Despite largely positive corporate earnings reports, investor caution has set upon Wall Street. For the third straight day stocks are set to move into negative territory, with futures showing the three major U.S. indexes heading lower ahead of Thursday's opening bell.

Some blamed Wednesday's near 1% drops in the Dow Jones industrial average and the S&P 500 on a late-day sell-off driven by the latest Beige Book survey from the Federal Reserve that showed the economy is ever so slowly emerging from recession -- too slowly, it would seem, for investors.

If you are one of the investors out there watching General Motors stock each day trying to pick the perfect time to buy the stock... don't! For whatever reason, people have continued to buy General Motors stock, despite the fact that the company and the government have issued warnings that the stock is destined to be worthless.

I read an interesting article that reported yesterday there were 12.6 million shares of General Motors traded. Maybe people do not realize that the company went into bankruptcy, or maybe they are just trying to profit off of traders that are not aware that this is not new General Motors stock, but the volumes are a bit curious.

After yesterday's closing bell, Capital One Financial (NYSE: COF) reported a second-quarter loss of 65 cents per share. The quarterly loss included $461.7 million COF repaid to TARP and a $38 million dividend payment. Excluding these payments, COF saw a quarterly profit of 53 cents per share. The Street expected COF to lose 73 cents per share, so the company managed to top expectations. Nevertheless, the company noted that its results were pulled lower by credit card losses along with the repayment of the government funds.

COF managed to make money excluding items, but a loss is still a loss. While the company noted that people have been a bit more defensive in their spending, I'm guessing that this may change. Remember that unemployment is at record highs, which may lead to more people to depend on credit cards (if they have them) to pay for necessities.

With such uncertainty, following an absolute return strategy continues to offer investors the biggest bang for their buck. There is no sense in guessing where the market will be down the road.

Instead, buy cheap stocks and sell stocks that are expensive. Then blend the two approaches together in one portfolio and chances are you'll make money.

Even with a huge rally in stocks, the S&P 500 ended the second quarter with a year-to-date gain of 1.78%. That is a vast improvement compared to the 11% loss at the end of the first quarter, but it's a minimal return for taking risk in the stock market.

Investors need to do better -- and they can.

Not a good day for those looking for green shoots with markets down strongly. And no wonder. Credit card problems with the U.S. consumer are off the hook as CapitalOne (NYSE: COF) charge-offs rose to their highest historical level of 9.91% (via ZeroHedge) and American Express (NYSE: AXP) rose to 10% (via Mish Shedlock).

Higher chargeoffs and retracting credit means further consumer spending retraction. A semi-annual survey by Collier Capital found that 20% of institutional investors plan to downsize their target allocation to private equity, (via PEHub) the largest negative response since the survey started in 2004. An article by two Harvard University economists found that the biggest reason for the growing income inequality is lagging educational improvement in the American workforce (via VoxEU). There is no quick fix for this so its fairly bad news (although better than blaming the inequality on globalization and some neo-capitalist cabal).

Alex Salkever is Director of Research at Piqqem.com, a stock analysis site powered by the Wisdom of Crowds.

Small biz credit card issuer Advanta (NAS: ADVNA) will shut down accounts to preserve capital and will stop lending June 10, according to Bloomberg. The company has 1 million customers that could be left without credit cards, yet another blow for small businesses suffocating without sufficient credit lines. Shares tumbled 24% on the news to less than a dollar per issue.

In the wake of the last five weeks' irrational exuberance its time to get real again. Via the Zack's investment blog, real estate giant Cushman & Wakefield reports office vacancies continue to rise around the country (out of 31 markets tracked, only one, Dallas, saw reduced vacancy). FT's Alphaville blog points out that CDS spreads for U.S. banks markedly widened on Tuesday, underscoring investor anxiety.

Capital One (NYSE: COF) and Chevy Chase Bank join the long list of bank mergers that we have seen this year, as Capital One announced today that it would be acquiring Chevy Chase Bank for $520 million in cash and stock.

Over the past couple of years, Capital One has acquired several regional banks as it moves to become a major player in the full banking services industry, after getting its start as primarily a credit card company. The move to acquire Chevy Chase Bank, which is headquartered in Bethesda, MD, involves a cash payment of $445 million in and 2.56 million shares of stock.

McLean, Va.-based Capital One is one of the banks that received part of the recent government bailout, reportedly getting $3.56 billion in exchange for preferred stock and warrants to purchase common stock.

Banking analyst Meredith Whitney is credited with questioning assets on bank balance sheets given the collapse in the real estate market.

Taking advantage of a complete lack of information, Ms. Whitney triggered a massive collapse of trust in an industry by claiming that mortgage-backed securities were worth far less than what the market had perceived.

While she may have had a basis for her claims, her assessment was more sensational than factual. Mortgage-backed securities are quite complex instruments whereby loans are sliced, diced and packaged for sale to a global market.

With maturities extending 30 years into the future, it is unreasonable and unfair to assume that paybacks, even with high default rates will amount to what is currently priced into the market.

The lack of understanding of the underlying security or loans at the individual level has created uncertainty that has yet to be resolved.

For fans of the original "Star Wars" movie, think of the weakness in terms of attacking the Death Star. That one hole was exploited (we can debate the merits of doing so later) by Ms. Whitney and those like her.

Reuters reports that Capital One Financial (NYSE: COF) reported that its profit tumbled 40% and its earnings came in 10 cents a share less than expected. Its loan losses spiked -- cutting into profits.

In particular, Capital One made $1.21 a share and analysts had expected $1.31. And its provision for losses more than doubled from the same period in 2007. According to PR Newswire, Capital One's provision increased 109% from $397 million to $829 million.

The problem? Consumers are not paying off their credit cards like they did when they were using their house as an ATM. With housing prices down 15% and three million foreclosures underway, consumers just can't afford to pay off their credit cards. And Capital One is expecting a big jump in bad debt. Its stock has fallen 4.9% after hours.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.

MOST NOTEWORTHY: AbitibiBowater, GlaxoSmithKline, AstraZeneca and Capital One were today's noteworthy downgrades:

• Lehman downgraded AbitibiBowater (NYSE: ABH) to Equal Weight from Overweight citing dilution from the recent $350M convertible offering, cost pressures, and a more cautious outlook near-term for pulp markets.
  
• JP Morgan cut GlaxoSmithKline (NYSE: GSK) and AstraZeneca (NYSE: AZN) to Underweight from Neutral on long-term earnings growth concerns.
  
• Keefe Bruyette lowered Capital One (NYSE: COF) to Underperform from Market Perform to reflect the company's credit outlook.

OTHER DOWNGRADES:

• Nokia (NYSE: NOK) was downgraded to Neutral from Buy at UBS and to Underweight from Overweight at JP Morgan.
  
• Textron (NYSE: TXT) was cut at Credit Suisse to Neutral from Outperform.
  
• Merriman downgraded Blue Coat Systems (NASDAQ: BCSI) to Neutral from Buy.

Andrew Horowitz, is a money manager and author of The Disciplined Investor. He discusses COF in the most recent episode of The Disciplined Investor Podcast

In an 8-K release this morning, Capital One Financial Corp. (NYSE: COF) reported a 13.7% increase in the monthly charge off rate for the U.S. card segment as compared to the December, 2007 report. As has been predicted, global credit card debt has been rising at an alarming rate. The most recent announcements of a 40% workforce reduction for Capital One's U.K. unit once again displays how "predatory lending practices" have now come back to haunt those companies that have been playing with financial-fire. As the Capital One Management was working on keeping credit card customers, they did not realize that that same level of loyalty would eventually come back to bite them in the asterisk. (Chart from 2007 COF Investor Conference)

When looking at the total picture, Capital One's $505,083,000 monthly principal write-off is becoming more and more concerning as we are continuing to witness a global economic contraction. Consumers are spending less as they have greater worries about their shrinking wallets...Right? They (we) are also becoming painfully aware that the housing slowdown is not going to be a short-lived phenomena. As their home values continue to fade, they are looking for alternative ways to pay for their everyday living expenses. This has led most to the only alternative they have to feed and clothe their family: The Credit Card in the wallet and the ones in the back of the drawer.

Now, as the "almost-affirmed" recession is upon us, delinquencies will rise along with foreclosures and bankruptcies. This will surely trickle down to the lenders as the inflows they receive dwindle, outflows grow and non-recoverable debt increases. While a 6% rate may seem historically high, back in 2003, Capital One posted rates closer to 8% as the U.S. was starting on the road to recovery from a difficult 2 years of recession and the fall off from the domestic stock markets averaging near -50%. The same predicament is what lies ahead as the stock market losses are substituted by housing losses. Even though property values may appear to be "on paper" the physiological wealth effect (or is it defect?) still hurts consumer confidence. All of this leads us back to an ever increasing problem with consumer credit.

Capital One Financial Corp. (NYSE: COF) shares are trading higher this morning on news that yesterday evening's Visa (NYSE: V) IPO raised almost $18 billion. COF offers credit and debit card services co-branded with Visa. Visa this morning has soared above the pricing at $44 from yesterday and is currently around $60. If you think that the company won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on COF.

After hitting a one-year high of $82.25 in June, the stock hit a one-year low of $37.41 in January. COF opened this morning at $51.65. So far today the stock has hit a low of $50.89 and a high of $54.46. As of 11:55, COF is trading at $51.85, up $0.36 (0.7%). The chart for COF looks bullish and steady, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.

For a bullish hedged play on this stock, I would consider an April bull-put credit spread below the $40 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 7.5% return in just one month as long as COF is above $40 at April expiration. Capital One would have to fall by more than 22% before we would start to lose money.

MOST NOTEWORTHY: Certain banks, VASCO Data Security and Bankrate were today's noteworthy downgrades:

• UBS downgraded shares of Discover (NYSE: DFS) and Capital One (NYSE: COF) to Sell from Neutral and American Express (NYSE: AXP) to Sell from Buy, as they believe a U.S.-led recession will lead to increased credit losses.
• Jefferies downgraded shares of VASCO Data Security (NASDAQ: VDSI) to Hold from Buy to reflect the company's exposure to the financial services market, as they believe 2008 will be a tough year for small companies selling into tightening IT budgets.
• Merriman lowered its rating on Bankrate (NASDAQ: RATE) to Neutral from Buy on valuation, as they believe the stock is pricing in upside from strong website traffic seen in January driven by refinance activity and Fed rate cuts. Citigroup downgraded shares to Hold from Buy on valuation, as they find the risk/reward less compelling at current levels.

OTHER DOWNGRADES:

• JP Morgan removed SanDisk (NASDAQ: SNDK) from its Top 3 Picks List.
• Goldman downgraded CSK Auto (NYSE: CAO) to Neutral from Buy and removed Google (GOOG) from its Conviction Buy List.
• Baird lowered Comerica (NYSE: CMA) to Neutral from Outperform.

The management at American Express (NYSE: AXP) must have hoped that its relatively high-end card holders might dodge much of the economic slowdown. It was not to be. According to The Wall Street Journal, "the card company said yesterday that it would take a $440 million pretax charge against fourth-quarter earnings as it sets aside more money to cover soured loans." The news and a warning from Capital One (NYSE: COF) showed that credit problems have moved beyond the mortgage market and into consumer credit.

American Express described its problems as "broad-based and sudden." So, part of the financial industry says the consumer pulled in very sharply in December, a sign that GDP may have already begun shrinking at the end of last year.

The consumer was the economy's last, best hope. He was needed to drive revenue in the retail and consumer goods markets. It appears now that his hibernation has begun in earnest.

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