TheStreet.com's Jim Cramer says a year of living dangerously almost destroyed Merrill Lynch and Citigroup.

To me the customers made out this time, the dealers didn't.

When I look at the losses the dealers are taking, I keep wondering how the heck they all got caught. Think of it like this -- if this merchandise were equities, you would ask: How did Merrill (NYSE: MER) (Cramer's Take) and Citigroup (NYSE: C) (Cramer's Take) get caught owning so much stock?

That's why we have to be shocked at the losses at Citigroup and Merrill. It was like they were making a big bet on housing and just masking themselves as dealers.

Now it is true that they were merchandizing and got caught. Prince was such an idiot. I hectored this guy and the board for a year, but all they did was stand by and applaud him. He probably had no inventory controls because he never understood the instruments anyway. That's OK, they were hard to understand. But he was the CEO, for heaven's sake.

You would think that with its stock in the toilet, lawsuits alleging securities fraud pending, and a history of SEC inquiries, Novastar Financial (NYSE: NFI) would find it wise to start being honest with investors.

You would think. But on December 20, I wrote about the departure of Novastar's CEO, CFO, and general counsel. In the press release dated December 19 announcing their "retirements," Novastar wrote that Chairman and CEO Scott Hartman would "leave the Company and retire from its Board of Directors."

In the 8-K announcing the moves, filed with the SEC on the 21, Novastar said that "On December 18, 2007, Scott Hartman was terminated as the Chief Executive . . . On December 18, 2007, Gregory Metz was terminated as the Chief Financial Officer of the Company, effective as of January 3, 2008."

Why did Novastar change its language so dramatically? "Leaving the company" became "terminated" in a wonderful case of differential disclosure: 'Let's put out a broadly disseminated PR saying one thing and then file an 8-K with the SEC a few days before a holiday saying something completely different and hope no one will notice'.

Given that Novastar has already handed its shareholders massive losses, the least they could do is be honest and forthcoming in their press releases. But apparently, that's too much to ask.

TheStreet.com's Jim Cramer explains what could force the Fed to cut rates again.

The housing index just can't rally for a minute. The thing's amazing. The stress of the system is so clearly manifested by this that I have to wonder if the Fed wants this index lower.

The fact that the Fed's speakers never mention things like this index and the homebuilders makes me wonder if this group is actually what the Fed wants to put out of business. I wonder if the Fed thinks that Pulte (NYSE: PHM) (Cramer's Take) and Horton (NYSE: DHI) (Cramer's Take) and Lennar (NYSE: LEN) (Cramer's Take) and Standard Pacific (NYSE: SPF) (Cramer's Take) and Centex (NYSE: CTX) (Cramer's Take) need to go bankrupt before the Fed can ease any more.

Many of these firms lent money recklessly. Are the Fed heads thinking these companies need to pay like the New Centurys and the NovaStars (NYSE: NFI) (Cramer's Take) did? (Are the feds, by the way, thinking that this GMAC company has to go because that was a huge provider of crummy mortgages?)

JC Penney (NYSE: JCP) is trading off almost 4% after cutting its holiday sales outlook.

InfoSpace (NASDAQ: INSP) is up 7% after announcing a special dividend.

Telestone Technologies (NASDAQ: TSTC) is trading up 26% on strong earnings.

Advanced Life Sciences (NASDAQ: ADLS) is up on news of a successful trial of one of its drugs.

Sina (NASDAQ: SINA) is down 10% on weak earnings.

NovaStar Financial (NYSE: NFI) is down 39% on poor earnings and the possibility that its shares could be de-listed.

Stocks trading in the pre-market may open at different prices in the regular session.

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

What a fantastic time to own oil, gold, or any currency other than the dollar! And what a wonderful world it must be for foreclosure lawyers! How can you profit? Buy non-dollar currencies, lock in your heating oil price, and consider shorting mortgage insurers.

The statistics are mind-numbingly awful. The price of oil hit a record $96 a barrel, up 300% from $24 in January 2001. Gold is near a record high at $800, the dollar is at record lows -- for instance it takes $2.08 to buy a British pound. Housing, which has been tumbling from its peak in August 2006, is hurting too -- with foreclosures up 100% in the last year. And the mortgage meltdown has led to big layoffs -- my firm counts 70,087 finance layoffs by 42 companies so far this year.

There are three ways you can profit from this trend. First, you can buy currencies -- like the pound and the Euro -- which are getting stronger as the dollar weakens. Second, if you heat your house with oil, you can consider locking in a fixed price -- because oil is clearly going to keep going up.

The New York Times [registration required] reports that American Home Mortgage Investment Corp. (NYSE: AHM) is shutting its doors thanks to the fear of its lenders -- who provide the wholesale money they lend to home buyers -- that they won't get their money back. Doug McIntyre posted about this here. Several of AHM's peers -- IndyMac Bancorp (NYSE: IMB) and Accredited Home Lenders Holding (NASDAQ: LEND) -- are also in rough shape.

Last October, I began looking for ways to profit from the collapse in the housing market. My best idea -- posted in December -- was to short shares of NovaStar Financial (NYSE: NFI) which dropped from $116 to $7.19. This post got the attention of a reporter from NPR's MarketPlace who dropped by my office this week to interview me about where the next opportunities for short profits might lie.

My answer is that I don't know. That's because the hedge funds, endowments, pension funds, and insurance companies that buy the mortgage backed securities (MBS) constructed from the loans that NovaStar and its peers originate are not disclosing the value of their MBS holdings. To identify short selling opportunities, I'd like to know this information because many MBS holders will be wiped out.

Computer Sciences(NYSE:CSC) call volume and volatility spikes on renewed speculation. CSC is recently up .97 to $61.27 on unconfirmed deal chatter Blackstone(NYSE:BX) or Hewlett Packard (NYSE:HPQ) will make a bid. CSC is frequently chatted as being sold to IBM (NYSE:IBM), Lockheed Martin(NYSE:LMT), United Technologies (NYSE:UTX) or private equity after Apollo Managements' bid for the CSC failed in the spring of 2006. CSC July 62.5 calls have traded 126 times on transaction volume of 3,459 contracts above its open interest of 2,356 contracts. CSC August option implied volatility of 36 is above its 26-week average of 25 according to Track Data, suggesting larger price fluctuations.

Option volume leaders today are: Novastar Financial (NASDAQ:NFI) and Apple Computer (NASDAQ:AAPL).

Daily Option Update is provided by Stock Options Specialist Paul Foster of theflyonthewall.com.

Government officials have been emitting a lot of gas about how problems in the mortgage market are nothing to worry about because they're limited to the subprime sector. But today's New York Times [registration required] shows that the problems have spread to the higher credit quality Alt-A tier.

I am new to the mortgage market -- particularly all these credit tiers like subprime and Alt-A. But I spent a summer in Washington a few decades ago working with the Federal Deposit Insurance Corporation (FDIC) helping it dig out of an avalanche of bank failures due to the collapse of the real estate market. And the current situation strikes me as much worse because it's much bigger and due to securitization, the contagion is in the hands of pension funds, insurance companies, and hedge funds as well.

Here's the situation. Alt-A loans -- made to borrowers with credit ratings that fall between prime and subprime -- make up 10% of all mortgages outstanding at the end up 2006 and 18% of new loans made last year. And combined, subprime and Alt-A loans account for 21% of loans outstanding and 39% of mortgages made in 2006.

But the government has been issuing statements designed to assure us -- falsely -- that the mortgage problem is limited to subprime.

Although short selling -- the practice of selling borrowed shares with the hope of repaying the loan by buying back the shares at a lower price -- goes against the American belief that stocks always go up, I have long been fascinated with it. Short Stories discusses what works, what doesn't, and what some of the leading lights in shorting stocks think about its opportunities and threats. I describe possible short trades and I seek your comments and questions for story ideas. I don't offer any investment advice and I don't trade on any of the posts I write.

Monday the Wall Street Journal noted that two of the worst performing stocks in the first quarter were NovaStar Financial, Inc. (NYSE: NFI) and Bally Total Fitness, Inc. (NYSE: BFT) -- both of which I suggested shorting last year. Looking for some new short ideas? Last month I was in Florida where the real estate market is tanking.

Reading about a busted residential real estate development there in the Sarasota Herald-Tribune gave me another idea for short stories: Coast Financial Holdings, Inc. (NASDAQ: CFHI). Although its market capitalization has tumbled 59% to $44.9 million in the last year, CFHI could file for bankruptcy. How so? In a nutshell, Coast lent money to Florida real estate developers who are going belly up. As a result it's at risk of not having enough cash to pay a $12 million portion of its long-term debt which is due this year.

After the recent pounding that the subprime mortgage sector has been taking, you're probably not thinking about its investment opportunities. But that's what I'll be talking about on CNBC at 11 a.m. with Becky Quick and Tom Gardner of Motley Fool.

There are two reasons for thinking there might be opportunities here:

• Investment banking put - Investment banks are putting a floor under the stock price of many subprime lenders. For example, Goldman Sachs Group Inc. (NYSE: GS), Lehman Brothers Holdings, Inc. (NYSE: LEH) and Bear Stearns Companies, Inc. (NYSE: BSC) have all said they may commit more funds to subprime. Yesterday, Accredited Home Lenders Holding Co. (NYSE: LEND) added $3.39, or 56%, to $9.43, helped by apparent takeover speculation in the wake of its statement Tuesday that it would explore "strategic options." On the pink sheets, New Century Financial rose 68 cents to $1.35, more than doubling its share price from a day earlier. NovaStar Financial Inc. (NYSE: NFI) is also up 50% since it bottomed out at $3.43 on Tuesday.
• Picking the long term survivors - Not every industry participant will be wiped out. For example, Countrywide Financial Corp. (NYSE: CFC) -- which only has 7% of its loans in subprime -- added $376 million in cash for a total of $1.4 billion in 2006. Nevertheless, it is far from being out of the woods: it recently reported a rise in bad loans across the board -- i.e., payments were 30 days late at the end of 2006 on 2.9% of prime home-equity loans serviced by CFC, up from 1.6% a year earlier and payments were late on 19% of subprime mortgage loans [subscription required], up from 15.2% at the end of 2005. If it reports worse than expected damage in future quarters, CFC will drop further, which could represent buying opportunities that lower an investor's cost basis. Despite the medium term pain of such a strategy, if CFC survives until the next housing upturn, investors will profit.

With stunning swiftness, the damage from the collapse of the subprime mortgage market is bleeding out to other parts of the economy. And that damage will explode on Monday as investors continue to flee the sector.

How so? Because late Friday afternoon, according to the Wall Street Journal [subscription required] two subprime lenders dropped several bombshells that have left them fighting for their lives:

• New Century Financial Corp. (NYSE:NEW), one of the largest subprime lenders, is facing a federal criminal inquiry into its accounting and trading in its securities. Furthermore, if NEW's lenders don't let it off the hook for meeting the terms of its lending contracts or it does not find new lenders, NEW stated that its auditors are likely to warn of "substantial doubt" over its ability to remain in business. Translation: NEW could go bankrupt very soon.
• Fremont General Corp. (NYSE:FMT) will stop making subprime residential loans and is negotiating to sell that business.

Although short selling -- the practice of selling borrowed shares with the hope of repaying the loan by buying back the shares at a lower price -- goes against the American belief that stocks always go up, I have long been fascinated with it. Short Stories discusses what works, what doesn't, and what some of the leading lights in shorting stocks think about its opportunities and threats. I describe possible short trades and I seek your comments and questions for story ideas. I don't offer any investment advice and I don't trade on any of the posts I write.

If you had followed my December 18th suggestion to sell short shares of subprime mortgage lender, NovaStar Financial, Inc. (NYSE: NFI) at $29 and covered your position -- by buying back the shares at today's $11, you would have made a 62% return.

After the market close yesterday, NFI announced its quarterly results. In response, investors are decimating NFI's shares -- it's down 37% this morning. Here are the lowlights of the NFI earnings report:

• Posted a loss of $14.4 million, or 39 cents a share, which compares unfavorably with its year-ago profit of $26.4 million, or 84 cents a share according to TheStreet.com;
• Suffered a drop in the value of loans made and securitized in 2006 leading to a $17.4 million charge, according to the Wall Street Journal [subscription required];
• Bought back bad loans earlier sold to investment banks resulting in a $13.4 million charge;
• Increased loan loss reserves to $10.3 million;
• Took a collateralized debt obligation (CDO) trading loss charge of $4 million due to "spread widening."
• Will replace its REIT structure. Since it expects to "recognize little if any taxable income" through 2011, NFI is considering whether to change its real estate investment trust (REIT) status which requires it to pay out 90% of its profits as dividends to shareholders -- a change which could obliterate its 32.6% dividend yield.
• Has a new target price of $8. Deutsche Bank expects NFI now to be worth the net value of its assets which it estimates to be $8 a share.

if you decided to short NFI two months ago it is worth considering the option of buying back most of your shares and locking in your profit. But as I posted yesterday, I think subprime has yet to bottom out. And I think NFI has further to drop.

Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm, He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in NovaStar.

Stock futures are lower early in the morning, setting the stage for a similar start for stocks, ahead of consumer price index that is due an hour before the market open. Stocks started lower yesterday as well, but the Dow Jones industrial average closed at yet another record level, while other major indexes reached their highest level in more than six years.

At 8:30 a.m. EST, January consumer price index, or CPI, will be reported by the government. CPI is a measure of inflation at the consumer level. Economists surveyed by Briefing.com expect the CPI to have risen 0.1% in January after increasing 0.4% December. Core CPI, a measure that take out the more volatile food and energy prices, is expected to have risen 0.2% compared to a 0.1% rise the month before.

While last week at his testimony in Congress, Fed Chairman Bernanke said he sees inflation pressures are easing, the CPI measure always focuses the market's attention.

At 10:00 a.m., January leading indicator will be reported and at 2:00 p.m., the minutes from the latest FOMC meeting in January will be released.

Oil prices fell this morning to below $59 a barrel ahead of the weekly inventory report due at 10:30 as forecasts of warmer-than-average weather in the United States could cause further lower demand. It's the third straight day oil falls.

Overseas, the Bank of Japan raised its benchmark interest rate to 0.5%, the highest in a decade, after the world's second- biggest economy expanded at the fastest pace in three years. The yen retreated, however, as the BoJ said further rate hikes would be done gradually. The Bank of England, on the other hand, kept the bank rate at a five-year high this month.

In corporate news:

Hewlett-Packard Co. (NYSE:HPQ) shares are down nearly 1% in pre-market trading despite reporting fiscal first-quarter income and revenue that topped analysts' estimates as it continues to gain market share from Dell. Analysts were expecting H-P to beat expectations by even more.