To refresh your memory, the rumor dated back nearly a year.  During a secret session of Congress, members were supposedly briefed on plans for “the imminent collapse of the U.S. economy to occur by September 2008”… followed by “the imminent collapse of US federal government finances by February 2009″… followed by the introduction of the Amero and roundups of dissidents to be hauled off to camps built by the former Halliburton subsidiary KBR.

What made the rumor so spooky, of course, were the events of September last year — Fannie and Freddie nationalized (although its debts weren’t taken onto government books, go figure), Lehman collapsing, Merrill Lynch’s shotgun marriage, WaMu seized, Wachovia, AIG… as I said last month, maybe not outright collapse, but close enough.

But it’s hard to say “U.S. government finances” collapsed last month.  Yes, we now have a record-high proposed federal budget with a record-high deficit to match.  But none of the possible catalysts I wrote about took place: Commercial real estate is in horrible shape, but nothing that’s triggered a big crisis.  The Treasury auctions went about as well as could be reasonably expected.  U.S. Treasury debt is still rated AAA.

That’s the good news.  The bad news is that all the Black Swans that could have shown up in February and didn’t could well show up during March.  Because the driving forces behind fading market and consumer confidence are all still there — starting with indecision and repeated acts of insanity from the White House and Treasury stunningly similar to that of the previous administration.

I mean, how many more bailouts is AIG going to need?  “Had the government not taken such action, AIG would have had its credit ratings cut by major agencies,” reports Marketwatch, “and that would have triggered the need for the firm to post collateral it did not have.”

Collateral it doesn’t have — isn’t that sort of the whole problem everybody’s got?  So there are the Fed and Treasury essentially telling us, “Yes, we know the last bailout didn’t really do the trick, but take our word for it, this one will.”  It’s like Bullwinkle forever trying to pull the rabbit out of his hat — “This time for sure!”

At some point, he’ll pull out a Black Swan.  Then it’ll get really interesting.

Source:You Survived Black Swan Month

The financials got whacked again yesterday — taking the market down along with it — on news of further debt downgrades from Standard & Poor’s.

On the i-bank side, Lehman, Merrill and Morgan all saw their credit ratings take a hit. On the commercial bank side, Wachovia and Washington Mutual said sayonara to their current leaders. This implies more bad news in the pipeline.

About a month ago, your humble editor compared Western banks to an old radio filled with cockroaches. (See Banks a Lot archived on the TPG Web site.) Four weeks later, the roaches are still pouring out.

At various times in the past few months, Taipan Daily has pounded the table for shorts on the broader financials. Those shorts are working well now, with XLF (the financial SPDR) trending lower in stair-step fashion and the Philly Bank Index ($BKX) testing its lows.

But in terms of keeping a finger on the pulse, the new bellwether for financial stocks just might be Lehman Brothers (LEH:NYSE).

Lehman is the smallest bulge-bracket investment house on the Street now that Bear Stearns is no more. Many thought it would follow in Bear’s footsteps during the heat of the crisis. (That’s where that big downward spike came from in early Feb.)

So far, Lehman has defied its critics — thanks in part to the smart moves of CFO Erin Callan and CEO Dick Fuld. But the sharks are still circling, and some very smart people think Lehman is still teetering on the brink.

The sharks smelled blood in the water this morning, as news arose that Lehman may be forced to raise billions in fresh capital to shore up its balance sheet.

The big question is how much exposure the investment bank still has to toxic mortgage trades and so-called “level 3 assets” — opaque stuff holdings that are extremely hard to value.

Watch LEH and the $BKX. If one or the other cracks, there could be another big downward whoosh for the financials. (“Whoosh,” of course, being a highly technical trading term.)

Buy One, Get One Free

Meanwhile, the housing bust is still in full swing. The above chart was featured in a recent Chart of the Day, but is worth reposting for those of you who didn’t catch it.

It is hard to reconcile the sunny optimism of CNBC with the grinding reality of the stock market. Where will earnings and growth come from in 2008? What sector? If inflation is out of control, are shares the best refuge? The stock market looks more and more nervous as investors try to sort all these things out.

The grim news Stateside is that the board of directors of Wachovia, the fourth largest bank in America, fired its CEO Ken Thompson. Wachovia lost US$708 million in the first quarter of 2008. It didn’t help Thompson that he engineered the acquisition of mortgage lender Golden West Financial in 2006—right at the peak of the mortgage lending bubble.

Thompson joins a long list of CEOs falling on their sword for thinking a credit boom would never end. It has. It’s still ending, in fact. Ratings agency Standard and Poor’s lowered the credit ratings of three big Wall Street firms earlier today. JP Morgan, Lehman Brothers, and Merrill Lynch were all downgraded because the S&P reckons the firms will have to take further asset write downs this year.

What did you expect? It’s a bear market in credit. The story comes straight from the department of news so obvious a rock would know it. What does it mean?

Well, a bear market in credit is bad for firms with heavily leveraged balance sheets. That includes most financial stocks. Why any investor would go bottom fishing in the financials when we still have a bear market in credit is beyond our feeble Tuesday-morning reckoning capabilities (still jet lagged).

Turning to our adopted homeland, we notice that other people are starting to get really worried about inflation. “Inflation rising at record rate,” reads a headline. “Inflation is rising at its swiftest pace on record,” according to a survey by TD Securities and the Melbourne Institute. You don’t say?

The RBA reckons inflation is running about 4.5% a year. It’s probably even higher than that, especially for people that eat, drive, get sick, and wear clothes. Hunger striking nudists who commute to work on bicycles are probably doing just fine. If there were only more of them.

There are comments by the usual morons on TV that the U.S. dollar is headed for a rally against the euro and the yen. This, the morons reckon, should lead to some “easing” in commodity prices. Oil eased itself up US$1.48 in early us trading, getting back on the north side of US$128. Gold eased itself up US$7 to just shy of US$900.

What if the dollar goes up against other currencies, but down against tangible assets? Is that even possible? Well of course it is!

The greenback weakened even more against oil and gold in the last few years than it did against the euro and the yen. Beware the false prophets of a dollar resurrection. They are looking at an incomplete picture because it’s more comforting.

How will shares behave if the global inflation bush fire becomes an inferno? Well, resource shares could melt up. The weak dollar is responsible for a lot of the nominal gains in commodity prices. But it’s not responsible for all those gains. Demand is too; especially demand from the 3.2 billion new industrial consumers in India and China, and the billion more in the next wave of industrializing countries.

We’d better be careful though. If people begin to think the central bank fight against inflation is lost, they will modify their behavior accordingly. This includes demanding higher wages to keep up with spiraling prices. And it includes trading cash for things before things get more expensive.

You’d be surprised how quickly the shelves of a supermarket can be picked to the bone when people become convinced (and afraid) that prices are going inevitably higher. There is probably not that much difference between the human genome and the locust genome.

Buy extra toilet paper.

And here’s a note we’ve been waiting to see. “Deal nears on iron ore price rise of BHP, Rio,” reports Jamie Freed in the Age. It looks like the Aussie miners are going to get something like a 95% increase from last year’s contract price. The Chinese steel makers won’t be happy about that. But if they don’t agree to a deal before June 30th, both Aussie ore titans are free to sell ore in the spot market, where prices are double the current contract price.

You can find more share market news from our pals over at Money Morning, who are all over the coal-seam-methane story. Until tomorrow…

Dan Denning
The Daily Reckoning Australia

Source: It’s a Bear Market in Credit

Good day… And a Terrific Tuesday to you! Well… The reigniting of fears really caught some wind in its sails yesterday, and why not? You see, Lehman Brothers was rumored to announce their first quarterly loss since going public, and will seek additional capital to shore up their balance sheet… I keep telling people / anyone that will listen, that we’re not even close to being out of the woods, and the losses, if being honest, will continue to mount…

Did you see the news yesterday that Wachovia’s CEO was asked to resign? Or that Washington Mutual also announced a change at the helm… It wouldn’t surprise me one iota if long after Lehman announces that loss that another “change” is announced…

So… The Risk Aversion has a two day win streak going… It will be interesting to see if the Lehman story comes to fruition, and if it does, what it will do to the Risk Aversion move… Or… Was it a case of sell the rumor, buy the fact? We’ll have to see, eh?

With the two day win streak for Risk Aversion, the currencies have seen some lovin’ once again… Forgotten but not gone, the euro, yen, and franc all posted nice gains yesterday and overnight… I’m seeing a little dollar strength right now, as the euro was 1.5606 when I turned on the screens, and it’s now fallen back below 1.56…

Eurozone Manufacturing posted a better than expected number yesterday, remaining above the 50 level… So… Economic growth hasn’t slowed as much as the pundits have been going around talking about… Inflation remains the bugaboo for the European Central Bank (ECB) and ECB President Trichet…

I had a reader send me a very funny note yesterday regarding the Eurozone’s inflation problem… “A suggestion for the Eurozone. If they’re worried about rapid rising inflation stats they should hire the U.S. stat calculation folks and they can moderate those nasty numbers and give them the great peace we have here in the USA!”

Now that’s funny! Whoa! We just had a streak of lightening outside my window here that was too close for comfort! It made me jump! The rain is falling so hard that it sounds like a train on our roof! Yikes! I’m sure glad I made here before this all started! WOW!

Speaking of Manufacturing reports… The U.S. ISM Manufacturing Index, did improve in May, but remained under the 50 level that marks the dividing line between contraction and expansion… These data reports lately don’t really say anything but confirm my friend, John Mauldin’s description of the economy… “muddle through”…

Speaking of John Mauldin, I’m going to be speaking in Dallas in September, and I going to catch up with John then… I’m looking forward to that!

Yesterday, I reported that the Australian Retail Sales shocked on the downside, but warned not to take one soft report and make a slowdown of it… Then came word that the soft Retail Sales could be explained… Let’s listen in on the explanation from the folks down under… “Retail trade fell by 0.2% in April, well below expectations for a rise of 0.2%. However almost all of this decline is due to the early timing of Easter, which caused unusual volatility in food retailing.

Ex-food, retail trade has been flat for the last two months. Moreover, sales in some discretionary areas, such as household goods and clothing are holding up quite well.”

Like I said yesterday, I don’t see anything here that makes me change my thought that the Reserve Bank of Australia will hike rates two more times this year… Oh, and one thing to think about here is on July 1st, income tax cuts set in, and I would expect this to spur economic activity like Retail Sales…

There are lots and I mean lots of people jumping off the weak dollar trend bandwagon these days… And most have very good reasons for doing so, at least that’s what they think! I prefer to think of this as a “pause”, not a reversal… Sort of like 2005, when the currencies got ahead of themselves at the end of 2004, only to spend 2005 in the correction mode, before going bonkers in 2006 & 2007.

The euro had moved so quickly from 1.44 at the end of the year, to 1.60 in less than 5 months… Can you say, too fast too soon? A Pause of the Cause, is what it looks like to me… As I said yesterday, the fundamentals in the U.S. are just absolutely awful! And since we’re dealing with nothing but fiat currencies these days, the “attitude” toward a currency can dictate the performance… But eventually, that “attitude” will come back to the underlying fundamentals…

So… In other words… The “attitude” may be changing toward the dollar… But, it’s not a trend reversal, it’s a Pause… Eventually, the underlying fundamentals will come home to roost!

One of those awful fundamentals is the Current Account Deficit… A reader made a great point yesterday in an email… “Didn’t they make a BIG deal about this when talking about the deficit a coupla years ago? That the reason that they don’t matter was that we had a healthy GDP (4.0%? at the time?). Well, how about now, with a .9% GDP??? (if you believe that number!) Shouldn’t there now be an uproar about the deficits?”

He’s absolutely correct! Why isn’t there an uproar about these deficits? Because, to harp on the Deficit would not make us “feel good”! But you know me… I like to pour salt on a wound… And that wound is the Deficit! I’ll repeat what I always tell a crowd when speaking… The folks that say Deficits Don’t Matter remind me of the man on top of the Empire State Building… He decides to jump off the building… And as he passes the 56th floor, he says… “So far, so good!”

OK… Remember 3 months ago when I was speaking just about every day on some radio station about the so-called “Stimulus Package”? I kept telling anyone that would listen to me that this was no “stimulus package”, that it was simply another “tax” and an additional $150 Billion on our already bleeding deficits! I said then that “by the time the checks get in the hands of consumers, they will be so stretched out from rising costs that they will most likely use the funds to pay a bill, pay down some debt, or save (a novel idea, eh?) but not spend the way the Gov’t wants them to do… Well…

The chickens have come home to roost on this “stimulus package”… Dave Carpenter wrote on Friday in the Chicago Tribune that “many consumers spend rebates on cost of living”… Here’s a snippet of his report…

“But reality has interfered, in the form of ever-climbing food bills and $4-a-gallon gasoline. Day-to-day living costs have sopped up the checks for many other early recipients and spoiled their rebate fantasies. Government figures released Friday showed consumer spending inched up just 0.2 percent in April, despite widespread anticipation of the stimulus payments sent out starting late in the month.

Thompson will step down after 32 years of service after having made a series of untimely – and ultimately disastrous – decisions that have cost the company nearly half its market value over the past year.

Shareholders began clamoring for Thompson’s removal in April after the company announced its first quarterly loss in seven years and cut its dividend by 41%. Issues were compounded on May 6, when Wachovia announced a first-quarter loss of $708 million, 80% more than the bank had previously reported.

The company has marked down $5 billion in mortgage and other debt-related assets, and recently announced it would cut up to 500 jobs. Wachovia stock has plummeted about 40% year-to-date.

Thompson’s most costly decision came in 2006 – the peak of the housing boom – when he agreed to spend $25.5 billion to acquire Golden West Financial Corp. Nearly half of Golden West’s lending business was based in California and Florida, which are now among the national leaders in foreclosure rates. Thompson himself acknowledged the deal as being “ill-timed.”

“No single precipitating event caused the Board to reach this decision, but a series of previously disclosed disappointments and setbacks cumulatively have negatively impacted the company and its performance,” Wachovia Chairman Lanty L. Smith, said in a statement.

Smith will takeover as CEO until a replacement for Thompson can be found. He will assume control over all of Wachovia’s staff functions, as well as head a board committee that has been charged with finding a new CEO. Vice Chairman and General Bank President Benjamin P. Jenkins III, has been appointed interim chief operating officer.

Also in the banking boardroom pipeline, Washington Mutual Inc. (WM) will shake up its management as Chief Executive Officer Kerry Killinger steps down from his duties as company chairman.

At WaMu’s annual meeting in April, shareholders voted to bounce Killinger from his post after the company posted a first-quarter loss of $1.14 billion. Independent director Stephen Frank will officially supplant Killinger July 1.

The world’s top financial institutions have reported more than $386 billion in asset write-downs and credit losses related to the housing bust, according to Bloomberg News.

Source: Wachovia CEO Thompson Shown the Door After 32 Years of Service, WaMu’s Killinger Steps Down as Chairman

It’s just the latest chapter in a continuing credit-crisis saga that’s gone on for so long that many investors have become numb to the news: They regard all new developments with a kind of “so what” attitude, or just ignore the news completely.

Believe me when I say that such a response is easy to understand. But hear me out as I underscore why investors must continue to watch this financial-services-sector saga closely. It’ll keep you out of trouble.

Let me explain …

The funds were invested the premiums from so-called “Bank Owned Life Insurance Vehicles,” or BOLIs, which are designed to pay off when key employees die.

BOLIs, in case you are not familiar with them, are specialized policies typically purchased as an employee benefit. Banks use them to fund such expected costs as employee compensation and the accompanying benefits. Like most life-insurance-type policies, BOLI policies contain both an investment feature and a death benefit.

And that’s why banks like them.

Not only does the bank accrue investment earnings revenue because they own the policies (bank-owned is the “BO” component of “BOLI”), the financial institution also receives the death benefit.

And since neither the death benefit nor the increase in the value of the investment vehicle is taxed, BOLIs became the mother of all tax shelters for banks.

And that brings us to the core problem.

You see, by taking the investment portion of the life insurance policies and moving them from traditional portfolio choices into more risky hedge funds, a bank, or in some cases the insurance company that sold the bank the BOLI policy, could increase its investment return with an almost-instantaneous, performance-enhancing boost that looked good to regulators and shareholders alike.

Of course, if you’re a baseball fan – as well as an investor – you know very well that there’s a downside to “performance-enhancing” boosts, even though the dramatic performance gains make that dark side very tough to resist.

That’s clearly why Fifth Third, Wachovia and a still-unnamed regional bank risked a reported $1.6 billion of their respective BOLI programs, an anonymous source close to the matter told MarketWatch.com. Many banks, presumably including these three, use BOLIs to offset the costs of their employee benefit programs.

And they’re not the only ones….

BOLIs have proven to be so popular that banks – always looking for additional ways to “rev up returns,” according to one news report – had more than $120 billion invested in them as of the end of last year.

But now the chickens are coming home to roost.

Fifth Third is suing Transamerica Life Insurance Co. – which sold it the policies – on the grounds that these investments in the Falcon fund were much more risky than the bank allegedly thought. Fifth Third also named Clark Consulting Corp. as a party in the lawsuit. Both Transamerica and Clark are subsidiaries of the Netherlands-based Aegon NV (ADR: AEG).

“As with many other credit-based investment products, the Falcon’s returns have been hurt by one of the most volatile periods for fixed income in recent memory,” said Citigroup spokeswoman Danielle Romero-Apsilos, Bloomberg News reported.

Filing a lawsuit is the Corporate America’s version of a high-school kid telling his teacher “the dog ate my homework.”

It seems to me that if you weren’t so greedy in the first place – and had simply stuck to your knitting with prudent, risk-averse choices that didn’t require all this creative accounting – you wouldn’t have had a care in the world when Citi’s Falcon Fund lost three-quarters of its value.

The bottom line: There could be an entirely new wave of write-downs encroaching onto financial-services firms’ corporate earnings reports in the next few quarters to come. And, as was the case with the initial part of the subprime-mortgage debacle, some investors are likely to be very surprised at the identities of the early casualties.

But other investors will continue to say “so what?”

Investors who continue to follow these developments will do so with the understanding that this, too, shall pass – and some pretty profit plays will ultimately start to show themselves.

We’ll be there to tell you when that happens.

And it’s likely to begin well before you’d expect it.

After all, as the old Wall Street adage says: “Buy when there’s blood in the streets.”

And if you’ve been listening to what we say, you’ll be able to say with confidence that none of that blood is yours.

Source: The Latest Banking Sector Credit Crisis Will Lead to That Sector’s Next Group of Profit Plays

Nickel blasted back over $13.10 in the late morning, but then fell sharply to close at $12.8374/lb., down almost 5 cents. Zinc was up and down with little change, ending at $1.0024/lb., down less than a quarter of a cent. Aluminum sagged to $1.307/lb., down 1 2/3 cents, while lead was marginally higher at $1.2228/lb., up two-tenths of a cent.

The Fed’s action had little effect on the industrial metals, with copper rising slightly on what analysts tabbed as primarily short covering.

Volume was light, as most of the trading came before the Fed weighed in.

Also factoring in was the slight rise in GDP, as expected, with speculators hoping that that signals a rise in future demand.

The strike against state-owned Codelco in Chile continued, but even down there, “All eyes are on the Fed,” said Bart Melek, global commodity strategist with BMO Capital Markets.

Melek went on to say that strike participants were mostly “keeping their powder dry” ahead of the interest rate announcement.

Supply data came in slightly bearish yesterday. Inventories monitored by the LME rose 875 metric tons, to 110,525 tons.

Had the Fed’s rhetoric indicated a more hawkish stance on inflation is coming down the road, “we wouldn’t be surprised to see a bit of a correction here in copper,” said Michael Gross, of OptionSellers.com. Gross added that over the next month the metal could pull back to the $3 to $3.25 range.

But with no clear signal given, prices are likely to “continue to move sideways” within a $3.85 to just over $4 range, said Eric Wittenauer, analyst with Wachovia Securities.

In company news, Grupo Mexico said on Monday that its plans to ramp up output at its giant Cananea copper pit have been delayed indefinitely after a labor board declared a 9-month-long strike there legal.

Grupo Mexico hoped to have significant production by May but plans were stifled by new worker blockades this month. “At this point, we are unable to provide a revised copper production guidance for the remainder of the year and the date at which we will resume operations is not currently foreseeable,” said CFO Daniel Muniz.

Nickel held above $13 until the late morning, but then plummeted to close at its intraday low of $12.814/lb., down 18¼ cents. Zinc’s slide continued, as it fell below the $1 mark to end at $0.9942/lb., down 2¼ cents. Aluminum declined slowly but steadily, giving up just over a penny, to $1.3603/lb., while lead also had a very weak day, shedding nearly 4 cents, to $1.2641/lb.

Copper sank for the third session in a row, as traders expressed fear that the price level will discourage Chinese buyers.

“Copper has lost its nearby premium,” said George Gero, Vice President with RBC Capital Markets Global Futures in New York. “There’s stories out there now that China wants to cool its economy and people are concerned about whether they want to hold on to copper for prompt delivery or not.”

If that concern persists, said Ron Goodis, a futures trading director at Equidex Brokerage Group in Closter, New Jersey, “It may trigger a short-term sell-off.”

Still, that scenario is playing out against a backdrop of potential supply problems. Inventories monitored by the LME fell by 475 metric tons yesterday, to 113,725 tons. Stocks are now down 42% on the year.

“Low inventory levels means that there is little buffer against supply-side disruptions, so we expect prices to remain high and volatile,” wrote analysts at Barclays Capital.

And Chilean production has been affected by a subcontract workers’ strike that is entering its 6th day. Three of state-owned Codelco’s mines in that country have been closed, with no end in sight.

The potential effects of the strike led Eric Wittenauer, of Wachovia Securities in St. Louis, to comment that, “This is a market that is already tight and cannot afford to lose production.”

Bucking the trend in the base metals was tin, which rose to yet another record high yesterday, as the LME said inventories were off by another 75 tons. Stocks have declined by a third since the first of the year.

Traders are deeply concerned that tightening supply from major producers China and Indonesia could cause stockpiles to contract even further as the year goes on. China has been a net tin importer since last September, and in January began levying a 10% export tax on the metal in an effort to safeguard domestic supply.

Wachovia Corp. (WB:NYSE), one of the largest banks in America, reported a large “unexpected loss” recently. And the main problem? Bad California home loans.

I hope they were joking when they used the word “unexpected.” Unless you’ve been living under a rock, you know that the housing earthquake is still sending out pockets of seismic activity.

As Soon As Possible

Like a post-modern movie plot, America’s economic big picture is deeper and darker than most realize. It’s only going to get worse.

The IMF (International Monetary Fund) thinks the credit crisis could cost up to $1 trillion. Banks have already written down nearly $250 billion in assets to date.

The IMF bluntly cautions banks to keep taking write-downs “as soon as reasonable estimates of their size can be established.”

In other words: Nip it in the bud ASAP.

The Consumer’s Movie Role

The bank write-downs include lots of consumer debt gone bad. You can blame the banks for giving out frivolous loans, or you can blame individuals for biting off more than they can chew. But regardless of who’s to blame, the American Bankers Association reports that the bad consumer debt problem is the worst it’s been since 1992.

Overdue bank-card accounts have increased 20 basis points to 4.38% in the recent quarter. Late payments for car loans (which count for two-thirds of fixed balance consumer loans) are on the top of the list. And exposed firms, like American Express Company (AXP:NYSE) and Capital One Financial Corp. (COF:NYSE), have doubled their cash reserves for bad debt.

Paying credit card bills is taking a back seat to necessities like gas and food and heat. While wages have increased 3.6%, prices have jumped more than 4% over the past year.

Unemployment isn’t helping, either. In March, 80,000 jobs were cut, continuing a trend of consecutive job losses.

According to Merrill Lynch, U.S. families now spend more on debt service than they spend on food (even as food is getting more expensive).

Unemployment, credit crunch, housing crisis, inflation, high gas prices… These all lead to one dirty little word: recession. The evidence is hard to dispute.

Resisting Temptation

Consumers are now faced with the challenge of saving as much as possible and spending more frugally. As a result, they are visiting thrift and discount stores more often, and generally looking for ways to cut back.

Starbucks, for example, is aware that people won’t keep paying $4 for a specialty cup of joe. Instead they are switching to lower cost competitors like McDonald’s and Dunkin Donuts. So Starbucks is focusing on making its regular brew better, and has even talked about bringing out a $1 cup of coffee to compete.

Meanwhile, discount store Family Dollar (FDO:NYSE) is “adjusting to its shoppers’ greater reliance on basics during an economic downturn” by focusing on foodstuffs and getting rid of some of its fashion merchandise.

The bottom line is, monetary constraint is here to stay, at least for a while… including resisting the temptation to make frivolous purchases.

Building a Recession-Proof Portfolio

At Diligent Investor, we’re well aware of the perils of the current market. Many investors’ hopes have been dashed. And some even think it might be worth just pulling out all their money and waiting.

In our opinion, the downturn is far from over. All these factors are affecting the market. The credit crunch and the dollar crisis have yet to reach their apex.

At Diligent, our top strategy is to build a recession-proof portfolio — one full of companies that have solutions to the country’s economic woes. For instance, last month we looked at a low-priced discount retailer that made it through the last recession with triple-digit gains, even as the rest of the market tanked.

Holding a position in a rainy-day retailer is one way we’re combating the credit and cash flow crunch. Now I’d like to tell you about another…

From Consumers to Banks

Individual credit defaults add up to countless billions. If consumers can’t pay back the loans, the banks lose money. So who is going to help the banks?

When banks announce write-downs, they are admitting they don’t plan on receiving any payment for the loans gone bad. Banks are shrugging their shoulders, claiming the losses on taxes and getting them out of sight.

So where do all those writed-owns go? What happens to all that bad debt?

A big chunk of it goes straight into the hands of a company I’ve profiled in the latest Diligent Investor issue.

This company is a sort of life preserver for the banks. The company buys debt portfolios at a serious discount — often pennies on the dollar — to take them off the banks’ hands. Then they use an elite force of call centers to try to collect full or partial payments on the debts over the course of seven years. The company often earns up to three times what it paid for the defaulted debt. (Not a bad rate of return.)

Saving the Banks’ Hides

With this recommendation, we’re giving credit where credit is truly due: to a company that will safely and quietly absorb the banks’ big problems, and profit nicely while doing so.

This debt company is an integral building block for a recession-proof portfolio… and will end up a very good long-term investment. It will carve more and more profits from more and more bad debt over time.

I just released this new recommendation to Diligent Investor subscribers. So if you choose to join us now, you’ll be on the road to having your own recession-proof portfolio with this rock-solid debt solutions company.

More than $16 billion in write-downs and higher consumer credit costs caused the company to record a loss of $5.11 billion, or $1.02 a share, compared with a profit of $5.01 billion, or $1.01 a share, a year earlier. Revenue fell 48% to $13.22 billion.

Reuters analysts expected an average loss of 96 cents a share and revenue of $14.35 billion.

“This is the quarter they get to clear the decks,” Arthur Hogan, chief market analyst at Jefferies & Co. in Boston, told Reuters. “(Chief Executive Officer) Vikram Pandit is coming in and making pretty big changes, and that’s what he gets to do.”

But so was the fourth quarter, with the first 4,200 job cuts.

Pandit, who assumed CEO duties in December, said the company’s financial results “reflect the continuation of the unprecedented market and credit environment and its impact on our historical risk positions.”

Despite Citigroup’s loss, its stock rose more than 6% by mid-morning trading today (Friday).

Financials’ Earnings

Citigroup’s earnings cap a week that’s seen many of the nation’s biggest financial firms post mixed, though fairly cathartic, results.

On Thursday, Merrill Lynch & Co. (MER) posted its third consecutive quarterly loss – $1.96 billion, or $2.19 a share – and announced 3,000 job-cuts.

On Wednesday, JPMorgan & Chase Co. (JPM) reported profit of $2.37 billion (or 68 cents a share), more than a 50% drop from $4.79 billion (or $1.34 a share) from a year earlier.

On Monday, Wachovia Corp. (WB) beat estimates with a first-quarter loss of $350 million. Washington Mutual Inc. (WM), however, reported a $1.1 billion loss.

Bank of America Corp. (BAC) will release its earnings Monday, and expectations are low.

“Our expectation is for the economic environment to continue to be weak and for the capital markets to remain under stress,” JPMorgan CEO Jamie Dimon said Wednesday.