All three major indices continued to slide for the third day in a row. The market started the week on a strong tone but finished the week with a loss of around 1%. Unless we get a strong Monday, the market is set to close lower for the fifth month and end the quarter with the steepest loss since 2002. Similar to yesterday, the economic news for the day was more or less matching expectation, but an analyst’s bearish comments for the financial sector along with a profit warning from JC Penny damped any hope of a positive close for the week.
Consumers held back their spending at a time that couldn’t be any worse. The Personal Spending for February rose 0.1% following a gain of 0.4% in January and the Personal Income increased 0.5%, better than expected. Although higher savings are beneficiary for the economy in the long run, the last thing economy needs right now is a further slowdown in consumption, which accounted for 70% of the GDP. In a separate report, the Core PCE, which is the Fed’s preferred inflation gauge, increased by 0.1% last month, bringing the y-o-y increase to 2%. Since the Fed has already raised its expectation for 2008 inflation to a range between 2% and 2.2%, today’s PCE results will certainly give the policy makers some comfort.
Financials and retailers were the biggest losers for the day. As we are approaching the end of the first quarter, it is difficult to read in too much of today’s action. It should be noted that many overseas markets are doing pretty well for the week. For example, the Nikkei 225 Average gained 4.6% and Hong Kong’s HangSeng index rose more than 10%. Will the recent underperformance of the US market compared with overseas markets become a trend? We probably need to wait a little longer before drawing a conclusion. The US dollar was again weakened against the euro and the yen. Interestingly, the CRB commodity index also dropped about 1.5% for the day. Treasury notes rallied today but for the week, they posted a loss. As for the coming week, we are going to get some important economic news and the market probably will face more tests going through the earning warning season.

The market continued to give back gains from the previous week. At today’s close, the S&P500 is in red for the week and month. With only two more trading sessions remaining in March, the widely followed index is on track to post losses for five months in a row, a streak last seen in 1990. Unlike previous few days, we did get some positive economic news. However, Oracle’s disappointing revenue results for its latest quarter along with concerns over first quarter earnings for financials deterred buyers from getting too enthusiastic.
The final reading on the fourth quarter GDP came unchanged from the previous expectation. Despite more economists worrying about recession, today’s GDP report confirmed that the economy was still expanding modestly in the last quarter of 2007. It is very likely we are going to get a negative reading on the GDP for the current quarter when the first reading is coming out late April. And clearly many parts of the economy are already in recession if not in depression. But technically, we need the upcoming April to June quarter to be negative as well before we can officially call it a recession. The final GDP report was revised slightly from the previous reading. For instance, consumer spending was revised up from 1.9% to 2.3% while prices were revised down from 2.7% to 2.4%. The final GDP report also shows that the fourth quarter GDP got a big boost from exports, which reflected both strong growth overseas and a weak dollar. In fact, the GDP would contract by 0.4% without contribution from exports. Separately, the weekly jobless claims dropped by 9K to 366K while economists forecasted a drop to 370K. In addition, the continuing claims also dropped from 2.85 million to 2.845 million. But again, one week’s data doesn’t constitute a trend and the market will pay close attention to next Friday’s Non-farm payroll report.
All sectors were down in today’s trading except for those defensive names such as health care and utilities. Technologies and financials were the biggest losers of the day. But interestingly, commodities didn’t rally further despite continuing strength seen in the CRB commodity index. The US dollar regained some ground against the euro and the yen after the better-than-expected economic news. Treasuries were sold off following the completion of the Fed’s first Term Securities Lending Facility (TSLF) auction. It is worth noting that the bid-to-cover ratio came at 1.15, below a typical ratio of 1.8 to 1.9. And the stop-out rate in the auction was 0.33%, just 8 bps higher than the minimum 0.25% set by the Fed. It shows the lack of interests of TSLF among the primary dealers. In a related report published by the Fed, the 20 primary deals borrowed averaged $32.9 billion a day from the Fed’s discount window in the week ending on Wednesday, up $19.5 billion from the previous week. So does it mean that the lending from the discount window is enough to solve the liquidity crisis faced by many financial institutions? We probably have to wait a little longer. The second TSLF auction is scheduled to be held on April 3 and we should have more clues by that time.

All three major indices ended the day lower by a little less than 1%. Disappointing economic news and an analyst slashing first quarter earnings estimates for several financial names outweighed strengths seen in many commodity names. However, even with today’s decline, the S&P500 is still up more than 6% from the lows reached on March 17th.
Businesses may have joined consumers in cutting their spending recently. The Durable Orders for February dropped 1.7% following a decrease of 4.7% in the previous month. Economists expected a rise of 0.7%. The unexpected drop was mainly caused by a 13% decline in demand for machinery, which was the biggest since 1992. Excluding orders for transportation, orders dropped 2.6%, the most in more than a year. In a separate report, new home sales for February fell to a 590K annual pace, the lowest level in 13 years. But the number was actually better than the 578K expected by economists. Inventories, however, remain at 9.8 months’ supply, the same as in January and the highest level since 1981. Although today’s new home sales number came at the worst in 13 years, we are probably much closer to the bottom of the recent housing slump compared to merely several months ago. Of course, the joint efforts by the government and the Fed should offer more help in the coming months.
The US dollar resumed its slide this week following a temporary rebound last week. It dropped back below 100 against the yen. Against the euro, the US dollar had the biggest 2-day decline since January 2001 after the ECB President Trichet rejected cutting interest rates. After today’s drop, the US dollar has lost 8% against the euro in the first quarter of 2008. The CRB commodity index continued to rally and gained another 2% led by a $5 jump in crude oil price. Treasuries continued to rise following today’s weak-than-expected durable orders. As for the next Fed meeting, traders currently bet a 40% chance of a 50bps cut in the Fed Funds rate with the balance for a quarter percent cut.

The market closed the day in a mixed fashion. The Dow, the only loser among the three major indices, swung between positive and negative territories for at least 30 times before finishing the day with a loss of 16 points. It was not a small achievement considering most news of the day was negative. In addition, no sharp sell off in recent winners after the recent run-up was also considered to be positive for the market moving forward.
Consumers seemed to be quite nervous these days after observing record high oil price and record drop in their home value. And recent turmoil in the financial market didn’t help the matter either. Hence, it should be no surprise to see their sentiment turning sour. In fact, it deteriorated even faster than economists forecasted. The Conference Board’s consumer confidence index for March fell to 64.5, the lowest in 5 years. Economists expected a drop to 73.5. Even more troubling, the expectations for the next six months tumbled to 47.9, the lowest since 1973. Although there is no direct relationship between consumer confidence and the actual spending, chances are we may see further weakness in retail spending until the rebate checks kick in starting in early May. Separately, the S&P/Case-Shiller home-price index dropped 10.7% from a year ago following a 9% decrease in December. The index tracks home prices in 20 U.S. metropolitan areas and it has fallen for 13 consecutive months after today’s results.
With the CRB commodity index rebounding from last week’s 8.7% plunge, commodities were the biggest winners of today’s trading. Technologies were also quite strong while financials and retailers took a breath. Treasuries had mixed results. The yields on the 10-year note dropped while the yields on the 3-month bill jumped by 24 bps. It appears that the worst of the recent liquidity crisis is behind us. But some caution is warranted as banks continue to hold their willingness to lend to each other. The US dollar dropped against most major currencies while gold price climbed by 2%. It is worth noting that the Dow Transportation Average continued to outperform its twin brother and is up more than 7% so far in 2008.

The market had its first back-to-back rally in March with all three major indices gaining more than 1.5% following last Thursday’s 2% gain. We have to go back to early February to see a rally of this scale. As most European markets are closed today for the Easter holiday, today’s rally in the US will likely have some positive impact on the overseas trading tomorrow.
Finally we received some positive news on the housing front. The February existing home sales rose 2.9% to 5.03 million. Economists expected a drop of 1%. Although one month number doesn’t constitute a trend, it nonetheless marks the first monthly gain in a year. In addition, inventories also fell to 9.6 months’ supply, the lowest level in six months. Separately, the Federal Housing Finance Board authorized Federal Home Loan Banks to increase their purchases of agency mortgage backed securities. The latest help from the government means additional $100 billion liquidity will be on its way to the mortgage securities market following last week’s relaxing surplus capital requirement on Fannie Mae and Freddie Mac. The joint efforts by the US government and the Fed so far will result in more than half trillion liquidity in the mortgage securities market and that is not small change.
Both Nasdaq and S&P500 closed above their 50-day moving average so all three major indices are above a key resistance level now. It is worth noting that the Dow Transportation closed at its best level year to day, which is certainly good news for those Dow Theory followers. As we are approaching the end of the quarter, some window dressing activity may occur in the next few sessions.