The floodgates of help from the government continue to open in the United States. It’s now believed that Congress wants to use the remaining $350 billion of the $700-billion Troubled Asset Relief Program (“TARP”) to reduce interest rates on consumer mortgages and to forgive some mortgage principal.

As we all know, the majority of the first half of the TARP bailout went to boost the capital bases of banks. Now, Congress wants to put the focus on helping consumers that are in jeopardy of losing their homes.

In modern history, the actions of the Federal Reserve have worked well to bail out the economy when it looked poised for recession. After the tech bubble of 1999, the Fed was successful in maneuvering monetary policy to thwart a damaging recession. Similarly, after the terrorist attacks of 2001, the Fed was again very successful at saving the economy from a severe downturn.

The current economic crisis, for the variety of reasons you have read in this column over the year, is more severe than the tech bubble or the terrorist attacks. And the question becomes: Can the Fed, using all the tools available to it, get us out of this recession or will the Fed’s actions become futile, and the downward spiral of deflation and near depression continue for years…just like it did in Japan?

President-elect Barack Obama’s Council of Economic Advisors is now expecting three to four million more American jobs lost in 2009. Hence, they are working on an even more ambitious stimulus package. In my belief, at one point, all the efforts of the Fed and government will kick in to jump-start the economy. But it will not happen overnight. Given the length of the economic boom the U.S. experienced, the contraction will be long.

The stock market, as a leading indicator, does not seem concerned at the moment about the three to four million more job losses that the Obama team expects in 2009 and the eventual economic impact. Has the stock market already discounted the worst? It’s also very promising that the Dow Jones Industrial has yet to break below its 2002 low. After all, aren’t these economic times a lot worse than what we saw in 2002?

There is a great temptation for contrarians these days — the temptation to jump into the stock market with both feet. For me, it is still too early to call the bottom of the stock market. In fact, we could be in classical bear market trap.  For the benefit of my readers, I continue to study every detail of the stock market’s action, looking for clues as to where we are headed. Great fortunes will be made in this recession by buying at the bottom — that goes for the stock market and real estate. The key is determining when that bottom is here. And that’s something I’m working on every day for my readers.

I’m amazed by the strength of this bear market rally and can only surmise that investors that have been sitting on the sidelines decided to invest a small portion of their cash after a period of exasperation. We had a lot of bad news in a short period of time and the main stock market averages corrected significantly in a short period of time. In a sense, the stock market’s worst fears about the economy were priced into stocks in record time.

I’ve written about a number of stock market winners over the last month, most of which were U.S.-listed Chinese stocks. In the last week of November, I wrote in this column about the power generation business in China as an industry that’s almost recession-proof. This is especially the case since that country announced an enormous infrastructure stimulus package. Specifically, I wrote about one interesting small company that’s experiencing a lot of growth right now.

The company is called A-Power Energy Generation Systems, Ltd. (NASDAQ/APWR). This U.S.-listed Chinese stock helps design and build micro power grids for industry and small communities in China. The company is now also selling large-scale wind power generating systems.

In China, the nationwide energy grid is a patchwork at best. So, many cities and many industrial sectors are opting to build their own smaller generation plants in order to get more reliable electricity. A-Power Energy has doubled in price on the stock market on heavy volume since I first explained about this company last month. This stock is a prime example of an equity security that benefited reatly from the sentiment-based bear market rally.

Without the wind at its back from the fast change in investor sentiment, this stock wouldn’t have moved like it did. It serves to illustrate that you can make a lot of money in a bear market if you don’t give up watching and waiting for the right stock and the right timing to come together.

A-Power Energy recently quoted the International Energy Agency (IEA) estimates that China’s primary energy demand will increase 3.2% annually from 1,742 million tons of oil equivalent (MTOE) in 2005 to 3,819 MTOE in 2030. The company cited the IEA as projecting that China’s energy demand will grow more rapidly in the near term, projecting a 5.1% annual increase from 2005 to 2015. Based on these growth rates, China will overtake the U.S. as the world’s largest energy consumer shortly after 2010. The company also quoted the IEA estimates that China needs to add more than 1,300 gigawatts (GW) to its electricity-generating capacity over the coming years, more than the total currently installed capacity within the entire U.S. market.

With this kind of growth, the power generation business in China is the place to be over the next 10 years.

In the continuing story of excess greed on the part of a few bad apples on Wall Street, the story isn’t just the estimated $50.0 billion in losses, but also the complete breakdown of oversight by regulators.

 The Securities and Exchange Commission’s (SEC’s) own Chairman, Christopher Cox, came out with a scathing assessment of his own agency and its failure to investigate Bernard Madoff, the alleged architect of the $50.0-billion investor Ponzi scheme, properly. Despite being made aware on a number of occasions of suspected wrongdoing by this so-called money manager, the Chairman blamed the SEC’s staff attorneys for not properly investigating this guy.

I guess this is just another black eye for the entire financial industry and its lack of discipline to play by the rules. Like the derivatives business, this is just another example of good intentions gone awry. We really need to rethink how the financial industry does business and how we enforce fair play for all market participants. We’ve had the shake-up on the sell side of Wall Street and now we need it for the rest of the business. Everything eventually comes out in a bear market.

 For the most part, public companies have been playing by the rules. Since the WorldCom and Enron debacles, companies listed on a stock exchange have had to spend a lot more time and money complying with the enactment of the Sarbanes-Oxley law. Now its time for new rules for the financial industry — those that are in the business of creating, distributing and managing money.

I remember when the aptly named Long-term Capital Management hedge fund collapsed and former Fed Chairman Greenspan had to intervene to get a bailout of this hedge fund so that the entire financial market didn’t collapse. If we don’t get new rules and new oversight for the managing of leverage and large pools of capital, we are going to get a total breakdown of capital markets in the future.

 Now is the time to address these issues. Now is the time for the financial industry to step up to the plate. The good news right now is that the bank takeovers of what’s left of the investment banking industry on Wall Street will go a long way to bringing morestability to the system. There remains, however, a lot more work to be done. 

Everywhere we look to today, we either hear or see bad news on the economy. In the same way smart investors jumped ship from the real estate market in 2005 and from the stock market in 2007, smart investors today are using the “bad news” to their advantage.

Dear reader, if there is one thing you learn from me, it is this: What we read in the newspaper or see on the news about the economy has already been discounted (taken into account) by the world’s smartest investor, the stock market. For example, the stock market predicted the future in the real estate market in 2005, when the Dow Jones U.S. construction index (an index comprising the world’s biggest new homebuilders) topped out.

 Today, economic news is extremely negative. In fact, news is so negative that consumers have put the brakes on spending and the U.S. Federal Reserve has opened the floodgate of liquidity to get the economy going again. But, in certain sectors, the stock market is telling a different story.

 This morning, Lennar Corp., the largest U.S. Homebuilder, reported its sixth consecutive quarterly loss. The company lost eight hundred and eleven million dollars in the last quarter. But Lennar stock is up today. Sure, no one wants to touch real estate these days. But the stock market sees it differently. The Dow Jones U.S. Construction Index is up a whopping 71% from its 2008 low and (guess what?) no one in the media is picking up this positive news.

 I’m not saying this is a good time to go out and buy real estate. In fact, because real estate moves much slower than stocks do, for buyers, next year will present a better opportunity for investors than this year in the real estate sector. At least that’s what the main stock real estate index is telling us.

 Depending on which stock market index you look at, stocks in general are down anywhere from 30% to 40% this year. And some stocks have become screaming buys. A recent study by Bloomberg showed that over 2,000 stocks in the world are now selling at prices that are less than their combined cash and debt. About 50 large corporations (with market capitalization of over $1.0 billion) hold more cash in the bank than the combined value of their debt and outstanding stock! When will we ever see this kind of opportunity again?

 Back in 2002, at the last bear market bottom, when the Dow Jones Industrial Average traded close to 7,000 (today at 8,824), 276 companies around the world had more cash in the bank than the combined value of their outstanding stock and debt. According to Bloomberg, by the following year, those 276 companies saw their stocks double in price on the stock market.

My message today is quite simple: Don’t be carried away with the negative news and move into the herd mentality. Use the negative news as your opportunity to invest in depressed areas before the major efforts of the Federal Reserve to jumpstart the economy kick in and lift the economy.