$FE is the "signal" to the compiler that the next byte should be sent to the LCD as a command and not as data. The fact that it's $FE and not something else is most likely because $FE in the character set of the HD44780 is a white space (at least in ROM code A00) which there already is a valid ASCII code for within the character set ($20).

DEFINE LCD_BITS 8 will instruct the compiler to talk to the LCD in 8-bit mode. This IS covered in the manual, there's even setup code and schematic for 8-bit mode. The LCDOUT command itself is used exactly the same, no matter 4 or 8 bit mode. Read through the section on LCDOUT again.