The market retreated again on Friday as enthusiasm towards the recent rally started to fade. By close, all three major indexes were off by more than 1.5%. However, all three major indexes managed to post a gain for the week, making it the first time in almost a year that the market has back-to-back gains. Banks were under pressure for the second straight session as investors were concerned that new tax bill on executive bonus would make it difficult for banks to retain some of their most talented employees. The Senate is expected to vote next week after the House approved a 90 percent tax on bonuses at companies that received TARP funds.
The Fed has placed great hope in the TALF or Term Asset-Backed Securities Loan Facility to fix the so-called Shadow Banking system, which has grown to more than $10 trillion at the end of 2007. By comparison, the traditional banking system as a whole is around $10 trillion. Although the Fed has lowered interest rates to almost 0%, its influence in the Shadow Banking system has been almost non-existent until recently. For example, according to JPMorgan data, top-rated auto-loan bonds are trading at about 350 bps more than LIBOR, making it pricier for consumer to purchase a car on credit. As a result, yesterday’s kickoff in the first round of the TALF plan application is worth paying attention to. In total, investors consisting mostly of hedge funds applied for a total of $4.7 billion in loans to purchase securities backed by credit card and auto loans. The term of interest rates is 2.73% for fixed-rate loan or 1.52% for floating rate loan. And investors just need to put up 5% to 16% of their own capital in purchasing those asset-backed securities. In essence, the Fed is encouraging risk-taking among private investors by asking them to be equity tranche holders, which has limited down risk and big upside potential. Sounds familiar? Better ask those investors in the equity tranches of CDOs backed by sub-prime mortgage securities.
Let’s take a look at the three key indicators: 1. VIX: closed at 45.89 compared to 43.68 yesterday; 2. The euro/yen cross: closed at 130 compared to 129 yesterday; 3. The TED spread: closed at 102 bps compared to 104 bps yesterday.
All 10 major sectors finished the session lower led by financials and transportation. The CRB commodity index rose 0.4%. The US dollar was mixed against most major currencies. Treasuries were modestly lower. The three-month US LIBOR dropped 1 bps to 122 bps. The VIX index jumped 2 points. The market breath was negative on both NYSE and Nasdaq. The volume was on the heavy side.

The market retreated on Thursday after the S&P 500 encountered strong resistance at a key technical level. Financials, which has gained almost 60% over the past eight sessions, lost some ground in today’s trading. Commodities, on the other hand, surged following a weaker dollar, which lost more than 4% following the Fed’s decision in pursuing “quantitative easing”. In the short term, commodity sectors may continue to perform well as a weaker dollar will attract hedge-related trades. But over time, the balance of supply and demand will remain the single most important factor in determining prices. 
The Fed Chairman Bernanke had studied the history of the Great Depression extensively before he took the position. He believed that shrinking money supply is the key factor that ultimately resulted in that part of history. To prevent history repeat itself, the Fed has poured enormous liquidity into the financial system although they know they may face the risk of inflation down the road. Below is a paragraph taken from Wall Street Journal dated on June 20 1932 and we can see the extent to which banks reduced their loans to customers during the Great Depression, especially when we take into consideration that the GDP in 1932 was only a little above $50 billion.
“An indication of the extent of the decline in bank loans and investments is furnished by the Federal Reserve Board which, in its annual report, states that the reduction from October 4, 1929 to December 31, 1931 amounted to $8.75 billion. The actual drop in bank loans was $10.6 billion, offset to the extent of $1.85 billion by an increase in bank investments. The decrease in loans was continuous throughout the period, while the increase in investments reflected the net result of a growth of about $3 billion prior to September 1931 and a subsequent decrease of more than $1 billion during the final quarter of the year.”
Let’s take a look at the three key indicators: 1. VIX: closed at 43.68 compared to 40.06 yesterday; 2. The euro/yen cross: closed at 129 compared to 129 yesterday; 3. The TED spread: closed at 104 bps compared to 109 bps yesterday.
The market is split between winners and losers. On the winners’ list, we had names like basic materials and energies. On the losers’ list, financial and healthcare took the top two positions. The CRB commodity index surged 5.3%. The US dollar was lower against most major currencies sharply for the second consecutive session. Treasuries were mixed. The three-month US LIBOR dropped 6 bps to 123 bps. The VIX index jumped 3 points. The market breath was negative on both NYSE and Nasdaq. The volume was on the heavy side.

The market had a dramatic reversal on Wednesday following the release of the Fed statement. At close, all three major indexes advanced more than 1% from an early loss of as much as 2%. In its latest attempt to revive an ailing economy, the Fed resorted to a powerful weapon – “quantitative easing” - by pouring another $1.2 trillion into the financial system.  The Fed is going to purchase up to $300 billion long-term government bonds over the next six months. This is the first such attempt in more than forty years. In addition, the Fed is also going to spend $750 billion on top of $500 billion that has already been pledged to purchase mortgage-backed-securities backed by Fannie Mae and Freddie Mac.  In doing so, the Fed is hoping to lower the finance costs for business and households. The market reacted to the news immediately with the yields on the 10-year treasury dropping from 3.01% to 2.50%, which is the biggest decline since 1981. Yields on corporate bonds also dropped noticeably. For example, the yields on the average 10-year A rated corporate bonds dropped 73bps today to 5.32%, the lowest in more than two months. Although the latest steps taken by the Fed are expected to give the economy a much-needed boost, one side-effect will be higher inflation in the long run. In fact, the US dollar index dropping more than 2% has already started to reflect that.
Let’s take a look at the three key indicators: 1. VIX: closed at 40.06 compared to 40.80 yesterday; 2. The euro/yen cross: closed at 129 compared to 128 yesterday; 3. The TED spread: closed at 109 bps compared to 108 bps yesterday.
Most major sectors closed the session higher led by financial and basic material. The CRB commodity index dropped 1.16%. The US dollar was lower against most major currencies. Treasuries rallied sharply with the yield curve flattened. The three-month US LIBOR dropped 1 bps to 129 bps. The VIX index was little changed. The market breath was positive on both NYSE and Nasdaq. The volume was on the heavy side.

The market advanced for the fifth time in the past six trading sessions. Strength in financial and home builder issues provided support to the broad market, which brought its accumulated gain over the past six days to 15%. Investors welcomed better-than-expected data from the housing front, which saw February housing starts jump more than 20% compared to the previous month. Although today’s data appear encouraging, we need to keep in mind that housing starts have dropped for seven consecutive months before reaching a record low in January. Similar one month or even longer rebounds have occurred several times since the housing bubble burst in 2006. Each proved to be short-lived. We may be in the seventh or eighth inning of the current housing crisis but in order to say that the worst is over, we have to see material pick-up in sales first. 
Today also marks the one year anniversary of the fall of Bear Stearns, which under the instruction by the Fed was acquired by JP Morgan for $10 a share. The event triggered excess volatility in equity and currency markets around the world. But as wished by the Fed, the key credit markets remained calm following the collapse of the fifth largest investment bank at that time. For example, the TED spread increased only 1 bps in the week following the event and actually narrowed 16 bps two weeks later. But the saving of Bear Stearns caused great debates among lawmakers of the Fed’s role in encouraging “moral hazard”, under which banks would regard themselves as too big to fail and therefore take excessive risks. To counter criticism of “moral hazard”, the Fed later allowed the fourth largest investment bank Lehman Brothers to file bankruptcy. This time, however, volatility showed up in the credit markets in an unprecedented way with the TED spread reaching a historical high of 461 bps on October 10th. In retrospect, Fed probably underestimated the damage caused by the frozen of the credit markets as a result of Lehman’s bankruptcy, which is why it will no longer allow any other big financial institutions to collapse even though the Fed Chairman Bernanke has mentioned several times in public how angry he is about AIG. 
Let’s take a look at the three key indicators: 1. VIX: closed at 40.80 compared to 43.74 yesterday; 2. The euro/yen cross: closed at 128 compared to 128 yesterday; 3. The TED spread: closed at 108 bps compared to 109 bps yesterday.
All 10 major sectors closed the session higher led by financial and technology. The CRB commodity index gained 1.2%. The US dollar was mixed against most major currencies. Treasuries declined with the yield curve steepened. The three-month US LIBOR dropped 1 bps to 130 bps. The VIX index declined 3 points. The market breath was positive on both NYSE and Nasdaq. The volume was neutral.

The market finished the session modestly lower after a four-day winning streak. Financials were once again the dominant force behind today’s movement. At session highs, the sector was up as much as 6%, helping the S&P 500 posting a gain of 2.4%. However, profit taking during the final two hours drove the sector into the negative territory along with the broad market. Despite today’s retreat, market sentiment has improved dramatically over the past week. With several major financial firms indicating that they are making money so far in the quarter, some may argue that the worst may have passed. Indeed, with the widest yield spread in recent years, it is difficult for banks not to make money even if the economy is in a deep recession. Fed Chairman Bernanke, in a public weekend interview on CBS “60 Minutes”, re-emphasized his early view that the recession could end by the end of this year and the ultimate recovery will depend on the health of the financial system.   
Let’s take a look at the three key indicators plus the iTraxx CDX composite spread: 1. VIX: closed at 43.74 compared to 42.36 last Friday; 2. The euro/yen cross: closed at 128 compared to 127 last Friday; 3. The TED spread: closed at 109 bps compared to 113 bps last Friday; 4. The iTraxx CDX composite spread: closed at 791 bps compared to 873 bps in the previous week.
About half of the major sectors finished the session higher led by transportation and utilities. The CRB commodity index gained 1.3%. Over the weekend, OPEC decided against of further cut in output quota. The news initially sent crude price sharply lower but it managed to close higher as the US dollar was moving lower. The US dollar was lower against most major currencies. Treasuries declined with the yield curve steepened. The three-month US LIBOR dropped 1 bps to 131 bps. The VIX index increased 1 point. The market breath was neutral on NYSE and negative on Nasdaq. The volume was on the heavy side.