Steve Christ - Angel Publishing

Gross Stares Down "Financial Tsunami"

Ugly.

That's how I would describe the markets today.

In fact, it is one of the ugliest days I have seen in some time. Everything is down.

And I do mean everything. Gold, oil, natural gas. Down, down and down. The same is true for banks, financials, and tech.

Everybody is headed for the exits. And if you're not long the dollar, bonds, of short funds you're bleeding red everywhere you look.

Then there's this bit form Bill Gross.

He's talking "financial tsunami" and is wearing out one metaphor after another to get his point across.

So here's Gross telling us what he really thinks in Bloomberg today.

It's in an article by Jody Shenn entitled: U.S. Must Buy Assets to Prevent `Tsunami,' Gross Says

The U.S. government needs to start using more of its money to support markets to stem a burgeoning ``financial tsunami,'' according to Bill Gross, manager of the world's biggest bond fund.

Banks, securities firms and hedge funds are dumping assets, driving down prices of bonds, real estate, stocks and commodities, Gross, co-chief investment officer of Newport Beach, California-based Pacific Investment Management Co., said in commentary posted on the firm's Web site today.

``Unchecked, it can turn a campfire into a forest fire, a mild asset bear market into a destructive financial tsunami,'' Gross said. ``If we are to prevent a continuing asset and debt liquidation of near historic proportions, we will require policies that open up the balance sheet of the U.S. Treasury.''

The government needs to replace private investors who either don't have the money to buy new assets or have been burned by losses, Gross said. Pimco, sovereign wealth funds and central banks are reluctant to fund financial firms after losses on investments they made to support the companies, Gross said. The world's biggest banks and brokers have raised $364.4 billion in new capital after more than $500 billion in writedowns and credit losses since the beginning of last year.

Gross cast a bleaker view for the prospects of the world's financial markets than in previous notes to clients.

As Fannie and Freddie, banks, securities firms and hedge funds shrink, yields on all debt assets will rise compared with benchmark rates and volatility will increase, Gross said. The declines will end once sellers have depleted their assets and sufficient capital has been raised, Gross said. Unless ``new balance sheets'' emerge, prices of almost all assets will drop, even those of ``impeccable'' quality, he said. (emphasis mine)"

Forget inflation.

Next up is deflation. And it's going to be across all asset classes—except for bond and the dollar.

That's because in a deflationary environment cash really is king.

Maybe that's what the markets are telling us today.

See you at 10K on the Dow.

Municipal Bond Funds

This may come as no surprise to you, but I'm no big fan of big government. It's bloated. It's broken. And it spends entirely too much time figuring out ways to bleed us dry.

And it doesn't matter if our incomes are rising or falling, the government always wants more. That irks me to no end.

Because let's face it, while the government thinks nothing of asking you to get by with less, it never has any intention of living within its own means—that's how you end up $53 trillion in debt in the first place.

Then again, that's part of our twisted national Carpe Diem. Except we seize the day at the expense of our future.

So instead of getting a $160 billion dollar program to become energy independent, we get stimulus checks to blow at Wal-Mart.

Yeah that's the ticket.

Big Government is Bad News for Investors

However, the bad news for taxpayers and investors is just beginning. The federal government is about to grab an even bigger slice of their wallets. Without action, the Bush tax cuts are scheduled to sunset at the end of 2010.

Here's a quick look at what that will mean for investors both big and small:

Tax rates will rise substantially, as the top bracket jumps back to 39.9% in 2011 vs 35% today;
Low-income taxpayers will see the 10-percent tax bracket disappear, and they will have to pay taxes at the 15-percent rate;
Married taxpayers will see the marriage penalty return;
Taxpayers with children will lose 50 percent of their child tax credits;
Taxes on dividends will increase beginning on January 1, 2009;
Taxes on capital gains will increase, also beginning on January 1, 2009 jumping from 15% to 20%;and
Federal death taxes will come back to life in 2011, after fading down to nothing in 2010.

In short, it's game on again. That's why you need to seriously consider municipal bonds funds as a defense against these characters and their busted budgets.

Municipal Bond Funds Beat the Tax Man

Here's why.

The interest from investing in municipal bonds is exempt from federal income tax and in many cases, state and local taxes as well. So they provide an income stream the boys in D.C. can't get their hands on unless you sell the bonds for a capital gain. Only then they're taxed.

That makes municipal bonds one of the easiest tax shelters on the market today. And you don't have to be rich to take advantage of them, even though the wealthy have been on to these benefits forever now.

In fact, according to the most recent data from the Internal Revenue Service about 59 percent of the interest from municipal bonds in 2006 was paid to households that earned more than $200,000. All of it, of course, was free of federal taxes.

Smart investors will only follow them since the end of the tax cuts is getting gets closer and closer every day now. However, the time to plan for this sunset is now.

Municipal Bond Investments

As for municipal bond investments, how could you consider them without looking for something from PIMCO. It's the company run by the bond king himself, Bill Gross.

In fact, the PIMCO Municipal Income Fund (NYSE:PMF) is everything an investor could ask for these days. It pays a hefty yield and it's safe.

That's no small matter in a bear market.

In fact, according to PIMCO, muni bonds are so safe that from 1970 to 2005, the average investment-grade municipal bond defaulted a mere 0.07% of the time, compared with 2.23% for corporate bonds.

Heck, even Orange County, made good on its debt when dealing with its high-profile bankruptcy in 1994.

The best part though is the yield. Its current yield is 6.06% which is the taxable equivalent of 9.04% if you're in the 33% tax bracket.

To calculate your taxable equivalent, of course, you simply divide the yield of your fund by (1.00 minus your marginal tax rate)

For example, to figure out the taxable equivalent yield for this fund in the 33% bracket, you would divide its 6.06% yield by (1-.33). That gives you a yield of 9.04%. Not bad.

And if the Bush tax cuts do expire and you suddenly find yourself in the 39.6% bracket again your taxable equivalent yield jumps to 9.93%. That's double what you can get from a bank and is far above the current U.S. Treasury yields.

Furthermore, the fund seeks to be "AMT-free" by avoiding bonds generating interest that may subject individuals to the alternative minimum tax. On top of that, it also pays its dividends monthly.

So don't think for a minute that municipal bonds are just something for the retiree crowd.

They're also a great way to keep the government out of your wallet while you build wealth.

After all, it is the government that needs to learn to live on less—not the rest of us.

Your tax-shelter-hunting analyst,

Steve Christ

Investment Director, The Wealth Advisory

PS. If beating the tax man appeals to you, I have developed a 5-stock portfolio of income investments that can send you on your way wealth without risks. It's a mix of dividend stocks and municipal bond funds that pay income ranging from 6.23% to 9.14%. To learn more about them click here.

Gustav is Gone, The S&P Awaits the Earnings Storm

Gustav blew by, the price of oil fell and the markets have gone green for the day. So what is the worry?

Well the markets are a bit like the weather. If you wait long enough they will change too. Tomorrow is another day.

Either way, stocks still look over priced when compared to their earnings power six months out.

Here's the skinny on that score from Bloomberg.

It is in a story by Michael Tsang and Jeff Kearns entitled: U.S. Stocks at 25.8 Times Profit Means Rally May End

"The best already may be over for the U.S. stock market this year.

The Standard & Poor's 500 Index, which had the worst first half since 2002, added 0.2 percent this quarter, the only gain among the world's 10 biggest markets in dollar terms. Shares in the benchmark index for American equity climbed to an average 25.8 times reported profits, the highest valuation in five years. The last time that happened, the S&P 500 fell 38 percent.

Money managers at Federated Investors Inc., Russell Investments and Morgan Asset Management, which oversee a combined $600 billion, said the gains won't last because corporate profits will fail to meet analysts' estimates. Wall Street

forecasters, who were too optimistic about earnings for the past four quarters, predict income at America's biggest companies will grow by a record 62 percent in the final three months of 2008, according to data compiled by S&P.

``The market is pricing in the expectation of a good quarter, but we just don't see it,'' said Philip Orlando, who helps manage $350 billion as chief equity market strategist at Federated in New York. ‘The fundamentals are going to be poor, earnings are going to be bad, and there are going to be more huge writedowns. We think stocks probably need to work 5 to 10 percent lower over the next month or two.'"

So summer is slipping by and winter is closing in fast.

By the way, the falling price of oil is a good news, bad news story.

It's only falling because the economy—both here and abroad—is rapidly cooling off. How far it falls now is the $64,000 question.

I'm starting to think it could drop as far $80.

The FDIC Ramps Up

Hmmm. It looks like the FDIC is ramping up for something big.

I wonder what it could be.

Here's the skinny.

From Bloomberg by David M. Levitt entitled: FDIC Adds Office Space in Dallas, Ready for More Bank Failures

"The Federal Deposit Insurance Corp. is preparing to sign a five-year lease to add five floors of space at its Dallas regional office as the agency prepares to increase scrutiny of failing and troubled U.S. banks.

The federal agency, which insures deposits and disposes of failed banks and their assets, will add 125,000 square feet to the 185,000 square feet it rented last year at 1601 Bryan St., a 49- story tower in downtown Dallas. That agency will add about 300 staff at the building, including some of the 69 retirees it is bringing back to help handle the increased workload, said spokesman Andrew Gray.

At least a dozen U.S. lenders and credit unions have been closed by state and federal regulators since last year, and the FDIC said on Aug. 26 it had 117 banks on its ``problem list.'' On Aug. 22, Columbian Bank and Trust Co. of Topeka, Kansas became the ninth U.S. bank to collapse this year.

``Already you've seen nine failures of institutions this year,'' said Gray. ``While historically this isn't a large number, it does represent an increase over the past two years. We anticipate additional failures and thus we would anticipate additional workload.''

Dallas is the headquarters of the agency's Division of Resolution and Receivership, the unit that handles failed banks. The staff additions would bring the total number employees at that location to about 850, he said"

Maybe they could call in Clarence. He sure helped out George in a pinch.

Case-Shiller Home Price Index

Problems. Problems. Problems.

I have mine....You have yours. He has his..... She has hers. The world is full of them.

But some problems are much bigger than others. And when they break the wrong way, even innocent bystanders get taken down by them.

Now here's a big problem for you: The banks gave a ton of money out to people that couldn't possibly pay it back. Not real smart if you ask me.

And of course, when the people they gave all that money to met their dates with reality, the problems really started. The Case Shiller Home Price Index began to tumble and so did the banks.

So today, tomorrow and the next day, falling home prices are everybody's problem now because the banks that made those not so smart loans are insolvent. In short, they don't have enough cash on hand to cover their losses. And with falling prices, those losses are a bottomless pit.

And if nobody is willing to lend these not so brilliant bankers any more money to mop up it all up they end up in place that is the equivalent of banker's hell—in default themselves.

Now picture that for a moment...banks begging for loans. Welcome to what my pal Chris Nelder calls Upside-Down-World.

And if there is one thing you need to avoid in upside-down-world it is banks, which are no better than sub-prime lenders themselves. However, the problem is that it is still almost impossible to tell the bad ones from the really, really, bad.

So I'll say it again: buying financial stocks is not for the average retail investor-the risks are too great. Your investment could go to near zero in the blink of an eye.

That's what happens when the FDIC shows up at your door and shuts you down. Or when you can't pull off your latest round of capital raising. The rumors suddenly become reality—sort of like the dot com crash, but with banks.

Now that, to me, really is a problem. E-Toys we can live without. Impaired banks, however, are nightmare.

After all, credit is our air hose.

Problem Banks Bury Financial Stocks

As for the number of "problem" banks, the list is getting longer every day. The FDIC said on Tuesday 117 banks and thrifts were considered to be problems in the second quarter. That was a 23% jump from just 3 months ago when the figure stood at "only" 90.

But the truth is the number is probably much larger. Indy Mac wasn't even on the list when it failed in June. That problem alone may cost the FDIC over $8.9 billion to fix, well above the original estimates of $4 billion.

The FDIC statement also revealed federally-insured banks and savings institutions earned $5 billion in the April-June period, down from $36.8 billion a year earlier. That's an 86% haircut for institutions that can hardly afford it.

"By any yardstick, it was another rough quarter for bank earnings," FDIC Chairman Sheila Bair said. However, the results were not surprising "as the industry coped with financial market disruptions, the housing slump, worsening economic conditions and the overall downturn in the credit cycle," she added.

Troubled assets — loans that are 90 or more days past due — also continued to rise, jumping by $26.7 billion, or 19.6 percent, over the first quarter. It was the first time since 1993 that the percentage of total loans that were troubled broke 2 percent, at 2.04 percent. That number is lkely headed higher.

Meanwhile, the FDIC is already planning to borrow as much as it needs from the U.S. Treasury to see through the crisis. Its $45.2 billion fund won't even come close to covering the eventual losses.

Of course, the last time the FDIC borrowed funds from the Treasury was during the S&L crisis of the early 1990s. But here's the kicker. That was at the end of the crisis after thousands of banks failed, not the beginning. To date, just nine banks have failed this year. According to banking analysts, as many as 300 banks could fail this go round.

But there's more.

The big banks are in deep trouble too this time, not just the smaller ones.

Kenneth Rogoff, a leading academic and former IMF chief economist warned, last week, "We're not just going to see mid-sized banks go under in the next few months, we're going to see a whopper, we're going to see a big one - one of the big investment banks or big banks."

So somewhere out there beneath the waves there is whale or two. Its business model is wrecked and it is loaded down with more debt than it can swallow. However, one thing is for sure, when one of these whales washes up on the beach it going to take financial stocks down another peg with it.

The Case Shiller Home Price Index: More Pain

In the meantime, the housing mess that started it all is still in an absolute free fall. That's important because the bottom of the banking crisis is nowhere in sight until home prices stabilize. That's just not happening as housing begins another leg down.

Through June 2008 the S&P/Case-Shiller home price index posted its biggest yearly decline falling 15.9% nationwide year over year. But to put that into perspective you have to take a look at the chart. It gives ugly a new meaning.

Now if that's not a crash, I don't know what one is. In truth, it's the 500 lb. anchor that is dragging financial stocks to their watery graves.

So it's simple. The banks can't bottom until housing does. That won't be until 2010 at the earliest—even then it would be miracle in the midst of a credit contraction.

In other words, the worst is yet to come. So don't make their problems your problems if you don't have to.

After all, who needs more problems? Not me.

In fact, I would sooner drink bleach.

Then again there is always the UltraShort Financials ProShares (AMEX:SKF). It goes up when banks go down.

Your avoiding-problems analyst,

Steve Christ

Investment Director, The Wealth Advisory

PS. Bad banks may be off my list, but there are plenty of other sectors to invest in these days. In fact, since the first of the year The Wealth Advisory is 11-5 in its closed positions with a cumulative gain of 290% vs. losses of only 55%. That is a net gain of 235%.Bear what?

To learn more about The Wealth Advisory click here.

Slow Days At Darden Restaurants

Way before I became famous market guy, I was a famous restauranteur.

I owned a 5 star dive called Peppers Tavern. It was enough to send me down another career path if you know what I mean.

So I know how sad an empty restaurant can really be. It's not exactly for the squeamish we used to say.

After all, the restaurant business is one where you invest a lot to make a little.

Margins? What margins?

That's never a good sign and why I never buy a company without earnings

But hey....the beer was sort of free.

But that was then and this is now.

For the restaurant business it is just getting tougher with discretionary income shrinking like a raisin these days.

Here's the skinny from a salad bar near you. Here's a hint: Nobody there is in the weeds.

From Reuters by Brad Dorfman entitled: Darden warns on quarter and year; stock plummets.

"Darden Restaurants Inc warned investors that its quarterly profit will come in well below Wall Street estimates and cut its forecast for the full year on Tuesday, sending its shares down 15 percent.

Traffic at the company's chains — which include Red Lobster, Olive Garden and LongHorn Steakhouse — was worse than expected, a spokesman for the company said.

"People were not in the restaurants in the volume we were anticipating," said Darden spokesman Rich Jeffers.

Casual dining restaurants — the moderately priced, sit-down chains run by Darden and rivals like Brinker International Inc and DineEquity Inc— have been hammered by the weak U.S. economy and soaring gasoline prices.

"For a large part of that period, gas prices were extraordinarily high," John Owens, analyst at Morningstar, said. "It was a challenging consumer environment and it's possible that consumers at the tail end of the quarter were watching Phelps instead of going out," he added, referring to gold-medal winning U.S. Olympic swimmer Michael Phelps.

Sure blame it on the kid from Baltimore. That's the ticket.

At least there won't be long wait for a table—especially at the 5 star dives.

The Wealth Effect Shifts Into Reverse

Yippee!! We're rich.

That's what so many believed as they looked around their homes and saw nothing but dollar signs. Beverly Hills here we come.

But for a large portion of the market, those big gains turned out to be pretty short lived. And when the price of their homes turned suddenly south, they woke up worse off then when they started.

But I guess it was fun while it lasted. Granite countertops, Hummers, trips to Mexico, and your own cement pond out back.

Boy those were the days.

From the San Diego Union-Tribune by David Hasemyer entitled: Economy forcing many to let go of luxury toys

"With paperwork in hand, Ashley Sparks set off in search of his newest target - a 2005 Winnebago motor home.

Sparks, an adjuster for ABA Recovery Service, found the vehicle on a well-manicured street in Point Loma, surrounded by homes nearing the million-dollar mark.

This was an easy one. The owner willingly handed over the keys, and Sparks' partner drove off in the latest luxury item repossessed by the Grantville company.

ABA owner Marcelle Egley-Sparks said that in the past year, high-end repossessions have swelled from about 15 percent of the 350 items taken by her company each month to about 50 percent.

"People are finding themselves overextended now that the economy is failing," Egley-Sparks said.

Egley-Sparks' adjusters have hooked up and hauled away opulent motor homes worth $800,000 and powerboats with price tags of $300,000. They've picked up travel trailers, dirt bikes, all-terrain vehicles and the trailers used to carry them.

Never in her 28 years in the repossession business has Egley-Sparks seen so many discretionary luxuries being lost to hard times. And it's happening all across the country, economists and industry analysts say.

Automobile repossession has soared 20 percent this year over last year, when nearly 1.7 million vehicles were taken back by lenders, said Tom Kontos, executive vice president for Adesa, a company that sells repossessed automobiles at outlets across the country, including one in Otay Mesa.

The super-wealthy are more easily buffered from the economic decline, but it's the worst of times for middle-and upper-middle-class Americans who splurged on toys in recent years, said David Jones, president of the Association of Independent Consumer Credit Counseling Agencies based in Fairfax, Va.

"It's happening in numbers never seen before," said Jones, who estimates that 2.25 million Americans sought debt consolidation in the past year, a 20 percent increase over the year before.

Banks, credit unions and other lenders try hard to help people out, rewriting loans or granting extensions, because they'd rather not take the things back, Jones said."

At least the repo-man is still hiring.

By the way, here's a chart for Winnebago Industries Inc. (NYSE:WGO). The company's third quarter profit skidded 73 percent as high gas prices, tighter credit and a soft economy pushed motor homes sales lower industrywide.

Buffett Moves the Markets

The dollar is up.

The Dow is up.

Oil is down.

And it's all thanks to an interview Warren Buffett gave this morning to CNBC. The oracle is suddenly more postive on the greenback.

From Reuters by Jonathan Stempel entitled: Buffett sees economy weak until 2009

"Warren Buffett said the economy is still in a recession and unlikely to improve before 2009 but that stocks appear better valued than a year ago.

The billionaire investor also said there is a "reasonable chance" shareholders of Fannie Mae and Freddie Mac may be wiped out in any government bailout of the mortgage financiers.

Speaking on Friday on CNBC television, Buffett said some housing-related businesses in his Berkshire Hathaway Inc conglomerate are struggling as the economy works off past excess in making credit available.

"You always find out who's been swimming naked when the tide goes out. We found out that Wall Street has been kind of a nudist beach," said Buffett, who in March was called the world's richest person by Forbes magazine.

He also said Federal Reserve Chairman Ben Bernanke has no "magic wand" to boost an economy facing weak growth prospects, mounting inflation and deteriorating credit. "In my judgment it won't be any better five months from now," he said.

Buffett nevertheless said U.S. stocks are broadly "more attractive" than a year ago. He also said Berkshire has completely unwound a once $21 billion bet against the U.S. dollar, helping boost the greenback in Friday morning trade."

Meanwhile, Ben Bernanke gave a speech of his own today in Jackson Hole, Wyoming.

Here's what he had to say:

"The financial storm that reached gale force some weeks before our last meeting here in Jackson Hole has not yet subsided, and its effects on the broader economy are becoming apparent in the form of softening economic activity and rising unemployment. Add to this mix a jump in inflation ... and the result has been one of the most challenging economic and policy environments in memory."

So who is right here? Well in a sense they both are.

Either way, today's market action seems to be a little overdone. The volume just isn't there.

Bear Market Rallies

Make no mistake about it, a bull market is a lot more fun than a bear market. After all, in a true bear market the bulls take it horribly on the chin.

But that doesn't mean that a bear market can't provide its own share of excitement—even for the bulls. They call them bear market rallies, and they are usually enough to bring all of the bottom callers back out of hiding again.

The most recent rally is the latest example of what I'm talking about.

The Dow bounced 11.2% of its July 15 lows and bulls could barely contain themselves. In fact, with every 300 point rally they were convinced that the train was about to leave the station.

But what most of them either don't know or won't tell you is this: 300 point rallies in a bull market just don't happen.

In fact, in the bull market from October 2002 to October 2007 the market never rallied 300 points in a single day. Not once.

Meanwhile, those same 300 point rallies have happened 6 times in the current bear cycle and occurred 12 times in the last one. So much for the train that guys like Jim Cramer keep talking about.

Bear Market Rallies Meet Reality

But statistics aside, many investors still wonder what the real deal was behind it all. Was the latest market move to 12000 again just another head fake in a deeper bear market? Or was it something else?

To help answer that question we are going to play game I used to love as a kid. It's called connect the dots.

Of course, the picture we are dealing with is a bit fuzzy, but that's the way game is played. That is until we begin to connect those dots one by one. The picture gets more clear.

It begins where it all started—-in housing. And judging from the most recent data the bottom in the housing market is nowhere in sight.

Here is the latest:

· U.S. Foreclosures Rise 55%, Bank Seizures Reach High: "Banks repossessed almost three times as many U.S. homes in July as a year earlier and the number of properties at risk of foreclosure jumped 55 percent as falling prices made it harder to sell or refinance. Bank seizures rose 184 percent to 77,295, the steepest increase since reporting began in January 2005."

· U.S. Home Sales Fall to 10-Year Low as Prices Tumble: "Existing U.S. home sales fell to a 10-year low in the second quarter and the median price for a single-family house dropped 7.6 percent as the real estate recession deepened. The median tumbled to $206,500 from $223,500 a year earlier, the Chicago-based National Association of Realtors said today."

The Bottom Line: As long as housing remains in a free fall - and it will - there is no bottom to the bigger crisis. It's simple really - the banks can't possibly bottom until the housing market does. That's because every leg down in housing causes greater losses for the financials, which lead to further write-downs, dividend cuts, and ultimately, in some cases, insolvency.

But that's just the first set of dots in this picture so you need to read on:

· Banks' Subprime Losses Top $500 Billion on Writedowns: "Banks' losses from the U.S. subprime crisis and the ensuing credit crunch crossed the $500 billion mark as write-down's spread to more asset types. The International Monetary Fund in an April report estimated banks' losses at $510 billion, about half its forecast of $1 trillion for all companies. Predictions have crept up since then, with New York University economist Nouriel Roubini predicting losses to reach $2 trillion."

· Large U.S. Banks May Fail Amid Recession, Rogoff Says: "Credit market turmoil has driven the U.S. into a recession and may topple some of the nation's biggest banks, said Kenneth Rogoff, former chief economist at the International Monetary Fund. ``The worst is yet to come in the U.S.,'' Rogoff, a Harvard University professor of economics, said in an interview in Singapore today. ``The financial sector needs to shrink; I don't think simply having a couple of medium-sized banks and a couple of small banks going under is going to do the job.''

The Bottom Line: As banks crumble beneath the weight of all those loans gone horribly wrong, they will face a point of absolute crisis. In fact, somewhere out there today there is a whale or two struggling to stay afloat. Its business model is wrecked and it is loaded down with more debt than it can swallow. When one of these washes up on the beach, it is going to take the market down with it.

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The Next Dot is Inflation...It's Getting Worse.

Bracing for Inflation : "The relative price stability of the past 15 years is giving way to worsening inflation, despite the recent softening of oil prices. The Consumer Price Index for all items shows the inflation rate averaged 2.6% a year from 1992 through 2007 but has doubled since January, reaching an annual rate of 5.6% in July (BusinessWeek.com, 8/14/08). By next year, the monthly figure could hit double digits, and the inflation rate for 2009 overall could triple 2007's 2.85%."

U.S. Producer Prices Surge: "Prices paid to U.S. producers rose twice as much as economists had forecast in July, reflecting the jump in energy and commodity costs that has since started to wane. Producers paid 9.8 percent more for goods from July 2007, the biggest year-over-year gain since June 1981, compared with a 9.2 percent gain in the 12 months ended in June. Excluding food and energy, the increase was 3.5 percent from a year earlier, its biggest jump since 1991, compared with a 3 percent gain in the prior month."

The Bottom Line: When the Fed rushed in to save the banks with big interest rates cuts (3.25% in 12 months) and bailouts, it set off bout of inflation that amounted to the final straw for the economy. The dollar dropped, and prices went into another universe. And while the ultimate end game is likely deflation, for now it is skyrocketing prices that have to be dealt with. That's helping to stall the economy.

· U.S. Economy: Jobless Rate Rises to Four-Year High: "The U.S. unemployment rate rose to the highest level in more than four years as employers cut jobs again in July, increasing the threat of a deeper economic slowdown. The jobless rate rose to 5.7 percent, from 5.5 percent the prior month. As recently as April, it was 5 percent."

· GDP fell in Q4 2007, first drop since 2001: "The U.S. economy shrank during the closing months of 2007 for the first time in six years, the Commerce Department confirmed on Thursday, hurt by the steepest slump in housing since 1981. The department sharply revised its estimate for fourth-quarter performance to show gross domestic product, or GDP, contracted 0.2 percent — rather than growing 0.6 percent as it previously reported. It was the first three-month period in which GDP shrank since during the last official recession when growth contracted by 1.4 percent in the third quarter of 2001."

The Bottom Line: A combination of higher prices, rising unemployment, and a recession have put the American consumer on the ropes. And since consumer spending accounts for 72% of U.S. GDP, the economy is about to go the mat.

Unfortunately, when you add it all up it has created a negative feedback loop right back to where it all began... housing. That makes for further down side as weakening economy and job losses drag housing down the next leg. In short it's a vicious cycle.

The next set of dots is a consumer-led recession, the first since 1991. That's the last leg of the game and it promises to be the most difficult.

Of course, there are many other dots out there but at this point the picture is crystal clear. We are in a secular bear market. Rallies within them are to be expected.

But don't tell that to the perma-bulls they're busy trying to catch trains to nowhere.

In the meantime, it is a trader's market all the way.

Your riding-the-waves analyst,

Steve Christ

Investment Director, The Wealth Advisory

PS. Making money in a bear market is tough, but it can be done. Since the first of the year The Wealth Advisory is 11-5 in its closed positions with a cumulative gain of 290% vs losses of only 55%. That is a net gain of 235%.

To learn more about The Wealth Advisory click here.

By the way: An alert old sailor was quick to point out the errors of my way last week when I wrote that John McCain finished at the bottom of his class. That was a bit of an overstatement. McCain actually finished 894 out of 899 midshipmen that year. I stand corrected, sir. Thank you for your service. To learn more about Sen. McCain's days in Annapolis click here

More Waves For Freddie and Fannie

It has been a tough week for the mortgage business.

One the one hand mortgage applications fell to an 8 year low, while on the other Freddie and Fannie continue to free fall.

Meanwhile, the waves just continue to build.

From Mortgage News Daily entitled: Expect Two More "Waves" of U.S. Foreclosures Economist Warns

"While the U.S is currently in the midst of the largest bout of home foreclosures in at least 30 years, at least one economist says two more 'waves' are likely on the way.

Patrick Newport, a housing economist at Global Insight, said the next round of foreclosures could come over the next several months as a result of continued job losses in the U.S.

In addition to the nearly 660,000 U.S. jobs lost since December, Global Insight is currently forecasting another 600,000 jobs lost over the rest of 2008 and into the first quarter of 2009.

This second wave of foreclosures, however, isn't expected to be quite as significant as the first and current round, which has mostly been related to bad loans, Newport said.

According to the Mortgage Bankers Association, foreclosures in the first quarter of 2008 hit an all-time high of 2.47% - the largest percentage of loans in foreclosure since records began in 1978.

"It won't be as big as the wave we're riding right now, but it will just add to the problem," he said.

The third wave, expected to hit in 2010 and 2011, will be associated with interest-only loans made between 2005 and 2007, Newport said. In those loans, borrowers only pay the interest for the first five to seven years before they start paying off the principal, at which time their monthly payments increase.

Newport said those loans were one of the innovations that lenders came up with to make it easier for people to borrow, but noted they would mostly make sense for younger homebuyers who expect their incomes to rise in the future.

"I think in most cases they were just given to people who shouldn't have gotten loans," he said. "A lot of these homes are going to be deeply underwater when the monthly mortgage payment shoots up (and) there will be a very strong incentive for people to just walk away from their homes."

These will be the waves that swamp the boat completely.

Target, Saks, and Home Depot Wobble

Here's more evidence of a consumer led recession as the housing ATM shuts down and wallets across the country slam shut.

The Christmas season is starting to look like one that only a scrooge could love.

From the Financial Times by Johnathan Birchall entitled: Leading stores suffer from US slowdown:

"The breadth of the slowdown in discretionary US spending was underlined on Tuesday by quarterly results from Home Depot, the home improvement store, Target, the mass discounter, and Saks, the luxury fashion retailer.

Saks saw its shares fall over 8 per cent to $10.29 at the New York close after it reported a $31.7m loss on softening demand for its luxury clothing, shoes and

Saks also predicted flat or falling comparable sales for the second half of the year.

Over the first six months of the year Saks comparable store sales have increased just 2.7 per cent, compared to the high-single digit growth it saw before the economic slowdown started to hit higher-end consumers at the end of last year.

Steve Sadove, chief executive, said that the retailer had "experienced a softening across nearly all geographies and merchandise categories" during the quarter.

At the other end of the retail spectrum, Home Depot, the world's largest home improvement store, reported a 5.4 per cent fall in total sales, and a 7.9 per cent fall in comparable stores, as sales of products from paint to electrical goods fell.

Comparable sales of stores in California and Florida - the areas in the US most hit by the housing slump - fell by more than 10 per cent, mirroring results at Home Depot's rival, Lowe's.

Carol Tome, Home Depot's chief financial officer, said that, while statistics suggested that the decline in home improvement spending should be bottoming out, other factors such as the uncertain mortgage market and rising costs for consumers were continuing to weigh on the sector.

"We should be getting towards the bottom, but there's all this other uncertainty that cause us to remain cautious not just for the back half of 2008, but also into 2009," she said.

Target, the mass discounter which aims at a more prosperous customer than its market rival, Wal-Mart, also reported a fall in profits and sales, with net earnings down 8 per cent to $634m.

While new store openings pushed total revenues to $15bn, sales at stores open at least a year fell 0.4 per cent."

So much for those stimulus checks. Of course, can you imagine how much worse these numbers might have been without all of that "free money"?

Either way,three months from now we will really know just how bad the story is in retail—just in time for the holidays.

Until then, go short the Consumer Discretionary SPDR (XLY:AMEX) or even long the Consumer Staples Select Sector SPDR (XLP:AMEX). After all, cutting back has its limits.

By the way, here's a chart of the XLY, it's not one for the squeamish.

How Uncle Sam Fiddles with the Figures

Fuzzy Numbers. That according to Kevin Phillips is what the U.S. government is all about when it comes to official economic data.

In fact I wrote about Phillips in a piece published in May entitled: Uncle Sam's Phony Economic Numbers.

In a Harper's magazine story, Phillips wrote:

"Ever since the 1960s, Washington has gulled its citizens and creditors by debasing official statistics, the vital instruments with which the vigor and muscle of the American economy are measured.

The effect has been to create a false sense of economic achievement and rectitude, allowing us to maintain artificially low interest rates, massive government borrowing, and a dangerous reliance on mortgage and financial debt even as real economic growth has been slower than claimed.

The truth, though it would not exactly set Americans free, would at least open a window to wider economic and political understanding. Readers should ask themselves how much angrier the electorate might be if the media, over the past five years, had been citing 8 percent unemployment (instead of 5 percent), 5 percent inflation (instead of 2 percent), and average annual growth in the 1 percent range (instead of the 3-4 percent range).

The real numbers, to most economically minded Americans, would be a face full of cold water. Based on the criteria in place a quarter century ago, today's U.S. unemployment rate is somewhere between 9 percent and 12 percent; the inflation rate is as high as 7 or even 10 percent; economic growth since the recession of 2001 has been mediocre, despite a huge surge in the wealth and incomes of the superrich, and we are falling back into recession."

Since then I've come across, a continuation on this theme via a post on The Big Picture.

It's a video from Chris Martenson, and it explains how the government massages the numbers in ways that mere print never can.

So if you want to know how it all really works, I recommend you click the link below:

http://www.chrismartenson.com/fuzzy_numbers

Martenson's entire course, by the way, is well worth your time.

The cleat of reality is out there folks-just don't expect to get it from the government.

Ponder that while you consider the recently released inflation data. It was hot again.

From AP by Martin Crutsinger entitled: Consumer prices rise at double the expected rate

"Consumer prices shot up in July at twice the expected rate, pushed higher by surging energy and food costs. The latest surge left inflation running at the fastest pace in 17 years.

The Labor Department reported Thursday that consumer prices rose by 0.8 percent last month, twice the 0.4 percent gain that economists had been expecting.

It marked the third straight month of oversized inflation increases following jumps of 0.6 percent in May and 1.1 percent in June. And it leaves inflation rising by 5.6 percent over the past year, the biggest 12-month gain since January 1991.

Core inflation, which excludes volatile food and energy costs, rose 0.3 percent in July, slightly higher than the 0.2 percent increase that economists had expected. For the past 12 months, core inflation has risen by 2.5 percent, the highest 12-month change since February.

The battering of consumers continues as prices are rising for just about everything," said Joel Naroff, chief economist at Naroff Economic Advisors. "If you think things are going to get a lot better with the drop in petroleum prices, think again. The increases (in July) were broadbased."

The core inflation figure was driven higher by a big 1.2 percent jump in clothing costs, the biggest increase in this area since August 1998. Airline ticket prices, which have been surging because of higher fuel costs, jumped another 1.3 percent in July.

The big rise in inflation left consumers even more squeezed. The Labor Department said that average weekly earnings, after adjusting for inflation, fell by 3.1 percent in July compared to a year ago, the biggest year-over-year decline since November 1990."

The truth is out there....

Greenspan Sees a Bottom, Foreclosures Soar

Alan, Alan, Alan.... you never learn.

That's what I thought this morning when I read Alan Greenspan has called out another prospective bottom in the housing market.

"Home prices in the U.S. are likely to start to stabilize or touch bottom sometime in the first half of 2009," he told the Wall Street Journal.

And while it wasn't as awful as his Oct. 2006 call when he said the ``worst may well be over'' for the U.S. housing industry, it was pretty close. In fact, I'm a going to go on record and say that 2009 will make 2008 look very attractive by comparison.

So hold on to your glasses Al, the real "Age of Turbulence" is far from over. And try as you might, you will never be able to rewrite the history on this one.

Meanwhile, the bubble you created continues to collapse.

From RealtyTrac Staff entitled: Foreclosure Activity Increases 8% in July

"RealtyTrac, the leading online marketplace for foreclosure properties, today released its July 2008 U.S. Foreclosure Market Report^TM, which shows foreclosure filings - default notices, auction sale notices and bank repossessions - were reported on 272,171 U.S. properties during the month, an 8 percent increase from the previous month and a 55 percent increase from July 2007. The report also shows one in every 464 U.S. households received a foreclosure filing during the month.

"Bank repossessions, or REOs, continued to be the fastest growing segment of foreclosure activity in July, posting a 184 percent year-over-year increase - compared to a 53 percent year-over-year increase in default notices and an 11 percent year-over-year increase in auction notices," said James J. Saccacio, chief executive officer of RealtyTrac. "The sharp rise in REOs, combined with slow sales, has resulted in a bloated inventory of bank-owned properties for sale."

The Cape Coral-Fort Myers, Fla., metro area registered the highest foreclosure rate among the 230 metro areas tracked in the July report. One in every 64 households in the metro area received a foreclosure filing during the month - more than seven times the national average.

Three California cities followed in the metro foreclosure rate rankings: Merced was at No. 2 with one in every 73 households receiving a foreclosure filing; and Stockton and Modesto were in a virtual tie, each with one in every 82 households receiving a foreclosure filing.

With one in every 85 households receiving a foreclosure filing, the Las Vegas metro area's foreclosure rate ranked No. 5, followed by three more California metros: Riverside-San Bernardino, Bakersfield and Vallejo-Fairfield.

Fort Lauderdale, Fla., documented the ninth highest metro foreclosure rate, and the foreclosure rate in Phoenix took the No. 10 spot."

So where are you in the foreclosure morass? Here's the current foreclosure map from RealtyTrac. It's getting redder every month.

By the way, according to a new report from the National Association of Realtors (NAR), the nationwide median existing single family home price plunged 7.6% to $206,500 in the second quarter, down from $223,500 in the same period of 2007.

You missed again Alan. Now go away.

Investing in Uranium

With election season now kicking into a higher gear, the real issue of 2008 has suddenly grabbed the center stage. From Maine to California, and everywhere in between "it's the energy crisis-stupid" and it's changing the political landscape.

But that is what happens when energy prices skyrocket, wallets slam shut and our economy gets crippled in the process. Peak oil has its price and this is one cup that won't be passed.

Of course, the problem is that while our leaders failed to lead, the peak oil train just kept coming on down the tracks. In four short years, oil has gone from $40 to $140.

So people worry.... people get angry.... and suddenly people demand answers. And who can blame them?

That has made for some strange bedfellows as the political classes do what they do best - pander for votes. So now almost everyone but Nancy Pelosi wants to drill, drill, drill.

But even Nancy has her reasons. She is "trying to save the planet" you know—pretty heady stuff for a kid from Baltimore. (Full Disclosure: My Dad says he used to date Nancy back in the day. Of course, if he had married her instead of my mom I wouldn't be poking fun at her today. Cosmic huh? I bet she's sorry now.)

Meanwhile sensible people have agreed that while there is certainly no one solution to the energy problem, everything that we do have needs to be thrown at it. That includes a much bigger role for nuclear energy in the years to come and the power of enriched uranium.

Before I get into the investing in uranium side of things, let's delve a little deeper into the debate...

McCain Powers up with Nuclear Energy

John McCain, of course, is nuclear power's biggest champion this fall. He's the best thing to happen to the industry since E=MC2.

During a campaign stop at a nuclear power plant in Michigan on Tuesday, McCain said, "If I am elected president, I will set this nation on a course to building 45 new reactors by the year 2030, with the ultimate goal of 100 new plants to power the homes and factories and cities of America."

That is pretty heady stuff for a guy that finished last in his class at the Naval Academy. Even still, at least McCain was on target. Nuclear power is one of the ways forward.

Even Barrack Obama agrees saying recently, "I think nuclear power should be part of the mix when it comes to energy."

That is a stunning reversal for an industry that had to fight tooth and nail just to survive over the last 20 years. But like I said earlier, people want real answers this time.

Enriched Uranium: America's "Other" Energy Crisis

However, one of the biggest misconceptions about nuclear power at the moment is this: It will end our energy dependence foreigners. The truth is it will not. That's the dirty little secret most people don't know about nuclear power in the United States these days.

You see, while everyone knows we have become virtual slaves to foreign crude, only a few know we also import 92% of the enriched uranium necessary to run our nuclear plants. That is even worse than our predicament with oil where 70% of our supply is now imported.

That's why I call enriched uranium America's "other" energy crisis. Because if nothing else changes we could conceivably exchange one set of shackles for another if we are aren't careful.

And it will likely only get worse when a 20 year program with the Russians called Megatons to Megawatts runs its course in 2013 since almost 43% of what we use comes from dismantled Soviet warheads. After that supply runs dry, it is not inconceivable we could be completely on our own, unable to meet our own needs.

That's a current danger that we can ill-afford and Washington knows it. Over time, those potential shortages will only be exacerbated as more and more nuclear plants here and abroad begin to come online and demand skyrockets.

According to the World Nuclear Association, there are 439 reactors operating globally, with 36 under construction. Moreover, there are also 93 new reactors on the drawing board, with another 219 proposed.

Investing in Uranium: Enriched Uranium Demand Skyrockets

And should all of the planned and proposed reactors be built, the world total will be more than 787, or almost a 79% increase over the current level—-the vast majority of which will be fueled with—you guessed it— enriched uranium.

So at some point in the future, enriched uranium could be no different than oil—sold off in a tight market to the highest bidder. Sound familiar?

Meanwhile, the price of uranium is headed higher since falling off its $136/lb. peak in 2007. Its current spot price is roughly $64/lb, which is a slight recovery from the $59/lb recorded only weeks earlier. In fact, Goldman Sachs analysts now see uranium rising to over $90/lb in the near future. For reference, uranium went for as little as $10/lb. only 6 years ago.

Higher future demand will only push the price of the commodity even higher.

Unfortunately, nuclear energy is just another area where we have been caught footed again. That's because while America allowed its nuclear industry to wither on the vine out of fear, the rest of the world moved on.

While we dithered, everyone else kept building...and building...and building. The good news though is that the process of rebuilding our nuclear industry began with the passage of the Energy Policy Act of 2005.

In it, the seeds of the industry's rebirth were sown. Specifically, the 2005 act provided the nuclear industry the following:

$3 billion in research subsidies
Over $3 billion in construction subsidies for new nuclear power plants

Nearly $6 billion in operating tax credits

Over $1 billion in subsidies to decommission old plants

A 20-year extension of liability caps for accidents at nuclear plants

Federal loan guarantees for the construction of new power plants

However, as important as the legislation has been to the industry, it is just the start. After all, rebuilding an entire domestic industry takes time.

Until then, Americas "other' energy crisis is one that we can't afford to ignore. Our leaders need to lead.

By the way, if you think McCain's talk of 100 new reactors is a bit unrealistic consider this. There is company in Arizona that is ramping up to produce 4,000 smaller sized reactors that are so small they can be shipped by rail and set up on site. And they are not the only ones headed in that direction. But that is a topic for next week.

Your keeping-an-eye-on the-future analyst,

Steve Christ

Investment Director, The Wealth Advisory

PS. There is one company that is working overtime to head off this shortage of domestically produced enriched uranium before it becomes a crisis. In fact, you could almost say that it's a monopoly at this point. The best part is it's heavily undervalued. To learn more about this company click here

The Credit Crisis Enters the 3rd Inning

I've never been a big fan of the New York Yankees, but if there is one Bronx bomber you have got to love it's Yogi Berra. After all, Berra could do it all in his day and and he certainly had a way with words.

In fact, if he were asked about it today I'm sure he would have something funny to say about the absurdity our current economic mess.

But since he's not taking my calls, I thought I would put a few of his famous words in the mouths of some other famous people. I hope he doesn't mind.

Here they are:

Something Ben Bernanke would say:

"It's tough making predictions, especially about the future"

Something Toll Brothers CEO Bob Toll would say:

"If they don't want to come, you can't stop them"

Something General Motors CEO Rick Wagoner would say:

"If you don't know where you're going, you'll wind up somewhere else"

Something former Bear Stearns CEO Jimmy Cayne would say:

"The future ain't what it used to be"

Something short seller William Ackman would say:

"You can observe a lot by watching"

Something Bank of America CEO Ken Lewis will say to his shareholders one day:

"We make too many wrong mistakes"

A conversation between Richard W. Fisher and Fed Chief Ben Bernanke:

Phil Rizzuto/Fisher: "I think we're lost."

Yogi/Bernanke: "Yeah, but we're making great time."

Something Economist Nouriel Roubini would say:

"It ain't over til it's over."

Of course, there is just one more:

"This is like deja vu all over again."

That's is what the rest of us say every three months when banks release their earnings.

By the way, according to an article in Bloomberg bank losses have now passed the $500 billion mark:

"Banks' losses from the U.S. subprime crisis and the ensuing credit crunch crossed the $500 billion mark as writedowns spread to more asset types.

The writedowns and credit losses at more than 100 of the world's biggest banks and securities firms rose after UBS AG reported second-quarter earnings today, which included $6 billion of charges on subprime-related assets.

The International Monetary Fund in an April report estimated banks' losses at $510 billion, about half its forecast of $1 trillion for all companies. Predictions have crept up since then, with New York University economist Nouriel Roubini predicting losses to reach $2 trillion.

``It just keeps spreading from one asset to another, so it's hard to know when these writedowns will stop,'' said Makeem Asif, an analyst at KBC Financial Products in London. ‘The U.S. economy needs to stabilize first. But even then, Europe could lag and recover later. There's still a lot more downside.'"

I guess that makes it about the 3rd inning now. Let's hope it doesn't go extra innings.

Paulson's Freddie and Fannie Hangover

In the annals of "too big to fail", there have only been two companies in my mind that had to be bailed out.

They are Freddie and Fannie, even though longer term they should be broken up into several much smaller pieces.

However, letting them go under in the blink of an eye would simply be unthinkable.

Without them, the housing market would go into a total deep freeze—-10 times worse than it is right now.

After all, Freddie and Fannie are the mortgage business these days with over 70% of the market. Besides if we stiff China on the $400 billion they have wrapped up in these two companies, they might cut us off completely. Oh my...now that would be unthinkable.

But despite the government's now explicit backing of these two miscreants, neither one of them is even close to being out of the woods yet—not by a long shot.

So when I heard Hank Paulson tell Tom Brokaw this weekend that ""We have no plans to insert money into either of those two institutions", I had to laugh. It's preposterous on the face of it.

That's because what's going on at Freddie and Fannie is just like the rest of mortgage mess: It is a slow-motion train wreck that can't be stopped. And while Freddie and Fannie might not need any "money injections" today, at some point they surely will.

Here's why.

What first started with sub prime has now worked its way fully up the value chain. Alt-A is toast and now even "prime" mortgages are defaulting at an alarming rate.

That means that the worst is yet to come for Freddie and Fannie and Paulson knows it.

Beacuse when "primes" begin to default in unexpected numbers, the results will push these two companies even deeper into the pit, since these will be new "unexpected" losses. The numbers of which will be staggering.

Unfortunately, that is exactly what is happening.

From CNNMoney by Les Christie entitled: The next wave of mortgage defaults

"Prime mortgages are starting to default at disturbingly high rates - a development that threatens to slow any potential housing recovery.

The delinquency rate for prime mortgages worth less than $417,000 was 2.44% in May, compared with 1.38% a year earlier, according to LoanPerformance, a unit of First American CoreLogic that compiles and analyzes residential mortgage statistics.

Delinquencies jumped even more for prime loans of more than $417,000, so-called jumbo loans. They rose to 4.03% of outstanding loans in May, compared with 1.11% a year earlier.

And prime loans issued in 2007 are performing the worst of all, failing at a rate nearly triple that of prime loans issued in 2006, according to LoanPerformance.

"The extent of how bad these loans are doing is very troubling," said Pat Newport, real estate economist with Global Insight, a forecasting firm.

Washington Mutual CEO Kerry Killinger said last month that the bank's prime loan delinquencies are on the rise. As of June 30, 2.19% of the prime loans issued by WaMu in 2007 were already delinquent, compared with 1.40% of prime loans issued in 2005.

Also last month, JP Morgan Chase CEO Jaime Dimon called prime mortgage performance "terrible" and suggested that losses connected to prime may triple. For the second quarter, the bank reported net charges of $104 million for prime rate delinquencies, more than double the $50 million recorded three months earlier.

Prime loans are just the latest class of mortgages to suffer a spike in failure rates. The first lot to go bad was, of course, subprime mortgages, whose problems set the housing meltdown in motion. Next were the Alt-A loans, a class between prime and subprime loans that doesn't require strict documentation of a borrower's assets or income.

Now, as prime loans are added to the mix, the resulting foreclosures could haunt the housing market for a long time, according to Global Insight's Patrick Newport.

"Home prices will drop for quite a while - maybe several years," he said."

Paulson, by the way, also ruled out the idea he was going to stick around for another tour of duty.

He also told Brokaw, "I am very focused on getting everything done I can get done between now and January 19^th. I look forward to doing other things next year."

Stimulus Fails to Excite

Oil is down.

The dollar is up.

The stock market is rallying.

So what's not to like?

Well, for one there is the consumer. They have one foot in the grave and the other on a banana peel.

Of course, it wouldn't be that big of deal if consumer spending didn't make up over 70% of U.S. GDP, but it does.

That is going to make for one rough fall in retail—-especially now that those stimulus checks have already been spent.

Here's the skinny in that regard from MSNBC. The gov't crack hand out has run its course.

It's in a story by John W. Schoen entitled: Stimulus spent, retailers face tough rest of the year

"With the bulk of some $100 billion in tax rebates now deposited in American consumers' bank accounts, the hoped-for boost in spending has proved disappointing for the nation's retailers. As chain stores reported July sales figures on Thursday, there are signs cash-strapped households may cut back even further in the second half of the year.

When the economic stimulus package was enacted in February, analysts debated just how much of the money would translate into new spending. Now that most of the money has been distributed, it appears that much of it went to pay down credit card bills or beef up savings accounts.

"We expected that as the checks fade, so would sales," said Goldman Sachs retail analyst Adrianne Shapira. "(Consumers are) filling up their SUVs, their home equity values are plummeting, and they're feeling a lot of pressures."

Those pressures may explain why the $100 billion worth of tax rebate checks didn't give retailers a bigger lift in July. Some 28 percent of consumers surveyed in July by market researcher TNS Retail Forward said they used the money to pay off credit cards; 27 percent said they used it to pay for everyday expenses like groceries and gasoline, and 20 percent said they put the check into a savings account. Only 11 percent said they used the rebate for discretionary purchases like a new TV or a vacation.

Now, with those rebate checks spent, retailers are warily looking toward sluggish sales through the rest of the year. Back-to-school shopping is already off to a slow start, especially for new clothes.

On Wednesday, MasterCard reported that sales of clothing and shoes fell in July, as consumers stretched to keep up with rising prices day-to-day staples like food and gasoline.

"We're continuing to see a divergence here in where the retail dollars are flowing," said Michael McNamara, an executive with SpendingPulse, MasterCard's retail data service. "They really seem to be flowing into the nondiscretionary areas like drugstores, food and gasoline, and it's really coming at the expense of some of these retailers such as apparel and electronics and appliances."

That doesn't bode well for the holiday shopping season, when many retailers look to make the bulk of their sales and profits for the year. With wages rising more slowly than inflation, consumers will have an even harder time making ends meet after their rebate checks have been spent.

"We think that when the stimulus checks end, which is this quarter, we're going to hit an air pocket and disposable income will take a negative hit relative to what we saw in the second quarter," said Brian Bethune, an economist with Global Insight."

So much for the escape from reality.

Now its time to wake up and smell the coffee.

The Lenders Sober Up

Here's is a great story about what is going on in the "real world" of mortgage banking these days.

The lenders have sobered up and put away the booze.

From the USA Today by Anna Bahney entitled: Mortgage rules changes skewer some sales

"The deal was to close on June 27.

Drake Paul, a pediatrician, entered into a contract at the end of May to sell his two-bedroom, one-bath newly renovated house in Sparks, Nev., for $170,000. The buyer had lender approval, the appraisal was done, and the inspection checked out.

Then the lender called: Mortgage requirements had tightened, and the buyer no longer qualified for the 5% down payment for which he was approved. Only 48 hours before he was to sign the papers and get the keys, the buyer learned he would need to put down 20%, jacking up the initial payment from $8,500 to $34,000.

"Who can afford that?" asks Paul, 37, whose property is now back on the market after the deal collapsed. "A person that can afford a $170,000 house does not have $34,000 in cash. It just doesn't work that way."

Both buyers and sellers, such as Paul, are being caught off guard by a rippling wave of mortgage changes. Lenders are responding to the crisis in their industry by suspending mortgage products, raising required down payments and imposing a premium on loans in regions they deem to be "declining" markets. Even when they announce the changes, the message sometimes doesn't get to the mortgage broker until nearly the last minute."

"The underwriting has really tightened up," says David Olson of Wholesale Access Mortgage Research and Consulting. "Before, if you could fog a mirror, you got a loan. Now, that's not the case."

In Olson's estimation, at the peak of the housing boom, roughly 20% of the mortgage market was subprime, and nearly 20% was "Alt-A loans" - or "A-minus" loans, typically for those with good credit but with high debt-to-loan ratios or little or no proof of income. Both categories are now nearly extinct. That means about 40% of the residential mortgage market has all but disappeared.

"I don't have the hours in the day to read all the changes that come in every day," Olson says.

"Buyers come in with confidence, and once they have talked with a lending practitioner, it's like they've been hit over the head with a ton of bricks," says Dean Moss, an agent at Keller Williams Fox and Associates Realty in Chicago.

The result? Some buyers who planned to take the plunge and buy are heading back to the sidelines.

Moss says that an increased down payment on a typical $400,000 house in Chicago gives buyers significant pause: "Now, you have to put down $60,000. Buyers are like, 'I was scraping to get the $40,000. How am I going to come up with another $20,000?' "

"In my opinion," Moss adds, "the only people who have a shot in this market are those with no house to sell, who have a good income - maybe two professionals - and have a good down payment. They can name their own ticket. That's a small percentage."

So why am I so negaive on housing? It's simple.

People that can't borrow money don't buy homes.

This is one party that won't be repeated.