Market Rallies after Morning Sell-Off...

After a rough morning of economic news, stocks reversed course and are up about 77 points as of this post.  The labor department said initial jobless claims soared by 69,000 to 375,000.  This of course comes as bad news while we await the government's January nonfarm payroll numbers.  Tomorrow should surely be an interesting trading day.

From an equity performance standpoint, the month of January has been rough for holders of stock.  Thus far...

DJIA = -6.8%

S&P 500 = -8.2%

NASDAQ = -12.0%

Please note that these are month to date numbers.  I would expect that, at a minimum, we retrace these losses over the next 6 weeks.  Financials should lead the way.  I will sit on my hands until we have more economic clarity.  No purchases or sales today...

Other thoughts from my perch...

Need to start reviewing and considering adding to financial stocks.  Brokers and banks are typically considered "interest rate sensitive" to the extent that they perform very well in an enviornment that see lower interest rates.

Among the names to look at:

Goldman Sachs (GS)

Bank of America (BAC)

Lehman Brothers (LEH)

Morgan Stanley (MS)

All are moving higher this afternoon...

Why I don't trade Fed Futures...

...cuz I was wrong on the size of the cut.  The Fed moves to cut the rate by 50 basis points citing deteriorating credit and housing market.  As I write this, the Dow is up 80 points.  In all fairness to Bernanke, he is pushing the pedal at full throttle to provide the economy with some serious liquidity and avert further economic weakness.  I just wonder how much lower we can go on the Fed Funds rate and real rates, for that matter... 

FYI, dollar weakens more....

Fed's Ex-Dallas Prez Robert McTeer says 25 basis points "most likely"...

Says he would like to see Fed Funds rate down 50 basis points today but says 25 basis points is "more likely".  I echoed the same sentiment yesterday...for some reason, I get a feeling that the Fed doesn't want to be bullied around by the markets and it shouldn't be.  I don't care what anyone says about that.  Monetary policy should, generally, not be a function of market performance.

FYI, I believe a 25 basis point cut would mean a selloff over the next day or two. 

China Strategy: "Soft Landing" in Play.

Some quick notes on China and FXI:

VISIBILITY IS A PROBLEM -  And this is due to three reasons:  (1) the US credit crisis has spilled over to global debt markets; (2) China's economy may be overheating; and (3) companies' earnings and liquidity in the equities markets.  With that in line, Chinese stocks have seen some weakness as investors are pricing in the expectations of lower shareholder returns and high equity risk premium which is a bi-product of outlook uncertainties.

IMPORTING GROWTH - The Chinese have been "importing" global growth by exporting Chinese produced goods.  These goods include everything from steel, copper to other often used commodities around the world.  Basically, the products that fuel economic growth.  However, in times of slowing global growth, China may act to help alleviate global weakness by trying to sustain long term growth which means that at some point they need to accept some moderating of their torrid growth pace. 

TIGHTENING THE CREDIT MARKETS - This may also mean tightening lending standards.  Investment projects in China are likely to face headwinds when they apply for approvals and bank credits.  When exports falter and signs of slowing in investment growth appear then imbalances in credit and hypergrowth should better align themselves.

I still believe that over a 12 month time frame, FXI remains an excellent longer term choice (12 month plus).  I would caution investors trying to day trade the stock or play on a very short term basis.  The equity markets in China are super-volatile as compared to the US markets.  Not sure most of us would have the stomach to see broader market numbers moving 10 to 12% on a daily basis as we saw last week on Asian exchanges.   

Economy Stalls Out?

The economy nearly stalled out in the 4th quarter with a growth rate of just 0.6%, capping its worst year since 2002.  This comes as economists were expecting a 1.2% growth rate.  As a matter of reference, the 3rd quarter growth rate sat steadily at 4.9%.  A change from 4.9 to 0.6 is pretty hefty.

The Commerce Department's report on GDP, released Wednesday, showed an economy that deteriorated significantly from October to December as the housing and credit markets both dried up. 

The timing of this announcement couldn't have been better.  With the Fed scheduled to meet tomorrow, they almost have to act before we stall into a nose dive.   Stay tuned!

Cramer says dump TECH!

In a interview this morning, Cramer says that market is selling them off too much.  MSFT does well and stock does nothing, IBM preannounced an EPS beat then gets slammed, AAPL beats but also gets throttled.

He notes an irregular imbalance and says Feb to June is normally a poor season for Tech.  Says most product cycles (iPod, Vista, Adobe, etc.) are being finished out.

But still likes EMC and HP under $40.  Says we are in a bad season for tech....

Dow Opens Higher as Investors Await Fed

Investors are anxiously awaiting this weeks FOMC meeting.  The Fed's rate decision is clearly the market's focus this trading week, so trading will be marked by investors' conjectures about policymakers' sentiments on the possiblity of a weak economy. With a decision not expected until late Wednesday, the market will continue to digest Tuesday's data on earnings, consumer spending and durable goods.

This week the Fed surely has a lot on its plate.  I think perhaps the biggest problem was that they probably overextended with respect to last week's 75 basis point cut.  With my retrospective advantage in mind, I would have done 50 last week and 50 this week to get the Fed Funds rate down to 3.0%.  But now they are probably stuck to 15 basis.  Taking the Fed Funds rate lower than 2.5% over the next months would put real rates into negative territory.  Thats a real dangerous situation to say the least. 

Given that as our backdrop, one of arguments that, inevitably, shows up at a time like this is that by lowering rates too much, as Bernanke & Co. could be doing, they are setting up the possibility for further asset bubbles.  Lower rates, which assisted the economy since 2001, created the huge "housing monster".  I would say at the moment, going lower than 2.5% on the Fed Funds rate might mean further bubbles. 

Caveat Emptor!

Source: Yahoo.com

Stocks Move Higher for Lower Rates? Oh No!

Wall Street advanced yesterday after a big drop in new home sales and disappointing earnings...and you ask "why?"...everyone thinks rates get cut again.  Traders who are betting on the Fed's next move and are pricing in a more than 80% chance of a half-point cut.  Anything less than that would be a letdown...

My take:  I think we will be lucky to get the 50 basis point cut.  In fact, I feel about 75% comfortable that we get a 25 basis point cut.  I just wish traders would manage their personal expectations on rate cuts...maybe I will be wrong but I think not.

In other news...

a) the dollar fell against most major currencies except the yen

b) gold prices were up again

c) crude oil rose 28 cents to close at $90.99 a barrell on the New York Mercantile Exchange

7 Months Later and the Blowup Happens!

Last July I posted that the subprime market was about to blowup and Bear gave us the forewarning.

Unfortunately, most investors/investment bankers didn't take it serious and now we are paying the price.  And with that we are now facing the possiblity of a recession.  On the heels on a deep global selloff, the Fed cut the discount rate by 75 basis points.  The Federal Reserve normally tries to avoid reacting directly to financial markets but with the global markets in a freefall, their hand was forced.

The Dow Jones Industrial Average (DJIA), down as much as 464 points early in morning trading, later recovered to close down 128.11 points, or 1%. European markets, which were falling for a second straight trading day, reversed course and closed higher on the Fed's action.

Bonus News for the Afternoon:  Apple beats estimates BUT falls on forecast!  Shares traded 10% lower after Apple execs warned on possible weakness in upcoming quarters.

http://online.wsj.com/article/SB120102062256706905.html?mod=hpp_us_whats_news