So the Fed got together and didn't change the language about accommodation sticking around for an "extended period." The Street grappled with the news as it says on one hand the economy is sure taking a long time, assuming extended means 4 to 6 months, to turn around. Gosh, is it going to be that long? By the same token, the stock market is happy with the decision because exceptionally low interest rates have been a panacea for stocks, if not the economy. On that note, the Fed is between a rock and a hard place but must have the will to act before the evidence of total recovery is overwhelming. The fact that the Fed said "economic activity has continued to strengthen" means they see something akin to a pulse, but at the same time the Fed didn't repeat the opinion that housing was improving. I get conflicted from this omission, and then we add in Kansas City Federal Reserve President Thomas Hoenig dissenting from other voting members with a nay.

The Fed is also going to quit with respect to its aggressive purchases of MBS, but one has to wonder what that does to the housing market. Yesterday on "Varney & Co.", David Jones, author of "Fed Watching and Interest-Rate Projections", said that mortgage rates would surge a full percentage point once accommodation is removed; this on the heels of a couple of ugly housing market reports. Once the Fed felt housing was central to total economic recovery it's hard to imagine they will stop buying mortgage-backed securities and hike interest rates. Moreover, it's also hard for me to believe that Bernanke will make any moves ahead of elections in November. As it stands the TALF program is winding down, with ABS backed loans expiring on March 31 and CMBS on June 30. When announced, TALF was going to lend $200.0 billion to maybe even $1.0 trillion. The rationale for the program was that it would spark lending to households and small businesses.

Let's face it consumer credit was down $17.5 billion in November, the most in a single month ever, and down ten months straight. And lending to small businesses? Give me a break! Yet this is why the Federal Reserve embarked on the TALF and TAF programs. This is why the Federal Reserve of New York, led by Tim Geithner, made the backdoor bailout of Goldman Sachs (GS) and others. There have been so many promises to help households and small businesses. Last night we got more. I think that the creative process is running dry as the centerpiece was an extension of bonus depreciation. The White House says that $38.0 billion will flow into businesses via a 50% write-off in the first year for new equipment like computers, wind turbines, or solar panels. It doesn't sound like something that will help small businesses. I remember when President Bush did the same thing and I was pumped, but didn't have a reason to buy new equipment from 2002 to 2004. So I figured I'd keep 100% of the money rather than spend it in order to get 40% back.

Actually, there have been studies at the Federal Reserve and Treasury Department saying this scheme didn't have any real economic benefits as it didn't move the needle much on investment spending. Still, this sort of thing could be a boon for companies like General Motors (GM) and Google (GOOG), but for people with small businesses it's not going to move the needle. In the meantime, TALF never really lived up to the hype even as the Fed expanded the collateral to include many dubious assets. We will see how the ABS market holds up on its own but it's unlikely there will be more action or more lending as a result.

Actual dollar amounts

You know, I have to say people out there that want to make money are working hard (if they are fortunate enough to have a job) but also trying to be extraordinary. Case in point is the makeup artists at Fox, which work long, hard hours but so many have dreams that right now a tax credit on capital equipment isn't going to help.

* There is the beautiful young lady with bubbly personality leaving for Hollywood this weekend. She is taking a two month break hoping to get her big break (word to the wise, she might not want to mention she worked at Fox News).
* There is the incredibly bright makeup artist that has created an actual product. It's a treatment for burns, and she has packaging and everything. She just needs one or two big contracts like a deal with Costco (actually that would be the only break she needs).
* Then there is the non-stop dynamo that is just getting her website up. She wants to train budding makeup artists. Her enthusiasm is infectious, and her dreams unlimited.

These people and so many others need an economy that is growing from demand. They need plans from the government not skewed to favor corporations or businesses with large union representation. I think that demand comes with a major tax cut for all Americans and a consolatory tone from the White House. If they ram healthcare through anyway and try to push draconian bank taxes and rule changes this spring it's going to be more of the same. The Fed is going to keep rates at zero percent for the rest of the year. I wasn't sure coming into the year, but now I'm 99% convinced.
But, it's going to take more than zero percent interest rates, and government schemes to stoke home buying and car buying (in the U.K. they call it "cash for bangers", which sounds like something that might only be legal in Nevada).

SOTU

Okay, so we started off with familiar themes in the State of the Union address. Get the bankers, even those that paid their obligations. The bragging about pulling the nation out of the abyss and those lovely tales of how wondrous the stimulus bill has been were duly noted. It has created two million jobs according to the kind of math that would put a business person in jail. Anyway, it's silly and disingenuous, which is why this speech was all about jobs...the jobs that haven't been created in large part because of fear of the Administration. But what I don't get is the fascination with "clean energy" jobs. In Spain, each clean energy job created resulted in two other jobs lost. Just how many people in this country can work in the clean energy space? What kind of money can they make? What about jobs for people with other skill sets? What about the free market dictating where jobs grow.

I was thrilled to hear acceptance of more nuclear plants and offshore drilling developments, as well as clean coal. Of course, the catch is that passing Cap and Trade, which would tax every person in America, make businesses less competitive, and actually make Goldman Sachs wealthier. Increasing exports is an idea whose time has come, and finally cutting trade agreements with Columbia and Panama is overdue. But how will we actually get exports to move higher? Is it code for a weak dollar policy? The President alluded to the notion of strong enforcement of trade agreements, but how strong will we deal with China? I can't believe Cap and Trade legislation came up but it paved the way for another swing at healthcare reform. The President insisted that he didn't explain it well and says he didn't take it on because it was politically popular. But, a year ago today there was overwhelming support for the idea of healthcare reform and the President pitched it almost on a daily basis.

The people don't believe the numbers, don't believe their current healthcare will not be diluted, and know they will eventually not only have to pay their care and their family's care but the care of many others through higher taxes. In the meantime, no more victory laps, as unemployment was at 7.7% last January and is now at 10.0%, while 2.8 million homes were foreclosed upon.

The President's goal of bypassing Congress hit a bump with the election of Scott Brown, but he will still find ways to use executive orders, czars, and all-powerful agencies like the EPA. But the goal of really fundamentally changing our country now involves usurping the powers of the legislative branch. Taking a swipe at the Supreme Court seems like an intimidation tactic. If indeed the Supreme Court decision to allow unlimited campaign contributions is bypassed by the White House then effectively we will be down to two branches of government. Of course, telling the Democrats not to run for the hills is another reason for the swifter move to a single branch of government.

President Obama is going ahead with a plan to give states $8.0 billion for high speed rail projects. Here's the problem; last year 40 states submitted 278 pre-applications for high speed rail projects that tallied up to $102.0 billion. In the meantime, as I've written about before, China will spend $300.0 billion through 2020 on high speed rails covering 16,000 miles and using 117 million tons of concrete (we actually featured a high speed train manufacturer in our newsletter).
That might sound like a bubble to many, but with speeds from 125 to 220 miles an hour its sounds like the kind of exciting development that propelled the industrial revolution in America. China spent $44.0 billion in 2008 on high speed rail projects and the current plan will see at least 20,000 new engineer jobs. I'm not advocating high speed rails but the idea of throwing large, but woefully insufficient, amounts of money at projects in a bid to appease certain constituents seems odd.

Source: KimonBerlin

Economic Data

Initial Jobless Claims

I'm glad that the job situation has gotten the attention of the White House because initial jobless claims were higher than expected...again. This is a worrisome trend. I have a feeling that the January jobs number is going to be a real nail-biter (current consensus has job creation of close to 26,000).

Durable Goods Orders

In addition to soft claims data, durable goods orders only increased 0.3%. The Street was looking for an increase of 2.0% as conventional wisdom holds there has been serious inventory replenishing that also includes big-ticket items. Ahead of tomorrow's 4Q09 GDP report it's another reason to fret (estimates ranging from +4% to +5.5%).

WSS Coverage Earnings Reporting

Brian Sozzi

* Ethan Allen (ETH) bombed in its latest quarter, missing consensus earnings by $0.04, reporting a loss of $0.06 per share. I was the second lowest estimate in consensus, looking for $0.01 per share in profit. Second place is the first loser in my world, but the only true losers will be shareholders of Ethan Allen today (stock indicating to open much lower). If the company does not receive a credit rating upgrade by S&P to investment grade by March of this year, which would result from improved financial performance that could help to reduce huge balance sheet gearing (70% D/E ratio), access to credit may be severely impact. In short, it's a precarious time for the company. We have had a sell rating on the stock for some time.
* Cardinal Health (CAH) blew past consensus earnings estimates this morning by $0.11, reporting $0.57 per share. I was the highest estimate in the consensus at $0.49 per share. Unlike my estimate on Ethan Allen, I am not the first loser. The company is turnaround story, benefiting from the insights of new leadership and a litany of industry opportunities (generics, for example).

Ford Reports a Profit

For the first time since 2005, Ford Motor Company (F) reported an annual profit. This morning, the company announced that it earned $868 million, or $0.25 per share, compared with a loss of $5.9 billion in the fourth quarter of 2008. Shockingly, despite the woes of the auto industry during 2009, Ford earned money in three of the four quarters last year. On top of the strong report (we had modeled for earnings of $0.15 per share during the fourth quarter), CEO Mulally also forecasted that the Dearborn, Michigan company will be profitable during 2010; previously management had only indicated that it would be "solidly profitable" during 2011.

Perhaps the biggest negative was the fact that company's debt load swelled more than $7 billion to $34 billion. While Mr. Mulally and the rest of the management team have done a solid job over the past year in attempting to slash its debt, Ford ended the year with more than $34 billion of debt. Another debt for equity swap would further dilute the shares, but we still believe that the positives outweigh the negatives in that regard.

In North America, the company earned $707 million compared to the last year's figure of a loss of $1.9 billion. Every segment, aside from Volvo, reported a quarterly profit while every segment reported a dramatic improvement in segment operating income. Maybe manufacturing in North America isn't dead yet.

The Market

Finally, there was a late rally. Although it wasn't convincing it was a relief nonetheless. The market is range bound with lackluster volume. For now, I'll take it even if I have more positions under pressure than I'd like...this is a great time to shake out the weak sisters.

It's unfortunate the economic data out this morning has been so disappointing because the market was hinting at moving much higher. The bias is still to the upside as corporate earnings, particularly those from blue chip companies, have been impressive.