Today's Coffee - Fed on Parade

(Stocks in this article: NYSE: SPY, NYSE: DIA, Nasdaq: QQQQ, NYSE: SDS, NYSE: GS, NYSE: CFC, NYSE: MBI, NYSE: DD, Nasdaq: ETFC, NYSE: SGR, Nasdaq: AAPL)

This week's parade of Federal Reserve Presidents should offer the market plenty of reason to grow hopeful. We suspect the rhetoric will be biased on the dovish end of the spectrum. Administration pressure on Bernanke's group should only increase as the Republicans become more concerned about their hold on the Oval Office. Market pressure is already intense on Bernanke, and he's shown a propensity to act against his own conviction in the past as markets warrant. This is a good thing for the economy, but this is a tough economy to fix.

The most drastic decline of housing in history is following up the most steep rise in history. Recessions of the past have often coincided with housing weakness. So, clear logic says the worst housing downturn in history should drive recession. We came to this conclusion early last year. Housing prices could correct from 20-40% before this is all said and done.

Recession or No Recession?

Goldman Sachs (NYSE: GS) shook up the world today with their brilliant observation that the economy is headed for recession. Goldman's Chief Economist Jan Hatzius joins The Greek, which first started forecasting recession early last year. Goldman is looking for two consecutive quarters of GDP recession starting in Q2. Jan is looking for the Fed to cut rates another 200 basis points, starting with a 50 point reduction this month.

At the same time, a Bloomberg survey indicated 40% of economists are forecasting recession in '08, while the majority sees slowing growth to about a 1.5% rate through the first half of the year. The Greek disagrees, as we see recession, but we agree with one point, that the Federal Reserve will surprise the market with deeper rate cuts than most expect. We also see it likely that the Fed could put into play Fred Mishkin's theory regarding the value of sharp and precise rate cuts. In other words, you could see a 100 point cut jolt the market and the economy, and it could happen as early as January depending on data. However, the most likely scenario would see a 50 point move this January accompanied by another near-term 50 point action.

Gold Run

Since the Fed has wised up, countering its own neutral bias with action and talk of further action, gold has rightly run higher. Rate cuts threaten to feed inflation, which in turn puts pressure again on the dollar, aiding gold. Since the Fed reversed its superficial neutral bias, we clearly are bullish gold. As Pakistan also awakened the world to the still present country and geopolitical risks, gold gains favor. These were two critical changes that occurred to impact the premise of our past call to buy the dollar and sell gold. Iran will not go away, and we will focus a piece in the near future on the Iranian issue. The Greek still expects Iranian nuclear facilities to meet American bombs this year; the only thing in question is whether they will be dropped by American planes and missiles or Israeli.

Whats Next for Oil

Until war becomes reality, the economic driver should increasingly take the wheel driving oil lower. Today's Petroleum Status Report, however, showed a stronger draw than expected again and is pushing oil higher this morning. A debate is brewing on the impact of U.S. economic weakness versus the health of global demand, and which of the two will influence oil demand most in the near future. For now, oil seems stable here until the U.S. economy falters further and softness develops in greater extent in Europe and Asia. European economic growth forecasts have seen some adjustment lower already.

Tracking the Election

John McCain's victory in New Hampshire should prove a short-lived memory of his role ahead the Republican pack. Recently vilified Mitt Romney will now win the state of Michigan. Romney appeals there more than McCain, as immigration and the economy are important issues in Michigan. Also, Romney's anti-establishment stance there (as a Washington outsider) will play well with the UAW members. Also, it won't hurt that Romney was born in Michigan, a state his father once governed. After Michigan, we are confident Romney will begin to separate as the clear leader in the race on the Republican side.

Clinton's victory in New Hampshire was a clutch one for her. Obama momentum would have been hard to stop if not for the New Hampshire win, however tear aided it may have been. Edwards is still hoping to pick up South Carolina and remake this into a three person race, but he seems likely to be pushed out soon. It seems clear to me that the winner of the Democratic nomination should choose the runner up as his/her vice presidential nominee, and unite the party. We expect Bloomberg to run for president, and it will be interesting to explore how this could impact the race.

Market-Moving News

• Greek: Sunset for Solar Stocks


• CNBC: Two Fed Officials Hint at More Rate Cuts


• MarketWatch: Goldman Sachs (NYSE: GS) Sees Recession in '08


• Economist: McCain, Clinton Win New Hampshire


• CNBC: Mortgage Apps Soar as Rates Plunge


• Bloomberg: Corporate Default Risk Continues Rise


• Platts: Gold Hits Record


• CNBC: Gartman Says Trim Gold Holdings


• AP/Yahoo!: Oil Prices Rise on Supply Concern


• ECONOMIC REPORT: 10:30 - EIA Petroleum Status Report


• Yahoo! Earnings Calendar


• AP/Yahoo!: Countrywide's (NYSE: CFC) Dec. Loan Fundings Rose


• CNN Money: MBIA (NYSE: MBI) Slashes Dividend


• AP/Yahoo!: E*Trade (Nasdaq: ETFC) Raises More Capital


• MarketWatch: DuPont (NYSE: DD) Likes Outlook


• AP/Yahoo!: Shaw Group (NYSE: SGR) Swings to Profit


• AP/Yahoo!: EU Reaches iTunes Deal with Apple (Nasdaq: AAPL)


• BBC: Bush Launches Key Mideast Tour


• BBC: Iran Says U.S. Video Fabricated


• Economist: The Geopolitical Week Ahead


• Iran Daily: Tales from the Dark Side

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