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We have all heard the term witch hunt before. During the 1950s, the House Committee for Un-American Activities was nothing less than a platform to roast individuals and organizations. While the Committee (with the help of J. Edgar Hoover) was able to produce evidence of "Un-American" activity, little to no wrong doing was ever found. Meanwhile, careers were destroyed, friendships lost, and democracy compromised. One of the lingering questions left from the Communist witch hunts was "What constitutes Un-American Activity?" In a time and era where almost anything goes, there is an opportunity to define... or even re-define what the United States stands for...

For instance, on November 18, 2008, we brought the credibility of [[BAC]]'s CEO Ken Lewis into question. While it is the job of many CEOs to hype their company, and serve as the point man for new initiatives, Ken Lewis should be compared to nothing more than a snake oil salesman. Since then, BAC has refused to completely cut its dividend to shareholders. Sure the stock would get beaten up... but mergers with companies like Countrywide and Merrill Lynch come at a price.

More good news for GMAC (GKM). Now that GMAC is more like a bank, the Treasury gave them $6 billion dollars in TARP money. GMAC said that it would use these monies immediately to introduce 0% loans, and loosen lending standards. Management hopes that this move will help [[GM]] reduce its car inventory, and create additional cash to keep it floating.

I am not as optimistic. As we have noted, rates (whether they were for cars, credit cards, homes, or business loans) were never really the problem. When rates were lowered it encouraged more people to buy and refinance, money was cheap to borrow. Now that we have extended too much credit to the wrong borrowers, we are seeing the fallout. GMAC's move may be the initial step. It may temporarily sell cars. The large glut of inventory may move. However, extending more credit could well be a recipe for disaster.

You have to love family movie night. Last night we watched the John Hughes version of Miracle on 34th Street. In the not too distant past, I distinctly remember going into the colossal department stores as a kid, sitting on Santa Claus' lap, getting a picture with Santa and taking a ride down the slide back to mom and dad. Big Cleveland Department stores like May Company, Hallie's, and The Bing Company stood as icons of a thriving 1970s era retail with big train displays, Winter Wonderland villages, and even a few elves.

One scene from the movie which really caught my eye was the flood of people coming in these stores to visit Santa Claus. Cole's had the best Santa Claus, and everybody else was jealous. We went out to see the real Santa Claus the other night. This required a track to Great Northern Mall on the west side of Cleveland. All that I could think of was a 40 minute drive, and another hour wait to see Santa. However, much to my chagrin, we were met with a 10 minute wait. And this guy is supposed to be the best Santa in Cleveland. According to the photographers, business was down approximately 30% from last year. That would suggest that 30% less people found themselves in the mall thus far during Christmas and Hanukkah shopping.

Congress (the Senate to be precise), had made a critical vote about the Big Three Bailout. They voted NO to the bill. They had used the legislative authority authorized by our Founding Fathers in the U.S. Constitution to deny bailout funds to car-makers. Not that this was the final word in the matter. More than likely, the measure would have been picked up by the House of Representatives... revived... revised... and resubmitted to the Senate for another vote. But it was the vote that never was. The Department of Treasury under the approval of the Executive Branch of Government offered up TARP funds to Detroit.

Why all the drama? Good question. It appears that no one ever needed the approval of Congress to begin with. While our Founding Fathers decided that ALL spending measures must originate in the House of Representatives. However, the Executive Branch was once again by-passed the House, the Senate, and for all intensive his own party to extend a helping hand to the car makers.

If the extension of credit has been the driving force behind financial growth in the United States, then another revenue stream should be sought. It is safe to say, that credit card growth will not be a viable option.

According to recent statistics released by the Federal Reserve, revolving debt rose to a staggering level of $969 billion dollars. Non-revolving debt continued to increase to $1.617 trillion dollars. (1) While these numbers demonstrate an up-tick from the previous month, it should be noted that spending increased while unemployment increased as well. August unemployment rose to the national average of 6.1%. (2) With the financial fallout of Lehman (LEH), AIG (AIG), Merrill Lynch (MER), and Bank of American (BAC) still to be felt, we can expect a healthy rise of unemployment claims for the foreseeable future. Of course, there will be additional claims due to the displacement of workers from Hurricane Ike as well.

In many ways, the current financial unraveling should be viewed under the auspices of two Founding Fathers, Alexander Hamilton and Thomas Jefferson.

Thomas Jefferson, an Anti-Federalist viewed big business in general, and financiers in particular as corrupt. He preferred the average man to be a farmer as opposed to a banker. Jefferson feared that big cities and big money would indeed corrupt the morals and values of the American people (as it did throughout history as in Rome).

Friday morning, the Bloomberg ticker noted two stories which caught my attention. One read "Justice Department seeks to curb prosecution of white collar crimes," Which suggests the campaign contributions are going to come to a screeching halt unless the fat cats on Wall Street, and those who benefited from the financial meltdown will not contribute to campaigns unless the heat is taken off of them pretty darn quick!

The other headline read "Banks lobby White House to save Fannie (FNM) and Freddie (FRE) preferred shares." I must say that as irritating as the first headline was, this was the one that really seemed to cry foul! To think that these institutions got their Federal backstop at the tax payer's expense, then are trying to save their arses from the inevitable insolvency and dilution of shares put me, Mr. Social Conservative, on notice. If this comes to pass, it should be classified as a high crime against the American people. I will vote for whoever is the biggest political change agent this time!

I can remember back to high school. The big homecoming football game was always greeted with a pep rally. The band played, cheerleaders cheered, and the football team got pumped for the big game. This helped create a euphoric environment for a team that had a losing record. But at the pep rally, records don't matter. The only game that counted was the one they were going to play that night!

This anecdote really reminds me of the shenanigans at Jackson Hole, WY. Make no doubt, Big Ben is giving his team a pep talk on keeping this economy floating. The team's record is not good. But, the Fed and Treasury have manipulated this game to where it would make the most crooked bookies in the underworld envious.

The term legion refers to an army of over 5,000 soldiers. However, it is appropriate reference to make for the thousands and thousands of people who have written to the National Credit Union, The Federal Reserve Board, and the Office of Thrift Supervision. The legions of activists have noted the Federal government's blind eye toward credit card practices. The Truth in Lending Act has forced credit card companies to make some disclosures, but it has not been as aggressive as some proponents would have it.

Most voters will agree that people should service their debts, however, when it becomes a goal of one institution to enslave another with debt, then it becomes a platform for reform minded politicians. Big business donations be damned! As Americans feel the credit squeeze, there will be more attempts to attack credit card companies with legislation in the upcoming fall elections (1). I am curious whether the attorneys that read this blog see any avenue for class action status against credit card companies.

“Panics do not destroy capital; they merely reveal the extent to which it has been destroyed by its betrayal into hopelessly unproductive works.”  (Mr John Mills, from Credit Cycles and the Origin of Commercial Panics)

The first day of trading once the short-sell ban was lifted gave Wall Street a taste of reality. I am convinced that the naked-short is not the cause of the pressure on this market. But, the FEAR of naked-shorting has definitely put the bear rally crowd on notice. Sure there was additional news like a $3.00 up-tick on a decrease in oil inventories, John Deere (DE) missed earnings, and a second rally day for metals, particularly gold. (I was able to turn my hedge of AngloGold Ashanti Limited (AU) 1/25s short into a 44% profit. - since Friday.)

In psychology, the Theory of Cognitive Dissonance suggests that while people admit the acceptance of one ideal, they often times will gravitate to the opposite. Take Billy the Kid, Jesse James, and John Dillinger for instance. Ask anyone on Wall Street and they would tell you this trio were outlaws. While one expects truth, honesty, and integrity as the foundation for successful business it often turns out to be that greed, theft, and deception win the day. This is part of Wall Street's credibility problem.

Consider the concept of a free market economy. In a recent conference call with Freddie Mac (FRE) to the financial markets, CEO Dick Syron was asked about "the balance between the responsibility to shareholders and its public policy mission." In a bit of a flip attitude Syron reminded all listeners that "I think we — virtually everyone, including our critics, would say that this would be an extremely ugly mortgage market, if you were looking at a mortgage market now that — that didn't have the GSEs."

My first position in Bank of America (BAC) was a 1/30 P on 6/4. Since then, I added a second position of 1/27.50s on 6/12. This week I added a third position of 1/22.50s on 6/24.

Everything I have read, and the credit climate I see, tells me this stock has the potential to drop down into the teens like Citi (C). While Citi has an unbelievable amount of exposure to the consumer lending market, BAC has a similar risk in its extremely heavy credit card portfolio.

It is true that you may fool all of the people some of the time; you can even fool some of the people all of the time; but you can’t fool all of the people all of the time. - Abraham Lincoln

The short-lived rally in financials came to a screeching halt mid-morning Tuesday proved Lincoln right... that same morning pundits on CNBC attempted to jump-start the stock market on Goldman Sachs (GS) earnings, others remarked about the Fed's desire to increase interest rates, yet most of Wall Street sifted through the smoke screen of half-truths and wishful thinking to punish the financials once again!

Yesterday in Cleveland, Randall Kroszner, a member of the Federal Reserve in Washington D.C., noted that three-fourths of all consumers have some type of debt. Kroszner noted that credit is the life-blood of the economy.

Credit Card companies are the center of concern. Simply put, Kroszner believes that credit card companies need additional regulations to police various business practices. Two areas deserve particular scrutiny:

We've Found the Bottom... and continued to dig... 

 I think what keeps some investors awake at night is not just so much the bad news that’s currently priced in to current valuations in some of these stocks, but what may come next... and that seems to be another shoe that has yet to drop. (1)
- John Brady MF Global

Last Week's Market Watch (Five Day Trading Range)

• XLF Financials weekly trading range 24.33 to 25.18 Friday close 24.76
• XLK Technologies 24.32 to 25.42 close 25.35 BOUGHT 1/25s call
• XLP Consumer Staples 28.05 to 28.51 close at 28.49
• XLV Health Care 31.47 to 32.18 close at 32.12
• XLB Materials 43.11 to 44.79 close 44.45
• XLY Consumer Discretionary 31.78 to 32.60 close 32.49 MISSED 1/32s @ 2.15 Put
• XLI Industrial 38.06 to 38.99 close 38.84
• XLU Utilities 40.81 to 41.61 close 41.38
  
• XLE Energy 88.52 to 85.02 close 86.00

This Week:

Market Watch (Five Day Trading Range)

• XLF Financials weekly trading range 24.33 to 25.18 Friday close 24.76
• XLK Technologies 24.32 to 25.42 close 25.35 BOUGHT 1/25s call
• XLP Consumer Staples 28.05 to 28.51 close at 28.49
• XLV Health Care 31.47 to 32.18 close at 32.12
• XLB Materials 43.11 to 44.79 close 44.45
• XLY Consumer Discretionary 31.78 to 32.60 close 32.49 MISSED 1/32s @ 2.15 Put
• XLI Industrial 38.06 to 38.99 close 38.84
• XLU Utilities 40.81 to 41.61 close 41.38
  
• XLE Energy 88.52 to 85.02 close 86.00

A number of the CNBC crew called the top of oil which invariably means that oil still has additional upside potential. The consumer may be taking on water, but evidently is not dead. However. depending on spending habits...for 10-15 % of the population the stimulus checks won't be enough. (2) That is part of the reason XLY should see some additional movement by January.

The Wave has Broken

For banks that rode the credit card wave to riches on the backs of sub-prime borrowers, it is time to find another revenue source. It appears that the consumer may be tapped out.