The stock market started the new month in a rather positive tone. The biggest headline news is probably Microsoft's $44.6 billion offer to acquire Yahoo!, marking it the largest technology acquisition ever (The AOL-Time Warner deal back in 2000 was an acquisition in the media industry not in the tech industry) . The news sent the futures immediately higher. However, economic news today was quite mixed. The January non-farm payrolls dropped 17K compared with 70K consensus and this was the first decline in more than 4 years. The number for December, however, was revised up by 64K while November's number was revised down by almost 50K. It is quite possible that January's number will be further revised in the next few months. Nonetheless, the trend of the job market was quite clear: After creating on average 150K new positions every month in the past two years, the job market has slowed to around 70-80K recently. The odds of a 50bps cut in the Fed's March meeting jumped to more than 80% from yesterday's below 70% level following the news. The ISM Index number, on the other hand, came at a stronger reading of 50.7 compared with 48.4 consensus, indicating the manufacturing sector is still expanding. Interestingly, it was the previous month's ISM report that shocked investors and was partly responsible for the sharp sell off in the equity markets around the world in January. US dollar got strengthened against major currencies today while gold gave back some of the recent gains. One final note: The rates that banks charge each other dropped sharply following recent Fed rates cut and Term Auctions. For example, the 3-month US LIBOR is currently at around 3.11 percent compared with around 4.70 percent one month ago, signaling liquidity is back to the banking system.

All three major indices closed up nearly 2% for the day, ending the worst January in decades. It is not just the US market that suffered their worst start in many years. Stocks in Europe had their worst-ever January with a total decline of 12 percent. In Asia, the Nikkei lost 11 percent for the month, the worst monthly performance since April 2000, and the Hang Seng Index declined 16 percent, a record monthly loss last seen in October 1997. It is indeed a tough month for investors all around the world. On the economic front, we received a weak reading of personal spending plus a big jump in initial jobless claims. As for the former, December's 0.2% gain was after November's 1% gain and this is probably due to the fact many retailers slashed their holiday prices earlier this year compared to last year in anticipation of a tough holiday sales environment. For the latter, the spokesperson in the Labour Department immediately commented that last week's data may be distorted by the holiday on Monday. In other words, we may have to wait one more week to see if any material deterioration in job market condition has occurred. Since today is the last day of the month and this January is by no means a normal month, window-dressing almost certainly occurred in today's trading, so I won't read too much in today's activities. After the bell, Google's earning results were not too exciting. Before the opening bell tomorrow, we are going to get the closely watched non-farm payroll report for January and if we get a number that is more than 50K different from the consensus either way, then we are probably set for an interesting start in February.

The Fed Chairman Bernanke finally surrendered himself to the market pressure and cut the interest by 50 bps despite more evidence of spreading inflation. I was quite surprised to see the same Fed Chairman to make several mistakes in a row within such a short period of time. Last December, when the Fed rate was still at 4.50 percent, he and his colleagues were given a chance to cut the key rate by 50 bps. He chose to cut by 25 bps and cited risks of inflation. Then earlier this month, when there were several opportunities for him to make an emergency rate cut in the order of 25 bps or 50 bps to prevent the market from falling apart, he simply passed them. Then last week, when financial market was in free fall around the world, he was forced to cut 75 bps. This time, he should have rather waited for the market to digest already huge 125 bps cut in less than 2 months (considering another 25 bps cut being made today), he simply followed the market consensus and made a 50 bps cut even though inflation was truly trending higher this time. Ironically, the market still sold off after a brief pop-up. On the economic front, we got mixed results this morning. The ADP employment report came better than expected with an increase of 130K job positions, indicating we may get a non-farm payroll number in the range of 100-120K this Friday vs. 75K consensus. The advanced Q4 GDP number, however, came lower than expected. I would like to point out that the former is a forward looking indicator while the latter is a lagging indicator. Based on recent data, it doesn't seem economy is facing the threat of an imminent recession. Instead, I'm getting more and more concerned about possibilities of run-away inflation. Following the Fed decision, US dollar was under pressure while gold hit another record high. It seems the Fed may indeed have more works to do in the next few months.

All three major indices closed high on this Tuesday in anticipation of the Fed's decision tomorrow. Volume is on the light side and is expected to continue to be so until 2:15pm tomorrow. After that, volume is expected to pick up dramatically. It may be interesting to watch this kind of dramatic market behavior every a few weeks. However, is there really such a big difference in terms of 25bps or 50bps cut to the real economy? I'm leaving this question to economy experts. Currently the market has priced in an 87% chance of 50bps cut, similar to the odds right before the previous Fed meeting on Dec 11th. But considering that the market dropped as much as 2000 points since the Fed's previous decision, the Fed Chairman Bernanke may really think twice before making any decision that is against market consensus. The economic news this morning was mostly positive. Durable Goods Orders came above expectation and the data for the previous month were also revised up, indicating less chance of an imminent recession. The Consumer Sentiment number was also higher than expected. The latest $30 billion loans of the Fed term auction were set at an interest rate of 3.10%, well below the current Fed Fund rate. Interest rate sensitive sectors such as financials and home builders were outperforming the broad market. It is worth noting that many home builders have seen their stocks rising by more than 60% from their lows just 1 month ago. Tech stocks, on the other hand, were under a little pressure after disappointing earning results from SanDisk and EMC. After the bell, Yahoo! just lowered its revenue guidance and it should add further pressure to the tech sector in tomorrow's trading.

The stock market is playing seesaw game these days. With market down big last Friday on good news while today up big on bad news, investors are spinning their heads trying to figure out the direction of the market. More interesting, the global market seems to be more closely inter-connected and a good day in the US market will almost guarantee a good day in Asia and Europe. Today's rise in the US market is mainly attributed to the increasing odds that the Fed is going to cut 50 bps this Wednesday(currently the odds are around 90 percent, up from 70 percent last Friday) following this morning's worse than expected new home sales report. I'm not too sure how much weight the Fed is going to put on this report when making the next interest decision. But I do know if the Fed instead just makes a 25 bps cut, the market will face a big sell off. Can we get a 50 bps cut? Of course we can. But considering the recent inflation trends, I have to remind myself that the first priority of the Fed is to fight inflation rather than accommodate the market. Gold, a good inflation gauge, hit another record high and closed at another record high. Coal, an important energy commodity, hit a record high at Australia's Newcastle port last Friday. Corn, wheat and soybeans are all near or at their record high prices and see no signs of easing any time soon. It seems that days of 70s and 80s are back. Bush is going to deliver his last State of Union address tonight and economy issue no doubt will be on top of his list. Tomorrow morning we are going to get the latest Durable Goods Order report and currently the market expected a rebound after falling three months in a row.