Well… The trading theme remained in place yesterday, but this time it was reversed. For those of you new to class, or any of you who have been playing horse hooky, the trading theme that has gripped the markets since August is: The deeper, darker, and more dangerous the U.S. economy and financial meltdown, including the credit market’s locked status, the dollar gets bought… If there is any sign of light to all this mess, the dollar gets sold, for whenever the markets get their minds off the mess, they are reminded of awful fundamentals for the dollar.

So… Yesterday, the stock jockeys must have read the Pfennig and seen that I called for a 50 BPS rate cut from the Fed… (now don’t get me wrong here… I’m against a rate cut, as: 1. it debases the currency further and 2. it will fuel, along with money stimulus going on, future inflation pressures… But! This is what I see the Fed doing, no what I would like for them to do, which would be nothing. They just cut rates 50 BPS last month, that rate cut hasn’t even filtered into the economy yet, why not wait-n-see, and not put that pressure on the dollar and inflation?

OK, I really got off on a tangent there… As I was saying, the stock jockeys read the Pfennig and noticed a call for a 50 BPS rate cut, and the stocks were off to the races! 600 points later, the Dow was looking perky… And all through the day when stocks were rising, and the overall feeling in the markets were upbeat… The dollar got sold, along with Japanese yen! This trading theme is so prevalent now that one could make some real dough if they were smart enough to trade this thing… But that’s not our bag… Really, I’m telling you that’s not my bag! (Austin Powers on a Wednesday morning, yeah baby!)

So… A currency rally that really had some meat and potatoes to stick to your bones! Stock markets around the world were strong overnight too, so maybe, just maybe, this rally can have a two-day run, and then… Who knows, right? Well… Maybe the shadow knows, and he tells me that the deep, dark, dangerous days (my poetry teacher would be proud of that alliteration!) for the U.S. are still in the cards… So be careful out there! Oh, and this just came across the screens… U.S. stock futures are down this morning, which doesn’t bode well for the stocks or the currency rally!

Consumer Confidence here in the U.S. for this month, fell to an all-time low… I saw that and said, “well it’s about time!” Not that I want gloom and doom for the U.S., I just happen to know that we already have it, and kept wondering what U.S. Consumers were so upbeat about! Well, they aren’t any longer… And wait till they get the news that the Credit Card Companies are curtailing the issuance of credit cards… Uh-Oh! If these guys that send pre-approved credit cards to grade school kids, (not really, it’s an exaggeration, but not a stretch!) are pulling back the reins, then you can be sure that they are feeling the pinch of losses from credit cards…

The Pfennig first told you that the next crisis would come from the Credit Cards… Well, it think we’re about to see it unfold right here in front of us, which is NOT exactly what beleaguered banks need right now… Or the economy for that matter!

In other news… The S&P/CaseShiller House Price Index fell once again in August (that seems like eons ago, isn’t there a way to get this data quicker?) to the tune of -16.6%! OUCH! That’s going to leave a mark! And the overall price index has fallen 20% since July 2006… The real problem though is the report indicated that the inventory of unsold homes remains very large, and that will put further pressure on prices…

You may recall me mentioning Bill Fleckenstein from time to time in the Pfennig… The most recent mention was with regards to he book: Age of Ignorance at the Fed, Greenspan’s Bubbles… I talked about it for months, as it gave me a great inside look at how badly Big Al Greenspan screwed up the economy we are now faced with. Anyway… Mr. Fleckenstein is an outspoken defender of short selling… And was interviewed by Bloomberg regarding his stance. I like his stance… Short selling is part of the fabric of the markets, and was put there for the bears… Short sellers are not jackals, hyenas, vermin or vultures, they are simply bears… How can the Gov’t ban this, and call the market “free”? Anyway… Way to stand up for what you believe, Bill Fleckenstein!

OK… I’ve sat on the sidelines too long on this next subject, and it’s time to get off the bench and get into the game… The Amero…

I know that there are people out there claiming they have Ameros, and that they were minted in Denver, and that the U.S. has shipped them all to China for holding until which time the U.S. can’t pay its bills any longer and calls for a “force majeure”, thus making the dollar worthless, and introduce the Amero. The Amero is supposedly the North American Union of the U.S., Canada, and Mexico, and that it will be back by Silver, thus the reason for the physical silver shortage…

OK… You have to ask yourself this question, if you are a believer of all this… The U.S. dollar is the reserve currency of the world, and by having the reserve currency, they are allowed to run up such huge deficits and the world doesn’t bat an eye! Why would they jeopardize this arrangement? Why would the U.S. give up the reserve currency of the world? I’m sorry, but I can’t get my arms around the Amero story…

But! If you are so inclined to believe in the Amero story, then you’ll want to make certain that you convert dollars to currencies now, before it’s too late!

OK… I’m joshing just a bit there, but in reality that’s the case… If that’s what you believe, then you had better get your dollars converted before the Gov’t proclaims them to be worthless.

Alrighty then… Back to reality (for me at least!, if you’re an Amero believer, then that’s OK!), and the reality right now is watching the euro add on to gains made yesterday! The single unit has gained 1/2-cent while I wrote about the Amero! Of course, I just put the kiss of death on the euro’s rally, by mentioning it! UGH! I seem to be a bit snake bitten lately… But, Shoot Rudy, at least I’m here to be snake bitten!

Regarding the Fed rate cut announcement this afternoon… I’ve said that I believe the Fed will cut 50 BPS, bringing rate to 1%… There is currently a 20-30% chance they could go 75 BPS… Talk about raising the “everybody out of the water flag”! That would really bring Halloween early to the markets, as they would have the bejeebers scared out them by a 75 BPS rate cut! I’ll stick to, and the Fed had better stick to 50 BPS, as if that’s not enough already to bring about memories of Jason or Freddie Krueger!

Norway’s Norges Bank, which did NOT participate in the coordinated round of rate cuts on October 8th, but then did cut 50 BPS a week later, is expected to shave another 50 BPS rate cut at their next meeting… But, I wouldn’t bet the ranch on that rate cut, based on their resistance to joining in the rate cut party earlier this month.

Norway’s krone has rallied along side the euro, and I would not like to see a rate cut from the Norges Bank…

The Bank of Japan (BOJ) announced last night that they are “mulling over” a 25 BPS rate cut this week… But come on! Since when does the BOJ tell us what they are “going to do” ahead of time? I would say they did this to jawbone the yen lower… I wouldn’t go betting strongly that the BOJ will cut rates this Friday at their meeting. Their jawboning did help yen to weaken yesterday, along with the trading theme.

And those wild and crazy guys over at Citgroup are talking up euros again… Recall, about a month ago when these guys issued a report showing charts that indicated the euro was about to take off against the dollar? Well… They’re Baaaaaacccckkkkk…. This time, they’ve tempered their call regarding euros, and it sounds a whole lot like they’ve been reading the Pfennig! Let’s listen in to see what they have to say now… “We believe the euro’s move lower against the dollar has been driven by a strong anti-risk bias that has benefited the yen and the dollar. Today’s improvement in commodities, equities, the rise in yields and emerging market improvements suggest a short-term respite that could send the euro back above 1.30 in the near term.”

That’s the trading theme in a nut shell right there! Glad to see them come around to the Pfennig’s way of thinking! But… If a spanner gets thrown into the works, and the deep, dark, dangerous clouds begin to gather over the U.S. economy again, those improvements seen yesterday will be wiped out in a NY Minute!

OK… A quick check of Economic releases today… Oh, here’s one… Durable Goods for September will print today… Recall last month’s print was awful at -4.5%… This month’s report should remain in negative territory, but probably not as awful as the previous month.

And… Then the Big Kahuna of them all… The FOMC rate announcement that will come right after lunch time today… Fed Funds are already trading at 1%, so, the announcement of 50 BPS is expected by everyone at this point! Should be bad for the dollar, but then… Will the current Trading Theme’s grip be too tight?

Currencies today 10/29/08: A$ .6460, kiwi .5750, C$ .7925, euro 1.2810, sterling 1.6020, Swiss .8715, ISK (no quote), rand 10.22, krone 6.7075, SEK 7.7210, forint 199.50, zloty 2.83, koruna 18.77, yen 96.75, baht 34.90, sing 1.4940, HKD 7.72, INR 49.71, China 6.8485, pesos 12.9590, BRL 2.1675, Dollar Index 85.45, Oil $66, Silver $9.27, and Gold… $748.66

Source: A Currency Bounce…

At the New York close, all three major U.S. indices had sizeable gains:

* The blue-chip Dow Jones Industrial Average Index soared 889.35 points, an increase of over 10%, to close at 9,065.12.
* The tech-laden Nasdaq Composite Index jumped 143.57 points, an increase of 9.5%, to reach 1,649.47.
* And the broader Standard & Poor’s 500 Index shot up 91.59 points, an increase of over 10%, to settle at 940.51.

“The valuations are extremely compelling right now,” Dan Veru, who helps manage about $2 billion at Palisade Capital Management in Fort Lee, New Jersey, told Bloomberg News. “When you’re in extreme oversold conditions, the market is prone to these types of wild swings. The key thing is, can we hold these gains?”

It was the second-biggest daily point gain for the blue-chip Dow, which had a record-setting 936-point one-day gain earlier this month.
With a “lack of selling pressure” late in the afternoon, “the buyers began to ride in on their horses, and that brought in some additional buyers and short-covering,” Robert Pavlik, chief investment officer at Oaktree Asset Management, told MarketWatch.

All sectors posted gains across the board with energy, up 11.76%, and basic materials, up 11.74%, marking the largest gains.

The Fed’s Federal Open Market Committee (FOMC) is expected to release its statement on monetary policy tomorrow (Wednesday) afternoon.

The Fed is widely expected to reduce its benchmark Federal Funds target rate as the likelihood of a U.S. recession continues to increase and inflation pressures have abated.

The Fed Funds rate currently stands at 1.50% and a cut of 25-50 basis points is expected.

“The cut is already in the market,” John Ryding, economist at RDQ Economics told AFP.

“The question is whether it’s 25 or 50 basis points.”

Source: Dow Zooms Above 9,000 on Eve of Expected Fed Rate Cut

The major indexes took their hardest hit in months as Wall Street digested the news.

As it turns out, the shiny happy Fed wasn’t nearly as shiny and happy behind closed doors as investors might have hoped. Instead, there was a palpable sense of gloom.

The battle with economic slowdown will be a long, tough slog, the notes implied… as will be the battle against inflation. The Fed went so far as to admit conditions could still be bad in 2010.

It’s a bit hard to swallow for those of us who’ve been paying attention but, believe it or not, slowdown worries and inflation woes are still big news to some folks out there.

There is a hefty cross-section of investors (and Wall Street pros, too, for that matter) who are just “waking up” to the reality that we at Taipan have been shouting about from the rooftops for so long.

What? You mean the Fed is fretting over a toxic cocktail of slowing growth and rising inflation pressures? Ye gads, why does that sound so familiar? Could it be… could it possibly be… what was that “S” word again that those doom and gloomers like to yap about? “Stagflation” or something like that? Stop the presses!

A Word From John McClane

The out-of-the-blue shock on the heels of the Fed minutes reminds me of a scene from Die Hard, one of my favorite old-school action movies.

Bruce Willis (in the role of detective John McClane) is trapped in a skyscraper with a bunch of ruthless German terrorists, and he is desperate to bring in outside help. He frantically gets hold of 911 on the roof, but the skeptical operator thinks it’s a prank call. Witticisms are exchanged; hilarity ensues. Finally the annoyed operator gives in and says she’ll “see if a black and white can do a drive-by,” just to get Willis out of her hair.

A cop cruiser later rolls up to Nakitomi Plaza, circles the pavilion aimlessly, and gets ready to leave with a “nothing to report.” But Willis is having none of that. He responds by heaving a defunct terrorist through a skyscraper window, right down onto the cruiser… and then fills the car’s hood with machine-gun fire from 20 stories up.

After seeing his windshield smashed and his car riddled with bullets, the half-asleep cop behind the wheel goes from bored day-dreaming to burning rubber in reverse gear, yelling at the top of his lungs for backup. Willis cackles at his success in getting someone’s attention. “Welcome to the party, pal!”

So here’s a shout-out to those who thought the U.S. could just tip-toe past the consequences of its actions… who assumed that consumers would soon be right as rain again with no worries over all that debt piling up… who shrugged off inflation as a “minor problem” and assumed the broken banks could just be patched up like bike tires… to you we say, “Welcome to the party, pal!”

40 Acres and a Mule

The party is revving up again now — for the bears. It wasn’t just that the market saw its biggest downward jolt in months yesterday. The S&P 500 also managed to fail right at its 200-day moving average (light green line)… a slightly ominous sign (and a plenty loud new shorting signal).

Oh, and by the way — financial stocks, those toxic turnaround candidates we love to hate, are again leading the market downward. On May 9, Taipan Daily said of XLF and the financials in general: “This is a nice short setup. There will be some bearish trigger-pulling here soon.”

Those shorts are nicely profitable now, and set to get more so.

• The U.S. service sector grew in April for the first time in four months, Reuters reported. The Institute for Supply Management said yesterday (Monday) that its non-manufacturing index was 52 in April, up from 49.6 in March. ISM’s jobs gauge for the sector posted its biggest improvement in seven months, however, inflation pressures remain at their highest in five months.

• Morgan Stanley (MS) will reduce another 1,500 employees from its securities-firm workforce, CNBC reported. The company rebounded in the first quarter of 2008, reporting net income of $1.5 billion, but business conditions remain weak and profit margins are tight throughout the securities business.

• Shares of Countrywide Financial Corp. (CFC) fell almost 15% yesterday (Monday) after a report from Friedman, Billings, Ramsey & Co. suggested that Bank of America Corp. (BAC) back out of its takeover. The report lowered Countrywide’s price target to $2 a share, down from $7, and cut its rating to “underperform” from “market perform,” Bloomberg reported.

• Sprint Nextel Corp. (S) is considering spinning off its Nextel unit, The Wall Street Journal reported, citing sources familiar with the matter. In 2005, Sprint bought Nextel Communications for $35 billion. Cyren Call, a company founded by Nextel co-founder Morgan O’Brien, is trying to reel investors to buy Nextel from Sprint.

• Warren Buffett spoke to a record 31,000 shareholders at Qwest Center in Omaha, Nebraska on Saturday for Berkshire Hathaway Inc.’s (BRK.A, BRK.B) annual meeting. “There is absolutely no question” that Berkshire’s returns will decline, Reuters reported Buffett said. “Anyone that expects us to come close to replicating the past should sell their stock. It isn’t going to happen. I think we’re going to get decent results over time, but we’re not going to get indecent results.” Both classes of Berkshire Hathaway stock slumped over 2% yesterday (Monday).

• Late yesterday (Monday) afternoon, Principal Financial Group Inc. (PFG) announced first quarter revenue fell to $2.5 billion from $2.66 billion for the same period last year. The results were below mean analyst expectations of $2.87 billion, Thomson Financial reported. Shares slumped 74 cents, a 1.28% decline, to close at $57.18 after the announcement.

• Wal-Mart Stores Inc. (WMT) announced yesterday (Monday) that it would expand its generic prescription drug program to cover over 1,000 over-the-counter medications for $4 or less. “We expect that today’s extension will generate additional pharmacy volume for the company, especially given the current weak consumer environment and rising health-care costs,” wrote Uta Werner, a retail analyst with Sanford C. Bernstein & Co, in a research note, Reuters reported.

The move by the BOE’s Monetary Policy Committee (MPC) was the third quarter point rate reduction since December as the United Kingdom faces many of the same problems currently plaguing the U.S. economy including a housing slump.

U.K. inflation is currently at 2.5%, above the BOE’s desired 2% target rate, but the central bank feels the current risks to economic growth outweigh inflationary concerns.

“Credit conditions have tightened and the availability of credit appears to be worsening,” the MPC said in its policy statement.

The statement did not foreshadow another rate cut when the MPC next meets in May.

“With today’s move arguably only providing a partial offset to the recent tightening of credit conditions, RBC Capital Markets suspects that the pressure is on for a follow up cut in somewhat short order and, indeed, sees some significant risk of a further 25-basis-point reduction in May, ” Richard McGuire, economist and fixed-income strategist at RBC Capital Markets, told MarketWatch.

Meanwhile, the ECB, led by President Jean- Claude Trichet elected to maintain its current interest rate due to inflation pressures.

“We are experiencing a rather protracted period of temporarily high annual rates of inflation,” Bloomberg News reported Trichet said at a press conference in Frankfurt yesterday after the ECB vote. While financial-market tension may have “a broader than currently expected impact on the real economy,” ensuring price stability is “very serious for us,” he said.

European inflation is currently at a 16-year high. And while Europe’s growth is expected to slow, the IMF forecast it would expand at a 1.2% rate, twice the 0.6% that is expected for the United States.

The U.S. Federal Reserve has cut its rate by 3% to 2.25% since September.

“The world is caught between ice and fire – slower growth and inflation,” Dominique Strauss-Kahn, managing director of the IMF, said yesterday. “Inflation is back.”