Just Another Short Covering Rally

U.S. Stocks Stage Biggest Two-Day Rally Since 2002; Banks Gain: “U.S. stocks staged the biggest two- day rally in five years, led by financial shares, after Federal Reserve Vice Chairman Donald Kohn buttressed expectations for another interest rate cut.

Citigroup Inc., Lehman Brothers Holdings Inc., Morgan Stanley and Goldman Sachs Group Inc. rose more than 5 percent as banks and brokerages in the Standard & Poor's 500 Index gained the most since 2002. EBay Inc. and Amazon.com Inc. helped push the Nasdaq Composite Index to a 3.2 percent gain after Sanford C. Bernstein & Co. forecast a “strong” fourth quarter for both.

“Kohn's comments just add to a perception that the Fed is embarking on a sustained path of easing,” said Michael Metz, the New York-based chief investment strategist at Oppenheimer Holdings Inc., which manages $60 billion. “There's also huge relief that the worst of the financial crisis may be behind us.””

It’s a little crazy to think the Fed would cut by 50 basis points in December…

“Traders boosted wagers that the Fed will cut its benchmark lending rate when it meets Dec. 11. Odds of a half-point cut rose to 8 percent today from 2 percent yesterday, while the likelihood of a reduction of any size remained 100 percent.”

A 50 basis point cut would destroy the US dollar, spike oil over $100 and send gold to $1000. Far more probably is a 25 basis point cut and a 50 basis point cut in the discount window to narrow that spread still further.

Kohn Sees Risk of Reduced Credit From Market Upheaval (Update7): “Federal Reserve Vice Chairman Donald Kohn said market “turbulence” may reduce credit to businesses and consumers, reinforcing investors' expectations the central bank will cut interest rates again next month.

“The degree of deterioration that has happened over the last couple of weeks is not something that I personally anticipated,” Kohn said in response to a question following a speech to the Council on Foreign Relations in New York. “We are going to have to take a look at'' the stress in credit markets “when we meet in a couple of weeks,” he said.”

It was Kohn speech that prompted traders to increase their bets on a 50 basis point cut in December. This in turn burned the shorts who scrambled to get out of their positions in financials.

U.S. Economy: Home Sales Slide More Than Forecast; Durable Order Decline (Update5): “Sales of previously owned U.S. homes fell more than forecast in October and orders for cars, planes and other durable goods dropped for a third month, the longest slump in 3 1/2 years.

The figures came as Federal Reserve Vice Chairman Donald Kohn signaled he's open to lowering interest rates again given “the degree of deterioration” in financial markets. Stocks rose as Kohn's remarks cemented forecasts for a rate cut next month to help keep the economy from sliding into recession.

Falling “consumer confidence and the slowing in capital- goods orders does bring us closer to recession,” said John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina. “I take Kohn's remarks as a good sign that the Fed is looking at the credit market issues, as well as the economic data, and deciding to react.”

… and the market melted up. There may have been some bargain hunting. That much is for sure. The rest however, was pure short covering.