Testy Tuesday Morning

I'm still bothered by the 88% probability of a .50 Fed cut that is priced into the futures.

One week ago the Fed Funds Rate was at 4.25% and the Fed went with a .75 emergency cut.  Another .50 cut would knock us down to 3% and that would be a 30% drop in just one week!  Were we really 30% too high – is the Fed that totally clueless that they are now going to stand up and say to the world "We were at least 30% wrong at our last meeting, maybe more – we'll get back to you next time Cramer pops a blood vessel."

So I guess the question we need to ask is: "How dumb is the Fed?"  Are they "just" 30% wrong or are they 50% wrong or perhaps (if we eventually race down to BOJ levels and start just GIVING money away) they are 100% wrong.  The BOJ has been SO wrong for SO long that they put a guy in charged named Fukui, just to make sure people got the message! 

President Bush gave the people a big FU in his State of the Union Address as there was little for him to do, other than laugh at his own suggestions while he was reading them, because he knows there's not a chance in hell he's going to put these things through Congress.   Rather than focus on productive legislation that CAN be passed, Bush decided to spend our nation's time at this very critical point in history asking for more war funding, more tax cuts and ratcheting up the rhetoric against Iran.  Needless to say, he drove the dollar to new lows in overnight trading.

The Democrats have begun to show ourtight disdain for the President, which I can't say I approve of but clearly, this administration is over and the Democrats are already measuring the drapes in the Oval Office.  “I don’t know what they gain by this relentless stream of negativity,” said Senator John Cornyn, Republican of Texas. “But I guess they just can’t seem to help themselves.”  Nancy Pelosi said: "“To realize that the president of the United States, in his final State of the Union address, is not talking about the promise of the future, he is talking about the process of an appropriations bill, I think that’s pretty sad.”

Jack Kingston (R-GA) said: "I think there was a certain relaxation and calmness to the president knowing it was his last speech and I think there was a certain relaxation and calmness to the Democrats knowing it was his last speech.” 

Asia had a calm and relaxing reaction to Bush's last stand with the Nikkei bouncing back 390 points (3%) and the rest of the markets over there gaining about a point.  As I said yesterday: "I’m sorry Goldman, but unless Godzilla is marching on Tokyo I just don’t see Japan’s ISM going lower than it’s the  0 (out of 100) it’s been at since November and the Nikkei already dropped 25% since July and I think you are trying to get blood from a stone here – everybody but the sheep who follow your calls already knew Japan had troubles and now it is very, very obvious you are trying to force a bottom!"  So, for those of you keeping score, in 2008 so far that's PSW 1, Goldman Sachs 0.

Europe is rockin' and rollin' this morning with the DAX giving us a point of follow-through after breaking back over 6,800 yesterday and we'll see how they handle 6,900 if we can pare it with a strong us open.  Commodities are leading Europe higher as Uncle Ben's monney drop is trumping Trichet's toe on the line, especially as the SocGen scandal looks like it may force the ECB to float a little liquidity after all. 

Durable goods are UP 5.2% (up 2.6% ex transportation, non-defense capital goods up 4.4%) and the prior report has been revised higher which means the Fed was totally wrong to cut.  Will they compound that mistake tomorrow in order to please Wall Street?  The Fed is backed into a corner and has to give the market something but .50 would be ridiculous at this point!  GE told us last week that the global economy was still very strong, this confirms it.

CFC "only" lost $422M and says that 1 in 3 sub-prime mortgages are now delinquent.  Still I think this is a BUYBUYBUY on BAC, who got a great deal picking them up for $4Bn just ahead of what is already shaping up to be a massive refi boom in '08.  They are out of the basement but the Aug $42.50s are just $2.92 and we can sell the March $42.50s for $1 IF they slip below $41 but, otherwise, we'll be looking to cover with the Feb $42.50s at $1+, a nice 33% return in our first month!  Let's put 20 of these in the Bargain Basement Virtual Portfolio.

Also in the mortgage mess, MS "reclassified" $7Bn in debt from level 2 to level 3, a nice way of writing them off without officially writing them off – they are just saying that there's no real way to value them!  This is from the "one man's trash is another man's treasure" school of economics made popular by Fred Sanford in the 70s.  MS has been rewarded for their very creative accounting with a subpoena but don't worry, they can car pool to the courthouse – our friends at Goldman also received "requests from government agencies" for information relating to subprime mortgage investments.

So we are corralling the criminals and things are looking up in the markets, I think the data is strong enough to knock down some of those rate expectations which will lower the chance the Fed will disappoint tomorrow when they follow my plan and give just a .25 cut.  So we can expect oil to drop ahead of tomorrow's inventory and gold to pull back a bit (as I noted yesterday, I covered into the run to $930)  but let's keep an eye on our levels and make sure they stick:

That is a MUCH nicer picture than we had last week.  We need the Nasdaq to step up and give us another green box and that's going to be tough if the SOX can only gain 10 points a week.  The Russell and the Transports should break up if all is well and let's keep an eye on the CAC, which is still teetering on our danger zone.  If we get to our feeling better level on the FTSE, the CAC should follow and we can give them a mulligan this week as the country's second biggest bank may be failing so, all in all, not so bad over there.

Let's enjoy our day but also take at least some index covers ahead of the Fed.  Things are looking a little better but not 200 points a day kind of better!