Due to the ongoing credit crisis, former Fed Chairman Alan Greenspan warned last week that the U.S. economy was "on the brink" of a recession, with the chances of entering recession being once again "over 50%." Greenspan added that "there are still very considerable structural problems remaining in the financial system. They will remain for a while. It's going to be very difficult. There are a lot of unexpected adverse events out in front of us."

Last Thursday, Goldman Sachs lowered the boom on brokerage stocks, adding Citigroup to its "conviction sell" list. GS said that Citigroup faces an additional $8.9 billion in second-quarter write-downs, while Merrill Lynch is facing $4.2 billion. The bottom line for Goldman's slicing and dicing: According to analysts, the sector's turnaround may not occur until 2009. And as long as the fundamentals for the major brokerages continue to deteriorate, most financial stocks won't be safe.

Goldman was especially harsh with Citigroup and made it clear that the financial giant will continue to face problems caused by a worsening consumer-credit climate and its riskier legacy assets.

As a result of this devastating report, Citigroup led financial stocks on a dramatic plunge last week. The situation worsened when Moody's Investors Service placed the long-term ratings of Morgan Stanley and its subsidiaries under review for a downgrade, which sent financial stocks further south. My advice: Stay away from most financial stocks! Use PortfolioGrader Pro to check my latest ratings and see which ones stocks the bill.

In honor of Canada's 141st birthday, here are ten A-rated Canada-based stocks:

Barrick Gold (ABX)
Agnico-Eagle Mines (AEM)
Agrium (AGU)
Canadian Natural Resources (CNQ)
EnCana (ECA)
Enbridge (ENB)
Nexen (NXY)
Potash Corp. of Saskatchewan (POT)
Suncor Energy (SU)
Talisman Energy (TLM)

I've been saying the European Central Bank will raise interest rates and that the Federal Reserve will hold off on any rate increases until after the election.

Well, today the ECB raised rates by 0.25% to 4.25%. The decision was unanimous. For now, they'll probably lay low until they have more evidence of inflationary pressures in the eurozone.

Meanwhile, we also got news today that the U.S. job market lost 62,000 jobs in June. This is the sixth straight month that the economy has lost jobs. I think this is only more evidence that the Fed will not raise interest until after November.

The stock market is closed today in honor of America's Independence Day. To celebrate, I'm offering a "half-off sale" to my Quantum Growth service. This is a huge opportunity so I hope you take full advantage of it!

The housing market seems to be getting worse. In the second quarter, new foreclosures almost quadrupled in Los Angeles and doubled in Miami. Even in healthier real estate markets, like New York City and Seattle, foreclosures are up about 50% in the past year. The percentage of homes in foreclosure nationally is up to 2.5%, while homes that are delinquent in payments has reached 7%.

One reason why the foreclosure rate is rising is that the labor market in the U.S. is in trouble. On Wednesday, the ADP employment index reported that private sector firms slashed 79,000 jobs in June, the biggest monthly job decline in six years. On Thursday, the Labor Department reported that the U.S. economy lost 62,000 jobs in June and 438,000 jobs in the first six months of 2008. Although the June payroll decline was not as bad as some economists had feared, payrolls losses in April and May were revised down by 52,000 jobs. Additionally, the Labor Department also reported that initial jobless claims rose by 16,000 in the latest week to 404,000, which is just the second time that jobless claims have exceeded 400,000. More job cuts are in the pipeline as the unemployment rate is expected to hit 6% this year. Due to the weak labor market as well as the upcoming Presidential election, the Fed will not likely raise interest rates this summer or fall.

There were some other troubling economic reports last week, such as on Thursday, when the June ISM non-manufacturing index fell to 48.2 from 51.7, the lowest since January and a sign that the U.S. economy is suffering from higher food and energy prices. The only good news was released on Tuesday, when the May ISM manufacturing index rose for the second straight month to 50.2 from 49.6, above economists' consensus estimate of a fall to 48.5. However, the manufacturing index has not yet reflected the big production cuts in the pipeline from Ford, General Motors and other vehicle manufacturers. Overall, a U.S. recession is brewing for the second half of 2008.

In my free e-letter from two weeks ago, I listed 23 Stocks to Sell. One of the stocks was Starbucks (SBUX), and the shares have been in the dumper ever since. In the last three weeks, shares of SBUX are down over 18%.

The Seattle Times reports:

Starbucks shares sank to a 52-week low Monday and is flirting with a five-year low as investors continue to digest last week's news that the company will close 600 of its least profitable U.S. stores.

The stock dropped 61 cents, or 3.9 percent, to $14.95. The overall Nasdaq market fell just 0.09 percent on Monday.

It is the first time Starbucks has traded below $15 since late 2003, when it had 7,225 stores worldwide. Now the company has more than 16,225 shops, including more than 11,400 in the U.S.

The stock is currently rated a "D - Sell" in PortfolioGrader Pro.

It's official! Activision has been bought out by Vivendi. Don't worry, nothing changes for shareholders. The stock is still traded under the ATVI symbol, except now the company is Activision Blizzard (ATVI).

Under terms of the agreement, Vivendi is buying 62.9 million newly issued Activision shares at $27.50 per each for a total of about $1.7 billion in cash. In addition, shares of Vivendi Games will be converted into 295.3 million new shares of Activision common stock at a price of $27.50 per share, for a value of $8.1 billion.

This is great deal and I think it's a win-win for both companies. Congratulations on cementing the deal!

The second-quarter earnings season will be the fourth straight "down" quarter for the S&P 500. However, if you knock out financial and consumer discretionary stocks, the S&P 500's Q2 earnings should rise. That's the good news.

The bad news is that as the financial crisis has deepened, Wall Street has cut its earnings estimates for many stocks. The S&P 500's Q2 earnings are now supposed to decline by -11.1%, which is worse than the estimate of a -7.3% decline back in May.

Despite the softening earnings environment, second-quarter GDP should be positive due to strong exports, robust retail sales in May and 100 million stimulus checks from Uncle Sam. But GDP is looking pretty shaky for the third and fourth quarters. Over 70% of the economy is due to consumers, so if consumers are in a bad mood, the economy will have a tough time.

It may surprise you to learn that the S&P 500's earnings are supposed to rise 13.7% in the third quarter and 59.8% in the fourth quarter. The reason is very simple: It has to do with the enormous write-downs from financial stocks in the third and fourth quarter of 2007. So when earnings are announced in October and next January, the year-over-year comparisons will be very good. These earnings will also help lower the S&P 500's price/earnings ratios from an 18-year low to possibly a 40-year low.

The Financial Times has a nice roundup of the upcoming earnings season:

Analysts expect average earnings for S&P 500 companies to have fallen 13.2 per cent in the second quarter, according to Thomson Reuters. At the start of the second quarter in April, earnings were forecast to decline just 2 per cent. A fall in second-quarter earnings would mark a run of four negative quarters in a row, the worst performance since profits fell during all of 2001 and the first quarter of 2002.

Financial companies are expected to once again lead the profit retreat, with an estimated earnings decline of 68 per cent caused by writedowns and credit-related losses.

Comments on the near-term outlook from Merrill Lynch and Citigroup, which report next week, will be closely scrutinised to gauge how much more pain is likely to be inflicted on banks and their investors.

Earnings at consumer discretionary companies are expected to be down 19 per cent, while profit expectations at materials groups have recently turned negative with a forecast fall of 1 per cent for the quarter. Energy, whose profits are set to rise 28 per cent, and technology, where earnings should climb 16 per cent, will be the second-quarter bright spots, analysts predict.

Excluding financials, second-quarter earnings are seen rising 8.6 per cent. But if energy earnings are also excluded, that rise drops to a gain of 3.2 per cent for the quarter. The projected decline in second-quarter earnings is less than the fall of 17.5 per cent seen for the first quarter and the fourth-quarter slide of 25.1 per cent.

Analysts still expect a rebound in the third quarter, although this may change if guidance from reporting companies disappoints investors.

The New York Times reports that the government in considering placing Fannie Mae (FNM) and Freddie Mac (FRE) into conservatorship "if their problems worsen." That might happen--both stocks are rated as "D - Sell" in PortfolioGrader Pro.

The companies, Fannie Mae and Freddie Mac, have been hit hard by the mortgage foreclosure crisis. Their shares are plummeting and their borrowing costs are rising as investors worry that the companies will suffer losses far larger than the $11 billion they have already lost in recent months. Now, as housing prices decline further and foreclosures grow, the markets are worried that Fannie and Freddie themselves may default on their debt.

Under a conservatorship, the shares of Fannie and Freddie would be worth little or nothing, and any losses on mortgages they own or guarantee -- which could be staggering -- would be paid by taxpayers.

Both stocks are down by over 40% today.

That was fast.

Apple Inc. sold 1 million of its new iPhones in the first three days after the handset made its debut, more than double what some analysts anticipated, sending the stock up 3.5 percent.

"IPhone 3G had a stunning opening weekend," Chief Executive Officer Steve Jobs said in a statement today, after starting sales of the device in 21 countries July 11. It took 74 days to sell a million of the original iPhone, which was only available in the U.S. at first, he said.

Half of Apple's 187 U.S. retail outlets were sold out as of last night. AT&T Inc., Apple's exclusive U.S. partner, said most of its 2,000 stores were out of supplies. Carriers in the U.K., Germany, Canada and Japan said many shops ran out of the iPhone 3G, which works with speedier third-generation wireless networks, on the first day.

Piper Jaffray & Co. analyst Gene Munster estimated sales of 425,000 devices in the first three days. He had figured Apple and AT&T sold a combined 225,000 in the U.S., after a failure in Apple's system meant some buyers had to finish the activation at home. Today, Munster said sales overseas outdid his expectations, boosting Cupertino, California-based Apple's results.

"International really hit it out of the park," Munster said today in an interview with Bloomberg Television. "This is definitely a faster start than we anticipated."

The stock is up nicely today.

In February, I listed Freddie Mac (FRE) and National City (NCC) as two of ten financial stocks to sell immediately. Since then, both stocks are down by 80%.

I also listed Citigroup (C) as a stock to sell. The stock just fell to its lowest level since Sandy Weill formed the company in 1998.

At one of my recent investment seminars, a new investor asked me what mistakes he should avoid. This is my list of the five biggest mistakes investors are making right now:

• Buying bank stocks for their big dividend yields.
• Averaging down in money-losing stocks.
• Confusing short-covering in financial stocks with a real rally.
• Not own A-rated stocks with strong sales and earnings growth.
• Not understanding that P/E Ratios are now at an 18-year low. After the third- and four-quarter earnings come out, P/E Ratios could fall to a four-decade low.

Just a quick update on Fluor (FLR). The stock split 2-for-1 yesterday. This means that shareholders now have twice as many shares as the stock price fell in half. Fluor is due to report its Q2 earnings in a few weeks. Wall Street currently expects earnings of 82 cents per share.

Badger Meter (BMI), which is one of our new Emerging Growth buys for July and a Top 10, just reported outstanding earnings results. Wall Street was expecting earnings of 43 cents a share, which is a decent increase of the 38 cents a share from last year's second quarter. Instead, Badger Meter earned 48 cents a share. The stock is currently up 12% in today's trading. We now have an 18% gain in BMI in just three weeks!

After the close yesterday, Apple (AAPL) reported earnings of $1.19 a share, 12 cents more than analysts were expecting. The company had sales of $7.46 billion, $100 million more than analysts were expecting.

So how come the stock is down? The reason is that Apple gave very conservative guidance for their next earnings report. The company said to expect earnings of just $1 a share on sales of $7.8 billion. That's well below Street estimates of $1.23 a share and sales of $8.3 billion.

My view is that once again, Apple is trying to "low ball" Wall Street. This is fairly typical behavior for Apple. They do this so they can raise their earnings estimates in a few weeks. The important news is that last quarter's earnings were very strong. Apple continues to be an excellent buy.

Last Tuesday, Fed Reserve Chairman Ben Bernanke warned that the economy faces "numerous difficulties," suggesting that those risks remain his top priority. But surprisingly, Fed officials now expect the economy to grow 1% to 1.6% this year and have raised their GDP forecast. What about those inflation concerns? It seems Bernanke may be trying to dazzle us with double-talk.

In his Congressional testimony last week, Bernanke outlined a long list of risks, including "ongoing" financial stress, falling home prices, a weaker jobs market, and inflation in food and energy prices. The Fed Chairman expects the economy to "gradually" improve but warned that "considerable uncertainty" surrounded his outlook. It was painfully obvious to me that Bernanke really didn't want to testify in front of Congress, so he just read a prepared script that confused the pants off everyone.

But the numbers will spell out what Bernanke won't. For example, the Commerce Department announced retail sales only rose 0.1% in June-far below forecasts of a 0.5% rise. Complicating matters further, retail sales in April and May were revised down to 0.2% (from 0.4%) and 0.8% (from 1%), respectively. That's just 1.1% growth in three months instead a forecast almost twice that! Considering that the economic stimulus checks are still being sent out, the June retail sales report was especially disturbing. Overall, considering that consumers represent over 70% of economy, you can see why Bernanke chose to baffle Congress instead of talking straight.

The reality is that the economy and the dollar are both in a tough spot. At the last Fed meeting, some officials argued that the Fed should hike interest rates "very soon" to fight inflation. Others said the Fed had to aggressively cut rates to 2% to guard against downside risks to economic growth. This internal Fed debate may explain why Bernanke appeared so tired in front of Congress last Tuesday. Quite frankly, it looks like he doesn't know what to do next.

But one thing is certain-doing nothing certainly won't help either the dollar or the economy. Inflation is still a problem, and the numbers show it will continue to affect the economy and consumer spending. In the meantime, Sovereign Wealth Funds from the governments of China, Qatar, Singapore and other countries are scaling back their exposure to the dollar. These countries took big losses after helping recapitalize faltering U.S. banks. One big sovereign wealth fund in the Middle East has cut its dollar-denominated holdings from more than 80% a year ago to less than 60% now, while China's State Administration of Foreign Exchange has been looking to strike deals with private equity firms in Europe as a part of a strategy to reduce its dollar holdings.

Until we see some leadership from the Fed, a weak dollar and high commodity prices are here to stay. Since any politically unpopular decision will likely be delayed until after a new president is elected, I expect the status quo to reign for the coming months. That means more inflation and high commodity prices.

Potash (POT) just reported blow-out earnings for the second quarter. The company earned $905.1 million which is more than three times the $285.7 million it made last year. On an earnings-per-share basis, Potash earned $2.82 compared with just 88 cents last year.

The average estimate of the analysts who cover Potash was $2.61 a share, meaning the company demolished estimates by 21 cents a share. I was also happy to see Potash raise guidance for this quarter. Wall Street had been looking for earnings of $3.31 a share, but Potash now says it will be in a range of $3.25 to $3.75 per share. For the full year, the company expects earnings between $12 and $13 a share.

Here's part of a great post by Tom Vanderwell at Paul Kedrosky's blog:

1. 6 months ago is ancient history. What your neighbor sold his house for 6 months ago doesn't matter. What the seller was asking for the house 6 months ago doesn't matter. What matters is what the market will support today.

2. Don't worry so much about what you paid for your house. Instead, look at the difference between what you can expect to sell your house for and what it's going to cost you to buy the new one that you want. I expect you'll find that those are much more important numbers (unless you end up without any equity in which case you don't sell).

3. Now is not the time for do-it-yourselfers. When the inventory levels are, depending on property type and area, any where from twice as much as is healthy (single family homes near my hometown) to 750% as much inventory as there should be (condos in Florida from what I've heard), you need to find a professional to help you navigate the markets and get your house noticed. I'm not, frankly, just talking about calling the Realtor who sold the house up the street. I'm talking about calling a high caliber professional who knows what it takes and can really give your house the attention that it needs. People like Greg and Teri and Jeff are examples of the types of Realtors who have the knowledge and talent to help you navigate through this market and make wise decisions.

4. Any interest rate that starts with a 6 is a good number. Check out the attached chart. From 1971 to 1998, we did not see any mortgage rates that started with a 6. Frankly, we've gotten spoiled in an era of cheap credit and we need to keep things in perspective.

Read the whole thing.

Yesterday, shares of Mechel (MTL) plunged 38%. The reason for the drop is former President Vladimir Putin, who's now Prime Minister, criticized Mechel's pricing policies. Putin claims that Mechel is selling its steel to foreign customers at twice the rate of Russian customers, and he's asked the government's anti-trust agency to look into the matter.

Doing business in Russia is very tricky and the last thing you want to do is make enemies in the Kremlin, particularly Putin. The Russian government went after the oil company Yukos for tax evasion. The billionaire behind Yukos is now in prison in Siberia, and other key officials fled the country. The fear is that the same could happen to Igor Zyuzin, the billionaire behind Mechel.

The good news is that the stock is bouncing back today by over 13%, and the company has released an official statement saying that it will cooperate with the government. I'll keep new posted on any further developments in Mechel.

One of my favorite Chinese Internet stocks, Sohu.com (SOHU), reported outstanding earnings this morning. For the second quarter, Sohu.com earned $1.02 a share. That's an increase of 580% over last year! Wall Street was expecting just 67 cents a share. The company also said it's going to have an IPO for Changyou.com which is its online games unit. Sohu.com is one of the largest providers of online products and services to consumers and businesses in China. Although the stock is down today, it's up over 18% in the last two weeks.

I want to thank everyone who participated in yesterday's Quantum Growth teleconference. We had a lot of good questions. In case you missed it, you can listen to the audio here.

Last week, there was lots of new evidence of a recession brewing in the U.S. More banks failed, Chrysler ended all lease financing, and housing statistics turned even uglier. Many financial stocks were on the way up again, but after a rough Thursday we saw the massive short covering rally in financial stocks flame out. Banks experienced their biggest one-day loss in eight years, proving that the trouble in financials is far from over.

This credit crisis has real impact on the average American. I spent four days in Southern California last week, and folks told me they are extremely worried about falling home prices and the recent failure of IndyMac Bank. Mortgage rates are now rising again, so the hope of refinancing homes is fading fast. The latest bank failure on Friday hit close to home for me, when the First National Bank of Nevada in my hometown of Reno had its charter revoked. The First Heritage Bank of Newport Beach, California, also was shut down, and the Federal Deposit Insurance Corporation (FDIC) was appointed receiver of both banks. In Reno, like much of California, the housing market remains very weak. The First National Bank of Nevada is basically a victim of poor mortgage lending. In Washoe County, which includes Reno and Incline Village in Lake Tahoe, the total homes in foreclosure jumped 186% in the past year!

The precarious state of the economy was also evident in the Fed's latest Beige Book, which was released last Wednesday. All 12 Fed districts reported that prices were "elevated or increasing." This was the worst Beige Book report on inflation in decades. While overall wages were soft, workers in some areas were demanding wage adjustments to supplement the higher cost of living. This is the first evidence that workers are beginning to demand higher wages, despite the precarious job market. The Beige Book survey used the word "grim" quite often, when describing various regional economies.

Since the Beige Book will guide the Fed on its interest-rate decision next week, I don't think the Fed will raise rates despite the urging of inflation hawks. The economy clearly needs all the help it can get. But if the Fed leaves rates alone, the dollar could fall and drive up inflation even more.

At 7 a.m. this morning with no members of Congress present, President Bush signed one of the most sweeping financial legislations since the New Deal:

The law authorizes the Treasury to rescue the mortgage finance giants, Fannie Mae and Freddie Mac, should they verge on collapse, potentially by spending tens of billions in federal monies. Together, the companies own or guarantee nearly half of the nation's $12 trillion in mortgages.

Partly to accommodate the rescue plan for the mortgage companies, the bill raises the national debt ceiling to $10.6 trillion, an increase of $800 billion. The bill also creates significant liabilities and risks for taxpayers, that are virtually impossible to calculate.

"We look forward to put in place new authorities to improve confidence and stability in markets, and to provide better oversight for Fannie Mae and Freddie Mac," Mr. Fratto said. "The Federal Housing Administration will begin to implement new policies intended to keep more deserving American families in their homes."

A half-dozen top advisers to the president, including the Treasury secretary, Henry M. Paulson Jr., who was the leading advocate of the legislation in the administration attended the signing. But it was not a particularly auspicious occasion given the precarious state of the nation's financial system, and the pressure that Mr. Bush came under to sign a bill that contained provisions he had opposed.

One of my favorite Emerging Growth stocks, Flowserve (FLS), just reported delivered an outstanding second-quarter earnings report. The numbers are simply astounding.

First, let me set the stage. For last year's Q2, the company earned 98 cents a share and Wall Street was looking for $1.49 a share for this year's Q2, so those were some pretty high expectations. Nevertheless, Flowserve still shattered Wall Street's predictions. Flowserve wound up earning $1.97 a share! That's 48 cents a share more than Wall Street was expecting.

That's not all. Flowserve also dramatically raised its earnings guidance for 2008. Before today, the company said it was expecting earnings-per-share of $5.90 to $6.20 for the entire year. Now it's says to expect earnings-per-share of $7.20 to $7.50. That's a huge increase. Once again, Wall Street was off the market. They had been expecting 2008 EPS of just $6.31. Expect to see a lot earnings upgrades very soon.

The economy is still growing, but not by much, The downward revisions of previous quarters is interesting, especially for the fourth quarter of 2007.

The economy grew less than expected from April to June, the government said on Thursday, and it shrank in the final months of 2007, dimming the outlook for a quick recovery.

Gross domestic product expanded at an annual rate of 1.9 percent in the second quarter, the Commerce Department reported, primarily because of a surge in export sales powered by the weak dollar. The government's tax stimulus package pushed consumer spending higher, but the ongoing pain in the housing market took a sharp toll on overall growth.

But that figure was below the estimate of many economists, who had expected growth of 2.3 percent, and it cast doubt on whether the stimulus package would be able to prop up the economy in the months ahead.