Thursday Morning

We got huge moves in both directions following yesterday's half-point cut.

I was negative on the rally and we went as far as to pick the DXD (ultra-short Dow) calls at 3:46 with the Dow topping out at 9,350 as I said to members: "I don’t know that Europe is going to have such an easy time cutting rates with oil up 8% and other commodities going up as they are now up sharply against the weak Euro and the ECB has a very definite inflation-fighting mandate."  Still, I was as surprised as anybody to see DXD fly from $71 to $77.50 in the last 14 minutes of trading.  Looking at the futures (7am) I may have been wrong to be so bearish about the Fed statement but the commentary struck me as very negative and, with the GDP and Unemployment hitting us at 8:30 and then the weekend looming, I couldn't see not covering into what looked like a pretty irrational rally.

Pre-market, we are back up to roughly 9,150, the mid-point of yesterday's trading.  Holding Tuesday's close will, of course, give us a small victory for the week but, as I pointed out in yesterday's Big Chart Review, it doesn't mean much unless we can take back LAST Tuesday's highs which are: Dow 9,265, S&P 985, Nasdaq 1,770, NYSE 6,051, Russell 546 and SOX 243.  The Hang Seng (15,041) and the Nikkei (9,306) made valiant attempts to get back to last week's levels with massive gains this morning but the Hang Seng still finished down 712 points since 10/21 and the Nikkei, despite a 10% gain on the day, fell 277 points shy of the mark.  Both had strong finishes and may follow through tomorrow if the US looks good today but it's going to be a real level test ahead of the weekend.

In addition to our half-point cut yesterday, the IMF offered up $100Bn in an expanded loan fund and we discussed China's cut to 6.66% yesterday.  Norway dropped rates to 4.75%, it's second cut in 2 weeks and Taiwan dropped rates to 3% while Japan is discussing halving their 0.5% rate to 0.25%.  Meanwhile, junk bond rates are exploding to 16% as corporations scramble for cash.  Last year junk bonds traded at 2.5% over Fed Funds rates of 4%.  "The junk-bond market is looking at a ticking time bomb," says Martin Fridson of Fridson Investment Advisors. "Even under the best of circumstances there's a lag with fiscal or monetary stimulus to the economy. When you have the banks as beaten up and resistant to lending, it is likely to be even less effective than usual."

Mortgage rates have also gone up, not down. That's in part because Fannie Mae and Freddie Mac, the mortgage-finance giants taken over by the government last month, are finding it costlier to borrow as investors are shifting away from their debt and toward other instruments, such as bank debt, that have new government guarantees. In just the past week, the average 30-year mortgage rate increased to 6.56% from 6.1%, according to HSH Associates.  As I keep saying, nothing the administration has done so far is doing anything to help the actual homeowners in crisis – or businesses for that matter…  With consumer spending making up 70% of the GDP, that's a recipe for disaster!

While Japan tossed a $51Bn stimulus package onto the global currency bonfire, as I expected, the rapid rise in commodities on yesterday's Fed move already has the ECB hedging and Jean-Claude Trichet said that an interest-rate cut at the bank's Nov. 6 meeting was a "possibility."  Even so, the market is expecting a half-point reduction to 3.25% from 3.75%.  Business confidence in the Euro-Zone hit new lows in a recent poll but Unilever (Europe's GE), RDS.A and DB had good earnings reports

8:30 Update:  Europe is up about 2% as we get our GDP report at -0.3% and the markets are taking that very well as the expectations were already baked in and, of course, that was before all the stimulation hit the economy so we can spin this as the worst being behind us.  Unemployment claims were flat at 479,000 new claims for the week, also pretty much in-line with expectations.  Government spending was up 6% and accounted for most of the positives in the GDP and the PCE index was a whopping 5.4% for the quarter, the worst inflation number since 1990, when Bush the first was dumping money on his S&L fire.  Consumer spending was down 3.1%, the worst level in 28 years and was responsible for 2.5 GDP points lost.  Durable Goods orders were off 14.1% and Residential Construction fell 19.1%. 

The bright spot of the GDP was International Trade, which gained 5.9% on a falling dollar, that's not looking like it will repeat in Q4 and that was responsible for 1.1% positive in this GDP.  Separate from Government Spending is Defense Spending, which was up 18.1% in the quarter so a MASSIVE effort was made by the administration to paint the GDP positive in Q3 as it comes in just ahead of the election. 

 XOM did it's part today with $14.83Bn in profits as our economy's pain was their gain in Q3, which began with oil over $140 per barrel.  We are hoping to get a nice pop in XOM to short into so we'll see where they go today, hopefully they get to $80 and we can buy some 2010 puts for a leap spread as things will look very different for XOM in a quarter where oil opened at $95 and is down to $65 at the end of the first month. 

We're going to sit on the fence and watch our levels this morning, especially our 10/21 close, which we would like to retake and hold in order to book a change in sentiment for the week.  Note that, for the most part, a 5% up move on the day will get us there other than the Russell, which is way behind (and that's why we went long on it) and the IWM May $52s at $5 are a nice way to play a breakout as that ETF was $70 just a month ago and there are plenty of nice premiums that can be used as a cover while you wait.

We'll be happy to be forced to flip-flop off our bearish covers yesterday and it's easy to sell covers against our put plays and keep a firm eye on the 2.5% line to protect our bearish positions from an upside rally but the weekend is coming and I can't see risking more than a neutral (50/50) stance into Friday's close as there is a centipede's worth of other shoes to drop and all we may have done this week is shifted the usual Monday stimulus (we didn't have one this weekend) over to Thursday, which is why it's so critical that we beat the goosed-up levels we hit last week to prove this is more than another dead cat bounce.