The new H.4.1 report showed that the Discount Window borrowings averaged $142 million last week and since I forgot to do this update, it was about $126 million on average last week. The week before that it was $113 million and one week before that it was $26 million.  What does this all mean?  It’s been upward sloping over the past month but certainly not indicative of an extreme problem that forces banks to seek money.  Other than that, as I have said before, it means nothing.  The credit crisis is not over and looking at this report will not tell you there is an emergency until we already know that from other sources.

Federal and State raids are never a good thing and WCG investors are suffering that fate today. Note that WCG has been one of the worst performing signals at HEDGEfolios since I gave it a DOWN signal on 4-30-07. As of Monday’s open, WCG was a loser by 36.5% - now its a winner by 38%. Neither of those were results of my good efforts.

The biggest issue with raids is that legal implications prevent the government and company officials from disclosing what it’s all about. No amount of comments like “we are cooperating with the authorities” makes anyone feel better. Meanwhile investors sell in the face of uncertainty and paranoia over worst case scenarios. In these situations, true bottoms are not found until the reason for the investigation is known and the perception of guilt is factored in. It will be interesting to watch. Some shorts will cover and provide some weak support. Some true believers will buy on the dip and provide some weak support. Some speculators will buy hoping that this was an overreaction. My preference is to stay the hell out until the smoke clears.

• Microsoft spends $240 million for 1.6% of FaceBook in October 2007. News Corp spends $580 million for 100% of MySpace in July 2005.
• Facebook gets about 15% of social network traffic.  MySpace gets about 75% of social network traffic.

You do the math and decide if this was a bargain.  If the market truly believes this was a good deal, MSFT will increase.  If investors validate Facebook being worth $15 billion based upon 100 times revenues and 500 times earnings, then what is News Corp worth?

By now, I am sure you have all heard Chairman Bernanke discuss the need to restore confidence in markets. Apparently, many in the government feel that the mandate of the Fed is centered on this principle and I suspect that is one of the only 100% bi-partisan sentiments you can find in this polarized mess we call democracy and free market capitalism. Certainly the financial media loves to hype every opportunity to show the government in action and more frequently, pseudo-journalists like Kudlow and Cramer love to take it one step further and call them to action. Investors seem to demand and love the idea as well - as long as they get the higher prices they think they deserve.

Of course, “restoring confidence in markets” means different things to different people. The popular view espoused by many and implemented by the President’s Wrecking Working Group on Financial Markets does not appear to match my definition of “confidence in markets.” My perception of the prevailing concept is that market declines are a reflection of a lack of confidence and when they appear, this government feels it must intervene. Of course, once the prices come back to previous highs, then by that definition the confidence is coming back. And when prices are higher…isn’t it strange that the calls for Fed intervention go away? It all sounds so simple and you would think that even a dummy like me could see the light.

However, my belief in capitalism means that there are losers. That there are risks. That taking risks can lead to rewards or believe it or not, punishment. I’d like to have “confidence” that those kinds of markets exist or can exist again. But too much has happened in the past year to make that a reality.

I enjoyed reading Ben’s October 15th speech to the Economic Club of New York (click here for the full text.) Please read the whole thing and hear his message about why the Fed has taken the numerous monetary policy actions over the past few months. In the conclusion, you’ll see a reiteration of the need to restore confidence of investors in their ability to price assets. Nice touch! Keep that slogan front and center.

Today’s reaction to another rumor of a secret emergency Fed meeting and intermeeting rate cut started a 200 point Dow rally at about 2:20pm. It was eerily similar to what happened on August 16th and given that Ben made the prior rumor come true before the August 17th opening bell, it’s no wonder that the shorts got scared and speculative longs played along. Of course, if you actually read what Ben said in that speech last week, you’ll have a tough time finding a hint of his belief in the need for a cut of any sort, discount or Fed Funds prior to the Halloween FOMC meeting(get your costume ready).

But you see, it just doesn’t matter right now. It’s too late for sanity. Prior policy decisions matched the cries of the bulls who had supposedly lost confidence in markets and were timed much too coincidentally to avoid the perception that the Fed is no longer the independent organization they need to be to maintain the foundations of confidence in markets. And that was only followed by the absurdity of Ben offering himself up as a tool of politicians like Senators Schumer and Dodd with the press conferences over special meetings and special letters all made public to “calm the markets” and apparently “restore confidence.” So today’s rumor rally should not come as a surprise.

I am confident that whoever started the rally had confidence in his markets. The kind we have now. The kind that have been “handled” by the Fed’s interventions and proposals like the Treasury’s SIV Superfund. The kind of markets that can be so easily manipulated by whispering Ben’s name, throwing in a few secret handshake gestures, mentioning a cut, etc. etc. Confidence. Confidence. Confidence.

On October 17th, I suggested that the stockonomists would call for emergency Fed cuts after a 3% decline. The S&P 500 close on that day was 1541.24 and by 2:20 this afternoon it was at 1492 - a 3.2% decline. How’s that for luck? Good guess.

If you believe the trader talk, this market moved about 1.5% on a rumor. Prices are higher. A negative close was averted. Did that inspire confidence for you?

Chairman Bernanke - restore my confidence. Take a stand on this. Do not announce your intention to comment. Just issue a press release so the anticipation of what you will say will not be further abused. Take a stand and say there will be no intermeeting cut. Show that you will no longer stand for the abuse of the Fed. Start restoring my confidence in free market capitalism. Start restoring my confidence in the non-political independence of the Fed. If the market declines on your statement, so be it. If you do nothing to show you are not willing to be manipulated, this nonsense will continue. Restore my confidence!

Last week, I mentioned that I was almost bearish. That’s over. This week’s stock signals include 211 new DOWN signals vs. only 21 new UPs. Additionally, I gave 46 new DOWN signals on the ETFs. The 10:1 ratio of DOWNs to UPs put the HEDGEfolios Timing Indicator into Bearish territory and this was confirmed by having more than 50% of the stocks I cover showing DOWN signals.

As I wrote on Sunday, last week’s declines were brutal to the technical underpinnings of this market. The market forces I follow had all turned negative in terms of their pressure on equities. Fundamentally, earnings season has not been supportive of higher prices. Monday and Tuesday may have benefited from AAPL and AXP, but Wednesday is being hammered by MER. This is exactly why I encourage everyone to let each company’s quarterly report speak for itself and avoid the media-induced temptation to believe they are proxies for the entire market. Having the indices up on AAPL earnings and down on MER earnings losses is providing a lot of excitement for the purveyors of financial entertainment and lots of trading commissions for brokers and intermediaries. However, they are not adding much to intermediate or long term profits for investors which is all I focus on.

My biggest challenge last week was not overdoing the signal changes. The slope of Friday’s decline was not sustainable and too many stocks moved too far in my opinion, so I tried to avoid overreacting. In these cases, I don’t spend much time looking for new buying opportunities, I just try to figure out what stocks not to sell. Yesterday, that decision seemed smart given the rally but today, it doesn’t look so hot. The market is much too volatile for me and does not fit with my trading style which is based on weekly technical indicators and longer term macro factors. One or two days of moves are interesting but over time, they smooth out and revert to the general direction of longer term trends. Right now, I believe that trend is bearish.

When I heard Whirlpool’s quarterly report today, I remembered that I had written something on them in July. I rarely talk about individual stocks but I made an exception in this case and here is what I said:

Based upon the warnings of Sears and Home Depot, I am concerned about downside risk in Whirlpool. It took a pretty big 4% hit yesterday, but I am not seeing support until about $94 per share. One of the problems with a stock like WHR is that its narrow product lines (appliances) and lack of publicly traded competitors forces an all or nothing approach. With concerns about both new home construction and weak appliance sales at retailers like Sears, investors are often inclined to sell now and find out the specifics later. Given the 25% rise since April, you have the added temptation of profit taking. I never recommend selling or buying at HEDGEfolios since I have no idea who you are, but my focus is on risk / reward tradeoffs, probabilities and likely directional moves. All those factors are very negative on WHR right now. Note that I have had a DOWN signal on WHR since May 29, 2007 at a price of $111.74.

Note that WHR closed at $108.95 that day and it’s now trading at $82.61. I wish I did that well on all the signals at HEDGEfolios, but that is not the case. And patting myself on the back for the good ones or kicking myself in the ass for the bad ones are not the reasons why I am writing this post.  I wanted to revisit the idea of pureplay stocks that do not have a lot of (or zero) comparable publicly-traded competitors.  Whenever you are long a stock like WHR, please make sure that the macro theme is definitely in your favor.  New home construction requiring new appliances was an obvious problem for this stock but it wasn’t a secret in April when WHR went up 25%.  Pureplay stocks without public competitors are great on the way up.  On the way down, the macro theme can make it very painful.

According to this Bloomberg article, “a Fed official who declined to be identified” says the Fed endorses the Treasury-brokered SIV Superfund mess. Apparently, it was not good politics for them to be silent and their failure to comment until now (according to the shy Fed official) was “misinterpreted as criticism.” First things first - GET SOME BALLS! If the Fed really does endorse it, then the Fed should have the courage to sign their name to it or speak on camera and not leave this to an unidentified source. Secondly, I don’t know who misinterpreted the Fed’s prior silence as criticism or a lack of support but it wasn’t me. Primarily because I don’t care what the Fed or the Treasury says about this plan. I do have a brain of my own and don’t need the government to tell me how to think. Lastly, if anyone is surprised that the Fed supports the Treasury - please wake up. By the way, do we need to hear from a “White House official who declines to be identified” to know whether President Bush endorses the Fed’s anonymous endorsement of the Treasury’s SIV Superfund?

Given the writeoffs from the financial world, there is a chance that earnings growth will be less than zero. After all the quarters of double digit improvements we have enjoyed lately, this is a bit of a shock. Of course, when you look at the nonfinancial world, we might see another quarter of growth above 10%. However, it will be important to evaluate the guidance from the nonfinancial companies and if CAT’s forecast is any indication, then we are in trouble.

Now that we are in the heart of earnings season with about half of the S&P reporting this week, I am intrigued by how the market is responding to individual reports. In my perfect world, each company’s financial performance would be evaluated against its historical performance, against its analyst expectations and in light of key competitors in its industry. I would really love for each key stock not to be considered as a proxy for the whole market. Unfortunately, our financial sensationalists journalists loves to extrapolate every positive and negative announcement to move the monolithic sentiment that pervades these markets.

One company is one company. Yes - the big guys can provide key insight into industries and key sectors of the economy that can give us clues to macro themes. However, we should avoid the temptation to look at Alcoa (usually the first to report) as evidence of anything. Similarly, if the first week is good or bad, we need to reserve judgment. If the big money center and investment banks suck, it doesn’t mean that all financials do or that the market does. AAPL came out with great results for the most recent quarter and they deserve the acclaim and a higher price if that is what their investors decide. But I don’t think it’s wise to suggest that AAPL is a reflection of all the other companies that have already or will report. I don’t think this means that the market is in the clear or the consumer is strong or that all tech is great or that DELL, MSFT, INTC et al are great. If they are, I’ll make that assessment based upon their individual reports and considering all the industry factors.

I used to love earnings season. Now that it is used to sway sentiment from day to day, I don’t enjoy seeing the exploitation and speculation. I realize that my preference doesn’t matter and I don’t expect the situation to improve. I just try to ignore it as much as I can. When the earnings season has enough data points to make guesses about the macro economy, earnings growth, future guidance, credit markets, consumers, sectors, industries, etc. - I will place some weight on them. Until that happens, I look at each stock on its own.

This morning CNBC mentioned that we are in a recovery two times in about 5 minutes.  The first came from Cramer in one of his Mad Money highlight moments where his theme was “how to play the recovery.”  Wow!  I had no idea that Monday was the end of the most recent “correction” and the start of a “recovery.”   Seriously, this is a dangerously stupid assertion.  Next, I heard the Squawk Box crew mention the recovery on Monday and the possible continuation today.  Click.  DIRECTV Channel 353 Bloomberg Television

It was a not bad day.  I was glad to see the market hold and moderate the slope of the decline.  I know that doesn’t sound as bullish as the tv personalities spun the day…Here’s what I heard:

• Premarket futures are not as bad as they were earlier.
• The open is not as bad as we thought it might be.
• We are only down 110 on the Dow.
• We are breaking even for the day.
• We are up 50 and wiped away the early selloff.

Rah Rah Rah!  The reality is that volume was pathetic and the damage that was done over the past week and a half were not repaired by today’s action.  Funny how the long term investing psychos are quick to disregard last Friday’s one day and simultaneously hype today’s.

As for market leadership…hearing that homebuilders and financials and retailers were all contributing to the positive sentiment made me laugh.  I know tech did well, but if investors can get excited about the market by believing that the problems in banking, homes, and retail are behind us - the sense of optimism is beyond my comprehension.

Overall, it was a not bad day.  It was not a good day.  It was not a great day.