What will it take to break the downward cycle for the U.S. stock market and its economy? Get back to our roots as a country that lives within its means.

The source of the problem is that we have gotten away from the idea of paying only for things we can afford. To close that affordability gap that results from lower income and higher prices, we have borrowed money -- $9.3 trillion in federal debt, a $410 billion federal budget deficit, and $2.5 trillion in consumer borrowing -- which has caused other countries to view the dollar as a distress currency. It's lost 72% of its value since January 2001 -- when it traded at 92 cents to the euro.

Having spent the last two weeks in Europe, that weak currency hurts -- everything seems to be about 50% more expensive there than it is here. Gasoline there is far more expensive than it is in the U.S. -- roughly $9.60 a gallon compared to $4.25 here. And the reason that our stock market is dropping while oil rises is a result of deliberate government policies designed to weaken the dollar and strengthen oil.

The New York Times reports that some in Washington are using the latest economic catastrophe to push Congress to make tax breaks permanent. What these folks don't recognize is that the tax cuts are a big reason why the economy is in such bad shape to begin with. With unemployment spiking to 5.5%, the worst since 1986, and oil prices up a record $11 yesterday to $138 a barrel, it won't be long before you're paying $5 a gallon for gasoline.

And since oil is traded in dollars, its 70% decline since January 2001 from 92 cents to the Euro to its current $1.56 -- has been accompanied by a 475% rise in the price of oil. The $1.3 trillion worth of tax cuts -- 36% of which went to the top 1% -- are contributing to record deficits. In 2008, we'll have a $410 billion deficit and the 2009 figure looks to top $500 billion. And thanks to $3 trillion worth of wars, the U.S. is borrowing $9.4 trillion -- almost double where we were in 2000.

Thanks to these deficits, the U.S. is borrowing 66% of its $14.2 trillion GDP -- and any country borrowing more than 60% is seen by international investors as a credit risk. You'll hear people trying to convince you that deficits don't matter. But deficits are at the core of all the economic problems we face. Republicans used to be seen as the party of fiscal conservatism. But what they've actually done would terrify a prudent banker.

I've been very wary of market conditions over the last six months. I've taken the bear position for better than a year now. Today however, I am seeing a convergence of conditions and circumstances that lead me to question whether the gates have again been thrown open for the bulls. Make no mistake about my position on the economy from a consumer standpoint. It's real ugly out there and I'm not too happy about that. However, I've seen it worse in my time and for now, we still live in a world where good hard work and some personal responsibility can accomplish a lot for a person.

There are several things that I now find promising for the investment world. First, the answer to the question of the Democratic presidential nominee is all but cemented. That's one big monkey off the nation's back. Second, the Federal Reserve has subtly come out in favor of protecting the dollar. I do understand more now about why the Reserve Board took the path that it did, but I still think that interest rates need to come back up a little. Third, our nation has shown that it can indeed reduce it's driving habit in short order. Fourth, manufacturing numbers have not declined as quickly or as deeply as I expected. Finally, I think the downward slide of real estate values is slowing and shall soon stabilize, but there are still a lot of mortgage notes yet to crumble.

I know that the stock markets and the overall economy are inextricably connected, I also know that they are two very distinct worlds. That is why I feel that the markets could surge while things at the consumer level still look very grim.

If the price of crude oil can be reduced and stabilized, if we can reverse the downward trend in employment, and if this country's citizens can repay their debts rather than defaulting on them, I see a bull market on the horizon. What do you think? Should we aim the DJIA upward again?

Gary Sattler is a freelance blogger. He spent most of his economic stimulus check on a much needed new refrigerator.

You know, I can't take much more of the financial crisis. That's because I own Newcastle Investment (NYSE: NCT) and CapitalSource (NYSE: CSE). I'm kind of hoping we get out of the mess brought on by the housing-bubble pop and the mark-to-market devaluation so that these stocks will rise again. As we continue through this recession, another problem may soon assert itself.

According to this article, consumers are starting to rely on their credit cards a little too much. This could lead to a larger quantity of delinquencies. In fact, the piece states that card delinquencies were at 4.86% in Q1, a multi-year high. Further, revolving debt increased 7.9% in March, coming in at $957 billion. Not too far away from a trillion, my friends. Let me tell you, this is the last thing we need right now. Delinquencies will become a major problem for the banks, leading to further erosion of confidence on financials by investors.

As can be expected, two ideas immediately came up during the course of the article: Visa (NYSE: V) and MasterCard (NYSE: MA). How could they not? If people are taking credit debt, then they must be using those two brand names. Since Visa and MasterCard don't really have exposure to the debt side of things, they are relatively safe from that aspect.

NetApp (NASDAQ: NTAP) shares are falling after the company announced it will sell $1.1 billion in five-year convertible senior notes to institutional buyers. Terms of the debt were not disclosed. If you think this stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on NTAP.

After hitting a one-year high of $33.84 last June, the stock hit a one-year low of $19.00 in March. This morning, NTAP opened at $23.48. So far today the stock has hit a low of $22.90 and a high of $23.88. As of 12:10, NTAP is trading at $23.85, down $0.11 (-0.4%). The chart for NTAP looks bullish but deteriorating, while S&P gives the stock a neutral 3 Stars (out of 5) hold rating.

For a bearish hedged play on this stock, I would consider a September bear-call credit spread above the $30 range. A bear-call credit spread is an options position that combines the purchase and sale of call 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 an 8.7% return in three and a half months as long as NTAP is below $30 at September expiration. NetApp would have to rise by more than 25% before we would start to lose money. Learn more about this type of trade here.

These past weeks, the deteriorating stock market that responds to expectations of slower or no economic growth in 2008, continued high oil prices, sagging housing market, high debt consumers and the financial industry quagmire, got me thinking about "my pal Warren" again.

It's times like these, when we are looking for a solid footing in the investment world, the few people with positive track records -- measured in decades, not years -- are worth examining once more.

Last year I started a series of stories on Warren Buffett's very basic investment cornerstones. Buffett's Berkshire Hathaway (NYSE: BRK.A) has such a track record. Today, given how many companies are up to their penthouse executive suites in debt, I thought I would continue.

The subject of debt is a simple one. Companies that carry excessive debt on their books are not as good as companies that have cash sitting around. Debt can be a drag on earnings, reduce the company's flexibility and opportunity in a slowing economy, and has all the negative impacts to a company that it does to an individual household.

It should come as no surprise that collection agencies have stepped up their activities in the pursuit of monies owed by consumers. However, with the increase of collection actions there has also been an increase of unsavory collection practices, many of which are unacceptable or even illegal. USA Today published an article that exposes just the tip of the questionable debt collection practices iceberg. That article gives a glimpse of what consumers who are delinquent in payment are facing, and what they can do about improper collections practices.

According to USA Today, "Complaints against debt collectors, after plunging in 2005, are rising again, the Council of Better Business Bureaus says. Complaints surged 20% in 2006 and 26% in 2007, according to the BBB's preliminary figures. And the Federal Trade Commission, which receives more complaints about debt collectors than about any other industry, says it's seen a steady rise in complaints against debt collectors." Debtors need to be made aware that they have specific protections that are provided by law. I'll tell you where to get started.

Credit cards ... the little plastic cards in your wallet that are so convenient to rely on when you are strapped for cash. While the convenience of having cards definitely makes it easier to buy items when you are running low on cash, the flip side is that credit card debt can drown the typical household, and statistics are showing that Americans are pulling out their cards more than before.

One of the reasons why credit card usage has been on the rise is the fact that homeowners are having a harder time using home equity to get a cash infusion into their accounts. As a result, they are looking to borrow money from somewhere, and more times than not, they are turning to credit cards.

The evil with credit cards is that once you start to use them to pay for your basic necessities like food and gas, you find that in the months to come you still can't afford your basic needs but in addition, your monthly bills are racking up like crazy due to your credit card expenses. It's a scary cycle that many families find themselves trapped in.

Bloomberg News reports that consumer borrowing -- as measured by credit card receivables -- grew much faster than expected in March. Specifically, the 9% growth to $2.56 trillion was twice the rate of increase that economists had expected (the actual increase was $15.3 billion vs. 34 economists who expected $6 billion). The March figures brought U.S. consumer borrowing in the first quarter to $34 billion, the most since the first three months of 2001, when the economy entered its last official recession.

And as consumers are increasing their indebtedness, they are also having more trouble paying it back. Overdue payments at the six largest U.S. credit-card lenders reached the highest level since November 2004, according to data compiled by Bloomberg. It found an average of 4.11% of loans were at least 30 days late in February and March.

Bloomberg quotes Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi in New York who says it all: "incomes are not keeping up with inflation and this is leading them to rely increasingly on credit to see them through the worst housing downturn since the Great Depression. The days of extracting cash from one's home to spend on goods and services are long gone."

With consumer spending accounting for 70% of GDP growth, that's why I suggested selling into the sucker's rally that peaked last week.

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

More Americans are behind on consumer debt than at any time in the past 16 years, according to the American Bankers Association. 2.65% of loans are at least 30 days past due, versus 2.23% a year earlier.

That's the highest rate of delinquencies since the 2.75% mark reached in the first quarter of 1992. Late payments on "indirect" auto loans -- those made through a bank or other financial institution -- rose to 3.13%, the highest delinquency rate ever recorded. Credit and debit card delinquencies are up to 4.38%. Home equity loan delinquencies are a relative bright spot at 2.39%, their highest rate in two and a half years.

A couple things come to mind. First of all, for all the talk about people struggling, 2.65% is a tiny chunk of the population, and it represents an increase of only about 1 out of every 250 people falling behind on their payments.

And 1992 -- the last time delinquency rates were this high -- preceeded a pretty strong bull market, with increasing incomes and consumer spending.

Given all that, I wouldn't fret too much about these statistics.

Billionaire investor George Soros believes the current financial crisis is the worst since the Great Depression, and said stocks have not bottomed yet, Bloomberg News reported Thursday.

Soros said the most recent market bottom "will probably not prove to be the final bottom," adding that the current stock rebound will last six weeks to three months as the United States moves closer to recession, Bloomberg News reported.

Further, Soros, in an op-editorial column in The Financial Times, argued that the cause of the market's current problems is a flawed premise: the belief that markets are self-correcting and tend toward equilibrium. They aren't and don't, Soros argues, and the laissez-faire policy creates bubbles, including the most-recent housing bubble, which, in turn, when it started to burst, led to the current credit crunch.

Soros cites deregulation

Soros added that the market's current troubles originated in 1980 when U.S. President Ronald Reagan and United Kingdom Prime Minister Margaret Thatcher led a laissez-faire movement that reduced/eliminated regulation of banks and financial markets, the FT reported.

Banks are demanding more capital from hedge funds to support outstanding loans resulting in the dissolution of some funds forced to liquidate assets, Bloomberg News reported Monday.

``If you have leverage, you're stuffed,'' Alex Allen, chief investment officer of London-based Eddington Capital Management Ltd., which has $195 million invested in hedge funds for clients, told Bloomberg News. Allen said the crisis is like a bank panic turned upside down with bankers, not depositors, concerned they won't get their money back. He added there are likely to be more collateral /margin-related liquidations of hedge funds in the weeks ahead.

The $2 trillion hedge fund industry is in the throes of its worst capital crunch since the Federal Reserve successfully encouraged the securities industry to provide $3.6 billion to bail-out Long Term Capital Management L.P. in 1998. Amplified by leverage and aided by innovative investment formulas, many hedge funds generated outstanding returns for much of this decade, often aided by high-performing asset-backed securities. However, as the housing market slowed and mortgage-backed securities began to fail, hedge funds started to experience the down side of their deployed leverage: banks and other counterparties who lent money for these investments had the right to and initiated requests that hedge funds put up more capital. Hedge funds that could not meet the capital requirement have been liquidated.

The latest issue of Barron's is suggesting that investors may want to look at beaten down, debt-laden companies(subscription required):

Blackstone Group, Apollo Management and the rest of the private-equity crowd may be sidelined by the mess in the credit markets, but investors still can play at their game by purchasing shares of debt-laden companies in the public markets.

Barron's goes on to suggest that, if credit markets stabilize, some companies with heavy debt loads will rebound well. I don't dispute this analysis but I also don't think most investors should go chasing companies with big debt loads. It's always struck me as being somewhat akin to tiptoeing in front of steamrollers to pick up a penny. I've never bought shares of a company with a lot of debt. Sophisticated investors with an ability to really understand the debt, how it's structured, and the risks that go with it may do well with these companies. But if that isn't you, I think your best bet is to stay away.

As Barron's warns, the ultimate danger with investing in heavily leveraged companies is bankruptcy. If you're a disciple of Warren Buffett's first and second rules of investing -- don't lose money and don't forget rule number 1 -- this probably isn't a game you want to be playing.

Given that subprime lenders are getting a mostly deserved bad rap of late, I've been on the lookout for articles about people who are doing subprime right. Yesterday I wrote about Grameen Bank founder Muhammad Yunus's crusade to provide credit to low-income entrepreneurs.

Now the latest issue of Forbes features a profile of Martin Eakes, called subprime's Mr. Clean, who runs a South Carolina credit union and is also the founder of the Center for Responsible Lending. Forbes describes him as being "to mortgage lenders what Ralph Nader was to the auto industry."

Mr. Eakes has led the legislative charge against payday lending (which I would argue is mostly a non-issue), mortgage prepayment penalties (which I think are evil), and mortgage-broker fees (which, in excess, are also evil). In Congress, he has convinced the House to pass a bill requiring that lenders be more demanding in search of documentation showing that home buyers can actually afford what they're getting themselves into.

Mr. Eakes may be more extreme than most, but the Center for Responsible Lending's website is a great research for anyone interested in researching these issues, including a state-by-state analysis of subprime losses.

After reaching an all-time low of $15.25 recently, shares of Blackstone (NYSE: BX) have staged a nice comeback. In today's trading, the stock price is up 6.71% to $17.0.2

So, are we seeing a turnaround in the buyout market? Not necessarily.

This week, there is a "Super Return" conference in Munich. Basically, it's a get-together for the big-wigs of private equity. And yes, Blackstone's chief operating officer, Hamilton James, is one of the attendees. Unfortunately, he has more bad news, according to a piece in Reuters.

That is, the debt markets have continued to deteriorate over the past month -- which will make it even more difficult to get deals done as well as work off the huge buyout debt backlog. His message is that the tough times will last at least until 2009.

Even so, James thinks there is still opportunity. Basically, with low prices on buyout debt, Blackstone can pick up some bargains. More importantly, the firm has billions in fresh capital to be opportunistic.

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.