Market Summary: Tues. Jan. 29, 2008

Today we had a nice, although choppy rally which came as a result of stronger than expected durable goods data. The numbers were much higher than what the street was expecting. As I said before, this is a measure of domestic manufacturing activity and a good sign that the market is not as slow as some people think. There was talk on CNBC today that the Fed might only cut 25 bp tomorrow because of the strong durable goods number reported today, but I don’t agree with that. The Fed shouldn’t be watching the daily activities of the market, but rather the health of the broader economy.

The Fed, for the fourth time in about two months, auctioned $30 billion to banks at a 3.123% to help bring more liquidity to the market. This action encourages banks to continue to lend so the credit markets don’t dry up. Read this article for more information about today’s auction as well as the past three Fed auctions.

For the most part, a 50 bp cut is priced into the market, so anything less will most likely cause a sell-off. There is argument that this upcoming cut could be the last one because the Fed funds rate is approaching the inflation rate. This was a problem in 2001 when the Fed lowered rates to 1%, well below the inflation rate. Any money kept in banks was losing value because the inflation rate was higher than the interest rate banks were paying. Low rates also caused the horrific housing downturn that we are currently experiencing. Here is a good article from Bloomberg.com explaining the potential risks of lowering rates too much.

If you remember in late Q3, early Q4, we saw the NASDAQ significantly outpace the Dow and the S&P because everyone said these tech companies (with tons of cash and little debt) would not be affected by the credit crisis and the downturn in the economy. However, since then, only two companies – IBM and Microsoft – have not disappointed investors. After the close yesterday, VMWare (the hottest IPO of 2007) reported some bad numbers and tanked (as did EMC, the parent company). Today after the bell, the troubled internet search engine Yahoo reported disappointing numbers (down 10% after-hours) and said they were going to begin laying off workers. There are rumors going around that Microsoft might be interested in buying Yahoo. Expect the NASDAQ and other tech stocks to open lower tomorrow morning.

Occidental Petroleum, Valero, 3M, and Eli Lilly all beat expectations and were up on the day. Oil finished up about $1 while gold hovered around its all-time highs ($925).

Something interesting to follow is Lehman Brothers and the other troubled big banks. Today after hours, Lehman raised their dividend as well as their stock repurchase program. This brings up the question: are the big investment banks really as bad as everyone thinks? They can’t be that bad if they are spending their excess capital in the form of dividends and buy-backs. How exposed to bad sub-prime mortgages are they?

You have to think about where we’ve come from in the last week. The Dow is about 1,000 points above its Monday and Tuesday lows and everyone is expecting a 50 bp cut. If the markets don’t get what they want – a 50 bp cut – we cut easily lose a few hundred points the last hour and a half of trading tomorrow. Also, look for guidance from the Fed about future rate cuts and the health of the overall economy. If we only get a 25 bp cut, but we get good guidance from the Fed, don’t expect to sell off too much. Amazon.com, Merck, and Starbucks report earnings tomorrow as well. We will also get the preliminary Q4 2007 GDP number tomorrow morning. Anything above 1-1.5% should be positive – meaning, our economy is not contracting.