As the U.S. economy decelerates, pummeled by the aftershocks of the worldwide financial crisis, consumers have been hit from every direction: Unemployment has spiked, and will continue to rise, economy unwinds and continues to work through the aftershocks of the global credit crisis, consumers have been beset on all sides. Unemployment is up, home prices are down, and credit is hard to come by.

And although inflation is beginning to moderate somewhat – slowing to a pace of 3.7% year-over-year in October – it’s still well above the U.S. Federal Reserve’s desired target rate of 2.0%.

With rampant inflation no longer artificially propping up consumer spending figures, retail sales have really started to lose their luster. Sales figures are based on the value of goods sold – not the volume – so the recent decline commodity and energy prices will translate into a sharp decline in retail sales.

That decline will be dreadfully apparent in this year’s holiday sales, but it will also carry into 2009. The question, now, is how much worse consumer behavior will get.

“The great unknown is just how much lower can consumer spending go?” Piper Jaffray Cos. (PJC) analyst Jeff Klinefelter told Reuters. “With savings rates at historic lows and constraints on the availability of consumer credit, I just think there’s concern that the perfect storm is brewing.”

According to the Fed, a recession is already under way in the United States. Gross domestic product (GDP) shrank 0.5% in the third quarter, and the Fed predicts the economy will continue to contract in the first six months of 2009, and possibly beyond.

Tighter credit standards and lower home prices mean consumers have less of an ability to finance their purchases through debt. And even those with cash to spend are opting to save instead, as the economic outlook continues to dim. Would-be consumers are also scrambling to rebuild savings that were decimated by a bear market that has dragged the Standard & Poor’s 500 Index down more than 40% this year.

“We expect to see consumer spending to be flat before inflation,” Gus Faucher, chief U.S. economist with Moody’s Economy.com (MCO), told the Los Angles Times. That means once inflation is factored in, consumer spending will see a sharp decline in 2009, and retail sales will be left to twist in the wind.

Retail Laggards

According to a recent retail outlook report from Fitch Ratings Inc., personal consumption expenditures are projected to decline 1.6% in 2009.

A wave of consolidation and bankruptcies will spread through the retail sector as weaker chains fail and stronger brands shut down underperforming stores. Department stores and specialty stores will be hit especially hard, as consumers cut back on discretionary purchases in favor of staples.

Bankruptcies of stores such as Sharper Image Corp. (OTC: SHRPQ) and Circuit City Stores Inc. (OTC: CCTYQ) are having a negative effect on the sale of gift cards, which stores traditionally have counted on to boost sales after the holiday season. Gift card purchases are tallied when the card is redeemed, not when the card is purchased. In the past, the sale of gift cards have given New Year sales a healthy boost as gift card recipients go shopping after the holidays are over.

But consumers are wary of getting left holding onto worthless cards while bankruptcy courts decide how to divvy up assets.

For the 2007 holiday season, 70% of consumers purchased gift cards. This holiday season, just 40% of consumers are projected to go the gift card route. And that’s going to weigh down sales and profits for the 2009 first quarter.

“I think you will see a six-point drop in sales for those first three months,” C. Britt Beemer, chief executive officer of America’s Research Group and author of “The Customer Rules,” told CRM Magazine.

Troubles Beyond the Big Brick-and Mortar Stores

While the big chains are struggling and grabbing the bulk of the headlines, small business owners are barely getting by. That might not seem like a big deal if the stock market is your focus, but small-businesses are integral to the economy.

According to the Small Business Administration, businesses with less than 500 employees account for almost half of private-sector employment. A recent National Federation of Independent Business survey showed 15% of small business owners anticipate layoffs in 2009, which will put even more strain on an already weak U.S. labor market.

And small business layoffs mean slower sales for big box stores like Best Buy Co. Inc. (BBY) and Target Corp. (TGT) as another wave of unemployed workers grapple with lost income.

Online retailers are starting to feel the pinch, too. Web sales have been one of the fastest growing retail sectors for years, but popular sites such as Zappos.com Inc., the No. 1 online shoe retailer, and QVC Inc., which sells online and on television, have each announced layoffs, as well as declining sales.

Amazon.com Inc. (AMZN), the top online retailer, also is struggling. Amazon’s stock is down 55% year-to-date, and the outlook is grim.

“[Amazon is] seeing a slowdown in their business that shouldn’t really shock anybody,” Jeffrey Matthews, a general partner at hedge fund Ram Partners LP in Greenwich, Conn., told Bloomberg. “They sell books. They sell movies. They sell blenders. They don’t sell magic potions or the fountain of youth.”

Retail’s Bright Spots

There are a few retailers that – while they don’t sell magic potions or the fountain of youth – have managed to position themselves as offering more value for the money, which has allowed them to buck this downward spiral in consumer spending have managed to buck dismal consumer spending. And that focus on value will continue in 2009.

The best example of this value exception is the world’s largest retailer: Wal-Mart Stores Inc. (WMT).

“This is Wal-Mart time,” Chief Executive Officer H. Lee Scott Jr. told Wall Street analysts during an Oct. 27 presentation at company headquarters in Bentonville, Ark., BusinessWeek reported. “This is the kind of environment that Sam Walton built this company for.”

The economic slump has found Wal-Mart returning to the basic strategies that the late founder made famous. The retail titan has given up on the brand-name designer strategy of competitors such as Target and Kohl’s Corp. (KSS) to offer rock-bottom prices on hundreds of consumer staples.

That bodes well, as consumers will continue to stretch household budgets and consolidate trips to save on gas.

“It is a great time to be Wal-Mart,” Howard Davidowitz, chairman of Davidowitz & Associates, told Bloomberg News. “It sells everything you need cheap.”

Stores like Wal-Mart, that can capitalize on this new value-seeking behavior will be able to turn a profit even in this bleak retail environment. And those that can’t, will be bought out or disappear.

Source: Retail Sales to Suffer in 2009 as U.S. Consumers Curtail Spending

Editor’s Note: This is the seventh installment of our “Outlook 2009” series, which is detailing the global investing outlook for 2009.

“The misguided macroeconomic and monetary policies, especially the confiscatory tax policy and huge government spending – much of it inefficient – was doomed to catch up with the country someday,” says Horacio Marquez, a Wall Street veteran, emerging markets specialist and editor of two trading services affiliated with Money Morning: The Money Moves Alert and the Shadow Stock Trader services.

Argentina’s act of not-so-petty larceny was launched late last month when the government, in a surprise move, ordered Argentine pension funds to liquidate their foreign holdings, the first step in a plan to transfer that money into the state pension system. Argentine President Cristina Fernández de Kirchner said she abolished the 14-year-old private pension system to protect pension money at a time of global turmoil and denied the government had grabbed the cash to service its crushing debt, which officials told The Financial Times is now about $21 billion.

The reality is, however, that surpluses from the state system – known as “Anses” – already have been a key source of government funding, especially in the past year, after a surge in the number of workers returning to the state plan caused its holdings to surge substantially. Expect the use of those surpluses to continue.

Indeed, the government is clearly hoping that the addition of the assets from the private pension system will create an even-bigger surplus that it can use to service its debt. Otherwise, the government might have to cut back significantly on the spending programs that benefit Argentine citizens. And since 2009 is an election year, such cutbacks aren’t an option.

But the strategy is fraught with peril. First, the decision “effectively killed the primary institutional investor in its emerging capital market,” the World Bank said. “Confidence in this market has predictably suffered from this measure, the latest in a series of government meddlings.”

The move calls to question what the government will do about the $10 billion in private investments, including the shares of both foreign and domestic firms.

That makes Anses the country’s biggest investor in its capital markets, whose liquidity and depth will become greatly reduced, The FT said. And the disappearance of the private pension funds will raise a lot of concerns over how the government will be able to keep a steady supply of credit available to consumers, whose spending drives the economic growth in that country, as it does here in the United States.

The lack of available credit major combined with a downturn in confidence in the Argentine financial system might well be the double-whammy that pushes Argentina into a major downturn, which could easily translate into another debt default.

Haunted by Past Problems

To really understand what happened, we need to turn back the clock to 2001, when Argentina – Latin America’s second-largest economy – found itself on the brink of financial collapse. A loss of confidence in the country and its policies induced a surge in capital flight and a major run on the nation’s banks, as investors and Argentine citizens alike exchanged pesos for U.S. dollars, which they then sent abroad.

Argentina was forced to default on the lion’s share of its public debt, estimated at $93 billion. Even today, however, an estimated 30% of Argentina’s bondholders still refuse to accept the 70% discount the government offered to settle the default.

Even in a world not currently gripped by a global credit crisis, Argentina would likely have found it impossible to obtain the finding needed to finance its government operations. But the financial crisis is a stark reality, meaning that the few sources of funding that remain available in the world markets are not open to Argentina.

And with Argentina’s agriculture-heavy domestic economy slumping badly – and now certain to feel the sting of the plunge in food-and-commodity prices – the central government is left with a possible debt-payment shortfall of as much as $10 billion for next year.

“With the abrupt drop in commodity prices, it left Argentina’s ‘cleptocratic’ government little room other than to confiscate private savings in order to reduce its chances of defaulting again in 2009,” says Marquez.

Default Déjà Vu?

There are some disturbing similarities between Argentina’s current economic crisis and the economic malfeasance that led the country to default on its debt in 2001.

Then, as now, the government faced accusations of corruption and mismanagement of debts. Argentina’s current president, Cristina Fernández de Kirchner, succeeded her husband, former President Néstor Kirchner, in December 2007. Like her husband, President Kirchner has been accused of employing dubious accounting tactics.

It is widely believed that the current president Kirchner has underreported Argentina’s inflation situation by replacing members of the state statistical office with handpicked analysts “friendlier” to the administration’s view.

During Kirchner’s husband’s administration, which ran from 2003-2007, several industries were nationalized. Despite having campaigned on a socialist platform of “returning to a republic of equals,” he nevertheless oversaw the state takeover of the postal system, water works and railways.

The pattern of the Argentine government’s failure to acknowledge economic reality continues.

The legislature recently passed the budget for 2009, that bases its financial assumptions on 4.0% economic growth (as measured by gross domestic product growth), 8.0% inflation, and a currency valued at 3.19 pesos for each U.S. dollar (despite the fact that it currently takes 3.33 pesos to buy one U.S. dollar), MercoPress reported.

Many economists feel Argentina’s economic growth is likely to be much lower. JPMorgan Chase & Co. (NYSE:JPM) predicts just 1.0% GDP growth for 2009. And some economists have predicted inflation as high as 20%.

Current President Kirchner has chosen to blame the global financial crisis for the government’s need to grab of private sector assets – without acknowledging the role that her administration, and the domestic economy, have played in the current economic crisis.

“There was a [private] system that spectacularly collapsed. This was a policy of looting,” Kirchner said in an attempt to justify the nationalization, the AFP reported.

“It is evident that when nobody regulates the market, nobody controls it and it is allowed to do what it wants, we wind up with a financial disaster like the one the global economy faces,” she added.

But it’s widely acknowledged that without the projected $4.5 billion to $5.0 billion in worker inflows to the private pension system next year, coupled with the current $24 billion in deposits, the Argentine government would find itself dangerously close to another default.

Despite all of the similarities between Argentina’s past and current economic troubles, there’s one important difference for global investors.

During Argentina’s prior collapse, Mexico and Brazil – large Latin American economies and important Argentine trading partners – were faced with their own economic crises. It cast a pall over Latin American investing for emerging markets and international investors. But that’s not the case this time around.

“Argentina, unlike Mexico, China and Brazil, is a fairly closed economy,” says Shadow Stock Trader editor Marquez. “Therefore, the impact to other economies from the Argentine pension nationalization is almost negligible.”

Argentina’s Economic Isolation

Even with its strong average economic growth of 9% for the past several years, Argentina hasn’t been a smart place to park investments since the 2001 crisis.

During the prior economic collapse, large numbers of business owners and foreign investors alike yanked all of their cash out of the Argentine economy and sent it to safer havens aboard. Needless to say, this caused a capital squeeze, and many businesses of all sizes failed, causing unemployment to soar, and government receipts to plummet. With no sources of income, many struck out on their own, without the presence of the owners and their capital, as self-managed “cooperatives.” This helped create some economic and job growth where there was none, and eventually the economy started to rebound.

Although GDP has grown consistently and quickly since 2003, it was only in late 2004 that it reached the levels of 1998 – the last year of growth prior to the recession. Other macroeconomic indicators have have shown a similar rebound pattern.

Strong commodity prices fueled an economy that counts soy as its biggest export, but government mismanagement and questionable economic policies continue to make Argentina a poor investment.

Standard & Poor’s Inc. recently downgraded the country’s credit rating to B-, well below investment grade.

“It’s a textbook definition of an economic disaster,” Nick Chamie, head of emerging-market research at RBC Capital Markets Corp. (RY) in Toronto, told Bloomberg News. The S&P ratings reduction “confirms what the rest of the market knows – that Argentina is close to default and that risk is very high.”

But the good news for global investors is that Argentina’s problems are unlikely to spill over into the economies of its healthier Latin American neighbors.

Even Brazil, Argentina’s largest trading partner, is likely to be unaffected by its Latin American neighbor’s current economic trouble. Argentina accounts for only 9% of Brazil’s exports. And the planned liquidation of foreign assets in Argentina’s pension funds will amount to just $540 million worth of in Brazilian equities – too little to have much of an impact on the Brazilian market.

“Argentina’s government does not pass the first ‘C’ of credit analysis: character,” says Money Morning’s Marquez. “It is not only the ability to pay [its debt-service payments], but the willingness to do it and the track record in doing this that matters.”

Compared to the fiscal responsibility of neighbors Brazil and Chile, Argentina’s history of borrowing and default make it a bad bet.

Latin America still hosts several choice investment opportunities, but you won’t find them in Argentina.

“The nationalization of pensions in Argentina shows the escalation of confiscatory government policies,” says Marquez. “In this environment, where flagrant violations of property rights are escalating, Argentina is no place to invest.”

Source: With its Pension Fund Grab, is it ‘Déjà Vu All Over Again’ For Argentina?

Exxon Mobil, the largest U.S. oil company, earned $14.8 billion, or $2.86 per share, a 58% increase from the $9.41 billion, or $1.70 per share it earned in the third quarter of 2007. Exxon Mobil’s record-setting profit was enough to beat analyst expectations of $2.38 a share, according FactSet Research data.

Exxon Mobil beat its own record for the largest quarterly profit for a U.S. company, which it had previously set in the second quarter of 2008 with a gain of $11.68 billion.

Royal Dutch Shell PLC (ADR: RDS.A, RDS.B) also announced third quarter earnings today, beating Bloomberg’s average analyst estimates. Europe’s largest oil company saw a 22% increase in profit to $8.45 billion from $6.9 billion in the same period the year prior.

During the quarter, oil averaged $118 per barrel. But crude prices have since slipped nearly $80 from a record high of more than $147 per barrel in July, which means Exxon Mobil’s string of record-setting profits could end in the fourth quarter.

While profits will likely dip in the near-term, analysts remain bullish on the long-term prospects of oil majors.

“The oil majors are coming all above expectations, which means they have resilient qualities,” Jason Kenney, an analyst at ING Wholesale Banking in Edinburgh, told Bloomberg News. “They show the benefit of being an integrated company, and they have the flexibility to weather the storm.”

High oil prices helped the oil majors to beat Wall Street expectations, despite production declines during the quarter. Exxon Mobil’s production dropped 8.2% during the quarter, while Shell’s output slumped 6.6%.

“This is a good outcome but some investors will be disappointed by the sluggish production volumes,” Tony Shepard, an analyst at London-based broker Charles Stanley, told the International Herald Tribune, speaking of Shell’s results. “Given the fall in the oil price, an issue for all oil and gas companies is current levels of capital expenditure.”

Exxon Mobil reaffirmed its capital spending budget of $25 million over the next five years, regardless of the subsequent trend of oil prices. However, Shell announced it would delay moving forward with developing its Athabasca oil-sands project in Alberta, Canada due to increased costs.

Source: Exxon Mobil Posts Record $14.8 Billion Profit, Shell Tops Estimates

Las Vegas Sands stock hit a daily high of $10.97, before paring back to close at $8.91 with an 80% gain of $3.96 each.

The Singapore Tourism Board stopped short of pledging financial support for the project, but said it would “facilitate the success” of the project under construction in downtown Singapore.

“The Singapore Tourism Board is monitoring the situation and is aware that the current uncertain economic climate may give rise to concerns,” the agency board said in an e-mailed statement, Bloomberg News reported. The tourism board said it was “working closely” with Las Vegas Sands’ Singapore unit, Marina Bay Sands.

Las Vegas Sands Chief Executive Officer Sheldon Adelson has been desparate to raise cash as his company’s shares have plummeted more than 91% year-to-date. The gaming industry has been hit hard by dwindling disposable income.

Las Vegas Sands shares have a 52-week high of $148.76, but prior to yesterday’s rise were hovering close to their 52-week low of $4.32.

Adelson has gone so far as to invest $475 million on his own money into the struggling casino company whose flagship properties include The Venetian Resort Hotel Casino (The Venetian), The Palazzo Resort Hotel Casino (The Palazzo) and The Sands Expo and Convention Center (The Sands Expo Center) in Las Vegas, Nevada, as well as The Venetian Macao Resort Hotel (The Venetian Macao) in Macao, China.

While the news of the Singapore government’s support certainly helped to boost Las Vegas Sands stock, some analysts believe the stunning 122% intraday surge can be attributed to short-sellers scrambling to cover positions after the stock’s initial rise.

A similar situation unfolded earlier this week with Volkswagen AG (OTC ADR: VLKAY). [Please click here for a related story in today’s issue of Money Morning on the recent Volkswagen share movements.]

“Gaming is a heavily shorted sector in need of a catalyst,” Todd D. Jordan, a managing director at New Haven, Connecticut-based investment-research firm Research Edge LLC, said yesterday in a note to clients, Bloomberg reported.

Source: Las Vegas Sands Shares Soar After Singapore Deals Itself In

At the New York close, all three major U.S. indices had sizeable gains:

* The blue-chip Dow Jones Industrial Average Index soared 889.35 points, an increase of over 10%, to close at 9,065.12.
* The tech-laden Nasdaq Composite Index jumped 143.57 points, an increase of 9.5%, to reach 1,649.47.
* And the broader Standard & Poor’s 500 Index shot up 91.59 points, an increase of over 10%, to settle at 940.51.

“The valuations are extremely compelling right now,” Dan Veru, who helps manage about $2 billion at Palisade Capital Management in Fort Lee, New Jersey, told Bloomberg News. “When you’re in extreme oversold conditions, the market is prone to these types of wild swings. The key thing is, can we hold these gains?”

It was the second-biggest daily point gain for the blue-chip Dow, which had a record-setting 936-point one-day gain earlier this month.
With a “lack of selling pressure” late in the afternoon, “the buyers began to ride in on their horses, and that brought in some additional buyers and short-covering,” Robert Pavlik, chief investment officer at Oaktree Asset Management, told MarketWatch.

All sectors posted gains across the board with energy, up 11.76%, and basic materials, up 11.74%, marking the largest gains.

The Fed’s Federal Open Market Committee (FOMC) is expected to release its statement on monetary policy tomorrow (Wednesday) afternoon.

The Fed is widely expected to reduce its benchmark Federal Funds target rate as the likelihood of a U.S. recession continues to increase and inflation pressures have abated.

The Fed Funds rate currently stands at 1.50% and a cut of 25-50 basis points is expected.

“The cut is already in the market,” John Ryding, economist at RDQ Economics told AFP.

“The question is whether it’s 25 or 50 basis points.”

Source: Dow Zooms Above 9,000 on Eve of Expected Fed Rate Cut

And that’s precisely the wrong decision to make at the wrong time. No matter how poorly the financial markets are performing, saving for retirement has to remain a top priority.

“It’s not a time for people to stop contributing,” Diane Young, director of retirement and goal planning at TD Ameritrade Holding Corp. (AMTD), the Omaha, Neb.-based brokerage firm that conducted the retirement study, said in an interview with Bloomberg News. “Because time is money, it’s important to stay on track.”

According to the Ameritrade study – released yesterday (Tuesday) – 63% of Americans have completely stopped contributing to their retirement plan. Financial strain due to the economic downturn was cited by half (50%) of those who say they have reduced or stopped contributing to their retirement plan. Unemployment (32%) and healthcare costs (25%) also were cited as key factors affecting their ability to contribute to their retirement plan.

Only 54% of survey respondents, which included senior citizens, indicated they had a retirement account. Of that number, one out of three had less than $50,000 in investment assets.

But slacking off on retirement savings now is only going to hurt you more down the road.
Chipping Away at Retirement Assets

Giving up the power of compounding can be the most costly mistake an investor can make when it comes to investing for retirement, but unfortunately that’s just what many are doing in light of the dismal market performance.

And those dismal returns aren’t the only factor hammering the bottom line of retirement accounts these days. Retirees and those close to retirement are feeling as if they are under attack from all sides due to the factors that threaten a comfortable retirement.

The main source of income for many retirees continues to be the Social Security Administration. But the Social Security program has been at risk for years as life expectancies continue to grow and the number of retirees advances in kind. The program will only come under more pressure as the baby boomer generation edges closer to retirement.

“Social Security’s current annual surpluses of tax income over expenditures will begin to decline in 2011 and then turn into rapidly growing deficits as the baby boom generation retires,” the most recent trustees’ report said.

Many retirees depend on dividend payments from investments to supplement income. But with a growing number of companies reducing or eliminating dividend payments in the face of poor earnings or a changing business landscape, that income stream is dwindling.

Even companies with long track records of dividend growth, such as General Electric Co. (GE) and Bank of America Corp. (BAC), have been paring back.

Given the current market conditions, selling a stock that has eliminated its dividend is no longer as likely to make up for that lost income.

“If I’m down 25% in dividend income, but the stock is down 35%, if I sell the stock, can I afford to lose another 10 to 15% by selling?” Howard Silverblatt, a senior index analyst with Standard & Poor’s, told The Associated Press. “Younger investors can wait the market out and sell the stock when it bounces back. But older people are really stuck in a bad spot.”

Companies with poor earnings are also cutting back on company contributions to 401(k) plans, which can downright wreck your expected retirement calculations. General Motors Corp. (GM) recently announced that it would discontinue company-matching contributions for non-union employees until economic conditions improve.

According to a recent survey by Watson Wyatt Worldwide Inc. (WW), 2% of companies surveyed have already decreased 401(k) contributions, while another 4% are planning to do so in the 2009.

Retirees with defined benefit or pension plans aren’t in much better shape.

According to Adrian Hartshorn, an actuary with Mercer, a business consultant subsidiary of Marsh & McLennan Companies Inc. (MMC), the pension account assets of companies in the S&P 1500 are shrinking. At the end of 2007, the companies Hartshorn tracks had a collective surplus of $60 billion. But stock-market losses have transformed that $60 billion surplus into a $35 billion deficit.
Protecting Your Retirement

If you find yourself the victim of a cutback in company contributions or a loss of dividend income, make sure you take the initiative to safeguard your retirement.

“Redo your financial planning and figure out if you need to save more now,” Robyn Credico, Watson Wyatt’s national director of defined-benefit consulting, told The Washington Post.

Here are some more steps you can take to help protect your retirement account, even during difficult market conditions:

* Be Aware: AARP’s website has a number of interactive financial calculators that will help you estimate everything from how much you need to save for retirement to how much income you can expect during retirement. While you want a long and healthy life, you don’t want to outlive your money, so be sure you don’t underestimate your time horizon.

* Be Proactive: If you think you’re going to come up short when it’s time for retirement, reconsider your options. Some workers are delaying retirement to give their assets more time to grow. Other retirees are supplementing their income with part-time work or curbing expenses by cutting back on unnecessary expenditures.

* Be Thrifty: Save as much as you can. Make sure you’re getting the most out of your company 401(k) plan by maximizing the company match. And try to save the maximum annual limit for your company’s 410(k) plan or your traditional IRA. Contributions to your retirement account often reduce your taxable income, so it might not be as much of a sacrifice as you think. Indeed, some investors do double damage to themselves by ending their retirement plan contributions, but forgetting to also adjust their tax withholding. That can make for an ugly surprise at tax time – either with a smaller-than-expected tax refund or a bigger-than-expected tax bill.

* Be Investment Savvy: Align your retirement investments with your time horizon and risk tolerance. Generally, younger investors can tolerate more risk, while those closer to retirement need to choose more stable options. Money Morning Investment Director Keith Fitz-Gerald recently recommended American Century Capital Preservation Fund (CPFXX) as a “safety-first” investment choice for investors close to retirement. And don’t be overly dependent on dividend income or a company pension fund, both of which could be affected by overall poor market conditions or weak company earnings.

Source: Four Ways to Protect Your Retirement From the Ongoing Financial Crisis

At the New York close on Friday, the blue-chip Dow Jones Industrial Average Index had plunged 312.62 points (-3.6%), to trade at 8,378.63. The tech-laden Nasdaq Composite Index shed 51.88 points (-3.23%), to reach 1,562.03. And the broader Standard & Poor’s 500 Index dropped 31.45 points (-3.46%), to hit 876.66.

“It’s a bear market on steroids,” David King, a money manager at Putnam Investments, who helps manage about $137 billion, told Bloomberg Television. “It’s very accelerated by the pace of financial markets today.”

Prior to the New York opening bell, pre-market traded futures for all three major U.S. indices fell their maximum allowed daily limit, causing safety measures to kick in and halt futures trading until the market’s open. Dow futures crashed 550 points, or 6.27%, to 8,224. The S&P 500’s futures index plunged 60 points, or 6.56%, to 855.20, and Nasdaq futures skidded 85 points, or 6.20%, to 1,175.75.

But despite the bleak picture futures painted, the U.S. markets recovered from the day’s deeper lows to close higher than originally indicated.

Commodities tumbled on fears of demand destruction from weak economic growth. Gold traded down to $681.00 an ounce from an opening level of $713.30. Oil also declined despite production cuts from the Organization of Petroleum Exporting Countries (OPEC). [For a related story in Money Morning on OPEC’s production cut, please click here.]

“Selling is across all asset classes,” Robin Bhar, a commodities analyst at Calyon in London, told Bloomberg News. “A month ago we were on the edge of a cliff and now we’re in freefall.”

In overseas markets, Japan’s Nikkei Index had an 811.90-point decline to close at 7,649.08, its lowest level in over five years. Hong Kong’s blue-chip Hang Seng Index plummeted 1,142.11 points to close at 12,618.40, its lowest level since August 2004.

“The market is pretty desperate and at a loss. Four days running of big losses, though the turnover is quite low,” Howard Gorges, vice chairman South China Securities, told Reuters, speaking of the Hong Kong markets. The Hang Seng Index has dropped 55% so far this year.

“People are just standing aside. These are dangerous markets to play around with. That’s the main reason for getting into cash,” Gorges said.

In Europe, major indices sunk on news that the United Kingdom’s gross domestic product contracted more than expected with a decline of 0.5% in the third quarter.

“We are obviously not sure exactly how this whole situation will develop. We’ve had some quite deep and severe recessions in the UK before, and hopefully we can avoid that sort of situation in the current circumstances, but the risks of that have increased,” Andrew Sentance, a member of the Bank of England’s rate-setting monetary policy committee, told BBC Radio Leeds.

The FTSEurofirst 300 Index of blue-chip European shares skidded 4.9% to close at 829.73 points, its lowest closing level since May 2003, Reuters reported.

The Paris-based CAC40, London’s FTSE 100, Madrid’s IBEX 35 and the Frankfurt-based DAX all posted triple-digit losses.

At the New York close, the dollar had gained ground against the euro [up 2.46%] and the pound sterling [up 2.02%], but lost ground against the yen [down 2.94%].

Source: Global Sell-Off Takes a Toll on U.S. Equities

“Once the global economy emerges from the current financial crisis, which it will, the countries that do well on our index are those that are best prepared to bounce back and perform well in the longer term,” Jennifer Blanke, director of the WEF’s global competitiveness network told The Financial Times.

And the United States is at the top. That’s the good news.

The bad news is that the safety of U.S. banks dropped to 40th this year from 26th in the WEF’s 2007 – 2008 report.

“Despite rising concerns about the soundness of the banking sector and other macroeconomic weaknesses, the country’s many other strengths continue to make it a very productive environment,” the report said of the United States.

But such a fall in the rankings for bank safety is a bit frightening for U.S. banking customers already spooked by the collapse of investment bank such as Lehman Brothers Holdings Inc. (OTC: LEHMQ) and regional banks such as IndyMac Bancorp Inc. (OTC: IDMC).

Summing a Country’s Competitive Balance Sheet

The WEF analyzes 110 economic indicators in 12 different categories for each of 134 countries to come up with its overall GCI ranking. One of those 12 areas is financial market sophistication, which is made up of factors such as “venture capital availability,” “strength of investor protection” and even “regulation of securities exchanges.”

But perhaps the most important factor in this category is the soundness of banks.

Confidence in a nation’s banks is what keeps citizens from stuffing dollars under a mattress. Banks need deposit assets to keep the wheels of U.S. industry turning, as deposit assets are used to fund the short-term credit markets that are so vital to the daily operations of many corporations.

And it’s an area where the United States ranks a disappointing 40.

Coming in behind such well-developed nations as Canada, which tops the list, or even Hong Kong in the 11th spot, might not seem so bad. But even the small African nation of Namibia ranks in at 17, illustrating the United States has some definite room for improvement.

While there are plenty of surprises at the type of the bank safety list, there aren’t many such surprises at the bottom. Algeria comes in dead last with Libya just above it.

Of the “BRIC” nations – Brazil, Russia, India and China – most moved up the list this year against better-developed nations. China landed in the top 30 for the first time as it moved up four spots to reach 30, but China’s banking system is still near the bottom of the list at 108. India, however, slipped two spots to 50 from 48 due to a widening budget deficit. India’s banks also slipped, falling to 51 from 46.

Meanwhile, Brazil was the biggest mover with an eight-spot jump to 64 on the overall list, and also tops the United States when it comes to the soundness of its banks with its 24th spot on the banking safety list. Oil revenues gave Russia a gain of seven to move to 51 from 58 the year prior, but Russia’s banks clocked in at 107 on the soundness rankings.

Slipping Bank Titans?

The United States wasn’t the only nation to find its ranking slipping in the bank safety category. The United Kingdom made a stunning plunge from 4th in the 2007 – 2008 survey, to 44th in the current one, after the emergency nationalization of banks such as Northern Rock PLC (PINK: NHRKF).

Even Switzerland, synonymous with banking to many, was hit hard by the global banking crisis, as it slipped from its top spot in last year’s banking soundness rankings to 16th this year. Swiss giants such as UBS AG (UBS) got caught with over-exposure to U.S. subprime mortgage-backed securities that necessitated government intervention while #2 rival Credit Suisse Group AG (ADR: CS) was forced to raise fresh capital.

Nations from Sweden to the United Kingdom to the Netherlands have all introduced government-sponsored packages to help support ailing domestic banks and avoid the fate of nearly bankrupt Iceland and Pakistan.

The United States $700 billion bailout package is by far the largest, but even that might not be enough to return the domestic banking industry back to safety.

The U.S. financial landscape has been changed forever as firms such, as Lehman Brothers – old enough to have weathered the Great Depression – toppled under the crushing weight of a credit market. The strong – Bank of America Corp. (BAC), JPMorgan Chase & Co. (JPM) and Wells Fargo & Co. (WFC) – have bought out the weak.

Bank of America bought both mortgage lender Countrywide Financial Corp. (CFC) and former standalone investment bank Merrill Lynch & Co. Inc. (MER). JPMorgan bought both regional bank Washington Mutual Inc. (OTC: WAMUQ) and the failed Bear Stearns Cos. Inc. Wells Fargo is buying Wachovia Corp. (WB).

But in the wake of such massive acquisitions, the United States is left with huge nationwide banking complexes dangerously close to the 10% regulator’s cap any one bank is allowed to have of domestic market share.

And with 117 financial firms on the Federal Deposit Insurance Corp.’s (FDIC) “Problem List” at the end of the second quarter, more bank acquisitions and rescues could be on the way. The FDIC’s list for the third quarter won’t be published until November.

The FDIC’s coffers have already taken a hit from the rescue of IndyMac and with the recent bailout law raising the cap for FDIC-insured deposits, it doesn’t seem like much of a stretch to imagine the nation’s banking insurance coming up short if one of the largest banks were to fail.

Bank Safety Plays

The FDIC doesn’t publish the names of the banks on its watch list, but luckily there are some simple ways to help ensure your banking deposits are safe. Here are three quick and easy steps from Money Morning Investment Director Keith Fitz-Gerald that you can take to determine if your bank is safe or not:

1. Click over to Bankrate.com’s Safe & Sound ratings page. There you can plug in your bank’s name and see how it scores on the basis of 22 objective measures designed to gauge the capital adequacy, asset quality, profitability and liquidity of thousands of banks. “If your bank doesn’t make the cut with a higher rating, then switch to one that does,” says Fitz-Gerald.

1. Use the FDIC’s electronic deposit insurance estimator to see if your assets are covered in full. With the recent signing of the bailout legislation into law, the FDIC now covers accounts up to $250,000 at any one bank in any single account or $250,000 per co-owner for joint accounts. Traditional and Roth IRAs, SEPS and other retirement accounts on deposit at an FDIC-insured bank or savings institutions are insured up to $250,000 separately from any other deposits you may have at the same institution. “But remember,” said Fitz-Gerald, “this is mainly deposit accounts and doesn’t include stocks, bonds, mutual funds or life insurance policies.”

1. Double-check your ownership. If a portion of your assets is uninsured, getting full coverage may just be a matter of changing ownership or spreading out your accounts to different banks. “Like most things the government doesn’t make this easy, so that means more paperwork,” Fitz-Gerald said.

Source: Global Credit Crisis Takes a Toll on Former Titans of Banking

Foreclosure activity saw a huge spike in the third quarter, as one in every 475 U.S. homes either received a default or auction sale notice, or was repossessed by a bank, according a report released yesterday (Thursday) by industry group RealtyTrac. It was a 71% jump over third quarter foreclosure activity in 2007 and a 3% increase from the second quarter of this year.

Foreclosure filings actually decreased 12% in September from August, but not due to an improving housing market.

“Much of the 12% decrease in September can be attributed to changes in state laws that have at least temporarily slowed down the pace at which lenders are moving forward with foreclosures,” said James J. Saccacio, chief executive officer of RealtyTrac, in the statement announcing the results.

A California law that requires lenders to give homeowners 30-days notice prior to filing a notice of default led to a 51% drop in that state.

The U.S. Treasury Department is working to implement a program that will modify the loan terms of struggling homeowners and guarantee those loans for banks that participate in the new program. The incentive for the government to stem the flood of foreclosures includes much more than just helping people hold onto their homes.

“We have never seen a foreclosure cycle like this one before,” Rick Sharga, RealtyTrac senior vice president, told CNNMoney.com.

A slowing economy generally precedes periods of elevated foreclosure rates. However, “in this cycle, we have foreclosure problems that have caused an economic downturn,” Sharga said.

Speaking in testimony before the Senate Banking Committee yesterday, Sheila Bair, head of the Federal Deposit Insurance Corp. (FDIC) and Neel Kashkari, head of the newly formed Office of Financial Stability, both spoke in favor of government assistance to homeowners facing foreclosure.

“We are passionate about doing everything we can to avoid preventable foreclosures,” Kashkari said.

Bair outlined how the government’s $700 billion bailout legislation includes provisions to help homeowners.

“Loan guarantees could be used as an incentive for servicers to modify loans,” Bair said in her prepared testimony, The Associated Press reported. “By doing so, unaffordable loans could be converted into loans that are sustainable over the long term.”

Bair pledged the FDIC’s support for the eventual Treasury Department plan.

Source: Treasury and FDIC Team Up to Aid Homeowners at Risk for Foreclosure

The newly created Money Market Investor Funding Facility (MMIFF) will help money market funds meet redemption needs and keep from “breaking the buck” – dropping below the normal $1 in net asset value – as The Reserve Primary Fund (RFIXX) did after the collapse of Wall Street investment-banking giant Lehman Brothers Holdings Inc. (OTC: LEHMQ). Struggling money-market funds that have seen more than $500 billion in redemptions since Lehman’s demise.

“The short-term debt markets have been under considerable strain in recent weeks as money market mutual funds and other investors have had difficulty selling assets to satisfy redemption requests and meet portfolio rebalancing needs,” the Fed statement announcing the new program read.

Losses on Lehman debt caused The Reserve Management Co. to mark down its Primary Fund’s net asset value (NAV) to 97 cents. It was the first time a money market fund had been forced to lower its NAV below $1 in 14 years. What followed was a half-trillion-dollar outflow from money market funds as institutional investors pulled their cash out of the funds to seek out the safety of U.S. Treasuries.

“By facilitating the sales of money market instruments in the secondary market, the MMIFF should improve the liquidity position of money market investors, thus increasing their ability to meet any further redemption requests and their willingness to invest in money market instruments,” the Fed statement read.   “Improved money market conditions will enhance the ability of banks and other financial intermediaries to accommodate the credit needs of businesses and households.”

The Fed selected JPMorgan Chase & Co. (JPM) to oversee the new program. JPMorgan will set up five “special purpose vehicles” through which money market fund managers can access Fed funds in exchange for dollar-denominated certificates of deposit, bank notes and commercial paper with maturities of less than 90 days.

Despite the half a trillion dollars in redemptions, the money-market industry still accounts for $1.7 trillion in assets. Cash outflows have slowed since August, Reuters reported, but money market funds have been left with very slim liquidity margins.

The Fed will supply $540 billion, with a remaining $60 billion to be raised from commercial paper sold by the five newly formed units.

“In terms of the redemptions money-market funds are seeing, and hedge funds as well, any of these moves by the Fed are going to help,” Mike Holland, chairman and founder of Holland & Co. LLC in New York, said in an interview with Bloomberg Television.

Holland predicted redemptions would ease with the creation of the MMIFF program.

Source: Fed Steps in with $600 Billion Plan to Bolster Money Market Funds