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Does everyone at CNBC own shares of Visa and Mastercard? You would certainly think so the way they parade those two stocks on multiple shows virtually everyday. Manipulation anyone? You’ve heard the nonsense from Cramer on Mad Money, the Fast Money morons, and a multitude of others. Everyone is terrified of holding financial companies so CNBC continually advertises that Visa and Mastercard have no credit risk. They say that they are just a payment transaction company and the credit risks fall to other banks. Well it may be true that Visa and Mastercard do not carry direct credit risk, but to say there is no risk is foolish. As the card issuers that utilize Visa and Mastercard increasingly cut off their client’s credit, Visa and Mastercard will suffer accordingly. And with such lofty valuations in both companies stocks, any slight disappointment is bound to result in a bloodbath in the shares.

Just last night Cramer was spouting his mouth off with yet another bottom call, and made specific mention to Mastercard prior to their earnings release this morning.

“I am indeed sticking my neck out right here, right now,” Cramer continued, “declaring emphatically that I believe the market will not revisit the panicked lows it hit on July 15. and I think anyone out there who’s waiting for that low to be breached is in for a big disappointment and [they’re] missing a great deal of upside.” …Cramer’s predicting the rally continues Thursday thanks to great after-the-bell earnings from The Walt Disney Co. and First Solar. And who knows what could happen after Mastercard reports in the morning.

Guess what Cramer. It’s now morning, and we see that Mastercard reported a second quarter LOSS of $747 million dollars, or $5.74 per share. Mastercard shares were off nearly 11 percent (so far) as of 9:51am est, just 21 minutes into the trading day. So much for that “NO CREDIT RISK” thesis that CNBC shoves down your face. CNBC has failed its attempt to prolong the Visa and Mastercard bubble. Thanks for the advice Jim, but I’d rather stick to the much more accurate Big Mac for my trading advice.

The recently passed housing rescue bill, along with hundreds of pages related to the massive housing bailout, also included a provision to increase the cap on the National Debt. It was certainly not the only random pork barrel provision completely unrelated to housing, but it is one that deserves special attention.

SEC. 3083. INCREASE IN STATUTORY LIMIT ON THE PUBLIC DEBT. Subsection (b) of section 3101 of title 31, United States Code, is amended by striking out the dollar limitation contained in such subsection and inserting in lieu thereof $10,615,000,000,000.

The provision in section 3083 raises the ceiling on the United States national debt to $10.615 trillion by $800 billion dollars. The debt ceiling was previously set at $9.8 trillion dollars. The current national debt, as of July 30, is $9.54 trillion dollars, which stands under the limit of both the $9.8 trillion mark and the newly increased $10.6 trillion mark. To understand what the national debt ceiling is requires a brief look into history.

The United States first went into debt in 1790 as a result of Revolutionary War debts. And prior to World War I, the United States needed approval from congress every time it wanted to borrow money from the public. Because of the frequent overspending beyond tax revenues, and the resultant borrowing, it was thought impractical to require approval for every bond sale. So in 1917 the second liberty bond act placed a ceiling on the national debt. Any treasury operations that required increasing the debt could be performed without congressional approval, as long as the total outstanding national debt remained underneath the legally binding debt ceiling. The initial debt ceiling went in place at only $7.5 billion dollars, and has been increased countless times since.

The entire use of the term debt ceiling has been reduced to an anachronism. Our government continually spends more then it takes in from taxes, and when they get close to the preset maximum debt, they just increase the ceiling. But they are so embarrassed by the insanity of the ceiling, they are forced to hide the ceiling increase in unrelated housing bailout bills.

For related reading:

• The United States has not had a balanced budget since 1957
• CNN continues to report on budgets it does not understand
• Zimbabwe news overshadows U.S. fiscal problems

Running on Empty: How the Democratic and Republican Parties Are Bankrupting Our Future and What Americans Can Do About It by Peter G. Peterson

Microsoft sells their new operating system, Windows Vista Ultimate for roughly $250. They also sell their Office Ultimate package for over $500. And if you need a good graphics program, then you can pick up Adobe Photoshop CS3 for $650. But if you really intend to run the latest versions of those software packages, then you better be prepared to also buy a new and faster computer for those applications from Microsoft or Adobe.

But there is another way, and you will be pleasantly surprised at the cost. All three of those useful programs are available for free as near equivalent freeware programs. Freeware is similar to shareware, but completely free, without any limited trial restrictions. Freeware is written by volunteer programmers, and some large and sophisticated applications are written by teams of volunteer programmers collaborating together. There are literally thousands of freeware programs, but the most valuable programs needed on every machine are the operating system, an office suite, and a graphic editing program.

Operating System - Use Linux instead of windows. There are several versions available of the free Linux operating system, but my new favorite is Ubuntu. It is freely available for download in either the desktop version or the server version direct from the Ubuntu website. There is even free online documentation and user forum support available. From the Ubuntu website:

Ubuntu is and always will be free of charge. You do not pay any licensing fees. You can download, use and share Ubuntu with your friends, family, school or business for absolutely nothing. Everything you need comes on one CD, providing a complete working environment. Additional software is available online. The graphical installer enables you to get up and running quickly and easily. A standard installation should take less than 25 minutes. Once installed your system is immediately ready-to-use. On the desktop you have a full set of productivity, internet, drawing and graphics applications, and games.

Office Suite - Open Office is a free multiplatform and multilingual office suite and an open-source project. It is compatible with all other major office suites, is free to download and free to use. It is also remarkably similar to the Microsoft applications (prior to the new version with those annoying ribbons!), so learning it will be a breeze. You can download it free at the open office website.

Graphic editing - GIMP is an acronym for GNU Image Manipulation Program. It is a freely distributed program for such tasks as photo retouching, image composition and image authoring. The list of features is very extensive, and even photoshop power users will be pleasantly surprised with the performance from Gimp. It can be downloaded free of charge from the Gimp website.

According to the the Financial Times, UK:

Zimbabwe will slash 10 zeros from its currency from Aug. 1, central bank Governor Gideon Gono said on Wednesday in another attempt to bring relief to consumers ravaged by hyperinflation….economic analysts said the move would do nothing to end an economic meltdown blamed on President Robert Mugabe’s policies, which have helped to push official inflation to 2.2 million percent, the world’s highest, and caused shortages of food and foreign currency….Prices are rocketing on a daily basis as ordinary Zimbabweans struggle to survive, prompting the introduction last week of a new 100 billion Zimbabwean dollar note….Businesses justify price hikes as the only measure to avert collapse.

Meanwhile back home in the United States, most people wrongfully assume that we are immune to such extreme economic disasters. In reality, the United States government continues to overspend like a pack of drunken sailors. We are now dependent on China and the middle east for charity. We spent $430 billion in fiscal year 2007 just to pay interest on the national debt, which currently is over $9.5 trillion dollars. That massive overspending requires us to sell treasury bonds to the Chinese in rapidly increasing amounts. But the Chinese are becoming increasingly nervous about our ability to make payments on the treasuries they own. From the U.K. Telegraph:

A sharp drop in foreign holdings of US Treasury bonds over the last five weeks has raised concerns that China is quietly withdrawing its funds from the United States, leaving the dollar increasingly vulnerable.

For additional reading:

The United States has not had a balanced budget since 1957.

CNN continues to report on budgets it does not understand.

Also, I highly recommend the following book, endorsed by Warren Buffett, Thomas Friedman and Paul Volcker:

Running on Empty: How the Democratic and Republican Parties Are Bankrupting Our Future and What Americans Can Do About It by Peter G. Peterson

If you have been successful with covered calls, then you you may also want to study up on calendar spreads. A calendar spread is essentially a covered call on steroids, and can be used when you expect a sideways or gradually moving market. But managed correctly, it can also benefit greatly from the trader that can effectively adjust from LEAP to calendar spread and back again.

Let’s start with the LEAP, which stands for long term equity anticipation securities. They are structured similarly to standard equity options, but have longer expiration periods. LEAP’s have January expirations and are currently available in many equities and indexes with a January 2009 or a January 2010 expiration. The extrinsic value (time premium) of a LEAP is going to be much greater then a front month option. But overall LEAPs will be much less expensive then purchasing a security or index outright. LEAPs are also less volatile then front month options due the extra time involved.

A buyer of a LEAP call option believes in the long term appreciation of the underlying security. But let’s examine a scenario that maximizes the return of a LEAP by taking advantage of front month price action and volatility.

The hypothetical ABC company sells computers, music players and cell phones. They currently trade for $157 per share. 100 shares of ABC would cost $15,700 out of pocket, but the January 2010 LEAP in ABC, at strike 150, goes for only $41 ($4,100 per contract). The breakeven point of this particular LEAP option is the strike price plus the option price or $191. The ABC company needs to get to $191 per share in January of 2010 just to break even. It needs to move over $191 to make a profit.

Assume that an investor buys a 2010 strike 150 LEAP in the ABC company on July 29, 2008 at a time when the ABC stock sells for $157. Option pricing is not an exact science, but suppose the ABC shares rally to $167 on July 27. The Jan 2010 150 LEAP contract may also move from $4,100 to $4,900 at the same time, for a healthy 19.5% gain on investment. But using the LEAP as a cover, the trader could then sell a front month option in ABC to potentially increase that profit. The August front month 170 call option might go for $4 ($400 per contract) with ABC just shy of 170. If ABC hits August expiration at under 170, then the August 170 call expires worthless, leaving the entire $400 premium collected as additional profit. But even if ABC nears August expiration slightly above 170, the front month August option could still be bought back (BUY TO CLOSE) for potentially less then you sold it for. In that case, you profit from the rally in the LEAP, plus the additional profit gained from the front month August contract. When you close out the August front month contract - either buying it back or letting it expire worthless - you have effectively gone from LEAP to calendar spread and back to LEAP again.

For additional reading, please CLICK, BUY and READ:

Disclaimer:  Investing and/or trading is dangerous and you can lose money.

The smartest guys in the room (CEO’s of major financial institutions) were not so smart after all. Their own economic forecasts asserted that home prices would continue to climb at 20-50 percent per year indefinitely. And they made HUGE housing loans - lots of them - to anyone with a heart beat. Jobs and down payments were optional. That house of cards is still crumbling, proving just how insanely stupid those CEO’s were. Thank you for your wise economic insight, but I’ll stick with the more accurate Big Mac indicator for my future economic insight.

The Big Mac indicator was introduced by the Economist in 1986 as a humorous illustration, but has been published every year since. It is based on the rule of purchasing power parity, which states that exchange rates should move to make the price of goods the same in each country. The price of a McDonalds Big Mac in the United States ($3.57) is used as the base for comparison. From the chart below, the Big Mac indicator is telling us:

• The Chinese Juan is undervalued by 50 percent
• The Thai Baht is udervalued by 50 percent
• The Euro is overvalued by 50 percent
• The Norwegian Kroner is overvalued by 121 percent

Currency exchange rates don’t make such dramatic changes to parity overnight, so there is still plenty of time to make your currency bets on what the Big Mac is telling you.

What gives? It now seems that every other day the market is up or down two percent or more. We all know that what really drives the big moves is the big money. But I’m not convinced that the big money is actually the smart money, especially when viewed in context of huge 2 percentage point swings every other day. To say we are in a volatile market is an understatement, and many people are just pulling out to sit in cash - what little they have left - as they wait for calmer waters. But if you still want to play, here are 3 strategies to consider that can work in high volatility markets:

1) Covered calls - An investment strategy where the investor has a simultaneous long position in 100 block increments of a security, and a short call against those positions. The short call acts as a minor downside hedge, and can also offer enhanced returns on the upside.

• the vix index and covered calls
• Time for cover - the covered call
• Covered calls - removing the covers and going naked

2) Calendar Spreads - Covered calls on steroids. Instead of owning the actual shares to sell calls against, a trader buys longer term options - LEAPS - to sell shorter term options against.

• From LEAP to calendar spread and back again

3) Iron Condors - Short term option strategy involving two simultaneous credit spreads composed of four individual option legs. The Iron condor trader hopes to make consistent monthly income of 5-25 percent. The higher your target income range, the more risk you take on. My personal favorite is to use monthly iron condors against the Russell 2000 index.

• Iron condor traders can make 25 percent per month

For additional reading, please CLICK, BUY and READ:

Covered Calls and LEAPS–A Wealth Option + DVD: A Guide for Generating Extraordinary Monthly Income (Wiley Trading) by Joseph R. Hooper

Option Strategies for Directionless Markets: Trading with Butterflies, Iron Butterflies, and Condors by Anthony J Saliba

Disclaimer:  Investing and/or Trading or Speculating is dangerous.  You can lose money.

Back in January of this year, Herb Greenberg made headlines by discovering a new leading economic indicator at his favorite Chinese restaurant. He called it the Hot-and-Sour soup indicator, apparently named after his favorite menu item. Herb is a regular at the Chinese restaurants near his San Diego home and the local staff was not shy about reporting the dramatic economic slowdown in Hong Kong and China, well before the Asian slowdown was reported by the official media. The hot and sour soup is a leading economic indicator direct from the U.S. based relatives of the Hong Kong and Chinese citizens feeling the pain of their regions slowdown. Herb went on to compare the hot and sour soup indicator to the official rear view mirror indicators released by the government, calling the former at least as credible.

In honor of Herb’s findings, I will now release my findings of the coffee shop housing bubble indicator. Back in 2006 at the height of the housing bubble, it was impossible to walk into a coffee shop in the high flying bubble areas - California or Seattle - and NOT hear people raving about how much money they were making on their houses. Those conversations occurred in 2005 and 2007 of course, but the peak of the coffee shop real estate wealth conversations occurred in 2006 by my very scientific calculations. And that peak corresponded precisely to the peak of the national housing bubble.

Today if I walk into any coffee shop in Seattle and listen (eavesdrop) attentively, I hear mixed signals from the coffee shop indicator. While some conversations point to worry over the value of houses, others are convinced their house is still appreciating. In terms of economic forecasting, I would say we are still well above the bottom of the housing bubble, despite the National Association of Realtors claims to the contrary. The coffee shop housing indicator does not lie, and we will not truly be at the bottom until the peak of the coffee shop conversations relate to housing wealth deterioration across the country. I’ll be sure to let everyone know the precise moment in time when that happens, and it’s safe to buy your new dream home. Don’t hold your breath waiting as the housing pain has just started in some parts of the country (Seattle) and will likely last several years to come.

At first glance, you would think that CNN understands the significance of the calamity the United States is in, as it reported today that “White House projects record deficit for 2009″. But after reading the article, their incompetence to report on such matters becomes readily apparent.

Let’s recap the CNN article to see if they got anything right.

The fiscal year begins October 1, 2008.

RIGHT! Good job CNN!

The federal deficit is the difference between what the government spends and what it takes in from taxes and other revenue sources. The government must borrow money to make up the difference.

WRONG! - The federal deficit is the amount by which our national debt increased from year to year. The other revenue sources CNN is referring to is the social security premiums we pay. They conveniently count them on the way in, but ignore them on the way out.

White House spokeswoman Dana Perino said the stimulus package was necessary, even if it increased the deficit.

WRONG again, but let’s ding White House spokeswoman Dana Perino for this one. Even if we buy into a necessary stimulus package, you still need a way to pay for it. Let’s start with firing Dana Perino to help fund part of the stimulus package.

President Bush inherited a budget surplus of $128 billion when he took office in 2001 but has since posted a budget deficit every year.

WRONG again, and CNN gets credit for this one. Check the numbers! The national debt increased $18 billion dollars between September 2000 and September 2001. That $18 billion dollar INCREASE in the national debt is the DEFICIT that Bush inherited when he took office. The United States has not had a budget surplus since 1957.

If they gave out Olympic medals for fiscal irresponsibility, President Bush would take the gold, silver and bronze.

RIGHT. In fact, over the last 8 years under Bush, the National Debt has increased from $5.6 trillion in 2000, to a whopping $9.5 trillion today, and growing. That’s a near 70 percent increase in the size of the national debt under the Bush administration.

Related articles:

The United States has not had a balanced budget since 1957.

The Starbucks stock price topped out near $40 per share twice in 2006, but has been steadily falling since that double top formation, and now sits at around $14.40 per share. By many accounts 2006 was also the peak of the housing bubble, and leaky home values have issued a strong blow to consumer spending since that time. Two of the hardest hit states in terms of housing are also two states that make up nearly 30 percent of the Starbucks stores in the United States. A $5 latte may not have been a stretch two years ago, but in the midst of this deflating economy and credit crisis consumers are definitely cutting back.

But consumer spending is not the only thing ailing Starbucks. They are also struggling with higher acquisition costs of their two staple ingredients - coffee and milk. In fact, over the past two years, the Deutsche Bank commodity index (DBC) and Starbucks (SBUX) appear to be an exact mirror image of each other:

McDonalds is another company affected by higher commodity input costs, but that fact is certainly not reflected in their share price which has hit several 52 week highs already this year. McDonalds healthy operating model allowed them to pay off $1 billion in long term debt in 2007. Yet Starbucks, who operated most of its life with insignificant near zero long term debt, suddenly racked up $550 million in long term debt during 2007.


McDonalds is also pursuing the high end coffee market through their aggressive expansion of stores offering the McLatte. And they are doing this at the same time that Starbucks is reversing their expansion into McDonalds traditional breakfast sandwich turf. It seems that every area where Starbucks is struggling and failing, McDonalds is thriving and conquering. But the struggle of Starbucks will not last forever. Howard Schultz is taking significant steps to reverse the downtrend - revising the menu, closing poor performing stores, and even offering a new customer loyalty program. Global commodity prices have also shown signs of leakiness, and any continued price relief on the milk and coffee front could be a potential windfall for Starbucks. If McDonalds is serious about their coffee expansion plans, then they need to take action now. The opportunity to acquire the biggest name in coffee during their weakest days won’t last forever. McDonalds needs to buy Starbucks now.

Disclosure: The author of the above article holds a long position in Starbucks stock.