The Federal Reserve Bank of Kansas City released its Beige Book Report detailing economic activity among the twelve Federal Reserve Districts across the country. The pace of economic activity was quite sluggish throughout much of the country. At the same time, there have been hawkish comments recently by several Fed governors. This leads us to the question of the possibility of a Fed rate increase on the horizon.

However, one must remember that hawkish talk is quite different from hawkish action. As I have said in my book, Follow the Fed to Investment Success, "watch what the Fed does not what it says."

The Fed has given no indication that an imminent raise in interest rates is forthcoming. There have simply been hawkish comments, which are an incredibly inexpensive means of maintaining its inflation-fighting credentials. However, every time market turmoil arises, the Fed adopts a more conciliatory tone.

A government bailout of Fannie Mae and Freddie Mac would cost U.S. taxpayers $25 billion over the next two years under a plan being proposed by the Bush administration, according to an analysis by the Congressional Budget Office.

The July 14th proposal by the administration would grant the Secretary of the Treasury temporary authority to purchase obligations and other securities issued by Fannie, Freddie and the Federal Home Loan Banks. Congress is expected to vote on the proposal soon.

CBO used historical data to estimate expected losses on the different types of credit risk the GSE's (government-sponsored enterprises) have in their portfolios.

The New York Times reports that as the White House pushes Congress to fund its bailout of Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE), it is finally getting around to scrutinizing their financial condition. Is there any chance that the inspection will NOT reveal a critical need for the Congressional bailout? No. That investigation is guaranteed to support the White House's case.

The Times reports that the Federal Reserve and the Office of the Comptroller of the Currency (OCC) will be inspecting Fannie and Freddie's books. This comes at a time when the Office of Federal Housing Oversight (OFHEO), which should have been tracking their condition, is due to be wiped out.

Meanwhile, the Times reports that Fannie and Freddie are on the hook for some big obligations. They owe $1.5 trillion; they "own or guarantee more than $5 trillion in mortgages"; and they have derivative contracts to hedge $2 trillion worth of mortgage risks. I am curious what else the Fed and the OCC will be looking for as they inspect the books. I hope they can figure out how much cash Fannie and Freddie have available to pay off their obligations over time. But why doesn't the government know this already?

The Fed and the Comptroller of the Currency want to know how Freddie Mac (NYSE: FRE) and Fannie Mae (NYSE: FNM) are doing financially. No one seems to know for sure. That means the price of a bail-out of the companies is up in the air

According to The New York Times, "The financial condition of Fannie and Freddie is of keen interest to members of Congress, some of whom have expressed concern about approving a plan without a clearer understanding of the value of the possible losses."

The questions out of Congress are fair enough. The fact that the two firms do not already have answers to the questions is disturbing.

It is hard to imagine how Fannie Mae and Freddie Mac could have gotten so off track that they cannot give an adequate assessment of their own books. Perhaps if they had know more about their balance sheets and had implemented better forecasting and risk controls, the current mess would not be nearly as dire.

When no one knows how bad things are, they usually get worse.

Douglas A. McIntyre is an editor at 247wallst.com.

This post is part of a series on celebrity spokespeople who ended up doing serious harm to the brands they were hired to promote, or vice versa. See how we rank the 20 top spokesperson fiascos.

In the buildup to the 1988 Seoul Olympics, Canadian sprinter Ben Johnson was the prohibitive favorite to win gold in the 100-meter sprint, having set a world record the year before at the World Championships. Many companies vied to tie their name to his speedy frame, and his coach estimated that Johnson was bringing in a cool $480,000 a month in endorsement money from companies such as the Italian family-owned sports company Diadora.

Once the Olympics began that September, the sponsors must have been high-fiving one another as Johnson, on the biggest stage in sports, broke his own 100-meter record by running a 9.79, which won him the gold medal.

He should have kept running, right out of the stadium and to a safe hiding place. Test of his urine found evidence that Johnson had been using steroids. He was stripped of his medal, his time was disallowed, and after further investigation, his 1987 world record was also invalidated. Diadora pulled its $2 million contract, and other sponsors followed suit. Johnson ended up living in his mother's basement, and Diadora probably made a bonfire of its Ben Johnson campaign.

The aftermath of this scandal is felt even today, as baseball and cycling struggle to overcome the same pollution of competition and incredulity of their fans. There's not a company in the world that yearns to cultivate the brand 'cheater'.

Read the entire series

The battle over what the Fed should do with interest rates is hardly over. According to Bloomberg, "The Federal Reserve shouldn't wait for housing and financial markets to stabilize before it begins raising interest rates, central bank policy maker Gary Stern said."

In other words, forget the recession. Inflation is the real enemy.

Mr. Stern would like to kill the consumer in the process of trying to save him. The Fed may move up interest rates, but, because the cost of food and oil are global problems, there is little reason to believe that the agency can do much to have an impact on issues that have most of their origin beyond U.S. borders.

Recession is another matter. A large drop in interest rates could help the consumer with a multitude of debts from his mortgage to his credit cards.

Raising rates is move that is 180 degrees in the wrong direction.

Douglas A. McIntyre is an editor at 247wallst.com.

Wall Street analysts have said that Freddie Mac (NYSE: FRE) would not be able to get by without raising money. Its losses from the current mortgage crisis have simply been too great. At one point it looked like the Fed would open its doors to provide the company loans and Treasury would buy stock in the company.

According to The Wall Street Journal, Freddie "is considering raising capital by selling as much as $10 billion in new shares to investors."

After a sharp sell-off in its stock, Freddie has watched its shares move up over 50% in two days because investors believed the government help would keep the firm from becoming insolvent. Now that the value of the stock is somewhat higher, it may turn out to be a good time to get some cash in the barn.

But, the company's shareholders are likely to take a brutal beating. Freddie's market cap is only $6 billion, so the dilution of bringing in $10 billion would be stupendous. The move could certainly push the stock down to the $4 level over time, unless the company can post results well above what analysts expect and push the current share price way up.

Of course, the shareholders are not to blame, but they will be left holding the bag. Freddie management bet that it could get better returns on its portfolio by getting into risky investments and were burned like most banks and brokerage houses.

No matter how poor their judgment was, management will probably keep their jobs. Maybe they will even get a fat bonus for raising the new capital.

Douglas A. McIntyre is an editor at 247wallst.com.

During the recent testimony by Fed Chairman Ben Bernanke, Treasury Secretary Hank Paulson and SEC Chairman Christopher Cox, it has become increasingly clear that the Federal Reserve will be forced at least in the near term to extend a financial lifeline to any and all U.S. financial entities that are too big to fail. This refers to entities whose failure cold endanger the U.S. economy and in some cases the global financial markets.

I have learned during my investment career to watch what the Fed does much more than what it says. This has been demonstrated by Chairman Bernanke's extension of the discount window to Fannie Mae and Freddie Mac in recent days despite initial indications by Secretary Paulson to the contrary. Hawkish talk remains just that, not action.

The discount window was initially intended only for regulated banks to prevent a meltdown of the financial system from bank failures. In return for this financial insurance, banks are regulated, including the charging of fees. One can debate the alternatives to such an arrangement. However, this regulatory framework will probably be with us for the foreseeable future.

The plunge in oil prices and Intel's good earnings report from Tuesday were not enough to lift mood on Wall Street this morning. Investors, worried about a wave of data, earnings and Bernanke's second day of testimony, pushed U.S. stock futures lower. However, after yesterday's wild swings in the market, we may yet see futures change directions several times before the open.

On Tuesday, the session was marred by wild and volatile trading, induced by concerns over financials in general and Fannie Mae and Freddie Mac in particular. The steep drop in oil prices -- over $6 a barrel -- offset somewhat Federal Reserve Chairman Ben Bernanke's bleak testimony. Sill, the Dow Jones Industrial Average ended 92 points, or 0.84%, lower to close under the 11,000 mark. The S&P 500 dropped 13 points, or 1.09%, while the Nasdaq Composite, in anticipation of Intel's earnings, rose 2 points, or 0.13%.

Today, more economic data and earnings will affect the Street's sentiment.
At 8:30 a.m. EDT, consumer price index -- inflation at the consumer level -- for June is due out. Again, there is a big difference between expected CPI and core CPI, which excludes food and energy prices.
At 9:00 a.m., May net foreign purchases will be reported and shortly after, June industrial production and capacity utilization.
At 2:00 p.m., investors could go over the released minutes from the last Federal Reserve meeting.

Meanwhile, Bernanke will continue his testimony that is due to start at 10 a.m. EDT.

There are many ironies in the fact that President George W. Bush will throw the first pitch at Major League Baseball's All-Star Game in New York. For one, President Bush is the first managing general partner of a Major League team (the Texas Rangers) to become President of the United States.

President Franklin Roosevelt was the first to attend an All-Star Game and throw out the first pitch, starting the tradition. He too had to deal with a poor economy and by the time he threw out that first ball the groundwork was being laid for World War II. President Bush has had to contend with his own war.

While there are differing views as to whether we should have gone into Iraq and whether we should stay or get out, this will always be viewed as George's war, fair or not. And the state of our economy in 2008 will also be viewed as George's economy, fair or not.

The ultimate irony for me is that Yankee Stadium is scheduled to be torn apart at the end of the season. This is YANKEE Stadium and the last president to set foot in it will be George W. Bush. The stadium with the greatest heritage in baseball, the 'House That Ruth Built', is going to be torn apart while our economy is also being torn apart. It is being torn out at its roots.

Oil plunged more than $8 to about $136 Tuesday at mid-day after Fed Chairman Ben Bernanke's indicated the risks to U.S. growth have increased as a result of credit market losses, Bloomberg News reported Tuesday.

Oil fell $9.26 to $135.92 per barrel before recovery slightly. Oil hit a record of $147.27 per barrel on July 11.

The other major energy commodities, likewise, plummeted on the news. Heating oil plunged almost 15 cents to $3.91 per gallon, unleaded gasoline sank almost 17 cents to $3.39 per gallon, and natural gas plunged 44 cents to $11.51 per million BTUs.

"Oil in free-fall"

Energy trader Jim Dietz said "a mini selling frenzy" hit the oil market after Bernanke indicated the U.S. economy was likely to slow further.

"We did have some support for an oil-long trade earlier as an investment when few other investments are working, but that sentiment was quickly wiped out by Bernanke's comments," Dietz said. "We had oil in free-fall for about an hour. The market put 'two and two together.' We had the Fannie Mae and Freddie Mac bailout news yesterday [Monday] and Bernanke's bearish comments today. That led a lot of people to conclude we're going to see a slowdown in oil demand growth, which means lower prices."

The dollar fell to a record low against the euro Tuesday morning as traders calculated that U.S. credit market losses will further hurt U.S. economic growth.

The dollar weakened about 1.25 cents to $1.6048 versus the euro before regaining some ground to $1.5995. The dollar also fell one cent versus the British pound to $2.0057 and 1.85 yen to 104.20 versus Japan's yen.

Currency trader Andrew Resnick told BloggingStocks Tuesday the equation is a basic one: with more dollars in supply, each dollar is worth less.

"The Fannie Mae and Freddie Mac assistance packages will require more federal spending or federal support though guarantees. That action, plus FDIC takeover of problem banks means more federal outlays, which weakens the value of the dollar," Resnick said. "We've been in a period of increasing federal outlays for the past five years, although I don't think anyone in 2003 anticipated that federal spending would increase to this degree."

Investors have watched the precipitous fall in the U.S. dollar over the past few years with trepidation. Investors in Israeli stocks trading in the U.S. have witnessed the once-lowly shekel dominate the dollar (and most other global currencies) over the past two years. It looks, at least from some uber-investors' perspectives, that the dollar may be set to reverse -- a boon for those companies with significant sales in the U.S.

Bloomberg has an article out this morning saying that bond guru, Bill Gross, the manager of the world's largest bond fund, the $129 billion Pimco Total Return Fund, has turned negative on the euro for the first time since its inception in 1999. According to the article, Gross's firm, Pimco, believes that according to purchasing power parity, a measure used to account for differences in exchange rates across countries, the euro is overvalued by 30%.

And Gross isn't the only one who is concerned that Europe may suffer a bigger slowdown than the U.S. in a world confronted with slowing growth and financial snafus. The same Bloomberg article says that according to a recent poll conducted by Bloomberg of global strategists, many think that the euro has seen its day and that the dollar is poised for a rally (hard to believe in the face of Fannie Mae and IndyMac).

Europe's Trichet-led Central Bank has signaled that it may be done raising rates. In fact, given the choice between fighting inflation and re-energizing a sputtering economy, some are betting that the ECB may need to actually lower rates. With a Fed-led plan to bailout the U.S. banking system and the bottoming out of the dollar, it looks like Gross and Co. are betting against the euro for years to come.

Zack Miller is the managing editor of IsraelNewsletter.com and a former equity analyst for a leading multinational hedge fund.

The Wall Street Journal [subscription required] reports that Ben Bernanke's congressional testimony is full of uncertainty. The interesting part is that he's suddenly coming to realize that there is inflation in the economy. With oil prices up five-fold from $24 in January 2001, the dollar down 72% and food prices triple where they were a few years ago, Bernanke's statement suggests that he his suddenly becoming aware that core inflation -- which excludes energy and food prices -- is not real inflation. His statement suggests he only now comes to realize that energy and food prices part of our economy too.

Investors are spooked by Bernanke's uncertainty. I would support an effort by Bernanke to stop the fall in the dollar, but in order to make that work, the White House will need to direct a change in policy. This would mean raising interest rates, reducing the budget deficit -- including ending tax breaks for the rich and pulling the plug on expensive wars, as well as paying down the $9.5 trillion federal debt.

Guess what? That policy will not happen under the current president. And if Paulson is serious about raising the national debt to bail out the mortgage industry, the dollar will grow even weaker. The administration's policy of waiting until a disaster strikes to wake up and do something is costing this country trillions. I think we're getting to the point where we need to ask whether there is a limit to how much bailing out the U.S. can afford.

Meanwhile, if Bernanke raises rates to combat inflation, it will be interesting to see what that does to the flow of credit.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.

So far, billionaire investor George Soros says he doesn't see a light at the end of the tunnel; at least not yet.

Soros told Reuters Monday the crisis over Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) will not be the last, and that the wider credit crunch will continue to effect the already anemic-growth (or worse) U.S. economy.

On Monday, the U.S. Treasury announced a plan to shore-up Fannie Mae and Freddie Mac, including authorization to buy unlimited stakes in and lend to the companies, aimed at stemming a collapse in confidence, Bloomberg News reported Monday. Soros said the U.S. Treasury's plan, and if need be, the resources of the U.S. Federal Reserve, will keep Fannie and Freddie functioning, but that does not blot-out the main negative: the drag effect of home foreclosures on the U.S. economy, Reuters reported.

'Most serious financial crisis of our lifetime'

Calling the year-long global financial market turmoil "the most serious financial crisis of our lifetime," Soros said the negative impact of foreclosures and the credit crisis is likely to increase, creating a deeper U.S. recession.

Economist Peter Dawson told BloggingStocks that "while Soros provided a candid description of current events, no doubt derived from considerable research, he may have been a little too stark . . . seeing too much of one side of the asset / liability ledger."