A few minutes ago, the Fed slashed their key interest rate by 50 points to 3%. This was on top of last week’s surprise 75 points cut. Ben and company did not have a choice at all. This morning’s 4 qtr GDP was just a measly 0.6%. For all of 2007, the economy grew by just 2.2%. With the horrible housing market and still tight credit conditions, the US faces real risk of falling into a recession.

The Fed has finally begun to act on the crumbling economic conditions. The markets are now beginning to appreciate the fact that they are getting ahead of the curve. There are hopes that the U.S. will only go through a mild recession. Before the stock markets can truly recover, the housing sector and the financial stocks needs to show signs of bottoming.

The worst thing that the U.S. can do is to emulate the Japanese after their credit crisis. Drag things on for too long and not really dealing with it. The financial players need to aggressively write off their bad debts, replenish their capital base and get on with business. Given the extensive carnage among in the lenders, the economic recovery will likely be muted.

For investors looking for respite from last week’s volatility, forget it. Major economic statistics such as payroll numbers are coming out. We are still in earnings season. The FOMC is meeting this Tuesday and Wednesday. The stock markets will still be extremely volatile. After the major drubbing the equity markets took, investors are still very nervous. With this morning’s new home sales figures, it showed that sales plummeted 26.4 percent last year to 774,000. This marked the worst sales year on record, beating the old mark of a 23.1 percent plunge in 1980.

With the latest data showing that housing is still sinking, the Fed will have no choice but to cut this Wednesday interest rates by 50 points. Anything less will signify to the market that they are behind the curve, negating any positives from the emergency rate cut of 75 points. With asset prices dropping, the main concern is the U.S. economy dropping into a recession. Inflation is a minor issue given the risks of a major economic slump.

Investors want to see that the Fed is being proactive on steering the economy away from a recession. They cannot afford to disappoint investors. They will do at least 50 points on the cut. Nobody wants to see a prolonged recession on their watch.

So far this week, the stock markets has its dramatic moments starting from pure fear to relief and hope. On Tuesday, before the markets opened, Dow futures were trading down 500 points. Near the start of the market, the Dow gapped down to 11,509 then recovered to close at 11,971. Yesterday, the Dow tried to retest Tuesday’s lows but closed up 300 points based on rumors of a possible bailout package for bond insurers. If one follows the signs of a market bottom, we might have already seen it. Panic selling and a retesting of the lows, a double bottom.

With the Fed cutting rates and the Federal government’s economic stimulus packages, it will help take the U.S. out of an economic slowdown probably in the latter half of the year. Before the stock markets can truly rally, the financial sector needs to bottom out and show signs of stabilizing. first . A bail out package for the bond insurers must also be quickly worked out. A sure sign that the financial stocks have bottomed out is their prices go up even with announcements of more write-downs.

On the bright side, China’s economy is still strong despite the U.S. Businesses are still spending as seen by IBM and Microsoft’s strong quarterly results and positive outlooks. The economies of the developing nations will continue to do well but are not immune to the U.S. economic slowdown. For stock investors, it is not a bad time to start buying high quality stocks and averaging down from current levels.

The stock markets are pricing in a recession. Things look pretty ugly right now. For the nimble investor, here are 10 ways to profit from a volatile and negative market:

1. Sell out of the money put options on the stocks you want to buy: If you’re a bargain hunter, you can sell these puts and earn a premium. If the option gets exercised, you own the stock at a lower price less the premium you earned.

2. Buy Gold: During market uncertainty, people flock to safe havens such as gold. For the stock investor, gold ETFs and gold participation units are possible investment vehicles.

3. Defensive Stocks: Safe haven stocks such as soft consumer goods companies and pharmaceutical companies. These companies make money during good and bad times. Go for these stocks that pay a good dividend rate.

4. Think long term: There are times when stocks become very oversold. For investors with long term horizons, moments of market panic offers bargains galore for well managed companies.

5. Short the market on bear market rally: If we are in a bear market, there will be opportunities to short the markets on rallies. Markets tend to recover from extremely oversold conditions, offering the trader opportunities to short the market.

6. Stay in cash: During trying times in the stock markets, the best course of action is simply be defensive. Just stay on the side lines and stay liquid. It’s better than being down on your stock holdings.

7. Buy quality stocks at bargain prices: The best managed and most financially solid companies are always the first ones to come back. These stocks are likely to outperform their peers.

8. Be nimble and careful: Stocks will be volatile during these uncertain sessions. Be ready to get in and out to catch the price moves. Respect your stop losses.

9. Look for the financial sector to stabilize before investing aggressively: The financial stocks are like the canary in the coal mine. The over all stock markets cannot go up without a stable financial sector. The market wants to see a kitchen sink quarter where everything and anything is written off.

10. Take advantage of the panic: When investors start panicking and begin liquidating their stock positions, it is time to start getting back into the markets. Buy when fear in the markets dominates.

This week in the stock markets was brutal to say the least. Those who are long were definitely wrong. The Dow and the Nasdaq lost 4 percent, while the S&P 500 gave up 5.4 percent. The resource laden TSX has shaved off over seven per cent this week, wiping out all 2007 gains, as investors dumped stocks on worries about a steep U.S. economic slowdown. The earnings so far from the poster boys of the bad debt fiasco Citicorp and Merrill suggests that the write downs are not yet over. Even the economic stimulus package announced by President Bush did not sway the negative market sentiment.
These financial stocks were continuing to hit new lows, indicating that the debt blow ups are no where near to being concluded. If one believes in the Dow Theory, the transport index is a leading indicator of where the rest of the markets will go. The key to seeing the markets stabilize and hit a bottom, the financial and transport stocks need to stabilize first.

Right now, the wash out is happening but it does not feel like the markets are anywhere at a bottom just yet. The selling seems orderly, pricing in a U.S. recession. What we need to see is panic selling and fear. People are just rushing to the exits at the same time. We’re not seeing that just yet. There needs to be massive pain first. TGIF.

No matter how you cut it, the US economy is rapidly slowing down. Some say that we are already in a recession and the incoming economic data seems to support it. Today in a hearing, the Federal Reserve chairman Ben Bernanke supported the idea and President George W. Bush made it clear he would offer a plan soon. Credit tightness, dropping stock markets, plummeting housing values and a suffering consumer are paring back economic activity.

To avoid the same fate as the Japanese with their credit fiasco, everybody needs to act fast. Banks and brokers need to suck it up and aggressively write off their bad debts. Take your medicine and get on with business. Just don’t let these disasters drag on. If a weak player goes under, so be it. As for the government, do temporary tax cuts to ease the stress on consumers and businesses. Put more money in their pockets so they can continue spending.

Quick and decisive action is needed by the financial services companies and the governments. The Federal Reserve Board needs to act aggressively and lower rates. Trying to hide the problem will only make it worse. Deal with it head on. The financial markets are waiting.

On his Mideast tour, President Bush urged Saudi Arabia and other members of OPEC to increase their output of oil. High oil prices are putting a strain on the U.S. economy and causing hardship for American families. Saudi Arabia politely responded saying it’s market forces that determines the price of crude. The Saudi official is absolutely right. Market forces are the most efficient way to correct any imbalances in the system.

Americans for too long believe that they have a God given right to cheap oil. As a result, they drive huge gas guzzling SUVs and live in large houses. When gasoline was going for a $1 per gallon, telling them to adopt measures to conserve energy meant saving the environment and cutting their country’s reliance on hostile nations that support terrorism, you are more likely to get the one finger salute.

What Americans need is high oil prices. This will force them to become more efficient in the ways they consume oil. Instead of driving around in a Ford Expedition, they’ll get around in a smaller, more fuel efficient Honda CRV. Oil companies also need the higher oil prices to fund expensive exploration and development programs to produce more petroleum. The markets are saying that cheap oil sources are long gone. Get used to triple digit oil prices.

This is the week where banks and brokers report their Q4 earnings. the numbers are expected to be ugly to say the least. Citicorp, which is reporting tomorrow, is rumored to write down as much as $24 billion. Merrill is expected to write off close to $15 billion. Others that are reporting this week includes JP Morgan and Wells Fargo. Despite the eye popping loss, shares of Citicorp and Merrill actually traded up the last few days. When markets rally on bad news, it seems most of the selling has been done on these beaten down stocks.

When they report, the markets want to see a kitchen sink quarter where anything and everything is written off. With a clean slate, these companies can get on with business. Get it over with and move on. Investors do not want to see these issues drag on over several more quarters. The Japanese banks are the poster boys for this. As a result, they have not fully recovered from the 80’s credit debacle.

For investors, hidden bombs include worse than expect losses from bad debts. Other consumer loans such as credit card debts could prove to be an unpleasant surprise. The markets are holding their collective breath to see what House of Horrors these financial firms have to unveil. Let’s hope their is no immediate sequel.

Tata Motors has introduced the world’s cheapest car, the Nano hatchback, priced at $2,500. It goes on sale in India later this year. and exports are planned within three years. The Nano is rear-drive with a rear gas engine, a 34-horsepower 623cc aluminum twin-cylinder. It achieves fuel economy of about 50 mpg. The Nano does meet Euro III emissions standards, which are up to four years behind current European regulations. It also meets India’s frontal crash standards.

The Nano is designed to replace the family scooter. In developing nations, it is very common to have the whole family riding on scooters. This car can seat up to 5 people. From a price point of view, car ownership is achievable for the scooter owner. For the rest of the world, there are ramifications.

Automakers will be forced to lower the cost of their vehicles to remain competitive. With more people owning cars, the demand for commodities such as oil and nickel can only go up. People should keep in mind that the Nano is designed to replace scooters. It is small enough to navigate around places that a full sized car would not go to.

Environmentalists are raising alarms about how this car will create greater strains on the globe. The attitude among developing nations is they should not be making economic sacrifices to save the environment. It should be the developing nations’ responsibility. After all, they enjoyed decades of economic prosperity centered around the automobile industry. Either way, the introduction of the Nano means the world will not be the same again.

The stock markets got a boost today when Ben Bernanke, head of the the Federal Reserve, said that the central bank was prepared to act aggressively to bolster a weakening economy. After the last Fed meeting where there was no strong statement about worries of a rapidly weakening economy, it seems that they are finally acknowledging that the US is sliding into a recession.

Unless they do a 50 point cut at their January meeting, the markets will not be satisfied. Along with an economic stimulus package being planned by the Bush Administration, it should help the US steer clear of a recession or just go through a mild one. The key will be the financial players. This sector needs to stabilize first by taking all the necessary write downs, replenish their capital base and start lending again.

A test for the equity markets are the credit card companies. Starting with Capital One and now AMEX, they are announcing lower earnings due to bad debts and less spending activity as a result of the housing implosion. The big question is how much has the markets factored in lower earnings for the companies.