Does America really need an economy that depends on creating new bubbles to get us out of the mess caused by the bursting of old ones? Is it possible to replace this with an economic system that generates growth without bubbles? I think the answers to these questions are No and Yes.

The most recent example of this bubble economy is the way the dot-com frenzy's aftermath was replaced by a debt bubble, which was focused heavily on a now-imploding mortgage-backed securities (MBS) industry. The dot-com bubble expanded thanks to the public's insatiable appetite for dot-com IPOs, regardless of whether the issuer was or could become profitable. The MBS bubble grew thanks to rock-bottom interest rates, rising housing prices and institutional investor demand for higher "risk-free" yields, all of which ignored the cost of a market reversal.

But the MBS part of the current bubble may not be the last to burst. There are also the leveraged loans that fueled a boom in private equity -- a market which has lost 70% of its business in the last year. Thankfully, massive defaults in such loans have yet to occur. The New York Times reports that capital-starved banks are starting to limit commercial and industrial loans that fuel normal business expansion. It reports that such loans have dropped 3% since 2007, from $3.36 trillion to $3.27 trillion.

In a quarterly dance routine that's becoming quite familiar -- call it the write-down, capital raising dance -- the Wall Street Journal reports that Merrill Lynch & Co. (NYSE: MER) is planning to sell a $5 billion stake in Bloomberg, the media company, and to cash out of its 49% stake, estimated at $12 billion, in Blackrock (NYSE: BLK).

Why is Merrill doing this? As we've seen over and over again in the last year, banks must maintain specific levels of capital to assets in order to meet regulatory requirements. When a bank reduces the value of its assets, as accounting rules require, the bank writes off the decline in asset values against its capital. In order to maintain a sufficiently high ratio of capital to assets, banks seek to raise capital equal to the amount of the write-down.

Merrill anticipates taking $6 billion in write-downs for the quarter. These could come from its $41 billion in Level 3 assets -- assets valued based on computer models since there is no active market that prices them. Merrill is fortunate to have these stakes available to sell because it will be able to raise capital without diluting current shareholders. Unfortunately, once it sells these stakes, Merrill shareholders will no longer get the earnings stream they generated.

Bloomberg News reports that Lehman Brothers Holdings (NYSE: LEH) wants to sell $4 billion in equity. But it already raised $6 billion so why does it need more? It should be no surprise -- but thanks to a chorus of statements by financial leaders that "the worst is over" -- including Lehman's CEO Richard Fuld, Jamie Dimon, Hank Paulson, and Barton Biggs some are surprised that there are still problems.

Since the crisis began -- last August when the Fed began cutting rates from 5.25% to 2% -- banks have been trying to reduce their ratio of debt to equity below the hugely risky 32:1. But it's hard when they hold $500 billion worth of Level 3 assets -- which don't trade and therefore have no objectively set market value. To maintain or improve their capital ratios, banks have been writing down the value of the securities on their books -- $276 billion worth so far -- and simultaneously raising capital. Citigroup (NYSE: C) has raised the most -- $44 billion.

S&P downgraded Lehman, Morgan Stanley (NYSE: MS) and Merrill Lynch (NYSE: MER) saying they may disclose more write-downs for devalued assets. And hedge fund manager David Einhorn -- who's short Lehman -- got into a verbal debate with Lehman CFO Erin Callan arguing that Lehman had failed to disclose $6 billion worth of such Level 3 assets -- known as Collateralized Debt Obligations (CDOs) and it needed to raise capital. Today's announcement suggests that Einhorn was right.

Just because executives act like cheerleaders, it doesn't mean investors should take them at their word.

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

MAJOR PAPERS:

• U.S. mall owner and operator General Growth Properties Inc (NYSE: GGP) is reportedly shopping its portfolio for capital to pay off $18.7B of debt coming due over the next four years to potential joint venture partners, according to the Wall Street Journal.
• The Wall Street Journal also reported that Merrill Lynch & Co Inc (NYSE: MER) is expected to reported another quarterly loss this week, as well as up to $8B in new write-downs, a person familiar with the matter said. This would bring its total to more than $30B since October.
• The Financial Times reported that General Electric Company (NYSE: GE) is planning to invest up to $2B in China in acquisitions and other deals in order to double its revenues in the country...

• Barron's Online said Gildan Activewear Inc (NYSE: GIL), the leading maker of undecorated t-shirts and sweatshirts for the U.S. wholesale market, might be worth a look. All of the company's shirts are now made in Gildan-owned factories in Central America and Caribbean, allowing Gildan to achieve cost benefits of offshore manufacturing before competitors like Hanesbrands Inc (NYSE: HBI). Gildan has recently broadened its market with the acquisitions of two sock makers.

Wall Street banks such as Citigroup Inc. (NYSE: C) and Merrill Lynch (NYSE: MER) are sending their CEOs to the Middle East and Asia to restore their capital depleted by write-downs of mortgage-backed securities (MBS) and collateralized debt obligations (CDO). To raise $10 billion, for example, Bloomberg News reports that Citigroup is going back to the well of Saudi Prince Alwaleed bin Talal.

Reuters reports that hedge funds have $2 trillion -- with almost $22 billion flowing into them in November 2007 alone. With so much money in hedge funds, much of which is in the U.S., I wonder why these Wall Street banks need to go overseas for capital.

Here are three guesses:

• Wall Street knows it can't pull the wool over the eyes of hedge fund managers. Would hedge funds demand to know how big the write-downs of CDOs and MBSs would be before agreeing to invest? Might hedge funds demand management changes before investing? Could hedge funds seek interest payments and option terms that the banks would find too onerous?

MAJOR PAPERS:

• A possible deal between Bank of America Corporation (NYSE: BAC) and Countrywide Financial Corporation (NYSE: CFC) has been seen as positive for the whole financial industry, the Wall Street Journal said, giving a lift to other weathered financial stocks including Washington Mutual Incorporated (NYSE: WM).
• The Wall Street Journal reported that several people familiar with negotiations believe ConocoPhillips (NYSE: COP) is in the lead to participate in a $10B, multi-year project to develop Abu Dhabi's Shah natural-gas field.
• According to a source familiar with the matter, the Financial Times reported that both strategic obstacles and antitrust reasons would make a Microsoft Corporation (NASDAQ: MSFT) bid for Logitech International SA (NASDAQ: LOGI) "hard to justify" and would "raise issues" because both are prominent players in the PC peripheral market.

• Merrill Lynch & Co Inc (NYSE: MER) is expected to report $15B in losses from mortgage investments, prompting the firm to seek about $4B in additional capital from an outside investor, according to inside sources, the New York Times reported.

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According to BreakingViews, "More worrying for Merrill's investors, it reeks of dilettantish risk management. There have been more than enough signs this year that mortgage markets were cratering. And Merrill was arguably in a better position than most of its peers to judge the extent of the wreckage.

On August 16th, Symantec Corporation (NASDAQ: SYMC) informed Monster Worldwide, Inc. (NASDAQ: MNST) of a thread of malicious software, called Infostealer.Monstres, which uploaded 1.3 million entries with personal information from a remote server. The information contained on this server was limited to names, addresses, phone numbers and email addresses.

It took Monster Worldwide five days to comment on the situation. "Regrettably, opportunistic criminals are increasingly using the Internet for illegitimate purposes," the company said in a statement Wednesday. The company is in the process of reaching out to its users and law enforcement on this issue.

Now, one might quickly say, "five days is a long time to keep quiet about this," but you'd be mistaken. Take a look at a few of the recent security breeches and how fast the response has been from corporations:

• Back on June 17th, 2005, MasterCard Incorporated (NYSE: MA) announced the information from 40 million credit cards "may" have been stolen. According to CardSystems, a third party processor of payment data, the credit card theft possibly occurred late last month, CNet.com reported. The company continued to say, "It identified a 'potential security incident' on Sunday, May 22nd and called the FBI the next day.

• CNBC's Charlie Gasparino reported earlier this month that a 'major identity-theft incident' occurred at Merrill Lynch & Co., Inc. (NYSE: MER). According to his sources, the device stolen from Merrill's corporate offices included personal information, including Social Security numbers, of nearly 33,000 employees. Gasparino said the incident allegedly occurred two weeks ago, but Merrill is now "only getting around to telling people."

• Massachusetts-based TJX Companies, Inc. (NYSE: TJX) reported on the week of January 15th than an "unauthorized intruder" gained access to its systems in mid-December, taking 45.6 million credit card and debt card numbers over a period of 18 months.

Monster Worldwide should be applauded on its immediate response on the matter. While the data stolen did not include credit card numbers or social security numbers, people need to be know what is happening with the information they hand out to websites.

MOST NOTEWORTHY:

• Matrix downgraded Advantest (NYSE: ATE) to Strong Sell from Hold; the firm doesn't expect Advantest's profits to improve in the near-term after chip makers indicated they plan to cut capital spending.

• RightNow Technologies (NASDAQ: RNOW) was cut to Sector Perform from Outperform at Pacific Crest to reflect the company's poor execution.

• Mattson Technology (NASDAQ: MTSN) was downgraded to Sell from Buy at American Technology; The firm said Q2 results were strong but bookings and gross margin outlook were weaker due to memory spending weakness.

• Credit Suisse downgraded P.F. Chang's (NASDAQ: PFCB) to Market Weight from Overweight at Thomas Wiesel to reflect below plan new store performance for the third consecutive year at Pei Wei...

• Citigroup cut Taiwan Semi (NYSE: TSM) to Hold from Buy.

• Merriman downgraded Fuel Tech (NASDAQ: FTEK) to Neutral from Buy.

• Bear Stearns cut Hess Corp (NYSE: HES) to Peer Perform from Outperform.

• Goldman Sachs removed Merrill Lynch (NYSE: MER) from its Conviction Buy list.

Merrill Lynch (NYSE: MER) announced its intention to invest $2.9 billion in non-voting shares of Resona Bank in Japan. Resona is the fourth-largest investment bank in Japan. Resona needed a Japanese government bailout a few years back because of its exposure to the then depressed Japanese real estate markets.

With Merrill Lynch's investment, Resona will be able to repay the Japanese government earlier than anticipated. It's certainly a winner for Resona. But what about the Thundering Herd (Merrill's Street nickname)? What does Merrill hope to gain from this investment?

Distribution, distribution, distribution. The Japanese retail investor is very loyal to the Japanese banks and brokerage firms. They are more comfortable transacting with home grown institutions and are a bit suspicious of international banks and brokerage firms. With Merrill's investment in Resona, Merrill has the entree to now package investment products, re-label them with Resona's moniker and have Resona distribute the products to their Japanese customer base.

Merrill Lynch has consistently believed in expanding outside the United States. They were among the very first firms to be in the various European markets with a physical presence, long before it became fashionable. The Asian markets are a bit trickier and American firms have hit and missed over the decades. This move by Merrill insures a home grown partner with name recognition.

Georges Yared is the CIO of Yared Investment Research. For more growth stock ideas, please visit the web site.

MOST NOTEWORTHY:

• Soleil initiated Microsoft (NASDAQ: MSFT) with a Buy rating and $33 target, expecting a strong upgrade cycle near-term and anticipates expanding addressable markets and its global footprint in the long-term.
• Dell Inc (NASDAQ: DELL) was initiated with an Above Average rating and $27 objective at Caris. The firm expects Dell to have 2-3 potentially "sloppy" quarters and believes investors will give it a "pass," as the company's current valuation reflects a majority of the near-term risk.
• Caris also started Hewlett-Packard Co (NYSE: HPQ) with an Above Average rating along with a $44 objective.
• Deutsche Bank initiated several broker/dealers with Buy ratings including Goldman Sachs Group (NYSE: GS), Merril Lynch & Co (NYSE: MER), Morgan Stanley (NYSE: MS) and Lehman Brothers Holdings Inc (NYSE: LEH).

• Lehman Brothers started coverage on the U.S. ethanol sector with a Neutral rating. The firm initiated Aventine Renewable Energy Holdings, Inc (NYSE: AVR) with an Overweight rating and $23 target.
• Wedbush started Guess?, Inc (NYSE: GES) with a Buy rating and $49 target.
• Kaufman reinstated Covad Communications (AMEX: DVW) with a Buy rating and $2.00 target.
• Prudential started Leap Wireless International, Inc (NASDAQ: LEAP) with an Overweight rating and $90 target.
• RBC Capital initiated shares of TurboChef Technologies, Inc (NASDAQ: OVEN) with an Underperform rating and $13 target.

MOST NOTEWORTHY:

• Goldman Sachs upgraded Merrill Lynch & Co (NYSE: MER) to Buy from Neutral with a $107 target, believing the sell-off in Merrill shares is overdone.

• JP Morgan added Kraft Foods Inc (NYSE: KFT) to its Focus List with a $40 target, believing valuation reflects the overhang from Altria Group's (MO) share distribution.

• Prudential upgraded shares of US Steel Corp (NYSE: X) to Neutral from Underweight citing synergies from the Lone Star acquisition and the increase in scrap prices.

• Jefferies upgraded shares of Cephalon, Inc (NASDAQ: CEPH) to Buy from Hold and raised its target to $88 from $69 to reflect a favorable risk/reward profile and the imminent approval of Nuvigil following FDA approval of draft labeling for the drug.

• Bank of America upgraded Sonoco Products Co (NYSE: SON) to Buy from Neutral with a $44 target.

• Baird upgraded Micron Technology, Inc (NYSE: MU) to Outperform from Neutral.

• Credit Suisse upgraded PG&E Corp (NYSE: PCG) to Outperform from Neutral with a $53 target citing valuation.

• Matrix USA upgraded TJX Cos (NYSE: TJX) to Buy from Hold on relative valuation.

• William Blair upgraded Blue Nile, Inc (NASDAQ: NILE) to Outperform from Market Perform citing near-term fundamentals, improved long-term cash flow, long-term growth potential and downside protection.

• Kaufman Bros upgraded Avid Technology, Inc (NASDAQ: AVID) to Buy from Hold with a $40 target.

MOST NOTEWORTHY:

• Oppenheimer expects Time Warner Cable (NYSE: TWC) to benefit from double-digit free-cash-flow growth over the next five years as it integrates Adelphia's (ADELQ) systems. The firm initiated shares with a Buy rating and $47 target.

• AG Edwards initiated Google Inc (NASDAQ: GOOG) with a Buy rating and $550 target to reflect the company's current business model and search growth. Nollenberger also initiated shares of Google with a Buy rating and placed a $575 value on just the core business.

• AG Edwards initiated shares of Yahoo! Inc (NASDAQ: YHOO) with a Buy rating and $35 target, expecting Panama to drive ad revenue. Nollenberger started Yahoo! with a Neutral rating saying the company is still a a "solid name" but believes shares are not cheap.

• Baird started Cheesecake Factory (NASDAQ: CAKE) with a Neutral rating on valuation.

• Lehman Brothers initiated four large-cap brokers: Merrill Lynch & Co (NYSE: MER) and Bear Stearns Cos (NYSE: BSC) were started with Overweight ratings, while Goldman Sachs Group (NYSE: GS) and Morgan Stanley (NYSE: MS) were initiated with Equal-Weight ratings. Lehman believes broker dealers are winning greater share of global capital-markets revenue from commercial banks as the products available for managing risk and capital become more sophisticated.

As the Private Equity deal juggernaut continues at a record pace, the Justice Department continues to send out letters in their probe of PE competitive behavior. The Wall Street Journal reported today that Merrill Lynch & Co., Inc. (NYSE:MER) has joined this inauspicious list. Other letters in the same form, I am sure, will be received by other players. Any Justice Department investigation is bad news and a distraction, and I am sure there is concern throughout the PE industry.

The question at hand is whether PE firms, in pursuing the "club" deals (many firms getting together to pursue a large target, like a bunch of hunters combining to wrestle an elephant) are "colluding" to bring down prices for the assets they are pursuing, thereby undertaking anti-competitive and thus illegal behavior. The Journal speculates that the Hertz transaction is under particular scrutiny. This was not only a large club deal but one where the buyers made a lot of money VERY quickly. To the Justice Department, I am sure, the fact that big bucks were made in short order MUST mean illegal activity. The Federal Government seems to frown upon large scale success, and therefore must investigate.

I have not seen any of these love letters and can only speculate about the investigation, but the facts of life in Private Equity do not support a case for collusion.