Investors often ask me why I'm so distrustful of the numbers supplied by companies. This Bloomberg article is a good reason:

Leave it to Wall Street to profit from its own distress.

Merrill Lynch & Co., Citigroup Inc. and four other U.S. financial companies have used an accounting rule adopted last year to book almost $12 billion of revenue after a decline in prices of their own bonds. The rule, intended to expand the "mark-to- market" accounting that banks use to record profits or losses on trading assets, allows them to report gains when market prices for their liabilities fall.

The new math, while legal, defies common sense. Merrill, the third-biggest U.S. securities firm, added $4 billion of revenue during the past three quarters as the market value of its debt fell. That was the result of higher yields demanded by investors spooked by the New York-based company's $37 billion of writedowns from assets hurt by the collapse of the subprime mortgage market.

"They can post substantial gains as a result of a decline in their own creditworthiness," said James Cataldo, a former director of treasury risk management for the Federal Home Loan Bank of Boston and now an assistant professor of accounting at Suffolk University in Boston. "It's completely legitimate, but it doesn't make sense by any way we currently have of thinking of net income."

Three years after we added Monsanto (MON) to the Blue Chip Growth Buy List, the stock keeps making new highs. Today, shares of MON broke $134. That gives us a total gain of over 360%!

Don't worry if you're "too late to the party." A few days ago, the company said that it expects gross profits to double by 2012.

From today's New York Times:

Monsanto, the leader in agricultural biotechnology, pledged Wednesday to develop seeds that would double the yields of corn, soybeans and cotton by 2030 and would require 30 percent less water, land and energy to grow.

The announcement, coming as world leaders are meeting in Rome to discuss rising food prices and growing food shortages, appears to be aimed at least in part at winning acceptance of genetically modified crops by showing that they can play a major role in feeding the world.

Much of what is in the commitment are things the company was doing anyway. But Monsanto's chief executive, Hugh Grant, said in an interview Wednesday that the company wanted to make the goals public "so this isn't just a bound report on some library shelf." He said it was only coincidence that the announcement was made at the same time as the meeting in Rome.

Last Thursday, financial regulators said that they now fear that the banking industry turmoil will continue as financial institutions face the repercussions of an ocean of bad loans they made in the boom days of building new homes and condominiums. It's bad enough when homeowners default on their mortgages, but a bigger problem is unoccupied or unfinished homes which the bank can only unload at sacrificial prices. It looks like bank stocks won't recover anytime soon.

This is scary for U.S. stocks, since the health of the U.S. economy is heavily dependent on the willingness of banks and other financial institutions to lend to consumers and businesses. If they are short of funds, due to non-performing real estate loans, they can't make loans to other, more credit-worthy customers. According to a housing research firm, Zelman & Associates, U.S. banks could charge off between 10% and 25% of their residential construction and land assets in the next five years. That would amount to about $65 billion to $165 billion, or two to five times the inflation-adjusted $31.6 billion that was lost in the last housing downturn in the late 1980s and early 1990s. So far, through the first quarter of 2008, banks have officially written down just 0.7% of such assets, according to Zelman, so much bigger charge-offs are now pending, especially as market interest rates rise and the Fed may raise short-term rates later this year.

The prospect of a new wave of losses worries federal regulators, given the large proportion of bank loans that went to housing developers. The problems are worse at small banks that cannot easily absorb losses, especially at banks with big exposure in states hit hard by the housing crisis. For example, banks in Arizona have placed 36% of their loans in construction and development. The Zelman report said construction and development loans, as a percentage of total loans, are at their highest levels since at least 1975. As a result, it appears that a second wave of bank charge-offs is brewing, as foreclosures rise. According to the Mortgage Bankers Association (MBA), the number of new prime ARM foreclosures increased by 29,000 to 117,000 in the first quarter, while the number of new subprime ARM foreclosures increased by 20,000 to 195,000. This is the first time prime foreclosures have grown faster than subprime foreclosures according to the MBA.

According to the MBA, about 1.3 million homes were in foreclosure at the end of the first quarter. In that quarter, the foreclosure rate increased from 2.04% to 2.47% on a seasonally adjusted basis, while the number of loans that were at least 30 days past due climbed by 0.53% to a stunning 6.35%. If you are looking for some good news, 20 states actually experienced drops in the number of foreclosures last quarter, including Michigan, Ohio and Indiana. However, just four states (Arizona, California, Florida and Nevada) accounted for 89% of the increase in foreclosures. High property taxes, especially in California and Florida, compound the rising delinquency problem, as the housing crisis is now reaching out to more expensive neighborhoods.

The Federal Reserve's "Beige Book" business survey came out today. The New York Times reports:

The Fed's regular "Beige Book," which surveys businesses in 12 metropolitan districts, declared economic activity as "softer, weaker" and "slower, sluggish" in most regions of the country. Activity did not pick up in any area.

Inflation remained an issue. Americans "were pinched by rising energy and food prices," the report said, leading many to delay big purchases like cars and household appliances. Sales of automobiles, particularly trucks and sport utility vehicles, also fell.

Retailers reported pressures to increase prices on popular consumer products, but many said they had trouble passing higher costs on to their customers.

The report came as the Fed appeared to be shifting its policy focus to fighting inflation. Though central bankers have acknowledged that growth was weak and faced further challenges, they have also warned that keeping prices in check would be a crucial goal of the coming months.

This confirms that the Fed can't cut rates any further.

The health of the economy is heavily depen¬dent on the willingness of banks and other financial institutions to lend to consumers and businesses. Many banks have already taken substantial losses, and either will have to pare their lending or raise new capital to rebuild their safety nets. The Fed and Treasury Department have been pressing banks to raise capital so they do not to further restrict lending. However, banks with swelling portfolios of troubled housing loans are struggling to unload some of their real-estate debt.

As homebuilders continue falling behind on their loan payments, the value of the land and housing developments that serve as loan collateral continue to plummet. Over the next five years, U.S. banks could "charge off" as bad debt between 10% and 26% of their loans tied to residential construction and land assets, which would amount to about $65 billion to $165 billion, according to a report by housing research firm Zelman & Associates. This compares with charge-offs of about 10% of construction-related bank assets, totaling $31.6 billion, when adjusted for inflation, during the last housing downturn in the late 1980s and early 1990s. In 2007 and the first quarter of this year, banks wrote down just 0.7% of such assets, according to Zelman, so more charge-offs are brewing, especially now that mortgage rates have resumed rising with the latest inflation fears.

The prospect of a new wave of losses worries federal regulators, given the large proportion of loans to housing developers held by many banks and thrifts. The problems are worse at small banks that cannot easily absorb losses, especially banks with big exposure in states hit hard by the housing crisis. For example, banks in Arizona have 36% of their total loans tied to construction and development. The Zelman report said construction and development loans, as a percentage of total loans, are at their highest levels since at least 1975. As a result, it appears that a second wave of bank charge-offs is brewing and delinquencies rise.

Nationwide, roughly 1.3 million homes were in foreclosure at the end of the first quarter according to the MBA. The foreclosure rate increased by 0.43% in the first quarter to 2.47% on a seasonally adjusted basis, while the number of loans that were at least 30 days past due climbed by 0.53% to a stunning 6.35%. Four states accounted for 89% of the increase in foreclosures, namely Arizona, California, Florida and Nevada. Experts also pointed out that high prop¬erty taxes, especially in California and Florida, are compounding the rising delinquency problem. The housing bubble is still deflating in Arizona, Califor¬nia, Florida and Nevada as the housing crisis is now encompassing prime borrowers in more expensive neighborhoods.

Goldman Sachs (GS) reported earnings today of just over $2 billion which was more than Wall Street was expecting. Despite the good news, I still don't favor owning the shares. The financial mess isn't over just yet.

Goldman's profit last quarter was 10% lower than the year before. This was still a big improvement from the first quarter when Goldman's profit was cut in half. I give the company a lot of credit for managing its way through this crisis better than most on Wall Street.

Goldman's stock is down about 19 percent from a year ago, but that drop is small in comparison to the bank's peers. Lehman's stock is down 66 percent, Merrill Lynch has dropped 56 and Morgan Stanley's by 39 percent since last June. Citigroup, a commercial bank, has seen its stock fall 62 percent. And Goldman's competitors have raised new capital, diluting the value of their shares.

One question on analysts' minds is whether Goldman could be at risk if the commodities business flounders. Investors like George Soros are calling the commodities boom a bubble, and new regulations about speculation could cause a pullback in trading. Goldman does not break out its commodities trading revenue but said in March that the amount it could lose in a single day by trading commodities had increased to $38 million from $26 million in the fourth quarter last year.

I currently rate Goldman Sachs a "C - Hold" on my PortfolioGrader Pro stock-rating website.

Oil is rising over fear of war between Israel and Iran. The New York Times reported on Friday that over 100 Israeli F-16s and F-15s flew more than 900 miles - roughly the distance from Israel to Iran's Natanz nuclear enrichment facility - to simulate an air strike. The exercise included refueling tankers and helicopters capable of rescuing downed pilots. These maneuvers were clearly a show of force, threatening an imminent strike on Iran's nuclear facilities.

Oil keeps rising despite flat demand growth. For example, Americans drove 4.5 billion (1.8% fewer miles in April 2008 vs. the same month a year earlier. In fact, this was the lowest April number of miles driven since April 2003. Higher gasoline prices are obviously causing more Americans to change their driving habits. As Americans switch to more fuel-efficient vehicles in upcoming years, demand could conceivably fall 20% or more if gasoline prices remain this high.

This drop in gasoline demand is causing concern in Saudi Arabia. This week, crude oil prices will likely take their cue from Sunday's meeting in Saudi Arabia, called by King Abdullah, who is apparently fearful that high crude oil prices will damage the world economy and permanently curtail demand in major economies like the U.S., Europe and Japan, where demand is falling. In Europe, fuel prices typically average more than $9 per gallon, causing truckers and fishermen to protest high prices. Italy, faced with a threatened transportation strike, passed a series of measures to depress fuel prices. Also on Wednesday, farmers drove hundreds of tractors into central Brussels to protest at the upcoming EU leaders' summit meeting.

Naturally, if the richer, more established economies are in this much turmoil, the poorer emerging economies are in worse shape. China, the world's second-largest energy consumer (accounting for more than half of the global oil demand growth of 800,000 barrels per day), finally followed India, Indonesia, Malaysia and Taiwan by raising energy prices to market levels last week, when Beijing said that gasoline and diesel prices would rise 18% and electricity tariffs would rise 5%, Before Thursday's announcement, Chinese gas prices were around 40% below those in the U.S. Some analysts had expected Chinese authorities to hold off price increases until at least after the August Olympics, but fuel shortages would have been very embarrassing at the Olympics.

There is no doubt that the hedge fund industry, which embarrassed itself last year by being overly leveraged in municipal bonds and other debt, has switched to being leveraged in commodities now. The reason I know this is that, as a major pension manager, I have seen many pension consultants and clients switch to direct commodity investing, typically moving into a hedge fund. To combat this new fad, Senator Joe Lieberman revealed a series of restrictive proposals aimed at curbing financial speculation in commodities, including one provision that would place an outright ban on big pension funds buying agricultural and energy futures. According to Senator Lieberman's office, the most severe restriction would prohibit private and public pension funds with over $500 million from investing in agricultural and energy commodities traded in the U.S. A second plan would direct the Commodities Futures Trading Commission (CFTC) to establish total limits on the share of the commodity market held by financial investors. A third proposal would direct the futures regulator to impose speculative-position limits on any stakes not related to real hedging. Senator Lieberman will most likely introduce his bills after the July 4 recess.

Curbing excess speculation in commodities and energy contracts is one way to show Saudi Arabia and other OPEC members that America is serious about curtailing energy speculation, especially since OPEC, led by Saudi Arabia, has made sure there is adequate world-wide supply. Shortages typically result from price controls - as exemplified by China's recent experience - but in the short-term, high energy prices are taking a much harder toil on emerging economies.

Monsanto does it again!

This morning, Monsanto (MON), one of my favorite Blue Chip Growth stocks, reported blow-out earnings for its fiscal third quarter, which ended in May. The company earned $1.45 a share which was 11 cents more than Wall Street's consensus. Net income rose by 42%.

Revenues rose 26% to nearly $3.6 billion, which was slightly below expectations. Most importantly, Monsanto raised its guidance for fiscal 2008. The company now sees earnings coming in around $3.40 a share compared with its earlier guidance of $3.15 to $3.25 a share. This is the fourth time Monsanto has raised its earnings guidance this year.

The stock is trading lower so far, but I'm hardly worried. Shares of MON hit a new high just last week so some consolidation can be expected. Since I first added Monsanto to the Blue Chip Growth Buy List three years ago, the stock is up an amazing 370%!

I currently rate Monsanto a strong buy up to $148 a share.

As I suspected, the Federal Reserve has left rates alone. Here's the Fed's post-meeting statement:

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent.

Recent information indicates that overall economic activity continues to expand, partly reflecting some firming in household spending. However, labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters.

The Committee expects inflation to moderate later this year and next year. However, in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high.

The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time. Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Voting against was Richard W. Fisher, who preferred an increase in the target for the federal funds rate at this meeting.

The one dissenting vote is no surprise.

Today was an ugly day for stocks but a great day for commodities.

One day after the Federal Reserve decided to leave interest rates alone, commodities surged. Oil rallied nearly $5 a barrel to reach a new all-time record of $139.64. Corn and soybeans also reached new highs. Gold jumped $32.80 to reach $915.10 an ounce.

But stocks moved in the opposite direction. The Dow plunged 358.41 points to close at its lowest level in 21 months. Goldman Sachs lowered General Motors to a Sell and the stock fell to its lowest level in 53 years. Shares of Citigroup fell to a 10-year low.

Resource stocks like Barrick Gold (ABX), Weatherford (WFT) and Cal-Maine Foods (CALM) were particularly strong today. One of my favorite Emerging Growth stocks, General Steel (GSI), defied the market and also closed higher.

In Quantum Growth, Starent Networks (STAR) was stopped out at $12.86 a share. If you're a Quantum subscriber and you still own Starent, I recommend you sell it as soon as you can.

The most painful stock today was Research In Motion (RIMM) which is a Blue Chip Growth recommendation. The shares dropped over 13% today. Yesterday, the company reported that its earnings more than doubled to 84 cents a share, but it was a penny below the Street's estimate. More troubling was that RIMM's guidance for Q2 was also slightly below what Wall Street was expecting. In Blue Chip, I rate RIMM a buy up to $151 a share.

The European Central Bank (ECB) will likely raise interest rates by 0.25% to 4.25% this week, due to ECB President Jean-Claude Trichet's previous comments, plus rising inflation concerns. For one thing, the euro-zone money supply is soaring by double-digits. Specifically, May's M3 money supply rose at an annual pace of 10.5%. Trichet reiterated his concern over inflation when he stated that "upside risks to price stability over the medium term have intensified further over the past few months, within a context of very vigorous money and credit growth."

It is highly doubtful that the ECB can significantly slow the tide of inflation by raising interest rates alone, and raising rates could do damage to the fragile euro-zone economy. The risk of a recession in the 15-country euro-zone region has increased. Specifically, the Munich-based Ifo Institute's business climate index pointed to weaker German growth ahead. The Ifo dropped sharply from 103.5 in May to 101.3 in June, its the lowest level since December, 2005. The situation is even worse in France, where the country's purchasing managers' index recently fell to its lowest level in five years. There is no doubt that the future course of the euro-zone's two largest economies, namely France and Germany, will weigh on the ECB's decision this week.

High energy prices usually hurt Europe and other countries more than the U.S., due to high taxes on diesel and gasoline. Last week, a weak U.S. dollar, renewed inflation fears and Libya's threat to cut its crude oil production helped push crude oil to a peak of $142.13 per barrel. Additionally, a warning from OPEC's president that crude oil prices could hit $170 per barrel helped to propel crude oil prices higher. Chakib Khelil, OPEC's president, said he believes oil prices could rise to between $150 and $170 a barrel this summer, before declining later in the year. This adds to the global inflation threat, giving Trichet and the ECB another reason for raising rates this week.

Currently, inflation in the euro-zone is running at a 3.7% annual rate, the fastest pace in 16 years. Inflation is widely expected to top 4% soon. The U.S. Fed likes to focus on the "core" rate of inflation, excluding food and energy. But the U.S. dollar was on a slippery slope last week after the Fed left rates unchanged and investors around the world worried that the ECB would raise key interest rates this week, giving an interest-rate advantage to the euro.

The Fed's statement after its meeting this week implied that it was not that worried about U.S. economic growth being derailed by rising inflation. The next Fed meeting will be on August 5 and its is widely expected that, due to the upcoming election, the latest core PCE report, escalating financial problems and rising unemployment, the Fed will likely refrain from rising interest rates in August.

More great earnings news for my Emerging Growth stocks. On Friday, AZZ Inc. (AZZ) soared 22.4% thanks to an outstanding earnings report. Profits more than doubled and the company raised guidance for fiscal 2009.

Today, Robbins & Myers (RBN) is up over 17.8% thanks to blow-out earnings. The company just reported earnings of 62 cents a share, which is four cents better than what Wall Street was expecting. The company also raised guidance for this quarter and next year.