The Dow logged its second best one-day point gain, 889 points, in its even more storied history yesterday:

Percentage wise, at 10.8%, the rally ranks sixth. The S&P and Nasdaq trundled alongside the old lady like puppies.

After finding a new “credit crisis” low on Monday, traders on Wall Street snapped back with vengeance. But it’s not the higher highs we’ll be watching for the rest of the week — but lower lows. During each sell-off since extreme volatility began three weeks ago, we’ve reached all-new lows.

The Japanese market performed in a similar way through the entire decade of the ’90s. It rallied at least 30% higher five times since 1992, before finding new lows again, and again… and again.

Extreme volatility is a good thing if you’ve got the stones for it. “You do know someone who does seem like they know what the hell they’re doing, day to day,” Steve Sarnoff wrote to us after reading yesterday’s 5.

Steve included his gains sheet from Options Hotline, noting that his Intel calls triggered yesterday. Any of his subscribers with filled orders profited about 97% in a single trading day. Yawn… stretch… not as exciting as his 439% gains on QQQQ puts two weeks ago. But still…

On the short side, Dan Amoss told his readers yesterday to pocket 94% gains on their Fleetwood Enterprises short sale. Shorting a financially distressed manufacturer of recreational vehicles… who’d have thought that would be a good play?

If you’re interested in options or shorting stocks, let us remind you both are extremely risky ventures. But we’ve got a couple of ringers to help. Check out Options Hotline and/or Strategic Short Report for ideas. Both are included in your Reserve Membership. Or available a la carte.

Despite yesterday’s monster stock rally, the credit markets are still moving cautiously. The rate at which banks lend to one another (Libor) did decline again today, the 13th day in a row, but only by a little.

The three-month dollar Libor fell just 4 points overnight, to 3.46%. Considering an all-but-certain rate cut from the Federal Reserve today, commercial banks had every excuse to relax lending rates significantly… but guards are still up around the world.

“We are not going to say, ‘Yahoo, this is over!’” explained JPMorgan Chase CEO Jamie Dimon, “and extend credit like we did without fear. If you’re not fearful, you’re crazy.” That coming from the guy who was fearless enough to buy Bear Stearns with little more than a wink from Ben Bernanke over Sunday tea.

The Fed will announce its latest interest rate decision today around 2:15. Anything less than 75 point cut and we suspect a sell-off. 1% or lower, here we come. We’re turning Japanese… we really think so.

After a decade and a half of practically free money, the Bank of Japan is considering its interest rate again, too. It’s already at the 0.5%. How much lower can the Japanese go?

The reversal in the equity market yesterday reverberated in the currency world.

The dollar took a pretty good whack. The dollar index fell two full points from yesterday’s high, now at 85.5. Thus, the euro enjoyed a nice bounce, up 3 cents, to $1.27. The British pound is back up nearly a nickel, to $1.60. And yen traders took profits, bringing the Japanese currency back to 97.

“The eventual cost to the U.S. financial and economic system,” says John Williams, “will be much higher inflation.

“The monetary base has seen an unprecedented surge, reflecting total reserves of depository institutions jumping from an average of $47.1 billion (seasonally adjusted) in the two weeks ended Sept. 10 to $328.6 billion in the period ended Oct. 22.

“Using the St. Louis Fed’s adjusted monetary base (effectively total reserves plus M1 cash in circulation), the year-to-year growth in the latest period was an unprecedented 38%. In the period since 1919, the previous high growth rate was 28% in September 1939, as the U.S. was building up industry for the evolving war in Europe.

“Back in the days when the Federal Reserve targeted money supply growth, the monetary base was the measure it adjusted. The current surge in the base is a direct result of the ongoing, extraordinary actions taken by the Federal Reserve and the U.S. Treasury aimed at preventing a collapse of the U.S. financial system. The higher monetary base growth will result in sharp spikes to domestic money supply growth and will intensify inflationary pressures in the year ahead, irrespective of wild gyrations and sell-offs in oil and of strength in the U.S. dollar, which otherwise should prove very short-lived going forward.”

Meanwhile, the U.S. government is beginning to advertise for new bailout money: “We are making it clear to sovereign wealth funds,” Deputy Secretary of the Treasury Robert Kimmitt said yesterday, while seeking help in the Persian Gulf, “that we are open to investments that are done on a commercial, not political, basis, and that do not raise security concerns.”

Kimmitt hinted he may have found some takers already: “We think that they are continuing to look very closely at opportunities in the United States. We have a number of cases before the Committee on Foreign Investment right now… Every investor that I’ve spoken with here and elsewhere had been in the United States within the past month, looking for opportunities.”

Who would have thought even three months ago — besides your cranky editors of The 5, I mean — that Wall Street would be holding a global garage sale this fall?

Orders for durable goods, surprisingly, jumped in September. According to the Commerce Dept. today, orders for things meant to last more than a few years increased 0.8%, well above the expected fall of 1.2%.

Before you celebrate (we know how durable goods data get you percolating), the actual details weren’t so optimistic. The Commerce Dept. revised August data to show a 5.5% fall in orders, the worst month in almost two years. And all of this month’s improvement came from transportation equipment, a sector so depressed it hardly has any more room to fall.

Since the dollar has pulled back, commodities have pushed forward. Gold continues to inch up this week, and has now struggled back to $760 an ounce.

Oil is creeping back up, too. Crude is up $4 today, on a weaker dollar and the fleeting image of a stronger U.S. economy. A barrel goes for $66.

“Energy development is exploding in Africa,” reports Byron King. Our energy adviser made the long trip to South Africa for a conference on African energy development.

“In the past decade alone, the number of companies actively looking for energy deposits in Africa has soared from under 100 to over 500. By 2018, there may be 800 or so companies exploring for and producing energy in Africa. Expect to see $350 billion spent in Africa by 2020, just on energy development.

“There are over 100 billion barrels of discovered oil reserves in Africa. And there may be as much as another 100 billion barrels left to be found. And even more natural gas, in terms of energy content. Plus, heavy oil. And coal and coalbed methane. Which makes Africa more of an energy development target than Russia, or the even the Arctic — without the weather issues that we find up north in such frozen climes…

“For now, oil prices are down, but investment is still flowing into a lot of energy projects in Africa. Some companies are having trouble with short-term credit, but this is not the biggest issue for the energy industry and its efforts in Africa. When the economic logjam breaks up, among the first things that will happen is that worldwide energy supplies will tighten. And eventually, the world will confront its long-term lack of investment in the energy industries.”

Even though oil has perked up, gas prices are still plummeting. The national average is now at $2.58 a gallon. That’s a level unseen since March 2006. The national average has shaved off a full dollar and change in the last month alone.

The IMF officially bailed out Hungary today. The country is getting a $25 billion loan. That’s the third IMF nation rescue in this crisis, and bigger than the first two — Iceland and Ukraine — combined.

Six percent of U.S. employers have cut 401(k) contributions this year or plan to do so in the coming months. According to a study by human resources firm Watson Wyatt, that number is likely to grow, as many firms surveyed refused to comment, as admitting to a 401(k) slash stinks of fiscal weakness.

Notable companies that have already nixed their 401(k) contributions include Goodyear, Frontier Airlines, commercial real estate firm Cushman & Wakefield, Entercom and rental car agency Dollar Thrifty.

“I, for one — also a Reserve Member — am totally thrilled,” writes a reader, responding to yesterday’s inbox, “that not one word of ‘asset allocation,’ ‘time horizon,’ ‘risk tolerance,’ ‘cost averaging’ or other such drivel and pablum of the financial industry is to be had among the Agora publications. I hope it stays that way. If it’s advice on those subjects he’s looking for, well, it’s even more abundant than the rivers of worthless paper flowing out of the Fed. Just ask for it from almost any investment adviser.

“As Buffett aptly notes, those are all methods for how to be average — and average right now is downright scary. The degree of risk that one assumes is directly proportional to how much one understands the fundamentals of an investment, sees the obvious and acts accordingly. It was largely due to the steady stream of spot-on, if not conventional and frequently unpopular, commentary coming from the crew of Agora doomsayers, who often ran against the mainstream financial media and consistently pointed to the buildup of ugly economic data, that I became convinced to do the obvious.

“Last year, I exited nearly all long positions and loaded up on puts in the financials and in the consumer stocks and indexes and barricaded myself with inverse market positions, with many of these either recommended or inspired by Strategic Short Report and the late Survival Report. And yes, I even did this for my retirement account. I couldn’t be happier with the results.

“While I’m still waiting for gold to have its day, Mr. Bernanke and friends have been very hard at work ensuring my eventual returns there. Had I asset allocated according to my time horizon and risk tolerance (gag…cough…) I would no doubt be enjoying the wonderful returns on bonds and cash, instead.”

The 5: Nice work.

Cheers,

Addison Wiggin
The 5 Min. Forecast

Source: Can the Mega-Rally Hold? The “True Cost” of the Crisis, An “Exploding” Energy Market, and More!

Continental’s management ended months of speculation by announcing that a merger with troubled United would do more harm than good, even with the intense pressure airlines are under due to record high oil prices and the competitive threat posed by the recent deal between Delta Air Lines Inc. (DAL) and Northwest Airlines Corp. (NWA).

“The risks of a merger at this time outweigh the potential rewards,” Chief Executive Officer Larry Kellner said in a letter. “While some would prefer to see Continental pursue a merger, we strongly believe we have made the right decision.”

As for the niche carrier Eos, in grounding itself it joins Skybus Airlines, Aloha Airgroup Inc.’s Aloha Airlines and ATA Airlines Inc., which have already ceased operations, as well as U.S. charter operator Champion Airlines, which announced plans to stop flying at the end of May.

Frontier Airlines Holdings Inc. (FRNT) also has filed for bankruptcy protection, but at this time plans to keep flying.

The Eos downfall was “no surprise,” Calyon Securities airline analyst Ray Neidl told The Associated Press. “We saw it happen with other smaller, undercapitalized airlines. Basically, there are too many airlines. We’re in a period of consolidation. The weaker guys, [facing] $120-a-barrel oil, are finally succumbing.”

With jet fuel the single largest expense for carriers, merging to capitalize on economies of scale makes sense. And as the world’s new largest carrier, the Delta/Northwest merger now has the competitive advantage.

But while Continental still might be able to go it alone – even against a stronger potential rival – United is in a much weaker financial position and needs a partner. The carrier wasted no time in turning its attentions to U.S. Airways Group Inc. (LCC).

“Consolidation is under way – ensuring you have the right partner is everything,” United Airlines Chief Executive Glenn Tilton said in a statement. “We will pursue all options to ensure a strong, sustainable future for our airline.”

While talks with U.S. Airways are not yet at the advanced stage United had reached with Continental, management is doing its best to accelerate discussions, hoping to finalize any deal before the end of the year – and before there’s a possible change in the political party in the White House.

When it comes to mega-mergers – and industry consolidations in which there might be a perceived decline in competition – the Bush administration is seen as being more of a proponent for deals that require Justice Department approval in order to proceed.

Analysts say that U.S. Airways and United could mesh well due to similar pay structures and complementary fleets. In addition, United and U.S. Airways are both members of the Star global marketing alliance.

Bigger is Better

Atlanta-based Delta announced it would buy the Eagan, Minn.-based Northwest for $3.63 billion, all in stock, creating a single carrier with a combined enterprise value of $17.7 billion.

Delta Chief Executive Richard Anderson will be chief executive officer of the combined company. Delta Chairman Daniel A. Carp will become chairman of the new Board of Directors.

The carriers decided to go ahead with a merger despite being their respective pilot’s unions being unable to come to agreement. Delta’s 7,000 pilots endorsed the deal by supporting a new labor agreement that includes an equity stake.

While Northwest’s 5,000 pilots will be asked to join a contract before the deal closes, the union is expected to oppose deal after the unions could not agree on how to assign pilot seniority – a key determinant of shifts, pay scale and what airplanes they fly – in the new organization.

It is expected that the Delta/Northwest merger will be approved later this year.