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*LILLY 4Q ADJUSTED EPS 90C, ANALYST ESTIMATE 89C

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So there it is, finally they’re attacking the heart of the problem in today’s credit crisis:

     Jan. 23 (Bloomberg) — New York State’s insurance
regulators met today with U.S. banks to discuss raising new
capital for bond insurers, said a department spokesman.
Talks in New York with the unnamed banks are part of
Insurance Superintendent Eric Dinallo’s effort to stabilize the
bond guarantors and bolster the market’s financial condition,
said agency spokesman Andrew Mais in an interview.
New capital may help preserve the top credit ratings for
the bond guarantors such as MBIA Inc., the industry’s largest,
and halt any erosion of investor confidence in the $2 trillion
of assets they guarantee. Ambac Financial Group Inc., MBIA’s
biggest rival, lost its AAA grade from Fitch Ratings this month
on concern about rising defaults tied to subprime mortgages.

This should mean a big time rally for the financials and with that the broader market (assuming of course that these meetings don’t only talk the talk but also walk the walk). Happy days are here again, at least for now.

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* Banks, New York Regulator Meet on Bond Insurer Rescue

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* TEXAS INSTRUMENTS 4Q EPS 54C, EST 52C. REVENUE $3.56B; EST $3.59B. OUTLOOK EPS 43-49C VS 46C EST; REVENUE $3.37-55B, EST $3.42B.

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* APPLE 1Q EPS $1.76; ANALYST EST. $1.61. REVENUE $9.61B, ESTIMATE $9.43B. SEES 2Q EPS $94, ESTIMATE $1.12

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It’s been an interesting day. European equities markets started the day in ultra-bearish territory, kicking off with a 4.5% drop in the Stoxx 600 Index, a benchmark of the six hundred biggest companies in Europe. After a good hour of trading a sticky rumour hit the markets that we would see a coordinated rate cut by the Fed, ECB and Bank of England. This immediately reversed sentiment, making the Stoxx 600 move back to Monday’s closing level  in a matter of an hour.

After lunch it was the Fed who actually delivered with a 75bp rate cut, which set the stage for another leg up, leaving the Stoxx with a 2.2% gain for the day.

So let’s get this straight. The market capitalization of the average multi-billion European company changed with about 7%in the course of 8 hours. And then there are still people who honestly believe that market participants rationally reflect all information in prices and sentiment only plays a modest role in markets. What a day!

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* Bank of America Corp. Adjusted EPS 7c vs 21c Estimate

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*WACHOVIA 4Q EPS FROM CONT OPS EX-ITEMS 8C; ANALYST EST. 33C

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European & Asian equity markets took a real beating today, closing at the lowest points of the day, generally down anywhere between 5-7%. The financial sector was the bleeder once again, this because of genuine fear that the Ambac’s and MBIA’s of this world will go belly up and with that create another round of monstrous write-offs on the bank books. At the same time a U.S. recession seems to be a “sure thing” now and people decided that this will have its effect on Europe and Asia. So much for the decoupling theory.

We tend to agree with those bears saying that a rate cut (50bp is well priced in for the end of this month) and fiscal stimulus won’t do the job to restore confidence. So what will? Because something always does. Don’t get us wrong, we don’t necessarily say that today has been the low in the equity markets, but boy, the masses are surely pricing in an Armageddon scenario now. And although this time can always be different, we have heard calls of Armageddon too often in the past to take it seriously.

So what can save this market? We kind of liked the idea posed by Jim Cramer. Throw a bucket of sand on the heart of the fire: the bond insurance cos. One way to do this is for the government to guarantee (part of) the exposure these firms risk defaulting on, get the exposure off their books to new kid on the block Berkshire Hathaway and solve the issue once and for all. No more speculation that huge write-offs are around the corner for the world’s banks, which can easily trigger a short-covering rally that drags along the broader market.

Now obviously such a bail-out will have people screaming “moral hazard!” and the likes, but realistically speaking such a move would at least prevent a deflationary bust scenario (just ask Japan what a hassle that can be). Although the (hyper) inflationary scenario might not prove to be a proper solution either, bringing along its own disastrous problems, in today’s over-leveraged world it will be the easier way out for those who currently run the central banks and treasury departments.

So if we had to forecast as to what it’s going to be, a deflationary collapse or a reflationary boom, we would put our money on the latter. The good news of that is that asset prices (amongst which equities) are therefore likely to bounce significantly once -and for whatever reason- confidence returns. The bad news is that these assets might not be able to increase in real terms (accounting for inflation) on a longer-term basis as they will continue to decline on a relative basis to real assets such as gold & silver.

Whatever it may be. These markets separate the boys from the men. Crisis provides opportunity. Good luck with your investments in these tough, yet interesting times.

—— Evening Whiskey is a an irregular update on the state of financial markets and the opportunities it provides by dealingfloor.com. It is not investment advice and not a substitute for your own judgment. When taking on any investment, make sure to have a first aid kit at your disposal that is jammed with tranquilizers and sleeping pills, you’ll need it. History is not a guide to the future, nor is anything else. Any sane person knows that there’s no sure thing except death and taxes. Fortunes are made and lost each day in this arena. If you can’t stand that heat, please stay out of the kitchen.

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*EURO STOXX 50 INDEX FALLS 6.9%; WORST DAILY DROP SINCE 1991

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