“Countrywide is leading the market higher today.” I love hearing that headline. Gives me a good laugh. Especially when it is read with such conviction and without any hesitation or fear it will sound stupid. Yep - Countrywide is up about 18% today. Big winner. Nevermind that this same useless headline was used last on October 26th when it went up about the same amount on Mozilo’s positive outlook. Check out Kedrosky’s comments back then. You might want to ignore that it closed at $13.07 on October 25 and then $17.30 on Angelo’s hype. I guess this time it’s different and going from $9.30 yesterday to $10.90 now is impressive. OOPS, that’s significantly lower than the last time Angelo was “leading the market higher.” I am still chuckling and I will do so every time the smarties tell me that CFC is a leader or a role model for why we should be optimistic about stocks. Is Angelo the kind of leader you would want to follow? If martians landed today and said “take me to your leader” please send them right over to Angelo. I am still chuckling. The reality is that CFC is a trading tool. It is not an investment. It is a proxy for short term bets on government bailouts. It’s tough to even call it a stock. It’s like a goofed up derivative with humongous implied volatility that traders love to play. I am still chuckling. Thanks for the good laugh daytraders. Thanks for the good laugh Bloomberg (by the way, I expect better from you). Thanks for the good laugh Angelo.

Please look at the H.4.1 report which showed Discount Window borrowings averaged $7 million last week, a $427 million decrease since the 11/21/07 report. This change and the ending balance of $8 million on 11/28/07 should catch your attention.   The ending balance a year ago was $4 million - is that so different than the $8 million now?  Is the similar borrowing indicative of the trouble that investors and the media and the Fed were warning you about and protecting you from a year ago?  Oh yeah, that’s right - we didn’t have a problem according to them a year ago.  Aren’t the Chairman and Vice Chairman of the Stock Market Federal Reserve telling all of us that the credit markets are in trouble? I’ve heard more than a few economists and media hypesters say how the Fed needs to lower the Discount Rate to help out our banks. Haven’t we been here before? This is the same crap that they said in August and September and Halloween and they got what they asked for. Remember - the Fed does what the market and the media tell them to do. And when some of their members signaled they were on hold after the last meeting, the media and market said “We don’t believe them. They’ll come around.” And voila - the Fed is now singing the stock market’s tune.

Other than the ceremonial borrowing, how much credit has found its way out of the Discount Window? NOT MUCH! So what do we know? According to Bernanke and the hypesters and yes, even me, the banks are in trouble. The main difference is that I have been consistent with that message and they have flip-flopped every few weeks. They are the ones that keep telling you “the worst is behind us” followed by there is a lot of pain out there and more to come. They are the ones saying the Fed needs to cut followed by the Fed is done (right Kudlow?). They are the ones saying that the writedowns were all put out with the kitchen sink followed by saying there probably will be more writedowns. They are the ones saying two weeks ago that the CP market is stabilizing (right Bernanke?) and getting healthier followed by saying how the credit / CP markets are deteriorating.

What a freaking joke! The market keeps buying into those stories and keeps listening to the same people who are either lying or grossly incompetent. I suggest that if you are a short term trader, you might want to listen to them and not listen to me. They move the market, I obviously do not. The truth appears to be less important than an alternating view of the truth as they see it at that particular moment. So since at this moment, I am in agreement with the concept that the banks are in trouble, let’s look at the Discount Rate discussion. Ipso facto - if the banks are in trouble now and we’ve had significant cuts to the Discount Rate over the past 3 months, those cuts have not worked. If the banks are in trouble and each time the rate is lowered, they have not borrowed significantly from the Discount Window, why do you think this cut will do the trick?

I know how the Fed’s timing of prior Discount Rate cuts screwed the shorts and how they have propped up the stock market. I have yet to see how any of the prior cuts have resulted in improvements to the credit market. Where are we headed with this? Let’s take their logic to the extreme. So if a lot of cuts haven’t helped but the next incremental cut might, that leads you down a succession of cuts to zero. What I do know is that if the Fed would just cut the Discount Rate to zero and allow for all the crappy collateral to be offered up, the system would be cleansed. Of course, the economic implications of that would be devastating and it would never happen. I just used this extreme example to show how dangerous it is to continue on our current course of believing that Fed rate cuts will solve the problems we have.

In January of this year, I wrote a post about Sears being confused as a retailer and that their prior earnings and SHLD stock price had actually reflected Eddie Lampert’s expertise as an investor / hedge fund manager.  You can read it by clicking here.   So I have no idea why people are surprised that their results sucked so bad today.  The stores weren’t doing well last year when earnings were coming from derivative transactions.  But investors didn’t care and the media loved to hype how wonderful things were going there and ahhhhhh! the love affair with a Sears buyback was just the topping on the cake.  If you read all the coverage today, you might see a brief mention of the “total return swap derivative” income that makes this year’s comps so difficult.  But for the most part, they are finally treating Sears as a retailer.  It would have been nice if they had bothered to do so when I wrote that post in January - the stock was at $172 that day, not $102 like today.  I hear you can get a great deal on derivatives at Sears and Kmart these days.

As I had hinted last week, I didn’t plan to make many changes to the signals due to the lack of a normal trading environment during the Thanksgiving holiday. With the last two days of big gains, that strategy may seem to have backfired on me. So be it! HEDGEfolios is not about two day rallies and often, it’s not about 2 week rallies. I work really hard on each of the almost 4000 stocks and ETFs to smooth out short term volatility. In doing so, I use fundamental and technical tools that help me disregard the noise and along with that comes the danger of missing out on massive short term reversals. With only 95 new UPs and 46 new DOWN signals this week, I clearly didn’t anticipate that we’d advance at such a steep slope. Note that Abu Dhabi’s Sovereign Wealth Fund does not consult with me and neither does Don Kohn and even if they had, I would have ignored the possible short term effects of their actions. If you want a reactive and panicky and hyper and short term analysis, you are in the wrong spot.  If the last two days are confirmed throughout the week by real buying (not short covering or premarket spikes) on significant volume, it will show up and I’ll make the changes that I feel are meaningful and sustainable.

The Fed has done well manipulating managing propping up the stock market. On that I give them an “A” grade. But as for their real mandates, I think the report card is not so hot. Please take the time to read up on the what the Fed is really supposed to be about and not its apparent current role as a political tool that has been successful at helping out equity investors. I suggest reading from the Fed’s own website which discusses why they were created and their primary functions (click here for that). I’ll get you started with a key summary in their own words…

Today, the Federal Reserve’s duties fall into four general areas:

• conducting the nation’s monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates
• supervising and regulating banking institutions to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers
• maintaining the stability of the financial system and containing systemic risk that may arise in financial markets
• providing financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation’s payments system

I cannot look at that and be impressed. Can you?

I guess if you believe the government’s measurement of economic factors you might be inclined to give them a passing grade for low unemployment, low inflation and moderate long-term interest rates. But lately the employment situation is weakening even with their goofy calculations. As for stable prices, if you exclude the stuff that is going up, prices are very stable! Depressing the dollar…ah hell, who cares? Without a doubt, long-term interest rates are moderate, if not low by historical standards. Then again, aren’t low interest rates one of the biggest causes of our current problem? HMMM…I’m not sure I’d want to take credit for that one.

Regarding their second bullet point, do you believe they were actively supervising the nation’s banking and financial system? Is it safe and sound? Were credit rights of consumers protected by the Fed? Billions in writedowns. Our largest bank obtaining capital at desperate rates; Countrywide and the FHLB; ARM resets, subprime lending; Fannie and Freddie…how many examples can you name that question the supervisory expertise they have shown?

That third general area of responsibility is a whopper. Systemic risk containment? A stable financial system? Yep that commercial paper market sure seems stable now doesn’t it. Where were they when those CDOs were being bundled and shipped throughout the global financial system?

I gotta give the credit for that last job description. They’ve provided a bunch of financial services to depository institutions: liquidity injections/open market transactions, discount window enticements, allowing institutions to provide questionable collateral, providing waivers of banking laws…you name it….they’ve provided lots of needed services to all the depositories, US government, foreign Central Banks, et al.

What did they do to prevent these systemic problems from appearing or getting out of hand in the first place? I know they are rushing around doing triage and major surgery, but all their responsibilities talk about preventative medicine and checkups to avoid having a crisis.

Personally, I don’t think they can be held responsible for this whole mess. Market participants did the deeds and I don’t believe that a Central Bank is where we should be pointing fingers. But when it comes to doing the jobs they have been assigned, let’s not fool ourselves about their actual performance. They’ve been great at Fedspeak and moving equity markets higher in times of crisis. I’ll let you try to explain how that fits into their mandates.

These men and women are clearly great economists. I don’t question that for a minute. What I do put in doubt is why the hell our capitalist society has put them and their role on a preeminent pedestal?   They are not all knowing.  They are not all powerful.  Investors have been conditioned to worship this group and continuously place their faith in the Fed’s promises to fix things and spur the economy. That’s the burden of Atlas and they are not worthy.

From the middle of July’s market peak until today, go back and review all the gains caused by the Fed and Fed-induced short covering. Be objective. How much of the rally can you attribute to real buying based upon fundamentals? Remember that stuff- the things that supposedly are the basis for stock prices and long term investing? On the other hand, how much of the positive action has been due to surprise Fed intervention like August 17th, Fed commentary like Kohn today, rumors of Fed rate cuts like August 16th, actual Fed rate cuts like September 18th and October 31st? If you subtract out all those 1 or 2% moves, you are left with a massive selloff. Now let’s look at the market reasons that stocks might have declined - poor 3rd quarter earnings, a declining dollar, inflation, the frozen commercial paper market, investment and money center bank writeoffs, a struggling consumer, mortgage defaults, etc. etc. This is the Fed’s stock market - bought and paid for. The bulls and the bears have been doing nothing but selling on the realities of the poor fundamentals and buying whenever the Fed gives them a reason to do so.  Are you investing in the Fed or are you investing in stocks?

I’ve run into some problems that prevented me from updating the signal database yesterday.  I expect they will be posted in a few hours.   Consequently, all existing subscriptions and free trials will be extended by one week.

Futures traders and the media love to hype the prospects of another cut.  They got some Fedspeak from Don Kohn saying that the credit markets are turbulent and the economy is at risk.  Of course we knew that already but traders are always looking for a reason to have volatility.  Nevermind that Kohn is blatantly saying that its necessary to ignore moral hazard for now and forget about inflation for now and forget about the dollar for now.   So once again, Kohn is taunting the stock market with another rate cut.  It’s great for traders but not for investors.  The shorts get scared.  The bulls get energized.  We see a rally.  As for actual improvements to the economy and markets, that hasn’t happened with previous cuts.  Maybe the Kohnheads think the next one will.  Good luck with that.

Freddie Mac is cutting its dividend in half and trying to raise $6 billion through issuing new preferred.   What?  No Abu Dhabi for Freddie?  That would be a tough one for the politicians to allow, now wouldn’t it?  Regardless, if there was no appetite for a lower yielding preferred than what Citi sold to ADIA - I just wonder who will buy this thing and at what price.

It was encouraging until now to see Wells Fargo steer clear of the mortgage mess.  Hearing about their $1.4 billion writedown was disappointing.  It’s one thing to encourage known culprits to come clean and it’s something altogether different to see the well-behaved kid admit to being guilty as well.