Just when we mentioned yesterday that the market had three reversals in a row, today the market gave us a fourth. The Dow closed the day up by almost 100 points after losing more than 1% just 40 minutes before the close. The trigger of the rally is a reporter on CNBC mentioning that a bailout on the troubled second largest bond insurer Ambac Financial will be announced as early as Monday or Tuesday. The news was regarded as a positive to the financial sector as one short-term uncertainty might be removed. However, it could also be some shorts rushed to cover their positions before the upcoming weekend. We will have to wait until next week to see if the latest rally is sustainable. US dollar again was weakened against most major currencies. The CRB commodity index closed at another record high led by higher energy prices across the board. As for next week, we are going to get more data on housing, manufacturing, inflation and revised GDP. Any surprise – either positive or negative can quickly change the direction of the market. Indeed, we are living in a time of uncertainty.

The market is whipsawing these days. It is not often in any typical day that we see the Dow to reverse by 200 points. Guess what? We had three such days in a row, which was unprecedented going back to at least 25 years. Simply put, the market has no trend. Eventually the market will choose a direction, either up or down, but we are not there yet.
We got more economic news this morning. Unfortunately, most were again tilting to the negative side. Start with the weekly jobless claims. It came at 349K, more or less in line with expectation. However, the previous week’s number was revised up by 10K, causing the 4-week average number to move above 360K, the highest in more than 2 years. In addition, the existing claims were also revised up by almost 50K to 2.78 million. Although the weekly claim number is not in recession level yet, the trend is clearly not promising. Separately, the Leading Indicator dropped 0.1% in January, the fourth consecutive decline. Then at 10am, we got the Philadelphia Fed manufacturing survey, which came much worse than expected at -24.0 while economists forecasted for -10.0. It is the lowest reading in that region in more than 7 years. So far in February, we got two rather weak regional manufacturing reports and this doesn’t bode well for the national manufacturing report which is scheduled to be released on Mar 3rd.
Interestingly, the slow growth perspective didn’t deter speculators from pushing commodity prices even higher. Although oil price was retreating a little bit following a bigger-than-expected build up in weekly inventory, several precious metals including gold and platinum hit new historical highs, so did some agriculture products. The CRB commodity index closed at another historical high. The US dollar got weakened against major currencies while treasuries rallied sharply following today’s weak economic reports. Similar to the Fed’s forecast yesterday, the European Commission today also cut its forecast for that region’s economic growth and hiked its inflation expectation. It seems the world is indeed more closely connected.

All three major indices reversed early losses and closed the day in positive territory. The news on the economic front was mostly neutral to negative. Start with the closely watched CPI report. Both headline and core inflation came higher than expected. The headline CPI number increased 0.4%, pushing the y-o-y inflation to 4.3%. Excluding food and energy, the core CPI increased 0.3% and brought the y-o-y increase to 2.5%. Within the CPI report, food prices rose 0.7% while fuel costs were up 4.5%. Based on recent commodity price trends, we are likely to see higher inflation in these two areas in the months ahead. Separately, the housing data for January were more or less in line with expectation although Building permits, which is an indication for future construction, fell 3% to 1.048 million, a 16-year low.
The stock market opened the day in red following the negative CPI report and the plunge in latest mortgage refinance application due to higher mortgage rates. However, close to middle of the day, there appeared some buying program in the S&P futures and the cash market quickly followed. Then at around 2pm, the Fed released the minutes for the previous two Fed meetings and also offered its latest outlook to economic growth and inflation. Basically the Fed anticipated slower economic growth, worsening job market and higher inflation compared to previous forecast for 2008. But the market didn’t pay much attention to this renewed forecast as it was mostly priced in already and instead, traders focused on “substantive additional cut” mentioned in the minutes and viewed it as a warrant to at least 50bps cut in the next Fed meeting. The market continued its rally following the minutes.
The US dollar was mixed against major currencies while both oil and gold continued to move higher. The CRB commodity index inched higher and closed at another historical high. Treasuries retreated while yields were rising. It is worth noting that the yield on the 10-year notes has moved up by more than 30 bps during the past two weeks, resulting in a steeper yield curve.

All three major indices closed the day in red after gaining more than 1% earlier. There is little economic news scheduled to be released today. The only news that managed to move the market higher mid-day is the US Homebuilder Confidence Index, which came at 20 compared with a previous reading of 19. However, since the number is still well below a neutral reading of 50, it is too early to call a bottom in the home building industry.
Most headline news of the day concentrated in two sectors: financials and commodities. Start with financials. It is really a mixed picture here. Credit Suisse, the second largest bank in Switzerland, shocked investors today by announcing the bank was going to take $2.85 billion of write-downs on asset-backed securities after pricing errors made by a group of traders. The announcement came less than a month after the rogue trader Jerome Kerviel in Societe Generale caused the worst trading loss in banking history. Investors start to wonder whether other banks have similar issues in risk management. And this is really a question that may never be completely answered. Barcleys, on the other hand, provided investors with some relief after it indicated today that it has no further substantial losses and its shares rose almost 10% in today’s trading. The financial sector is increasingly divided into two groups these days: the first group are the ones that still have substantial exposures related to the sub-prime assets and the second group are the opposite. In my opinion, the first group is going to underperform the second through time.
Now turn to commodities. Oil again grabbed most attention after closing above $100 per barrel for the first time in history. Even more amazingly, it all happened in a relatively short period that no one seemed to pay attention to. It is very likely that we are going to get used to three-digit oil price in the next few months. However, it is not just oil that moved higher for the day. Nearly all commodities from energy to agriculture to precious metals to industrial metals moved higher. The CRB index jumped by almost 3% for the day and closed at another historical high. Now it is really up to the Fed to tell us how inflation is going to moderate given higher prices seen almost everywhere. In fact, we may have some clues tomorrow after the CPI report (8:30am) and the Fed’s latest forecast for the economy (2pm). Indeed, it will be a busy Wednesday.

Market is close today...