We just finished the last full week in 2008, a year that will be remembered by financial historians in the same fashion as 1929 or 1987. Several more historical events hit the market this week alone, including an unprecedented interest rate cut by the Fed and historical low yields on treasuries. In case we forget to mention, we also get some historically weak housing data this week along with several other dismal economic reports. But in the end, the market was little changed for the week. Maybe it’s finally the time that the market is willing to look past all the bad news; maybe it’s just a short period of dawn before a new thunderstorm. One thing is quite certain: a relatively quiet market is what most investors need as their holiday gift.
Let’s take a look at the three key indicators: 1. VIX: closed at 44.93 compared to 47.34 yesterday. Conclusion: improving; 2. The euro/yen cross: closed at 124 compared to 127 yesterday. Conclusion: worsening; 3. The TED spread: closed at 150 bps compared to 152 yesterday. Conclusion: improving.
Most major sectors finished the session little changed. The CRB commodity index dropped 0.6%. The US dollar was higher against most major currencies while treasuries declined with the yield curve steepened. The three-month US LIBOR dropped 2 bps to 150 bps. The VIX index dropped 3 points. The market breath was neutral on both NYSE and Nasdaq and the volume was relatively heavy due to option expiry factor.

A late-afternoon credit outlook downgrade in GE damped any hope of a rally in a session that was traded narrowly for most of the time. By close, all three major indices were lower by at least 1.7%. Other than the GE news, which by the way was more of an excuse for market participants to rebalance their position ahead of tomorrow’s OE day, most economic and corporate news for the session came actually better than expected. However, investors were still stuck between fears of a deepening recession and hopes of a massive stimulus package from new Congress and administration (the price tag can be as much as $1 trillion while most estimates point to $850 billion). In case we forget, more than $110 drop in crude price since early July would mean another $800 billion stimulus to consumers on an annual basis. Put them together, we are talking about almost 12% GDP stimulus down the road along with unprecedented loosening monetary policy.  
Let’s take a look at the three key indicators: 1. VIX: closed at 47.34 compared to 49.84 yesterday. It was the first time since market tumbled in early October that the VIX index closed below 50 for two consecutive sessions. Indeed, it was quite impressive to see it drop in a day when the Dow was down more than 200 points. Conclusion: improving; 2. The euro/yen cross: closed at 127 compared to 126 yesterday. Conclusion: improving; 3. The TED spread: closed at 152 bps compared to 158 yesterday. Conclusion: improving.
Most major sectors finished the session lower led by basic materials and energies. The CRB commodity index dropped 2.2%. The US dollar was higher against most major currencies while treasuries rallied with the yield curve flattened. The three-month US LIBOR dropped 6 bps to 152 bps. The VIX index dropped 2 points. The market breath was negative on both NYSE and Nasdaq and the volume was neutral.

The market pulled back modestly on this Wednesday following yesterday’s 5%-plus rally. Despite lower closing price in all major indices, there are a couple of positive signs. First, the advance issues actually outpaced the decline issues in a session when the market is closed lower compared to the previous session, which is quite rare recently; Second, the historical rate cut by the Fed yesterday caused the LIBOR to tumble today and the 3-month LIBOR closed at 1.58%; Third, due to the decline in LIBOR and prime rates, the average rate on a 30-year fixed rate mortgage fell to 5.06%, the lowest average since the early 1960s. The record low mortgage rate will eventually make people back into the real estate market; Fourth, Goldman and Morgan Stanley reported worse than expected quarterly earnings in the past two sessions. But both managed to gain for two consecutive sessions, indicating much of the bad earnings expectations in the financial sector have been priced in. If the financial sector can be stabilized, the market will follow soon.
Today (Dec 18th) marks the 30th anniversary of China’s reforms and opening up. During the past 30 years, China’s GDP has grown at an average 9.8% or more than 3 times world average. The average household income has increased more than 5000% at the same time. I’m quite lucky to be born with the beginning of China’s reforms and personally witnessed countless changes over the past three decades. There is not enough time and space for me to write all of them down but I would like to offer one example to illustrate: Two days ago I went to a local supermarket to purchase toilet tissue. Guess what? There are more than 30 brands on shelves for me to choose. I had to spend a few minutes to compare some of them before finally making a decision. When living in Canada, I don’t have such trouble because the selection is much smaller. Things like this can be found almost everywhere in everyone’s life here in China.
Let’s take a look at the three key indicators: 1. VIX: closed at 49.84 compared to 52.37 yesterday. The last time that we have VIX closed below 50 was Nov 4th. Conclusion: improving; 2. The euro/yen cross: closed at 126 compared to 125 yesterday. Conclusion: improving; 3. The TED spread: closed at 158 bps compared to 183 yesterday. Conclusion: improving.
Most major sectors finished the session modestly lower. The CRB commodity index dipped 0.5%. Crude closed at the lowest price in more than 4 years despite OPEC announcing a bigger than expected 2.2 million barrel per day production cut. The US dollar was lower against most major currencies while treasuries rallied with the yield curve flattened. The three-month US LIBOR dropped 27 bps to 158 bps. The VIX index dropped 3 points. The market breath was neutral on both NYSE and Nasdaq and the volume was relatively light.

The market moved sharply higher on this Fed decision day. At close, all three major indices were up by at least 4%. The Fed, in another unprecedented move to revive the economy, cut the target rate to a range between 0% and 0.25%. Many analysts were expecting a smaller move. It should be noted though that the Fed fund rate has been traded below 0.25% for most of the past month already. Investors were cheerful about the Fed’s decision and sent the equity price immediately higher following the Fed announcement. Treasuries, instead of moving opposite to the equity market, continued its historical rally and pushed the yields on the 10-year to 2.26% and the yields on the 30-year to 2.77%. As we mentioned previously, the bubble in treasuries can be the next big bubble set to burst in 2009. However, a really big bubble can grow so big that it can always challenge one’s imagination. In fact, the market is always looking for a greater fool during the period of forming a big bubble. In the past decade alone, we have witnessed bubbles in the Nasdaq stocks, in the real estate, in the commodity prices. The recent commodity bubble was clearly related to China’s Olympic Game as the government pledged to use all resources to support the event. Speculators used it as an opportunity to bid up prices from oil to diesel to coal to steel ahead of the Game. Now speculators take the Fed as the next greater fool and hope that the Fed will purchase treasuries directly from them. But they had better keep in mind that it is always a dangerous game to think that the Fed is a fool.
Let’s take a look at the three key indicators: 1. VIX: closed at 52.37 compared to 56.76 yesterday. Conclusion: improving; 2. The euro/yen cross: closed at 125 compared to 124 yesterday. Conclusion: improving; 3. The TED spread: closed at 183 bps compared to 187 yesterday. Conclusion: improving.
All major sectors finished the session higher led by financials and basic materials. The CRB commodity index rebounded 0.3%. The US dollar was lower against most major currencies while treasuries rallied with the yield curve flattened. The three-month US LIBOR dropped 2 bps to 185 bps. The VIX index dropped 4 points. The market breath was positive on both NYSE and Nasdaq and the volume was notably heavier compared to the previous session.

The market ended this Monday modestly lower. By close, the Dow gave up 65 points while the Nasdaq declined around 2%. Besides some noise such as Bernard Madoff scandal and uncertainty surrounding the fate of the Big Three, investors these days seem to constantly switch their moods between fears of a deepening recession and hopes of massive stimulus plan from the new Congress and administration in January. In addition, with holidays and the end of the year moving closer, investors are cautious of betting heavily on either side of the table. As a result, volume will stay on a relatively low basis for the remaining trading sessions.
Let’s take a look at the three key indicators plus the one credit indicator I added several weeks ago: 1. VIX: closed at 56.76 compared to 54.28 last Friday. Conclusion: worsening; 2. The euro/yen cross: closed at 124 compared to 122 last Friday. Conclusion: improving; 3. The TED spread: closed at 187 bps compared to 199 last Friday. Conclusion: improving. 4. The iTraxx basket spread: closed at a new record of 780 bps vs. 759 bps in the previous week. Conclusion: worsening. We had some conflicting data here: On a positive note, the TED spread dropped more than 30 bps over the week. But on the other hand, the iTraxx spread didn’t narrow. After taking a closer look, one can find that much of the weakness in iTraxx can be attributed to CDX North America, which may be skewed following the rejection of the bailout plan by the Senate.
Most major sectors finished the session lower led by financials and technology. The CRB commodity index dipped 0.6%. The US dollar was lower against most major currencies while treasuries rallied with the yield curve flattened. The three-month US LIBOR dropped 13 bps to 187 bps. The VIX index increased 2 points. The market breath was negative on both NYSE and Nasdaq and the volume was relatively light.