Whether they like it or not, the Fed will be cutting rates to help ease the pain felt by homeowners and borrowers after the subprime mortgage blowout. After the tech blowout, the Fed aggressively lowered rates which led to the current housing bubble. Morally, it is wrong for the Fed to bail out people who simply just got too greedy and stupid. The current attitude for financial players is to take the risks and rake in as much profit as possible. The Fed will be there to draw the line to help stabilize the markets and bail us out.

The other option is even less appealing. The credit freeze we saw in late summer could have led to the global markets seizing up. The whole world could have been plunged into a recession. The world’s central banks would have even to pump in more liquidity. Worst still is nobody knows with certainty the exposure that financial institutions and investors have to these bad debts. Don’t be surprised to see more Merrill sized write-downs.

Right now, the risks of a recession in the U.S. is very real. The real estate bubble burst means the value of homes are dropping, layoffs in the housing sector and the financial services industry. Lower consumer confidence likely means that the retail sector will suffer also. Expect to see the Fed lower their key lending rate by 25 points.

Today, the price of WTI crude closed at a record high of $91.86. For the already suffering American consumer, higher fuel prices is the last thing they need. During the housing bubble, many people bought over-sized homes far away from their work and also purchased gas guzzling SUVs. Now faced with declining property values, the besieged owner is now faced with higher gasoline prices and higher heating bills.

You can blame the speculators for the higher oil prices. The harsh reality is that supply is outstripping demand. What was once considered the shoulder season where a drop demand in oil products allows users to build up oil inventory has not materialized. Fast growing countries like China and India also need oil to run their economies and create much needed jobs for their people.

Higher oil prices are also pushed up by geopolitical events. Iran is threatening to go nuclear. The worries persists that Turkey could invade Northern Iraq to take out Kurdish separatists. Once the panic buying blows over, there could be a $10 to $15 correction in the price of oil. Don’t expect to see oil back down to $50 unless their is a major global recession.

There is no doubt we are living in an era of higher oil prices. Time to downsize your house and trade in your SUV for a station wagon. Use the savings to buy oil stocks. Cheap oil is a thing of the past.

According to legendary investor Jim Rogers, the United States has entered a recession. Some of this week’s figures seems to indicate that the carnage in the housing sector is not yet over. September housing sales plunged 8 percent, more than analysts were expecting. On top of that, broker Merrill Lynch wrote down $8 billion in bad loans. It seems that everyday, there are announcements of layoffs in the housing and financial sector.

If it weren’t for decent business spending activity, the US economy would have been in much worse shape. With declining housing values and uncertainty about the economy, the American consumer is paring back their activities. To steer the economy away from a recession, the market is saying that the Fed will cut rates at their upcoming Oct 31 meeting. The question is not if but how much?

It’s still probably too early to buy the beaten financial sector just yet. Nobody knows with certainty what the exposure these financial players have. Look at companies that benefit from a weaker US currency. My favorites are the techs and the energy sector.

As the saying goes, go big or go home. In Merrill’s case, it went home with its tail between its legs bruised and battered. After writing down a whopping $8.4 billion in subprime mortgages, asset-backed bonds and loans to finance leveraged buyouts, the humbled broker posted a third-quarter loss of $2.24 billion. This was the biggest quarterly loss in its 93-year history. Just weeks ago, the broker indicated that the write downs would be around $6 billion.

The main concern for investors is will their be more A-bomb losses not just for Merrill but other financial institutions with huge exposure to this hard hit sector? Until this matter is settled, the financial services sector will continue to under perform. There is no doubt that heads will be rolling after this disastrous display of risk management. The executives got greedy in winning new business. Risks be damned.

Like Bear Stearns, Merrill can sure use a potential suitor to help it expand into new business. The debt markets they operate in is about as inviting as Chernobyl after the nuclear plant meltdown. The good news is that Manhattan real estate should be a bit more affordable again.

Yesterday’s earnings report has shown that Apple is firing on all cylinders. All its product lines are doing well particularly the Mac computer line. The simplicity of use and its attractive designs are attracting sales worldwide. Despite the anti-American sentiment permeating the world, Apple sales are surging.

It is seen as being hip and cool. Apple has universal appeal. This is in direct contrast with Microsoft, which is seen as the evil empire and whose products are complex and cumbersome to use. It goes to show that if you come up with interesting easy to use products that consumers want, you’ll do well.

The cheaper U.S. dollar is definitely helping Apple. As long as it continues to surprise on the upside, the shorts will continue to get slaughtered. Another American company that is doing well is MacDonalds. These companies’ appeal transcends all nationalities.

The months of September and October are usually the scariest months for investors. The stock markets tend to be susceptible to noticeable drops. The good news is that these drops offer buying opportunities for well run, well financed companies. Buying quality stocks on dips tend to generate good returns for investors over the long run. So where does one buy at this point?

The housing debacle has yet to see a bottom. With declining housing prices and higher food and energy costs, the consumer will certainly have less spending discretion. With the U.S. dollar weakening, I would look at U.S. exporters, particularly the tech sector. Another is commodities. Even with the U.S. slowing down, demand for commodities should remain strong in the rest of the world.

From a chartist point of view, both these sectors are breaking new highs and enjoying higher lows. With higher commodity prices, businesses will spend more on technology to improve productivity and lower costs. Always go with the winners and avoid the losers.

Twenty years ago, Black Monday occurred. The Dow Jones industrial index dropped 508 points or around 23%. Over exuberance about the markets despite the tightening of interest rates created a stock market bubble. Program trading and margin calls added to the heavy selling. Billions of dollars and careers were wiped out. There were fears that the market crash could lead to a recession.

Those who bought as others were selling made incredible returns. The mantra of buying well run companies at attractive valuations has proven to be profitable. Furthermore, the financial system proved to be able to handle the volatility in the market. To ward off a looming recession, the Fed was quick to ease rates.

The Fed has demonstrated that they will step in to bail out the markets. The good news is the conditions that caused the 1929 crash is less likely to happen. The bad news is it encourages people to take on more risk. History has shown that buying well managed, financially sound companies at low valuations pays off for the investor, especially those that pay dividends. The best time to buy is when everybody is extremely negative on the markets.

In another blow to the already battered housing sector, Standard & Poor had cut ratings on $23.4 billion of subprime and Alternative-A mortgage securities that were created as recently as June. Alt-A mortgages are regarded as notch above subprime because they are made to borrowers with good credit scores who get more lenient borrowing terms, such as reduced income documentation or delayed principal repayment.

According to Standard & Poor, the conditions in the U.S. housing market, especially in the subprime sector, will continue to weaken before they improve, with home prices still under stress. For those involved in this sector, whether they’re the lenders or the borrowers, more pain will be coming.

Lax lending standards and rampant abusive practices that led to the housing bubble means that more of the excess still needs to be taken out. This means the holders of these debts will likely have to write down the values. For the borrowers, the resets on their borrowing rate will likely go higher. Their monthly payments will go up. For many, they will lose their properties to foreclosure because they can no longer afford to make the payments.

It will likely take years before the excess in housing is absorbed. It took years for the bubble to build. It will likely take just as long for the housing market to correct itself. For buyers, the good news is housing prices are coming down. For others, the storm is not over yet.

There is talk that the Chinese is interested in investing in the once mighty Bear Stearns. After writing down a smaller than expected $250 million dollars, the Bear’s main profit generators in the debt and mortgage market are no longer the cash cow it was. Even if their financial situation stabilized, the profit out look remains less than stellar. Where are they going to find the next bonanza to generate mega profits?

That’s why letting China’s investment arm China Citic Bancorp. buy a stake would make sense for the Bear. They would get a fantastic opportunity to take advantage of the growth in one of the world’s fastest growing economies. And for China, they get to tap into the financial expertise of the Bear Stearns people.

Both have a lot to gain from this arrangement. The benefits would far outweigh the risks. China is establishing itself as a major manufacturing force. But its capital markets and financial system is still not sufficiently developed. The timing is good for the Bear. If they agree, they have an incredible opportunity to grow their top and bottom line growth.

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With the Feds clearly drawing the line on averting a possible recession resulting from the subprime mortgage crisis, there is no question that they have put the emphasize on saving the economy and not fighting inflation. As past data shows; even Fed easing cannot avert a recession. There are some possible threats to the U.S. economy. Given the dynamism and flexibility that the American economy has shown, we should avert a recession.

The challenges include the uncertainty coming from how much exposure the banks and brokers have to bad debt. Will it be significant enough to affect their operations and particularly their solvency? Nobody knows for sure. This includes financial institutions particularly in Asia and Europe. The risk is it can spark another credit crisis globally.

The biggest factor is still the U.S. consumer. For the last few years, they have been driving the U.S. economy. Will declining housing prices, higher food and energy costs stop the consumer from buying. Thanks to a low dollar, American exports are healthy, boosting manufacturing activity and job growth.