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Based on the decline in two key measures of business risk, it appears that the actions of global financial leaders is beginning to thaw out the frozen credit markets. This improvement means that the dollar will drop as investors take their money out of U.S. Treasury bills to buy stocks. It also means that the price of oil will rise -- since a weaker dollar means it takes more of them to buy a barrel of oil.

What are these measures of business risk? The TED spread -- which is the difference between the three month London Interbank Offered Rate (LIBOR) and the three year Treasury rate -- has declined from its high of 4.65% to 4.09%. This is a big improvement but a far cry from the 1.04% at which it stood a month before. And the the LIBOR-OIS spread -- a measure of inter-bank lending risk -- fell to 3.41% from its record high 3.67% Friday -- still much higher than the 0.30% at which it stood a year ago. Things are getting better but there's a long way to go.

Meanwhile the dollar is losing altitude as oil prices rise. The dollar is losing ground to the Euro now that panicked global investors are getting out of Treasuries. For instance, the euro climbed to 1.3712 dollars from 1.3576 dollars in New York on Monday. Oil hit a 14 month low of $77.70 last Friday but has traded as high as $83 today.

Does today's record 936 point rally in the Dow mean that happy days are here again? I think it's a gift to investors who want to stop their losses after having seen their portfolios plummet in the last year. Last week, the Dow fell 22%, destroying $2.4 trillion in market value -- it gained back $940 billion of that today. As an unpleasant reminder, after today's 11% rally, the S&P 500 has lost 36% of its value in the last year. And, while I hope I am wrong, I don't see the conditions yet in place to believe that we have reached bottom with the economy and can now expect the earnings growth that would justify investment in stocks

Today's rally feels good but it is highly likely that there was an element of short covering driving up the market. Last Wednesday, the SEC lifted its ban on short selling. Investors who shorted financial and insurance companies were doing quite well last week as fears of another financial bankruptcy mounted. With today's successful save of Morgan Stanley (NYSE: MS), anyone who was short that firm -- or other financial stocks -- was forced to buy those stocks as they spiked in order to repay their stock loans. This probably contributed significantly to a buying panic.

If you need your money in the next six years, you could sell first thing tomorrow morning and you will be able to limit the losses that could come from unpleasant surprises. What kind of surprises? Here are two:

• Credit Default Swap settlements. There is no central repository of information about who owes how much to whom for their CDS obligations. Nor is there solid data on how much these CDS counterparties have in their capital accounts in the event of a default that triggers their obligation to pay up. For instance, I was surprised to learn that Goldman Sachs (NYSE: GS) had a $20 billion obligation in the event of an American International Group (NYSE: AIG) failure. Who else is out there with such obligations? Do each of these counterparties have the ability to get the government to bail them out by taking over the company to prevent them from having to pay? Probably not.

The U.S. decided it could not allow another investment bank to fail. And if it had allowed Morgan Stanley (NYSE: MS). to file for bankruptcy -- as it did with Lehman Brothers -- that would not have happened. Why not? Because Morgan Stanley is now a commercial bank. But thanks to a guarantee from the Treasury and a change in the structure of its deal, Morgan Stanley has skated away from bankruptcy.

That's because Mitsubishi UFJ negotiated a new deal with Morgan Stanley. Instead of buying a mixture of common and preferred stock, Mitsubishi will acquire a 21% stake in Morgan Stanley by purchasing $9 billion worth of its preferred stock yielding 10%. More specifically, $7.8 billion of the Mitsubishi investment is in preferred shares which its can convert into Morgan Stanley common at $25.25 per common share. The other $1.2 billion is in perpetual noncumulative preferred stock that is not convertible into Morgan Stanley stock.

Why the change? Previously $3 billion of Mitsubishi's stake was to be in common stock purchased for $31.25 a share, but after Morgan Stanley's stock fell 58% last week -- this deal would have been embarrassing to complete. This weekend I was thinking about buying Morgan Stanley stock but I held back because I thought that the Treasury might inject senior preferred capital into Morgan Stanley which would drive down the value of its common.

The first speech by bailout guru Neel Kashkari reveals that the $700 billion bailout plan to save the world is turning into a Wall Street WPA program (WSWPA). What a disappointment!

WSWPA started off by hiring a law firm -- Simpson Thatcher & Bartlett LLP! And it hired a consultant -- Ennis Knupp & Associates -- to help Kashkari evaluate which of 70 Wall Street firms will get their share of the gravy train. To be fair, Kashkari mentioned a voluntary program to invest in healthy banks -- but it sounds far from aggressive to me. So the U.S. is announcing its plans to dole out our tax dollars to enrich Wall Street firms while Britain has already taken action to shore up its banking system.

Perhaps disappointment with the glacial pace of U.S. response to this financial crisis helps explain the somewhat anemic stock market action. Futures had indicated a 6% rise; however, markets are currently up a relatively mild 4.2%. I find it interesting that the administration is choosing to use Kashkari's discussion of the nuts and bolts of a government contract for Wall Street as the best way to lead us out of this financial crisis.

November 4th cannot come too soon.

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

Princeton professor and New York Times op-editorialist, Paul Krugman, just won the Nobel Prize in economics "for his analysis of trade patterns and location of economic activity." This award comes at a time when he has been weighing in on the debate as to how best to fix the financial crisis. And I found inspiring his suggestion that governments should inject capital into ailing banks -- an idea that has taken hold in the U.K. and may also prevail here.

Why did Krugman win the Nobel? His work bolstered a branch of economics called strategic trade theory which argues that countries can subsidize certain industries to gain global market share. Others have praised his work on the development of clusters of related industries and his equations that measure how economic shocks affect the current account, exchange rates and capital flows.

The official name of Krugman's prize is "The Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel." He'll get $1.4 million, a gold medal and a diploma. I've agreed and disagreed with him but if his ideas about how to fix the financial crisis take hold, maybe he'll be able to find a safe bank in which to deposit his winnings.

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

The current financial crisis differs from the Great Depression in many respects. At the moment, the most significant difference is that central banks around the world are moving fast to try to stop the problem from getting worse. Stocks in Asia and Europe are rallying and futures point to a higher opening in the U.S.

Should you sell into this rally? Maybe. It depends on whether you think the world's finance ministers have solved the problem.

What are European central banks doing? The UK is injecting $64 billion into three large banks -- Royal Bank of Scotland Group Plc, HBOS Plc, and Lloyds TSB Group -- European governments agreed to guarantee new bank debt until the end of 2009, and the U.S. is coordinating with Europe to offer unlimited dollars to ease the credit crunch.

How are markets reacting? In Asia, stocks rose -- Hong Kong's Hang Seng index surged 7.5% while Sydney's S&P/ASX 200 index rose 5.6%. Things are looking up in Europe as well -- London's FTSE 100 index and Paris's CAC-40 are both up 5.4% and S&P 500 futures suggest a 6% gain in the U.S. What will the U.S. do?

With reports that the UK will invest $60.5 billion to take control of its four top banks, leading Western finance ministers left Washington with an important unanswered question: "What can we do that will restore confidence to the global financial markets?" I am heartened to learn the U.S. leaders are discarding their reverse auction strategy in favor of a plan to inject capital into our banks. But if that plan is not done the right way, it could be a missed opportunity of colossal proportions.

Here's what worries me about the current vague discussions. If the U.S. invests $700 billion in banks that apply for the investment, then the applications are likely to come from banks that are losing money and have the least amount of capital. If the Treasury invests in these money losing applicants, odds are good that they will keep losing money and the investment will be wasted.

In order to get a return on our investment, Treasury must follow a plan I called cull and capitalize. In this plan, Treasury would analyze our 8,400 banks and pick the winners. To do this, the FDIC could rank banks based on their profitability, their capital levels, and the quality of their assets. The banks that did not make it into the winner's circle would either be encouraged to merge with those winners or close down.

John McCain has made several unexpected moves during his campaign. For instance, he picked Alaska Governor Sarah Palin as his vice president. After an initial surge of support, her charming personality has given way to revelations about her lack of familiarity with the issues and Troopergate -- which led a bipartisan committee to conclude that she violated an Alaskan law prohibiting abuse of power. Now McCain may be questioning whether this maverick move hurt him more than it helped.

McCain also decided to suspend his campaign last month to deal with the financial crisis. Coincidentally, this decision came just a few days before McCain was to debate his opponent during a week when he was down in the polls. As it turns out, McCain resumed his campaign in time for the debate but without fixing the crisis. Did this maverick move strengthen McCain's image as a strong, effective leader?

At the end of a week in which the S&P 500 fell over 18%, more than it ever has in any previous week in history, some in the Republican party are questioning whether McCain's campaign is functioning as well as it could. Former Massachusetts governor, Mitt Romney, has suggested that what McCain needs is a "broad vision of how he would lead the country through the economic crisis," according to the New York Times. This comment suggests a maverick move that McCain could take to revive his chances: replace Palin with Romney.

The SEC's ban on short selling ended Thursday. This creates the conditions to resume the cycle of value destruction that brought down Lehman Brothers Holdings. What happens is that a threat of a credit downgrade causes a spike in the premiums for credit default swaps (CDSs) that insure the bank's debt. That premium spike requires a collateral call which the bank lacks the cash to meet. This jeopardizes its effort to raise capital and sends the stock plunging -- to the profit of the short sellers.

Enter Morgan Stanley (NYSE: MS). A few weeks ago, it announced that it would raise $9 billion from an investment from Japanese bank Mitsubishi UFJ Financial Group, which is due to close on October 14th. However, the $25 a share purchase price is now about double Morgan Stanley's closing stock price Thursday. If the $9 billion capital commitment remains constant, MUFJ would own 65% of Morgan Stanley rather than the original 21%.

And this morning, a report emerges that Moody's (NYSE: MCO) will put $200 billion of Morgan Stanley's debt on downgrade watch -- helping drive its stock down 27% in pre-market. As happened at Bear Stearns and Lehman, hedge fund clients have pulled out their money and its CDS premiums are up so much that it can't issue new debt. Specifically, Morgan Stanley's 5-year CDSs rose to an upfront payment of 28% of the amount insured -- yesterday it was 19% -- plus 5% percent a year. So Morgan Stanley would pay $2.8 million to insure $10 million of debt plus $500,000 a year.

While you were sleeping, Asian markets followed the U.S. down. Japan's Nikkei lost 9.6% as a real estate investment trust and an insurance company -- Yamoto Life -- filed for bankruptcy. Markets in Hong Kong, Korea, Australia, Singapore and Thailand fell between 6.5% and 8%. In Europe, markets opened down 10%. Fear is rampant with the volatility index (VIX), a measure of fear, closing at an all time high of 63.92.

By chance, there is a meeting of G7 finance ministers in Washington this weekend, and there will be a push to do something by Sunday night. I think it would be a triumph if everyone in the meeting could agree on a common definition of the key problem: the freezing up of short-term lending markets (the TED Spread, a measure of short-term lending risk, hit a record 4.23%), the lack of capital in the global banking system, or investors fleeing the stock market.

Why would this help? Part of the reason that global efforts so far have failed is that there does not appear to be a common understanding of what is wrong and what it will take to fix it. This has been reflected in uncoordinated tactics -- flooding the markets with liquidity, cutting interest rates, guaranteeing money market funds, injecting capital into banks -- in the UK only -- and our DOA $700 billion reverse auction plan.

This afternoon, Citigroup (NYSE: C) chose to walk away from its discussions to acquire Wachovia (NYSE: WB) but Citi will revive its $60 billion lawsuit against Wells Fargo (NYSE: WFC). Meanwhile, with its $122 billion portfolio of toxic option ARM mortgages -- which add gaps in borrowers' monthly payments to the loan principal -- Wachovia may be too radioactive for Wells Fargo to buy.

How did we get here? On September 29th, Citi thought it had a deal to buy Wachovia's banking operations for $2.2 billion -- Citi would absorb the first $42 billion in losses and stick the FDIC with the rest. In exchange, the FDIC would get $12 billion worth of Citi preferred stock. Last Thursday, Wells Fargo announced a deal to buy all of Wachovia for $15 billion without costing the FDIC anything. Citi sued, the FDIC encouraged the three parties to split the baby, and this afternoon Citi decided to withdraw.

But now that the field is open for Wells Fargo, should it continue with the deal or has it learned that Wachovia's bad assets will make the deal too costly? Although Wachovia would give Wells $448 billion in deposits in 3,300 branches in 21 states, it also has $122 billion worth of option ARM mortgages. These mortgages are likely to default in huge numbers over the next few years. That's because the average option ARM holder will see a 63% rise in monthly payments -- for an additional $1,053 per month. With the economy likely to deteriorate, that could burn a big hole in Wells' $48 billion in capital.

In the wake of S&P's downgrade watch of General Motors (NYSE: GM), which sent its shares down 31% to a 58-year low, the Dow lost another 679 points today. Exactly a year ago, it was levitating at 14,164 -- now 5,585 of those points are gone. In the process, $9.3 trillion in market value has evaporated. And that loss of market value shows no signs of stopping.

A week ago, I suggested that investors who need their funds in the next six years should give some thought to cutting their losses. Since then, the Dow has lost 2,252 points. As a reminder, during the Great Depression, the Dow lost 89% of its value. If you end up losing 40% of your investment instead of 90%, you may look back and think that you were wise to have salvaged something.

Last Friday, the White House signed an $850 billion bailout bill. That bill was pushed as a way to stop a catastrophe. With $3.2 trillion in stock market value lost since then, some might argue that the bill's benefits were oversold. Meanwhile, the short-term cash market seems to have stopped working as the TED spread peaked at 4.14%. I've suggested that a cull and capitalize plan for the U.S. banking system is essential for restoring the functioning of the credit markets. Let's get this started.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in GM securities.

A digital clock in New York City counts up the U.S. National Debt. But the current administration broke the clock which only had enough digits to count up to $9,999,999,999,999. As Dick Cheney said, Ronald Reagan proved that deficits don't matter. I wonder whether this broken clock is proving Cheney wrong?

The clock has an interesting history. The now-deceased Manhattan real estate developer, Seymour Durst, built this sign in 1989 because he thought that the then $2.7 trillion debt was too high. The debt kept growing after he put up the sign but by the end of Bill Clinton's second term, it was down to around $5 trillion. Since January 2001, the national debt has grown to $11.3 trillion thanks to the $850 billion bailout bill.

The good news is that the clock, which currently counts the deficit by substituting a 1 for the $ sign that was there before, will be fixed next year -- adding two digits. Too bad fixing the clock won't make the U.S. economy any less perilous. At 81% of Gross Domestic Product (GDP), our national debt is way above the 60% that the IMF considers to be a risky borrower.

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

With its stock down 53% since it announced the first delay in the 787 Dreamliner, it would be an understatement to say that Boeing (NYSE: BA) is going through a rough patch. It has been a month since its 27,000 machinists went on strike and both sides are hurting. Now they are resuming negotiations.

How much pain is this strike creating? Boeing could lose $1.75 billion worth of revenue and take a 13% earnings hit if the strike ends up lasting seven weeks. Meanwhile, machinists -- who average $26 an hour -- are making $3.75 an hour worth of strike pay (assuming a 40 hour week for their $150 a week strike pay packet).

The dispute between Boeing and its machinists appears to be about several issues. But the most important one seems to be that Boeing wants to have the flexibility to outsource work and machinists want to limit that flexibility. I think they should agree to a compromise which would give the machinists a chance to make a proposal to keep work with them if they can do the work well at a competitive price.