekly employment figures. Initial jobless claims increased to 516k during the first week of November, and last weeks numbers were revised up to 484k. The employment picture continues to darken here in the US, and it doesn’t look like it will improve any time soon. This is just what the US consumers don’t need right now. Not only are most consumers living paycheck to paycheck, but now many of those paychecks are being ripped out of their hands.

Personal bankruptcies are heading into record territory, and job losses will only make this worse. While the total size of the consumer credit market is dwarfed by the size of the mortgage market, with home loans there is an underlying asset providing some base from which banks can work. Credit card debt is different, the banks and investors who hold this debt have no underlying assets to fall back on. This fact has not been missed by the current administration, and Treasury Secretary Paulson is now looking to spend some of the bailout package to try and help out the consumer lenders. Unfortunately it looks like we will be taking another step into the deep dark area Chuck has continually talked about.

This morning we got the retail sales numbers here in the US which showed a further deterioration. Retail sales less autos were down 2.2% in October, almost double economist’s expectations. This fall is the largest monthly drop ever, and is just one more sign the US economy is heading for a doozy of a recession!

We did get some good news yesterday morning as the trade deficit narrowed somewhat, a result of a stronger dollar and lower oil prices. But even after the narrowing, we are still running a deficit adding to our need to attract foreign investments. Chuck let me have a sneak preview of December’s Review and Focus the other day before he sent it to the printer. In the latest issue, he talks about our need to finance the twin deficits which the US continues to amass. This financing need is one of the factors convinces me the US dollar will have to get weaker. The current dollar strength will not last, and once the ‘flight to quality’ buying of US Treasuries subsides, we will see the US currency return to its long term decline.

As I said earlier, the dollar continued to strengthen yesterday morning as the stock market fell. But both reversed course early in the afternoon after Paulson started talking. The Treasury Secretary said the big 3 auto makers should receive some government help, but he isn’t willing to take any of the funds already approved by congress to help them. Instead, he urged congress to come up with additional funds to help the car makers. He also said he would look to try and spend some of the already approved rescue package on ‘non-traditional’ lenders who give loans directly to consumers. Looks like Paulson is finally realizing what we have been saying for a while now, that the next big crisis is the consumer credit crunch.

Anyway, just after the news came across the wire about Paulson’s remarks, the stock market jumped 400 points and the euro bounced up over two cents in the matter of a few short minutes. The dollar has really become a contra indicator for the risk appetite in the market. The dollar index and the stock market have moved in opposite directions 88 percent of the time since the beginning of September. As investors feel more comfortable with risk, they sell the short term dollar holdings and invest them into other markets. The Europeans have started to take the dollar back up this morning, but it remains lower than at this time yesterday.

The Europeans are taking the euro down after it was confirmed that the European economy fell into its first recession in 15 years during the third quarter. Germany had already reported a third month of negative growth, and the European Union confirmed the GDP shrank .2% in the 15 euro nations during the third quarter. France, Europe’s second largest economy, unexpectedly grew in the third quarter as consumer spending gained and exports rebounded. I am still convinced that while things are bad across the pond, Europe’s economies are still in better shape than the US economy. And while some here in the US have given the ECB trouble about not lowering interest rates as quickly as the US; I believe they have done a better job navigating the current crisis, and Europe will be able to recover more quickly than the US.

And finally, the RBA was in the markets protecting the Australian dollar again. Lately, the RBA is intervening to hold the AUD$ up while there are rumors the Bank of Japan may start intervening to stop the appreciation of the yen. Officials at the Swiss National Bank have also been complaining about the rise of the Swiss franc. Both the Japanese yen and Swiss franc continue to strengthen as investors reverse carry trade positions. So we have a couple central banks intervening to hold their currencies down, and others who are intervening to try and keep theirs from falling further. Crazy Times!!

Currencies today 11/14/08: A$ .6585, kiwi .5595, C$ .8188, euro 1.2671, sterling 1.4738, Swiss .8409, ISK (No Quote), rand 10.152, krone 6.890, SEK 7.894, forint 213.42, zloty 2.9408, koruna 20.015, yen 96.39, baht 34.97, sing 1.5184, HKD 7.7501, INR 49.01, China 6.8250, pesos 12.97, BRL 2.30, dollar index 86.89, Oil $58.25, Silver $9.65, and Gold… $747.24

Source: Data Shows Just How Bad Things Are

Good day… And a Tub Thumpin’ Thursday to you! I get knocked down, but I get up again… Yes, Tub Thumpin’, come on sing along! We finally saw a full day of sunshine yesterday, but sitting at my little buddy Alex’s baseball game late last night I had a jacket on to combat the falling temperatures… I thought last week we had finally turned the corner with this weather, but to my chagrin that was not to be… Oh well, we had sunshine yesterday!

OK… Currencies… Let’s see… Yesterday, the currencies tried to stage a rally VS the dollar only to be knocked down again, this time by Fed Head Fisher, who was speaking about inflation and debt… Fisher, decided to throw a cat among the pigeons by indicating that the Fed was ready to fight inflation, and raise rates… Of course, the markets didn’t stop to ask Fisher if that was just him talking or if he had surveyed the other Fed Heads… Recall that Fisher was one of two dissenting votes at the last rate cut… He has always been somewhat of a Hawk, so his comments shouldn’t have done anything for the markets… Unfortunately, it has led them to buy dollars…

Today, we get more Fed Speak, with Geithner, Kohn, and Big Ben all speaking on something… Trust me on this, there’s not one of these guys that will be talking the truth, the whole truth, and nothing but the truth… It’s not good for the markets to have them talking about the “real stuff” going on! So… Look for more dollar strength today… Not a trend reversal, just more dollar strength.

Well, did I hit that media reaction to Durable Goods bang on or what? The number was negative, which is bad… However, it wasn’t as bad as forecast… How did the media report it? “Durable Goods Surprisingly Strong”… What? By reading that headline you would think that Durable Goods were on the positive side, right? Yeah, don’t bother telling people that they were NEGATIVE!

Today, we’ll see the latest update to the 1st QTR GDP here in the U.S. Recall that the 1st reading had it pegged at just .06%, which when you don’t play games with the numbers like the Gov’t bean counters do, was really negative growth. The revision that will print today is expected to show an upward move to .09%. To do so, the report will have to show a move toward more sales activity and less inventory build up… Something’s wrong here… Hasn’t Retail Sales been weak? Hasn’t the Big Box stores reported slower sales?

I would guess to get to .09%, the Gov’t will have to use some smoke and a few mirrors…

Bill Bonner of the Daily Reckoning (www.dailyreckoning.com) had some thoughts yesterday regarding the Consumer’s problems… Let’s listen in…

“Naturally, the auto industry has to downshift. Not only because gasoline is so expensive, but also because the average household is struggling to pay its other bills too. After it pays the interest on its debt, it has less left over than ever before. And then, it has to pay for food, gasoline…and other things, many of them imported. Of course, food and energy are rising sharply, but until recently Americans could count on low-cost Asian producers to cut prices on our imports. Now, import prices are rising at 14.8% – the highest rates since the early ’80s.”

I received a few emails from readers regarding my thought that Credit Card Debt would be the next big shoe to drop on the U.S. economy… They wanted me to talk about how I see this playing out… Well, if you don’t like movies like the Texas Chainsaw Massacre, then you had better not read this, and just go on to the Big Finish, as this won’t be pretty…

OK, Credit Card Debt… Well… The problem with Credit Card Debt is that most people buy things with it, and at the end of the month, they look at the statement and say, “I didn’t buy that, did I?” Yes, you did… And when that card gets maxed out, all you have to do is sift through your incoming mail, to find an offer from another bank card that offers you some wild-eyed offer to get you to use the card… The next thing you know, you have accumulated quite a few of these, with no ability to pay them back. Now you’ve got a mountain of debt, and no ability to pay it off… Your house equity has gone underwater, and the last time wages grew greater than money spent, we were wearing bell bottoms…

Now, the people that loaned you that money expect to have to write off some amount of debt… But this will get out of hand… And pretty soon, these banks will be taking losses… They won’t like that much, so guess who they go after? The credit card holder… I see tons of law suits, losses, lay offs, and other “L” words, and this will prolong the U.S. recession…

ALL CLEAR NOW! Yes, it’s safe to get back into the water now… The horror flick is over… That reminds me of my first date with my beautiful bride many, and I mean many years ago… We went to the movies and saw a horror film, The last House on the Left (another “L” word!), I looked over to her, and she was watching the movie through her coat sleeve, she was that scared… We never went to another horror film again…

The Aussie dollar continue to be resilient with this U.S. dollar strength going on… Unfortunately, some of that strength is coming from Carry Trades though…

A couple of weeks ago I talked about The Slovakian koruna being approved for a conversion to the euro… Yesterday, the Slovakian Gov’t asked the European Union (EU) for a revaluation of the koruna ahead of its entry into the EU… That request was granted. The Slovakian koruna (SKK) was revalued 17.65% higher, with an allowed upward movement of 15%… Too bad this was such a small currency with no liquidity to trade before all of this happened… The good news is that the Eurozone continues to grow… Back in 2001 I said that the Eurozone would eventually grow to 25 countries… Slovakia makes 16…

While we’re talking about the Eurozone… The Eurozone received a shock this morning as Germany’s Unemployment unexpectedly rose for the first time in 28 months. Unemployment rose 4,000 in April… Hmmm… It’s been a long time, since Germany saw this… But hey! If the U.S. media were on this story, they would tell you that “Employment is surprisingly strong” given the fact that the economists forecast a drop of 25K!