The market closed mixed for the day but for the week, all three major indices managed to post a gain of around 1% following previous week’s 4% loss. The news on the economic front was mostly negative this morning. Start with the latest inflation trend. The import price index jumped 1.7% in January and brought the year-over-year increase to 13.7%, the highest on record. Meanwhile, US export prices rose 1.2% during the same period, which is the biggest increase in almost 20 years. The February NY Empire Manufacturing Index, on the other hand, came at -11.7 compared to the consensus of 7.0, the first contraction in that region in more than 3 years. This reminded investors of “stagflation”.
Consumers and foreign investors didn’t give the market an easy time either. The University of Michigan Consumer Sentiment Survey fell to 69.6, a 16- year low. Economists forecast a reading of 76.5. Although the consumer sentiment is not always a good indicate to their future spending, it is still worth some attention considering the service sector contracted for the first time in 5 years last month. Foreign investors purchased a net $56.5 billion in US financial assets in December, below $73.5 billion expected and dropping for the second month in a row. Since US needs foreign investors to finance their massive trade deficits each month, a lack of interest from foreign investors will not be good news, especially for the dollar.
As if things were not worse enough, UBS provided its latest update today that financial institutions around the world may have to take as much as $203 billion further write-downs in addition to the $152 billion already reported. Within the potential $203 billion write-downs, CDOs and sub-prime-related losses account for $120 billion. SIVs(Structured Investment Vehicles) may need another $50 billion write-downs and commercial mortgage-backed securities can take as much as $18 billion. The balance goes to the leveraged buyout loans. Interestingly, financials held up remarkably well and provided much support to the broad market in the afternoon. As for the coming week, which is a shortened one due to holiday on Monday, we are going to get latest data for CPI and Housing Starts. The Fed minutes for its January meeting will also be released in the middle of the week.

All three major indices dropped by more than 1% for the day, essentially giving back yesterday’s gain. The economic news this morning was more or less in line with expectation. Initial claims dropped for the third week and came at 348K. Continuing claims, however, still stayed above 2.75 million. Trade Balance was a little better than expected at -58.8 billion, which was helped by strong export due to a weak dollar.
The financial sector led the market down today. Before the market open, UBS reported a net loss of $11.3 billion for its latest quarter after a further write-down of $13.7 billion related to the mortgage-related investment. Since the company had already warned about the potential write-downs in late January, so the earning news was not really that surprising. What really shocked investors was the company also revealed during the conference call that it still had more than $27 billion position related to the US sub-prime mortgages at the end of reporting quarter. In other words, more write-downs should be expected in the next few quarters. Interestingly, the Fed Chairman Bernanke commented during his testimony today that he also expected further write-downs in major financial institutions related to sub-prime mortgages. It seems things will get worst before it can get better. Financials faced more pressure in the afternoon when the insurance units of FGIC were cut by six levels by Moody’s and lost its Aaa rating.
Move on to Bernanke’s testimony today.  The Fed Chairman didn’t change much of his stance regarding the growth and inflation perspective from his previous speeches. However, he did mention that financing condition remained challenging for many businesses even after the Fed had cut interest rates by 225 bps since last September and the market took it as a hint that the Fed would continue to make aggressive interest rate cuts. The US dollar got weakened against major currencies while the CRB commodity index hit another all-time high. Since the Fed is currently expecting inflation to moderate by the second half of 2008 after economy slows down during the first half, Mr Bernanke will really be in a “conundrum” position if things turn out differently than he thought.

HAPPY VALENTINE'S DAY!!!

The market continued to move higher for the third day in a row with all three major indices gaining more than 1%. The trigger of today’s gain is the retail sales report for January. Both headline number and ex-auto number came better than expected after a decrease in sales in the previous month. Since recession is really the biggest concern among investors, today’s report at least provided some relief. Treasuries dropped while the yields moved higher following the news.
All 10 major sectors registered a gain for the day with tech and energy leading the way. Tech got a boost from Applied Materials, which reported a somewhat bullish new order forecast in its latest earning report. Energy, especially the oil service sector, was helped by the strong oil price after today’s oil inventory report showing less than expected built-up in crude inventory. US dollar gained against most major currencies while gold moved little. Platinum, the precious metal that is widely used in jewellery and automobile emission control, passed $2000 per ounce mark for the first time amid continuing mining disruptions in South Africa.
As for tomorrow, the Fed Chairman Bernanke is going to testify before Senate Committee and the market will pay close attention to what he may indicate about Fed’s next interest rate decision. Currently the market has priced in a 100% chance of 50bps cut and around a 20% chance of 75 bps cut at the March Fed meeting.

Most indices closed higher for the day although the selling pressure during the final hour of trading pushed Nasdaq briefly into negative territory. Just like the past two days, there is little economic news to drive the market action. The biggest news of the day was Warren Buffett offering three bond insurers (MBIA, Ambac Financial and FGIC) reinsurance of their municipal bond holding. The news gave the broad market and especially the financial sector an early boost. However, as Buffett’s offer doesn’t cover the most troubled CDO portfolios that were tied to sub-prime mortgage and the municipal guaranty business is one of the last few profitable businesses to the bond insurers that can be used to offset losses in other areas, it looks like those bond insurers are in losing positions if they accept the deal (in fact, one of the three has already rejected the offer). Financials gave up some of the earlier gains in the afternoon and actually most major brokerages ended the day in red.
Sector rotation was still ongoing. After providing leadership in the past two sessions, tech was one of the most noticeable laggards of the day. Commodity was traded mixed after a pull back in the CRB commodity index, which hit another historical high yesterday. The US dollar was mixed against major currencies while gold price dropped by almost 2%. The euro gained after the German investor confidence unexpected jumped in February.
It is worth noting that although the rate that banks charge each other has dropped significantly in the past two months( e.g. the 3-month US LIBOR is just slightly over the Fed fund rate now), the investment grade corporate bond rate doesn’t ease much since the Fed started to cut interest rates in the second half of last year. The corporate junk bond rate is actually higher by almost 200bps during the same period. In other words, the borrowing condition is still quite tough for many businesses.

All three major indices managed to post a modest gain. Like last Friday, sectors were traded in a split fashion throughout the day. Financials were again weak following news that AIG may need to make substantial write-downs due to decreasing values in its credit derivatives. The one-trillion dollar question on Wall Street these days is really how many more write-downs related to the sub-prime issue are going to occur to the financial industry. I certainly don’t know the exact number.  But from various comments and published reports, it is possible to make an educated guess and I will have a try here.
The official estimation from the Fed was between $100 billion and $150 billion. This certainly seems too optimistic considering the total write-downs in the financial industry are already topping $140 billion. Wall Street firms including Bear Stearns thought that $250 billion might be a more reasonable estimate and if that’s the case, then it means we are more than half way done with the sub-prime crisis. Over the weekend, German Finance Minster Peer Steinbrueck estimated during the G-7 meeting that the worldwide write-downs will eventually reach $400 billion. If Mr Steinbrueck is right, it means that we are just a little over one third done with the crisis and there will be much more to come in the next few quarters. But this is not the worst scenario yet. On top of the already widely-known sub-prime mess, there is another ticking time-bomb that just started to emerge: credit derivatives (mostly CDS – Credit Default Swap and CDOs – Collateralized Debt Obligation) and this is the monster that caused Dow component AIG to post its worst daily performance in 20 years.  
According to PIMCO’s Bill Gross, the total outstanding CDS is around 45 trillion and historically the default rate is around 1.25%, so about $500 billion of these CDS insurance contracts will be in default. And if we use a recovery rate of 50%(a normal also conservative estimate), it will equal to a loss of $250 billion. However, during the past few years the bonds under insurance are changing dramatically, from less risky such as municipals and investment grade corporate bonds to highly risky such as corporate junk bonds and SIVs in the mortgage area. If we instead use a 2.25% default rate (100 bps above the historical average) and still keep the 50% recovery rate, then the total default will be around $500 billion, which can easily dwarf the capital held by the bond insurers. In other words, if the bond insurers cannot absorb the potential loss, then banks will have no choice but to make further write-downs. And if this scenario turns out to be the case, we may have many more $140 billion write-downs to come. Certainly not a good thing to happen!