There may be money to be made in stocks right now. However, before jumping in consider the following facts (which we’ve plundered from yesterday’s Daily Reckoning):

1) Unemployment has risen to 9.4 million, according to heavily doctored “official” Bureau of Labor and Statistics figures. In reality, the number is much higher. People without jobs don’t spend money. They also rely on handouts from the government. One in every six dollars of personal income in America now comes in the form of federal aid.

2) Housing prices have so far been knocked down 32% since the slump began. Housing expert and Yale economist Bob Shiller reckons we’re a long way off from a recovery. People with mortgages whose house prices are falling don’t have room for discretionary spending – the kind of spending that helped keep US GDP in positive territory for so long.

3) Defaults and foreclosures aren’t confined to the subprime part of the mortgage market. Prime and Alt-A mortgages are now under severe pressure. The contagion is spreading. And it will continue to spread thanks to record job losses and the contraction of credit.

4) The resulting fallout in consumer spending is impacting production. This is evident from the severe fall-off in the transport sector. Traffic in the trucking sector is down 13% year on year – the biggest drop in 13 years. Airlines are carrying 21% less cargo. Cargo rates are down a whopping 90% in shipping.

We could go on… and on… But you get the point. As least we hope you do. The plunge in the economy may be slowing, but the data points are still heading in the wrong direction. Until this changes, we don’t fancy our chances in stocks.

We’re conservative that way: we like to have a reason for investing other than “everybody else is doing it, so it must be right.” That attitude will get you killed. You may make some money on the way to the chopping block. But sooner or later your head will still end up in a basket.

Of course, a bet on stocks right now is a bet on inflation (although not necessarily a good one). This is where the plot thickens, as a good plot always does.

We suspect the reason traders and investors are ignoring economic fundamentals in their flight from relatively safe-harbor investments (think Treasurys) into stocks is because they’re counting on the Fed flooding the economy with liquidity.

As we’ve discussed before, stocks tend to be particularly sensitive to fiscal and monetary stimulus. The problem is such overwhelming stimulus is likely to make the currencies stocks are valued in worthless.

There are better ways to bet on inflation – ways that also allow you to benefit from currency dollar devaluation. At the risk of repeating ourselves, there are two easy ways to do this.

You can go long the SPDR Gold ETF (NYSE:GLD), which has been on a tear since mid-April.

Or you can go long the PowerShares DB Agriculture Fund (NYSE:DBA), which has also been a great performer since mid-April.

This mantra was always in response to those in the business who, following a big run-up or downturn in the market, would make the claim that “it’s different this time.” This claim of new market rules usually was an effort to support buying at the top of a market, or buying when things seem over priced.

The former, the old timer’s advice, was, until now, always correct. Markets have always been the markets. They run up, they fall down. They always fall a lot faster than they go up and if you wait until everyone gets in to convince you its ok to do it you will lose money.

This time though I believe some things have changed in the markets, the changes may be of a temporary nature, but this definitely is not our grandfather’s or father’s market.

What I think has changed is how investors will have to prepare themselves mentally for the markets for the next three to five years. It’s called a trading discipline and you will have to change yours or get out of the market. You can stay in and try to do the jump in and out game, but you’ll get crushed even faster than in the past.

Since the majority of small investors have no trading discipline anyway, this will be a new concept for them. There is still a lot of money to be made in stocks and bonds; it will just take a few shifts in expectations and procedures to get to it.

The first change is that this is not a trading market. Some will continue to get lucky with their guesses, and the select few who always seem to make money will, but going forward, the big money will be made by those who can wait it out and use dollar cost averaging to their benefit.

Trading requires some amount of predictability, the biggest change in the new market is the little predictability the markets ever had has been driven underground by the huge collapse of confidence. This market today is jumpier than at any time in our history. The slightest suspicion, wind shift or rumor makes this thing plummet. We will see more falls over the next five years than at a rock climbing competition.

The trader’s position has always been just this side of insane, but now it has crossed the line. With virtually no fundamentals, no confidence that the changes that have been put in place by the Obama administration will produce any lasting results, the debt, the monetization of the debt, the politicalization of the banks and a world community that has grave misgivings about the future of our markets and economy, you’d have to be crazy to think you could predict anything.

What will work going forward are positions in companies like Clorox (CLX). There are the usual reasons to own a stock like this, and the new reasons that work within the new market rules.

First, the usual reasons: The company recently raised their earnings projections. They will earn around $3.70 this year and $4.17 next. The dividend is $1.84, about a 3.4% yield, and there’s plenty of cash to pay it. Their profit margin is rising, they have abundant cash, they’re paying down their debt and they have stable brands; bleach, Kingsford Charcoal, Brita, Glad Bags, Burt’s Bees Skin Care and Greenworks Detergents.

A solid company with reasonable prospects.

In this economy this is what I call a slap in the face investment. It is about $51 per share, was as high as $65 in the last 52 weeks, was as low as $46 and has been showing a very nice upward trend for the past three months.

The new reasons to own it: It isn’t sexy, it will not run off the charts with breaking news, it pays a good dividend that appears to be safe, it won’t be subject to big swings, it won’t fall off the charts because of a rumor, it is expected to show an incredibly boring growth rate of around 15% going forward and most importantly you can own it and still retire on time.

In fact, this stock has everything you will need to survive the next five years; stability, fundamentals, solid management, income and products that consumers will need and buy.

Why income, because I expect to see major, I mean major swings in this market. If you don’t have some type of money showing up in your account from a bond or a safe dividend there will be extended periods in the new market when you probably won’t see any money at all.

The second aspect of your investing you must change is to average into this market. Take advantage of the big price swings we will definitely see. Make the volatility work for you. As Warren Buffet said recently, “I love when things are this bad.”

Investors must learn to cheer when the market crashes, it’s a buying opportunity. If you’re in the right stocks you have virtually nothing to worry about except where you’ll get more money to buy into the dips.

Shift your expectations and investing style for the next five years or be prepared to be very disappointed. Get out of the Stock of the Month Club, get back to boring, solid companies you can live with.

This is the same advice my old timer friends in the markets have been giving me for years. Maybe things haven’t changed that much after all. Maybe we’ve just been dropped kicked back to reality.

Good luck!

Source: Navigating the New Market

Is stealing 177% from summer-dazed investors ironic? You betcha!

“…I gotta wear shades.”

Still, the line from Timbuk3’s 1986 hit by that name is particularly apropos – and particularly ironic – in all sorts of ways these days.

Did you catch Luxottica Group (LUX:NYSE)’s wild 15% rally last week? In case the name is unfamiliar to you, Luxottica is the Italian company that owns those stalwarts of the American mall, LensCrafters and Sunglass Hut, and those ultimate summer scene accouterments – Ray-Ban and Oakley sunglasses – so heavily pitched at same.

Profits Down – Shares UP!

Now I should point out that LUX shares have been on a tear for some time now, rising some 57% since setting a six-year low back in March. Clearly the stock had more than a little momentum going into last week.

But even still, the reason buyers gave for this latest spike is worth noting: LUX’s first quarter income fell 23% to €80.4 million (roughly $108 million).

Now in normal times, one might expect news like this to have a slightly different effect. It seems intuitive that investors ought to prefer companies that are, well, actually making money?

Best? Worst? How About “The Weirdest of Times”

But these are not normal times.

We have a new president who is inventing trillions of new dollars and thousands of novel ways to spend those dollars. He is also inventing reams of new regulations and hiring hundreds if not thousands of new bureaucrats to enforce them.

After so much economic destruction, this is now the era of “Hope,” as in: “I hope the stocks I am buying will go up eventually. I have no real economic reason for believing that. I’m just tired of all this bad news and have decided to fly on faith here. Now take all your facts and figures and leave me alone!”

“But first: could you hand me my sunglasses, ‘cause man, it’s bright out there.”

When a Loss Ain’t a Loss

LUX qualifies as an absolute winner under this new “hope-based” regime. You see, the “experts” who watch sunglass companies for a living had slated LUX profits to come in around €66.5 million. So now they are pitching this not as a 23% slide but rather an amazing 21% victory!

I suppose this speaks to the point that all those folks who have been waving around copies of Akerlof and Shiller’s new tome, “Animal Spirits” are trying to make: When the herd is predisposed to buy, it will latch onto the thinnest of excuses to do so.

Corporate profits in the toilet? “We thought (in as much as we think at all) that it would be much worse.” Unemployment just shy of 10%? “Yeah, well, at least the rate of increase is slowing.” Our biggest banks are virtually bankrupt? “Now Washington will forgive the money they – that is to say you, me and most all of our descendents unto the third generation – ‘lent’ them.”

Animal (House) Spirits

Akerlof and Shiller’s (and their disciples in Washington) point is simplistic enough: “Mood is everything, so whatever you do, just don’t bring folks down, and it all will be okay in the end.”

And in the short run, they may even be right. Washington can buy an apparent rally. Heck, it’s been done countless times. Might even last a few months. Maybe it will take years for folks to notice that the inevitable side effects – a falling dollar and rising costs – are stealing real wealth away.

If Washington knows anything, it knows this: “Inflation is always a “later” thing, while recessions are very much a “now thing.”

Summer Lovin’…

So they pump and pump, and stocks like LUX go up, and commodities like cotton and oil go up.

Hmmm: seems like a theme is brewing there. Sunglasses? Cotton towels? Gasoline? I’ve got it: It’s all about summertime fun! And where can you buy all of those things, and some sunscreen to boot? Wal-Mart (WMT:NYSE)’s chart looks like it could pick up some 20% moving into summer. WMT September 50 Calls (WMT IJ) are trading for $325 a contract, and are carrying a delta of 0.57, indicating that they might gain 177% off that rise.

So there’s your tip, my friends. But take it with a grain of salt.

… And Blind Faith

“The future’s so bright, I gotta wear shades” was always somewhat misunderstood. Just as Voltaire didn’t really believe that pre-revolution France was the best of possible places and times, Pat McDonald didn’t really mean for his song to become some kind of fist-pumping anthem for over-enthusiastic college graduates. Rather, he was trying to warn against blind optimism in the face of sobering facts.

So buy the damned rally already. It’s there. It’s real. It’s a “now thing.”

Source: The Future’s So Bright

It all began in 1994, when one of my brother’s college buddies began talking about the big checks his girlfriend was receiving as a member of a hot, new Multi-Level-Marketing “opportunity.” His friends joined and soon convinced others to enter. Business was booming.

Then the money stopped.

Like many of these stories, the company went under – its investors and many of its employees were out countless millions – many losing more than just money.

And now I had the opportunity to sit down with the founder of one of these debacles. One who had wantonly misspent revenues on such extravagances as chartered corporate jets to Paris and Friday lobster dinners.

Before I blew him off entirely, I realized that this was a rare opportunity to get into the mind of a fraudster. I said “yes” to Randy’s visit and was soon sitting in front of him.

He’d flown down to Puerto Rico to try to coax me into joining him in his next scheme. I welcomed the opportunity to understand the mental wiring of a financial criminal.

Unlike this meeting, where I could see the culprit face-to-face, most Americans never get to meet the person who is trying to scheme them.

Financial Fraud – Always Such Nice, ‘Honest’ People

He explained that he didn’t begin in financial fraud, but that he started as a salesman for a penny stock “pump and dump” scheme in New York. When it ended, he’d made a lot of money as a brilliant – yet dishonest – salesman for a dishonest business.

He was soon invited into a vitamin scheme preying on financially unsophisticated elderly people where the FBI temporarily locked him up. In the federal penitentiary he learned that it was easier to steal money from the public through Multi-Level Marketing since intentional fraud would be re-interpreted by bankruptcy courts as “miss-management.”

As an investor and consumer you’ll be bombarded by all sorts of “opportunities” that come your way – from any number of unexpected sources. It may be your barber or hairdresser who’s just learned of a “hot” opportunity.

It may be an old friend from college.

Each “opportunity” will have a reasonable story. The fraudsters will have all sorts of evidence to bolster their “sterling” reputation. But that’s just the start of the bait they’ll dangle in front of you.

Making things even harder, the friend or colleague that contacted you will have already been pulled into the con’s web of lies. As an unsuspecting promoter, they’ll express concern or even anger over your disbelief. But you’ll lose your you-know-what if you hand over your money – and your friendship or family relationships will end even worse.

Financial Fraud & Off-Shore Banking

There has been consistent number of financial fraud in “off-shore banking” scams. And I am approached for help at least two or three times a year by individuals who have lost money in an international con-job.

Bermuda has two major sources of foreign revenue for its population; tourism and offshore insurance/finance. And while there are many legitimate offshore investments, there are just as many schemes and con artists eager to steal your money. Just watch the show American Greed on CNBC and you’ll quickly see what I mean!

Local politicians protect fraudulent operators in order to avoid any negative press in the U.S. and European markets that drive their industries. They fiercely protect their market – even if it means you get hosed.

The sad irony is that these schemes gush such fat geysers of ill-gotten cash that conmen protect themselves with expensive legal defenses – paid for by the victims.

They use the world’s legal system to hose the innocent by taking advantage of laws that sometimes seemed designed to protect crooks, particularly the draconian British libel laws that exist in many offshore financial centers.

Since the fraudster suddenly controls millions – or billions – there’s always an unscrupulous attorney willing to file a defamation lawsuit against any and all whistle-blowers. It leads to a situation where many frauds aren’t discovered until it’s too late.

6 Simple Steps to Avoid Financial Fraud

When you’re presented with an “opportunity”, there are a number of ways to give it a “sniff test” and tell if it’s legitimate.

1. Sounds Familiar

Does it look like anything you’ve ever heard of or seen before? It’s amazing how many versions of pyramid schemes or Nigerian scams there are out there. If it sounds similar, chances are it is.

2. Trusted Sources

Does this investment come from a trusted source? This is the hardest hurdle for most to get by. Bernie Madoff seemed to have an impeccable resume and background, and it’s why his fraud went on for so long. Do your own reference checks.

3. The Pudding

The proof is “in the pudding” as they say. If you ask for performance results or documentation to back up claims, they should easily provide the information. Information should be available on a quarterly basis.

4. Information Demands

If someone were to walk up to you and ask for your credit card number, you’d say no. But you’d be surprised to find out the number of people who give up sensitive information – like bank account numbers and personal data – for an opportunity to collect untold millions. When someone requires something like this without a reasonable expectation, warning flags should go up.

5. Your Uncle

Imagine you had a skeptical uncle (some of us don’t have to imagine it). If you presented the opportunity to him, what would be his response? If your uncle doesn’t approve, then neither should you.

6. Embarrassment

Would you have any qualms about sharing this investment with your friends and family? What about if it went badly? If you would feel that any investment of yours isn’t something that you’d be embarrassed to share, then that should tell you something.

Finally, it never hurts to be overly cautious. Take your time and do your research. It won’t stop all the scams and fraudsters out there, but it can protect you from the thousands of other snakes in the grass.

Source: Financial Fraud: 6 Simple Steps to Protect Yourself

But there is a lesson to be learned from every rough patch. One of the lessons I learned from the crazy market of the fourth quarter has to do with the elasticity of indicators.

What I mean by “elasticity” is that a number of indicators are calculated based off the most recent trading activity, including most of the overbought/ oversold indicators. In the fourth quarter, these indicators were stretched out like an elastic waistband thanks to big moves in both directions.

For example, if you use the Relative Strength Index as one of your indicators, the RSI uses volume and price change in its calculations. Whena stock goes up four or five percent two days in a row and then drops four or five percent the next day, the RSI is getting stretched out. When the market calms down and that same stock is moving less than one percent per day, the overbought and oversold levels are harder to reach because the RSI is stretched out from the four and five percent moves. These changes to the RSI lead to fewer trading signals.

I know personally that I cut back on my trading because I wasn’t getting as many signals as I was a few months ago. With my mini futures trading for the Velocity Strategy, I went from getting six or seven trade signals per month to only three or four. Now that the market is settling down, the indicators are starting to tighten back up, and the signals are becoming more frequent again.

I have said it numerous times in IDE, but it is worth repeating. You don’t want to be trading for the sake of trading. You want quality trades, not quantity. When the indicators get stretched out like they were in the fourth quarter, you have to have the discipline to step back and wait. Sometimes the waiting is the hardest part of being a disciplined trader, but it is also one of the most important traits.

Discipline and patience are always important traits, but they are even more important in a market like the one we have seen for the past year.

Source: How Elastic Are Your Trade Indicators?

So my holiday message to President-Elect Obama and his new Treasury Secretary – Timothy Geithner is this…

Don’t ask banks to be your kid’s wimpy version of Santa Claus – giving out gifts to all those who ask nicely … or scream the loudest (autos, anybody?).

Banks can make your dreams come true. Or they can destroy them.

In either case, I’d like them to lend responsibly.

I’ve seen both sides of what banks can do. And I’m sure you have too.

I remember getting a bank loan for my first home. I needed to prove that payments would take up no more than 20 percent of my disposable income. I needed to prove I had a job. I had to show a good credit rating.

Jumping through all these hoops wasn’t optional. No exceptions allowed.

When I got the loan, my wife Cec and I went out to celebrate. It was a big deal.

Then there’s the other side…

My Cousin Harvey had built his door and window business from scratch. They had so much business he applied for a loan to build a bigger facility. The company’s bank gladly gave it to them. After all, the company was flying high on the mini-real estate boom that visited the greater Boston area in the mid-1980s.

Five years later it reversed direction. Housing prices plunged. And housing construction shrank to almost nothing.

Even after downsizing, the company could barely pay its bills. It dipped into its revolving loan more and more. Until one day the bank took it away.

The company lasted a month more before shutting its doors.

I’ve seen the same thing happen to publicly listed companies like the small Texas-based oil company that seemingly was sitting on top of the world.

I was on the phone with the CEO and he was sounding his normal confident self.

The drilling was going great, he said. Every well tested so far found oil. They were ahead of schedule. Their big investment in a potentially huge oil basin off the coast of Nicaragua was also making better-than-expected progress.

Then he dropped the bomb.

The company’s bank was withdrawing their loan.

The CEO tried to cover his tracks. “As far as I’m concerned,” he said, “This gives us an opportunity to find a better bank … a bank that really believes in us.”

But without access to bank credit, they couldn’t pay their bills. Their credit rating plunged. Other banks wouldn’t touch them.

They were forced to sell their promising parcel off the coast of Nicaragua. It bought more time for them. But that parcel was a big part of what made the company so attractive. More shareholders sold off. Their stock price plummeted.

Ten months later, they were de-listed from the New York Stock Exchange. Fifteen months later they declared bankruptcy.

It happened a couple of years ago. But I believe it gives you a sneak preview into 2009 … except for one thing. Next year these won’t be isolated incidents. The market will be littered with dead corpses whose money lifeline was cut off.

Banks matter.

They matter a great deal.

Banks will give loans to companies with cash or with a high credit rating. Other companies will see the back of their hand.

Same thing with individuals. Banks will lend to those who need the money the least: the careful savers … the homeowners who didn’t cash out their home equity … the very well-off.

It’s the nature of the banking business that when you need them the most, that’s when they fade from view.

That doesn’t make them evil. But it doesn’t endear them to the rejected – whether they’re companies or individuals.

And now, with the economy swooning, the government wants banks to act like a three-year old’s version of Santa.

Isn’t that how we got into this mess in the first place?

They don’t want banks to become responsible careful lenders. It would make a sick economy even sicker.

The lesson is clear. If you’ve got cash, nourish it. Hoard it. Save it. Because if you run out, your bank won’t have your back.

Cash is king.

Remember that when you’re looking to invest in 2009. Companies out of cash could also be out of luck.

Source:  A Preview of 2009?

Here are eight stocking stuffers to unwrap.

1) The conversation between Libertarians and the rest of us (who aren’t on some nutty fringe) would go a lot smoother if we would all agree that laws and regulations do not prevent bad behavior.

Rather, they are merely guideposts to measure the quality of deviance in a way that allows the US’s local, state and federal judiciary to hand out retribution.

If you need further proof of this, I offer you two words – Bernard Madoff.

In an under-regulated world, Ponzi schemes might not be illegal. In fact, you can assume that is a near certainty, judging by the number of famous institutions and wealthy people that poured billions into Madoff’s fund, even as they suspected he was cooking the books.

The allure of that steady 9% return was just too strong… flies to the dung heap.

You have to wonder how many of Madoff’s investors will not only lose millions on the madman’s fund, then double those loses when the IRS goes all militia on their wacky offshore tax schemes. The latter is one of 2008’s most under-reported financial stories… as it will likely be in 2009.

2) Poor and middle-class people dream of the big investment score – the lottery… wealthy people, as the Madoff affair demonstrates, get all dewy eyed over 9%.

The reason is simple. Nine percent of $10 million is $900,000. That’s enough to survive on, even if it’s your only income. On the other hand, try living on 9% of $200,000 or 9% of $100,000…

Actually, if you don’t have health insurance and you live in a tent, you can probably stretch $18,000 out through a year, as long as you don’t pay the capital gains tax on it.

3) Now that the conservatives on the Supreme Court have opened the door for a new round of huge lawsuits against the Altria Group, you have to wonder what would prevent the President-elect, who can choke down some Marlboros, from joining a class-action suit.4) Here’s a play for all those union-hating people who believed, without verifying, all the recent bunk about how the United Auto Workers union is killing US automakers.

There is LUV in the air for you. Southwest Airlines trades around $7.50 today. Many of its employees, 7,200 ground-crew workers, haven’t had a raise since 2005. Ten-month long negotiations with these workers broke down in October.

LUV is profitable, its debt is manageable, and its earnings and revenues are slated to increase by about 10%. Additionally, though I hate the quarterly reporting game, LUV seems historically adept at producing earnings surprises on a regular basis.

Still, the best part of this play is it’s so Reaganesque… Southwest seems to hate its employees.

Nevertheless, LUV looks like one of 2009’s share-price doublers.

5) Here’s a sweet play that should tap into the infrastructure mania that’s about to sweep the world.

Find someone to give you good, long odds on an under/over bet that you won’t be reading at least 199 “First Great Obama Stock” promotions in the coming six months. Take the over.

Hell, I got an “Obama stock” via fax the other day – some 22-cent West Virginia coal play. Damn thing went up 10 cents the next day, too.

6) If you want to play the coming Obama/worldwide economic-stimulus infrastructure bubble, you’re going to have to get in soon.

In China, that would mean jumping on low prices General Steel Holding (NYSE:GSI). I’ve known the GSI guys for five years now – even before they were public.

Actually, I took a bunch of investors over to Beijing in 2004 and introduced them to the company just two hours before it went public.

Great company… great CEO… great management (much of its top management and board are from what I affectionately refer to as Beijing’s born-again Christian mafia).

Its earnings are slated to jump out of the roof next year. At around $4, GSI is a wicked steal.

GSI is one of 2009’s potential share-price triplers.

7) If you want to stay closer to home and still play the great-infrastructure-bubble-of-2009, then take a good look at Pasadena, California-based Jacobs Engineering (NYSE:JEC). But, do it fast, because it is destined to be a newsletter darling next year.

Multifaceted, JEC provides technical, professional, and construction services to industrial, commercial, and governmental customers worldwide.

It designs and engineers manufacturing plants that make chemicals and polymers, pharmaceuticals and biotechnology, oil and gas refining, food and consumer products, and basic resources industries

It also designs and engineers infrastructure projects such as highways, roads, bridges, and other transportation systems, as well as water and wastewater treatment plants, water resources facilities.

Most analysts agree that JEC should see a nice jump in earning next year. It has a tiny amount of debt, which make its 20.5% return on equity that much more impressive.

JEC has the very real potential to be one of 2009’s safest share-price doublers.

Do your own homework on Illinois Tool Works (NYSE:ITW), Vodafone (VOD), Cosco Singapore (CSCMY)… each could have a smoking hot 2009.

That’ll do it for this week. I’ve been traveling so, I need get home to Boston and get some of that New England Christmas spirit going.

Of course, one of the season’s happiest symptoms is the fact that so many of us return to a naïve child-like state that peace on earth – even for a few weeks – seems like a noble goal.

Merry Christmas (for those among you that find such a salutation applicable).

Source: Double- and Triple-Profit Ideas For 2009

In an effort to demonstrate how serious they are about this whole “recession thing,” they stated that their new interbank loan rate target was zero. Zip. Nada.

When asked if this meant they had run out of bullets, Bernanke implied they could always simply inject money directly into the system by buying billions of dollars worth of Treasury bonds.

This is actually a peculiar thought, because Treasury bonds are the one asset that is actually in demand these days (whereas dollar demand is actually rather tepid).

In fact, Chairman Bernanke’s rather alarming statement caused the U.S. dollar to fall against the euro by the biggest amount in the latter currency’s history. The dollar also notched up a 13-year low against the yen.

Why Are They So Scared of American Banks?

But let’s go back to T-Bills for a moment. Right now, there is so much desire out there for the darn things, the Treasury Department can actually offer interest rates of zero, and even less than zero, and they just keep on selling.

To explain this, I’ve heard a dozen or so terms bandying about: words like inflation, deflation and stagflation. What I want to know is this: why would somebody want to buy T-Bills at zero percent, when they could park them at most any American bank for 2% or 3%? And that’s just for short-term notes – commit to a longer time spread and you can crank that up to nearly 5%.

The only reason I can think of is that despite all the efforts to secure the banks – all the billions and indeed trillions of dollars we have poured into their coffers, and all the various deposit insurance promises Washington has made – whoever is buying all those T-Bills has reason to think America’s banks are still not good risks right now.

And that’s a scary thought indeed.

No More Failures (Please?)

In a press conference on Wednesday, U.S. Secretary of the Treasury Henry Paulson assured us to the contrary. Paulson is so sure that the banks are completely secure, he might not even ask for the second half of his “TARP” money. “I don’t expect any more major financial institutions to fail during the current credit crisis,” he said.

Shortly after Paulson made this categorical statement, Morgan Stanley (MS: NYSE) announced that it had lost another $2.2 billion in the three months ending on Nov. 30.

They were kind enough to point out that while this loss was some 558% higher than they had led folks to expect, it was actually a 39% improvement over the same time period last year.

Another scary thought.

The Wrong Kind of Record Gain

Meanwhile, things are still tough down in the trenches (where success or failure is measured by whether you still get a paycheck). Last week saw new applications for unemployment surge to a 26-year high.

The only good news to come out of all that was analyst expectations that unemployment had peaked. Unfortunately, we are now being told to look out for another record-breaker.

Indeed, Nobel prize-winning “Neo-Keynesian” Professor Paul Krugman has warned that if Washington does not continue to dump billions (if not trillions) into the economy, unemployment could climb as high as 10%.

Krugman shouldn’t worry but so much: The incoming Obama administration has pledged an immediate flow of additional billions aimed directly at unemployment – not to mention a highway and bridge program as big as anything we’ve seen since Eisenhower in the 1950s.

The Perfect Accessories For Troubled Times

So, given all that, here are a few things you might care to invest in during these troubled times.

Back in the days of FDR, they used to call idle hands the tools of the devil. Certainly unemployed folks are occasionally driven by desperation to seek out cash by removing it from other folks’ wallets. Usually by threat of force.

I don’t think that but so many middle-class working stiffs are going to start carrying serious heat. In fact, Smith and Wesson (SWHC: NASDAQ) are in a bit of a pickle this quarter, as only their lower-margin Saturday night specials seem to be selling well right now.

But I do think sales for those nifty little shock guns TASER (TASR: NasdaqGS) sells could be just the thing in 2009.

And if Obama is bound and determined to spend trillions building roads, I suppose a few shares of Caterpillar (CAT: NYSE) would do well as a stocking stuffer.

Finally, I suspect that all these trillions and trillions of loose dollars that Washington seems intent on forcing on us will quickly reverse the minor deflation we have seen over the past few weeks. So I would strongly suggest adding shares of PowerShares Bearish Dollar ETF (UDN) as a hedge against the return of inflation.

Source: What to Buy as the Dollar Stumbles