In the first half of 2008, the S&P 500 fell 12%. June's stock market was the worst since 1930. So are stocks now a screaming buy or are they poised to plunge further? Nobody knows. But my guess is that stocks will move based on how well they perform compared with expectations. And the risk of negative surprises in most industries exceeds the chance of positive ones. So stocks will probably keep falling.

Here's a quick review of six negatives:

• Oil prices. With oil at $142, up 492% since January 2001, consumers are paying about $4.10 a gallon for gas and companies that use oil are getting squeezed while trying to raise prices. An attack on Iran, a big oil supplier, looms on the horizon. This and other geopolitical uncertainties could put further pressure on oil.
• Housing. Three million people are expected to face foreclosure on their homes. And prices have dropped 15%. Since people were using home equity to finance their purchasing, their negative equity is sucking the wind out of the economy.

Are the world's major central banks signaling an end to interest rate cut cycle?

Officials from three of the four major central banks - - all except the Bank of Japan - - have recently signaled their concern about rising inflation stemming from rate cuts implemented to stimulate demand following the credit crisis, Bloomberg News reported Friday. The U.S. Federal Reserve, Bank of England, and European Central Bank have commented, in various phraseologies, their concerns about prices and business costs.

Economist David H. Wang told BloggingStocks investors/traders can ignore comments out of the ECB, but not the Fed's or the BOE's - - which translates to at least a rate cut pause.

"[ECB President Jean-Claude] Trichet has been on the wires commenting on the need to contain prices, but he's been doing that since, I think, 1962, so ignore that," Wang said. "But the Fed comment blitz we had earlier this week and the Bank of England comments about rising prices I think are clear signals of a rate cut pause. The central banks have implemented enough monetary stimulus, for now."

Bloomberg News reports that Bank of America (NYSE: BAC) missed earnings expectations by 44%. Specifically, its first-quarter net income declined to $1.21 billion, or 23 cents a share, from $5.26 billion, or $1.16 a share in 2007. The 21 analysts surveyed by Bloomberg expected the bank to make 41 cents a share. The bank experienced a huge rate of late credit card payments in its $81 billion credit-card portfolio -- 5.8% compared with an industry average of 4.1%.

Bank of America's problem is its exposure to the housing market. Assuming 2% of its home-equity loans are uncollectible this year, the cost may be $2.3 billion according to a Fitch Ratings analyst. If the bad loans reach 5%, the damage could total $5.9 billion. Meanwhile, Bank of America is still on track to buy Countrywide Financial Corp (NYSE: CFC) which had $34 billion in home-equity loans at the end of 2007.

Both Bank of America and Countrywide have home-equity loans concentrated in the regions with the most foreclosure filings. California, Nevada, Arizona and Florida are the four states where housing prices are sliding faster than the national average -- ranking among the top 10 states with the most foreclosure filings in March.

The tightening of access to credit and higher costs associated with financing hit used car seller CarMax Inc. (NYSE: KMX) right in the wallet. The company suffered a huge 48% drop in 4th quarter (4Q) net earnings, the vast majority of which stemmed from growing losses and increasing credit expenses in its auto finance unit. Thus unit posted a $1 million loss in 4Q2008, as compared to a $31.7 million profit in 4Q 2007. CarMax CEO Tom Folliard states the company is willing to tolerate such a loss in order to maintain in-house financing capabilities as a way to help boost sales and grow market share. But for how long? Fiscal Year (FY) 2008 earnings declined 8% as a result of the 4Q plunge.

CarMax is doing a whole lot of things right. 4Q sales increased 9% to just over $2 billion and FY 2008 sales increased 10% to $8.2 billion for used cars, to help counter a 20% decline in new car sales. Comparable store sales increased 3% and market share grew a bit. But in order to hit these numbers, CarMax dropped its gross profit per unit by $120. Average profit per unit sales was just over $2500.

"You can't sell what you can't finance" remains as true in the used car market as in real estate. Despite increasing costs for credit and financing, CarMax plans to continue its expansion plans, opening 14 used car superstores in 2009. Revenue is projected to grow in the 7-14% range based on modest growth in sales per unit volume. FY 2009 EPS is forecast at $0.78-$0.84. Used car retailers will remain in a much stronger financial position than new car retailers, at least for the foreseeable future.

After a recent run-up in mid-March, many stocks in large money center banks and brokerages are back near multi-year lows. A great deal of news about mortgage-backed paper write-downs and poor first quarter forecasts is already in the market. So, what's wrong? It would seem like most of the trouble is already known to the market.

There may be several things which could hurt that financial sector nearly as badly as the housing crisis. One is related to the current problem. There are $1.2 trillion in home equity loans on bank books. With many houses valued at below mortgage value, this could be a real problem. Home equity holders could block home sales if consumers do not get the money to pay-off both the primary mortgage and secondary mortgage at a closing. The could further gridlock the housing market.

Perhaps more troubling is that large pools of credit card and auto debt have not hurt financial company earnings. These are sliced into pieces and sold as derivative paper just as mortgages were. A lot of this paper is still sitting on balance sheets.

According to The New York Times: "what investors fear is that financial companies' pain will not end with the troubled mortgages, which by some estimates have already resulted in more than $200 billion of losses." And, they are right to. Housing is not the only big sector of the US economy. There is a reason that a company like Merrill Lynch (NYSE: MER) fell another 14% last week. A lot of the bad loans and bad derivatives are not washed out of the markets yet.. That means that shares in banks and brokerages could make new lows.

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

This morning, I took a look at Bear Stearns' (NYSE: BSC) 10-K filing, focusing on the Risk Factors. Usually, such stuff is boilerplate and not worth thinking about. Yet, reading the list, it seems that Bear is triggering many of them. Essentially, it's a classic case where there's a run on the bank.

OK, so take a look at this risk factor from the 10-K:

"Liquidity risk could impair our ability to fund operations and jeopardize our financial condition. Liquidity, i.e., ready access to funds, is essential to our businesses. An inability to raise money in the long-term or short-term debt markets, or to engage in repurchase agreements or securities lending, could have a substantial negative effect on our liquidity... For example, lenders could develop a negative perception of our long-term or short-term financial prospects if we incurred large trading losses, if the level of our business activity decreased due to a market downturn or if regulatory authorities took significant action against us."

With Bear, we are certainly getting a hard dose of "negative perception." Despite its billions of dollars, the firm has had a tremendous break-down with its clients and counterparties. According to Bear's CEO, Alan Schwartz, the liquidity position "deteriorated" in a matter of about 24 hours (yes, it's something you never want someone like him to say). As a result, the firm has received secured loan facilities from JPMorgan Chase & Co. (NYSE: JPM) and even the Federal Reserve Bank of New York.

This action is vital. After all, a collapse of a massive financial institution is poison for all the other players (if history is any indication). What's more, firms like Bear have extremely complicated operations and structure highly leveraged transactions and derivatives. In other words, the "house of cards" seems like the right analogy. More importantly, what other firms are stretched like Bear?

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar Online Guide to Decoding Financial Statements. He also operates DealProfiles.com.

MAJOR PAPERS:

• Take-Two Interactive Software Inc (NASDAQ: TTWO) rejected Electronic Arts Inc's (NASDAQ: ERTS) unsolicited takeover offer as too low, and now EA is turning hostile, going directly to the shareholders to acquire all outstanding shares for $26 each, the same price originally offered to Take-Two, the Wall Street Journal reported.
• No one wants to see The Bear Stearns Companies Inc (NYSE: BSC), rumored to have liquidity problems, fail, but competitors and clients are being extra cautious, according to the Wall Street Journal.
• The credit crunch has hit three more funds, the Financial Times said. Drake Management, Global Opportunities Capital and Blue River Asset Management have all been forced to suspend investor withdrawals or close down after being faced by turmoil in the credit markets.

OTHER PAPERS:

• According to Tim Berners-Lee, the inventor of the World Wide Web, the UK Times reported that Google Inc (NASDAQ: GOOG) may eventually be superseded as the dominant Internet brand by a company that uses the power of next-generation Web technology.

Reuters reports that U.S. home prices fell a record 8.9% in 2007. The last time home prices fell anywhere near as much as in 1991 when they lost 2.8% of their value. That was when the current president's father was in office. And he presided over a $200 billion government bailout of the savings and loan industry.

This is an impressive accomplishment for junior. But it does not appear to be the end -- although it may mark the beginning of the end. That's because, as you may have read by now, two million homeowners are expected to foreclose on their homes by the end of 2009. The reason is that variable rate mortgages are resetting to rates higher than many borrowers can afford.

It's too early to tell how much the current president's housing market problems will cost the economy. Although, so far, he is doing a good job of keeping the government from formally bailing out the housing market. That is unless you take into account the skyrocketing stagflation resulting from the Fed's interest rate cuts and the credit crunch.

Maybe the U.S. needs a break from Bushes in power.

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

Moody's (NYSE: MCO) is thinking of releasing a new ratings system that does not use letters, but has numeric ratings and "warning labels" for securities that may be difficult to analyze.

According to The Wall Street Journal, "one of the most significant changes being considered by the parent of Moody's Investors Service: a new, 21-point numerical scale to rate structured securities." The new system would also help investors look at CDOs and other risky investments differently from corporate bonds.

The whole exercise is bogus. Moody's could have employed a similar system long ago. Why are numbered ratings any different from those that use letters? Why didn't the firm have a systems that indicated the risks in complex securities such as CDOs and other structured investments?

The Moody's move is simply an attempt to try to hide and rectify the substantial flaws in the system that exists now. And, it is a feeble attempt to boot.

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

Mervyn King, governor of the Bank of England, and long-time inflation hawk, may stand out in history textbooks [subscription required] for all the wrong reasons, in the view of some monetarists, The Wall Street Journal reported Monday.

In August 2007, when markets nearly froze as Wall Street digested the first wave of subprime mortgage and related asset defaults, King initially was not moved. As the U.S. Federal Reserve and European Central Bank added billions in liquidity to the financial system, King refused to participate, arguing that the tactic would increase the intensity of future crises.

But events soon took on a momentum of their own, and King changed his stance. In September 2007, when Northern Rock experienced a bank run, King sensed a threat to the financial system and added liquidity, calming London's credit and equity markets. Still, Britain's press labeled him "Swervin' Mervyn."

Unwarranted criticism?

London-based economist Mark Chandler told BloggingStocks Monday the King criticism "is unfair, and unwarranted."

The Associated Press reports that Bank of America (NYSE: BAC) and Wachovia Corp. (NYSE: WB) both banked badly in the fourth quarter -- seeing profits plunge 95% and 98% -- respectively.

Here're are the lowlights:

• Bank of America: Net income fell to $268 million, or 5 cents per share, in the fourth quarter from $5.26 billion, or $1.16 per share in Q4 2006.
• Wachovia: Net income fell to $51 million, or 3 cents per share, from $2.3 billion, or $1.20 per share, in Q4 2006.

The culprit? Bloomberg News blames home loan write-downs for Wachovia's bad numbers. Wachovia's provision for credit losses rose to $1.5 billion from $408 million on September 30. And Bloomberg News fingers $5.28 billion in mortgage-related write-down as reason for Bank of America's poor results. Some good news for Bank of America: it had a pretax gain of $2 billion from its holding in Visa Inc., the credit-card network that's planned an initial public offering for later this quarter. We'll see.

Bank of America is down 5.5% in pre-market while Wachovia is a mere 3.6% lower.

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

Commercial real estate developers are no longer immune to the credit crunch hitting residential real estate owners and developers, according to today's Wall Street Journal. Yesterday in visible proof of the problem, a Las Vegas casino developer, Bruce Eichner, defaulted on a $750 million loan from Deutsche Bank because he was not able to refinance the debt. It's not the first time he's been caught up in a credit crunch. The Journal reports he lost several projects in New York City during its real estate downturn in the early 1990s.

The Journal also points out he's not the only one having trouble getting refinancing. Other commercial developers in trouble according to the Journal include:

• A major Australian shopping mall developer, one of the largest owners of shopping centers in the U.S., has been unable to refinance $3.4 billion in short-term debt.

• New York developer Harry Macklowe, who bought office buildings at the top of the commercial real estate market, can't refinance $7 billion in debt that's due in February. He's trying to sell his General Motors Building in midtown Manhattan to come up with cash.

Once again, the ever-incisive Financial Times columnist Martin Wolf, an economist, identifies with laser-accuracy what ills the current market. The problem, Wolf argues, is not a lack of solvency but a lack of liquidity (i.e. 'panic').

Wolf does not deny that there have been bad loans (there have been) or that no companies will go out of business (some will). But the circumstance that froze credit markets, that caused quality corporate bonds to fail to price, and that leads to 100-point spreads between the LIBOR rate (what banks charge each other) and the ECB's benchmark interest rate, is rooted more in a lack of confidence, than a lack of sound economic fundamentals or a lack of resources.

A lack of liquidity

And a lack of liquidity or 'panic' is something that central bankers can address. With the above in mind, the U.S. Federal Reserve's plan, in consultation with the European Central Bank, the Bank of England, the Swiss National Bank, and the Bank of Canada, to inject $40 billion via auctions into the financial system is appropriate and prudent. (Further, in addition to reciprocal currency arrangements, the companion central banks will take related actions, including the Bank of England's decision to accept a wider range of collateral on 3-month loans).

As expected, Merrill Lynch & Co. (NYSE: MER) has ousted Chief Executive Stan O'Neal after the Wall Street firm took a gargantuan $8.4 billion write-down of securities backed by subprime mortgages -- whose value has been decimated -- that was almost double what the company had forecasted earlier this month, according to The Wall Street Journal [subscription required].

Can you imagine screwing up that badly and getting $250 million? That's the value of O'Neal's golden parachute pegged by the Associated Press. The question now is who else on Wall Street will be riding into the sunset with him. Jimmy Cayne of Bear Stearns? Chuck Prince of Citigroup Inc. (NYSE: C).

O'Neal's fall from grace has been stunning to watch.

In December, O'Neal promised that the $1.3 billion acquisition of subprime mortgage lender First Franklin would provide "revenue velocity" whatever that means. The company also said that it expected the acquisition to add to earnings by the end of 2007. Guess that didn't happen either. To make matters worse, O'Neal approached Wachovia Corp. (NYSE: WB) about a merger without consulting his board, which is a major no-no for any CEO. Let's not forget that Merrill's shares are down 29% this year, underperforming many of its peers including beleaguered Bear Stearns & Co. (NYSE: BSC).

To recap, O'Neal went full throttle into the subprime mortgage market at the height of the real estate market. He failed to consult the board on a major acquisition and has shafted the company's shareholders and will be richer beyond most people's wildest dream because of it.

Over the past several months Wall Street experts have been debating whether or not America is headed to a recession, and according to a new CNN poll, a large percentage of Americans think that the country has already entered a recession.

Concerns over a possible recession have been lingering for most of the year, as housing prices have steadily fallen, while prices for gas and food continue to rise. But the sentiment really started to take hold this summer as the subprime mortgage meltdown started to spread. These concerns are only going to grow today after a weak Bank of America Corp (NYSE: BAC) earnings release.

As the weak housing market continues to deteriorate CNN finds that nearly half of all Americans are now under the impression the country is already in a recession. According to its recent poll, 46 percent of U.S. residents believe the country is in a recession, with 51 percent thinking we have not.

The report also showed that black Americans are taking a much more pessimistic stance on the current economy. CNN shows that 69% of all black Americans feel the country is in recession, while only 42% of white Americans think this is the case.