A normally quiet Friday turned out to be one of the most volatile sessions in recent years. All three major indices ended the day down by more than 1.5%. But for the week, Dow was actually higher compared to one week ago while S&P500 lost less than half a percent. The VIX index closed at 31.16, the highest since March 2003 - the month that US launched the second “Gulf War” against Iraq and was marked as the end of the 2000 – 2003 bear market. Can history repeat this time? Only time will tell.
Most of today’s volatility can be attributed to one single company – Bear Stearns. The company last time enjoying this kind of publicity was in July 2007, when two hedge funds of the company collapsed due to their sub-prime exposure. Today, it was the fate of the company itself that unnerved investors. The news that the company’s liquidity had deteriorated severely during the past 24 hours and the Fed has chosen JPMorgan to bail it out sent its shares down by more than 50% earlier in the day. The volume was gigantic as more than 186 million shares were changed hands for a company that has total outstanding shares of just 118 million. The fall of Bear Stearns brought down the whole financial sector and in fact, 8 out of the 10 most actively traded companies on NYSE belonged to this group. The news also overwhelmed a rather bullish CPI report (both headline and core CPI numbers were unchanged m-o-m), which initially drove the Dow futures to a gain of more than 120 points.
The financial market was in a disorderly fashion following today’s event. The US dollar hit a new record low against the Euro while closed at the lowest level against the Japanese Yen in 13 years. Gold price closed above $1000 for the first time in history. The two-year Treasury note’s yield dropped 14 bps to 1.48% after touching 1.37% earlier, the lowest level since July 2003. Traders, meantime, increased the bets of 100 bps interest rate cut at the Fed’s next meeting to 60% from 0% yesterday. The spreads between risky assets and risk-free treasuries were not narrowed much despite the recent actions taken by the Fed. For example, the spread on the current-coupon 30-y fixed-rate mortgage securities guaranteed by Fannie Mae over 10-year notes was 207 bps today compared with an average of about 112 bps in the past five years. As for next week, which is a shortened one due to the Good Friday holiday, we are going to get several brokerages releasing their latest quarter’s results, which may not look good but investors will try to look for clues whether the worst is behind. Also, the Fed is going to announce its latest interest rate decision on Tuesday, which can be a big market moving factor.

There are more than a dozen reasons that could drive the market down by more than 300 points. But in the end, one report saved that from happening and all three major indices ended the day in green. What a remarkable day and it should not be easily forgotten by bulls and bears alike. Before the stock market open in the US, there was simply no good news to cheer about. Even worse, we got some overwhelmingly bearish news.  
Start with the troubled hedge fund Carlyle Capital. Although the story that Carlyle failed to meet more than $400 million of margin calls on mortgage-backed collateral was revealed earlier last week, it was still a shock to the financial industry when the fund failed to reach an agreement with its creditors that may prevent it from being liquidated. With more than $16 billion mortgage-backed securities at stake, there was no doubt that a fire-sale of its assets would add further pressure to the already fragile mortgage security market. Also, investors were concerned that the issue at Carlyle may well be just a tip of the iceberg and more hedge funds employing similar strategy and level of leverage may explode. Indeed, the news sent the dollar to a record low against the Euro and a 13-year low against the Yen overnight.  Not surprisingly, the overseas equity markets were doing terrible. The Nikkei 225 Average lost more than 3% and closed at the lowest level since Aug 2005. In Hong Kong, the Hang Seng Index lost almost 5%. And stock exchanges in many European countries were down by 2 – 3% before the US market open and the futures in US indicated more than 1% lower open in S&P500 index. Meanwhile, gold climbed above the $1000 mark for the first time in history and oil was above $110 per barrel.  
The economic news in the US this morning didn’t help things either. The closely watched weekly initial claims came at 353K, unchanged from the previous week’s figure and matching expectation. But the continuing claims continued to move higher and reached 2.835 million, the highest since September 2005. Separately, the monthly retail sales missed expectation by a wide margin. The overall sales dropped 0.6% following a gain of 0.4% in January while economists expected a gain of 0.2%. Excluding the volatile auto sales, consumers still reduced their spending by 0.2% while economist forecasted a gain of 0.2%. There was little light in the housing market either. The California-based RealtyTrac, a seller of foreclosure data, reported today that US home foreclosure filings jumped 60% in February and more than 223K properties were in some stage of default, which was certainly not good news to those that had hoped a housing bottom is near the corner.
The market opened sharply lower as a result. At its worst, Dow was down over 230 points and financials were down by as much as 4% and slightly breached its lows reached earlier this week. It looked as if the market were going to be in free fall then something interesting happened. The market started to move higher after S&P reported that the sub-prime related write-downs may be half done. The agency estimated that total write-downs could reach $285 billion compared to the current level of $150 billion. Although there was still more pain to go through, investors seemed to be relieved that at least the number was not as high as some other institutions had suggested (for example, UBS expected more than $600 billion in write-downs). At the end of the day, all 10 major sectors were closed in green. The market breath was also positive with more advance volume than decline volume on both NYSE and Nasdaq. Despite today’s rather remarkable reversal, the market still faces quite a few headwinds. The CRB index closed at another all time high while the dollar index was at new low. Tomorrow we are going to get the latest CPI data and from today’s import price report, we may see some worse-than-expected reading in CPI. Indeed, there is no easy time in this market.

The market held up pretty well until 30 minutes before the close, when a wave of selling in financial shares brought all three major indices into red. But the losses were quite limited. For example, S&P500, the worst performer among the three, was down by less than 1% after gaining more than 3% yesterday. The volume was on the light side. Similar to yesterday, there was little economic news scheduled to be released. As we mentioned yesterday, financials are the key to watch in this environment and it is very obvious to see why that’s the case in today’s trading (a comparison graph between the financial ETF and the S&P500 Index was shown below).

  
The market opened the day relatively flat.  After some initial profit taking, which sent the major indices briefly into negative territory, financials led the market higher. One can see from the intra-day comparison between financials and S&P500 that both peaked at exactly the same time. And each time there was a plunge in the financial sector, the broad market would follow pretty quickly. So why would financial start to lose steam after a pretty positive start in the morning? Part of the answer can be found in the treasury market (below is a graph comparing the financial ETF and the 10-year Treasury note yield). Apparently, bond traders were not convinced that yesterday’s Fed announcement would be enough to rescue the mortgage security market. In fact, the odds of a 75bps cut in the Fed’s next meeting jumped back to 70%+ area. The US dollar also hit a new historical low against the Euro as a result.

JC Market’s Morning Call:
Good morning! The Fed just made its second significant announcement following last Friday’s decision of increasing the sizes of Term Auctions. Basically the Fed will lend up to $200 billion of Treasury securities to its 22 primary dealers in exchange for debt including private mortgage-backed securities starting form March 27th. The news is regarded as a positive move in at least two ways. First, it will take some pressure out of the US dollar. Before today’s action, the market has already priced in at least 75bps rate cut in the Fed’s next meeting and some on the Street has expected an intra-meeting cut. Those are all bearish to the dollar. With today’s action, there is almost no chance of an intra-meeting cut. In addition, the chance of 75bps cut has dropped to just around 50% at the time of this writing. Second, it injects liquidity into where it needs most. The biggest issue facing the financial institutions these days is the lack of interests in mortgage securities. It was reported that some AAA agency-sponsored securities could only be sold of 70c on the dollar compared with over 90c in the fourth quarter. By allowing banks using those mortgage securities as collaterals, the Fed essentially is trying to prevent further fire-sales in this area.
Having said that, there are still some headwinds for the market to go through. The market has partially retested its January lows in the past two days. S&P 500 successfully held onto its intra-day low in January yesterday but Nasdaq failed to find a support. Currently the futures indicate a 2% jump in equities and it seems it has more to do with short-covering. We need real buying activities here for the market to move forward. On a technical basis, the market has been oversold so a rebound is quite deserved. Indeed, if S&P500 can pass the 1310-1318 area, we may see some real buying coming. Stay tuned!    

End of market:
What a remarkable day on Wall Street! All three major indices registered more than 3% gains, the first time since March 2003. In particular, Dow closed the day up by more than 400 points, the fourth such kind of gain in Dow’s 112 years’ history. It was the Fed that made all this happen. Before the market open, the Fed surprised the market for the second time in less than a week by announcing the creation of a new Term Securities Lending Facility. Under the new facility, the Fed will lend up to $200 billion of Treasury securities, equivalent to one fourth of its balance sheet worth, to its 22 primary deals in exchange for debt including private mortgage-backed securities starting from March 27th.
The news is regarded as a positive move by the market in at least two ways. First, it relieves some worries about further tanking in the US dollar. The US dollar hit a historical low against the Euro yesterday and an 8-year low against the yen. If the Fed were to lower the interest rate by a widely expected 75 bps before today’s announcement, the dollar could face further pressure, which in turn could cause dollar-based assets to depreciate. Indeed, today’s announcement greatly lessened the probability of a 75bps cut and the US dollar also gained some ground as a result. Second, the latest $200 billion is targeting to the weakest link in the financial system, i.e. the mortgage backed securities. The biggest issue facing the financial institutions in the latest wave of credit crunch is the lack of interests in the mortgage backed securities. It was reported that some AAA agency-backed mortgage securities could only get 70c on the dollar recently compared to around 90c in the fourth quarter. By allowing banks to use those hard-to-sell mortgage securities as collaterals, the Fed essentially is trying to prevent further fire-sales in the market.
It was not surprising that financial companies were among the best performers in today’s rally. But the gain was much broader. All 10 major sectors were up by at least 1% for the day. Despite some sell off during the middle of the day, the market kept moving higher and higher throughout the afternoon and closed at the highest level of the day. Technically, the market was quite oversold entering into today’s session so a rebound was quite deserved. Moving forward, financials are still the key and we may see some meaningful gains if financials can hold their recent lows.

The market resumed its slide following the weekend with all three major indices ending the day down by more than 1%. The only economic news of the day was the Wholesale Inventories report, which usually has little impact to the market and today was no difference. Wholesale Inventories increased by 0.8% in January compared with 0.5% expected. Although it may have some positive impact to the first quarter GDP calculation, it simply does not bear the same degree of importance compared to Retail Sales and CPI reports later in the week.
All 10 major sectors were down for the day. Finally we started to see some extreme readings in technical indicators. The down volume outpaced up volume by 9 to 1 at NYSE. In addition, there were close to 1000 company stocks hitting fresh 52-week lows across the board. The VIX index closed at the highest level since January 22nd although it was still below 30. Financials and commodities were the biggest losers for the day. The former was due to more credit market worries while the latter was probably having more to do with profit-takings. The CRB commodity index changed little and crude oil hit a new record high. Treasuries continued to rally and the yield on the 10-year note was the lowest since June 2003. US dollar was mixed against major currencies and it hit a new 8-year low against the yen. One side note: China’s surplus unexpected narrowed in February to $8.56 billion while economists predicted a number close to $22 billion. It seems that China’s exports to US did slow down quite materially as shipments to the US fell in February to $15.5 billion compared to $19.2 billion in January and $16.3 billion a year earlier. Certainly, it’s not good news to both China and US.