What an incredible week we just finished! If one spent the week in an island without communication and just returned, he may think the market is normal as the S&P 500 is barely changed on a weekly basis. However, it took the S&P 500 to leap by almost 12% from its lows touched less than 48 hours ago to reach the breakeven level. Indeed, in a week that witnessed so many historical moments, it is worth spending some time to recap what has happened during the week: The market dropped more than 4% on Monday in the wake of Lehman filing for bankruptcy and Merrill selling itself to Bank of America. Lehman's bankruptcy became the largest one in the US history. The market was so panic that by Monday's afternoon, the odds of a Fed rate cut exceeded 80% from almost zero one week before. But quite surprisingly to market participants, the Fed chose to stand by and leave the key interest rate unchanged on Tuesday during its regular FOMC meeting. The news initially sent the S&P 500 tumbling before finishing the session higher by 1%. The market condition deteriorated remarkably on Wednesday. Stock exchanges worldwide tumbled amid fears that a crash in the financial system was imminent. Treasuries soared and gold jumped more than 10% as investors lost faith in the financial market. The market volatility reached the highest level in years and the credit spread even exceeded that on Black Monday in 1987. The sky seemed to be falling on Thursday. At one point, the S&P 500 was seen to drop a further 100 points. Then something stunning happened. The market was suddenly moving higher and higher as some investors on the Street speculated a bailout of the whole banking system could come soon. Of course, the rest has become history now. Stock markets worldwide enjoyed their best 2-day gains in more than a generation to finish an incredible week. 
Financials for the second day in a row became the market leader. In a week that has so many negative news surrounding the sector, the KBW Bank index managed to post a gain of 15% and is now more than 75% higher compared to its mid-July lows. Other winners for the session include basic materials and energies. Consumer staple and healthcare lagged the broad market as investors tried to move money out from the previous safe-heaven. The CRB commodity index jumped 2.5% and gains were quite broad. Treasuries suffered one of its biggest losses. The yields on the 2-year note were up 50 bps, the most in 26 years. The US dollar gained against the yen but was lower relatively to most major currencies, especially to the Australian dollar and the Indian Rupee. The VIX index dropped 1 point and was closed above 30 for the fifth consecutive session. The index reached the highest level in six years yesterday. The volume on NSYE reached 3 billion shares, the highest on record on a day happening to be option expiry day. Market breath was decisively positive.

A seat belt is not enough and you really need a good heart to stay in the market these days. At any moment, the market is able to more up or down by more than 2% within minutes. The kind of volatility that we haven't seen for years has become a norm and even those stocks that usually are considered to be low-beta can see their prices to move more than 30% intra-day without any company related news. Luckily for the bulls, the market is able to shrug off all the negative news and closed near the highest level of the session. The latest news that Congress is in full support of a proposal by the Treasury and the Fed to form an entity to absorb all bad mortgage loans from banks is expected to stabilize the financial market. Indeed, if such a legislation can pass, I do expect we can see a major rally led by financials from here because that's the root issue in the current financial crisis. Just a quick recap of today's action: Following yesterday's 4% plus decline, all three major indices finished the session higher by at least 3%, the most in 6 years. The S&P 500 was trading in a range of almost 8% before settling the day up by 4.3%.  
In other top financial news, central banks worldwide continued to pour record amounts of liquidity into the financial system. The Fed boosted its dollar swap line by adding as much as $180 billion. In the aftermath of the collapse of Lehman Brothers and AIG, financial regulators in the US, UK and the three largest US pension funds(California State Teachers' Retirement System, California Public Employees' Retirement System and the New York State Common Retirement Fund) jointly adopted new rules aiming to restrict short-selling activities. Washington Mutual, the largest US thrift, gained almost 50% following news that several banks including JP Morgan, Citigroup, Bank of America and Wells Fargo may be interested in buying pieces of the company. Putnam Investments closed a $12.3 billion money market fund following a surge of investor withdrawals. Earlier this week, a money market fund run by Reserve Management became the first in 14 years to expose investors to losses by "breaking the buck" after writing off investments in Lehman debt. Separately, the advance figure for seasonally adjusted initial claims for the week ending Sep 13 increased 10K to 455K while economists were looking for a small drop. Continuing claims, on the other hand, dropped 55K to 3.478 million, slightly better than expectation. The leading indicators fell 0.5% in August, more than a 0.2% drop expected. Six of the 10 indicators subtracted from the index, led by faster supplier deliveries to factories that signal fewer orders are coming in. On an annual basis, the index fell at a 2.1% pace compared with a drop of 4.7% pace in January. Finally, the Philadelphia Fed index reported an unexpected expansion in the region's manufacturing activities, the first time this year. Economists were forecasting a contraction instead.  
All 10 major sectors posted a gain led by financials. The KBW Banking index surged almost 14% after falling as much as 9% earlier. Following today's gain, the banking index is 60% above its mid-July low. The CRB commodity index was little changed as strength in agriculture products were offset by weakness in metals. Earlier, gold price soared as much as 9%. The US dollar was higher against most major currencies while treasures retreated from yesterday's close. The VIX index finished the session lower by 3 points. Earlier, it reached 42, a level not seen since October 2002. The volume continued to be extremely heavy while the market breath was the best since April.

We are at the centre of a global financial crisis. Let me re-emphasize it here - it is a global financial crisis and nothing short of it. Markets from Mexico to Brazil to London to Russia all posted double-digit losses during the past 72 hours. I was proved to be dead wrong in predicting a bottom had been reached but that's the way to be in this business: being wrong many many times and trying to learn from past mistakes. Having said that, I still believe we are very close to a major bottom unless all historical comparisons are irrelevant this time. Indeed, with panic level in the market exceeding those seen in August 1982 and October 1987, could we see something that has never happened before? Certainly that's always possible. But I think a short-term rebound is much more likely. A quick recap of today's action: For the second time this week, the S&P 500 tumbled more than 4%. In fact, all three major indices ended the session lower by at least 4%, the most since September 2001 terrorists attack. 
In other top financial news, Morgan Stanley is reported in talks of selling itself and possible candidates include Wachovia, HSBC, JP Morgan and China's Citic Group. A potential Morgan sale will make Goldman the only pure investment bank on the Street, which is something inconceivable just weeks ago. But with so many inconceivable news happening so quickly, anything can happen during the next few days. Separately, the Treasury is selling $100 billion in short-term debt to enable the Fed to expand its balance sheet after the Fed announced an $85 billion loan to AIG. Fed holdings of Treasury securities have fallen below $500 billion recently from almost $750 billion at the beginning of the year as it seeks to boost liquidity in credit markets. The news was regarded as a sign of stress in the world's largest central bank and offered little to soothe the market participants. The SEC also re-adopted its rules aiming to restraining short-selling activities. Traders and brokers must borrow shares used in all short sales and it can be a security fraud when sellers deceive brokers about delivering borrowed shares to buyers. Finally, a government report showed housing starts fell 6.2% in August to an annual rate of 895K, the fewest in more than 17 years. The reading was much worse than 950K expected. Building permits, an indicator of future construction, also dropped more than expected to an annual rate of 854K. 
All 10 major sectors ended the session with a loss of at least 2%. On a relative basis, consumer staple and healthcare were among the best performers but they still posted losses of 2.8% and 2.81% respectively. Financials and capital goods were among the worst performers with each posting a loss exceeding 5%. A rebound in commodity prices did little to help commodity stocks. The CRB commodity index jumped more than 3% led by a surge in gold price, which gained more than 10% as investors picked up hard assets amid global turmoil. The US dollar lost ground to the euro and the yen but gained against several emerging and commodity-rich countries. Treasuries had a huge rally as typical flight to quality. The rates on the 3-month bill was pushed down to as low as 0.02% before ending the session at 0.04%, near the lowest since World War Two. With the plunge in the 3-month bill rate, the so-called TED spread that calculated the difference between the LIBOR and 3-month bill rates soared 83 bps to 3%, a level that even exceeded what happened on the Black Monday in 1987. The VIX index jumped further in today's trading and closed at the highest level since Oct 10, 2002, when a major market bottom was reached during the last cycle. New lows on NYSE exceeded 30% of all issues for the second straight session, a phenomenon that has not seen since October 1987.

Wall Street continued its wild ride on this Tuesday. By one composite measure I follow closely, the panic level has reached the highest level during the past 25 years. Only three other instances in the period saw similar levels of panic and they are 10/19/1987, 08/20/2007 and 03/19/2008. Interestingly, the market was positive for the next two days in all cases. Will history repeat given the latest news that the Fed is going to loan $85 billion to AIG to avoid the systematic risk in the financial market? I think the odds are quite high but one needs to fasten the seat belt to enjoy the ride. Let's take a quick look at today's close: All three major indices posted a gain of at least 1.2% despite opening around 2% earlier. The biggest news of the session was the FOMC meeting. Ahead of the meeting, bond traders had put an odd of more than 80% that the Fed was going to lower the key rate by at least 25bps. But the Fed chose to stand by. The inaction by the central bank initially disappointed the market and sent all major indices sharply lower. But during the final hour of trading, some investors were sensing that a possible resolution in AIG could be imminent and bid up the key financial sector.
In other top financial news, the Fed injected another $70 billion of temporary reserves into the banking system today following yesterday's $70 billion, the most since September 2001 terrorist attacks. Central banks worldwide have added at least $270 billion to the financial system in a joint effort to prevent a systematic crash. The consumer price index, or the CPI, dropped 0.1% in August for the first time in almost two years mainly due to falling fuel costs. The core CPI, on the other hand, rose 0.2%, matching expectation. On a year-over-year basis, the CPI increased 5.4%, down slightly from a 17-year high of 5.6% in July. In a seperate report, data showed that foreign demand for US financial assets increased $6.1 billion in August, the slowest pace in almost a year as investors sold debt issued by Fannie and Freddie and other agencies.
Three yesterday's biggest losers became the biggest winners in todays session and they are financials, energies and basic materials. On the other hand, yesterday's best performers were among the worst performers today and they included names such as consumer staple and healthcare. One exception is utility,which suffered from a one-third drop in CEG.  It is worth noting that six out of the ten major sectors hit fresh 52-week lows in today's trading and they are energy, basic material, industrial, telecom, utility and tech. Interestingly, the financial sector, which has been affected most by the negative headline news, is still up over 20% from its 52-week low that was reached July 15. The CRB commodity index continued to slide and now is negative year-to-date. The US dollar moved higher most major currencies and treasuries had a wild ride similar to equities before settling down. The VIX index closed above 30 for the second session in a row. Earlier, it reached 33.7. New lows on NYSE and Nasdaq continued to expand and exceeded 1600 issues. The volume is extremely high while the market breath has improved dramatically from yesterday.
One final word: given the resolution in AIG and the extreme panic level discussed earlier, I believe a major bottom was reached this morning and we should expect to see a nice fourth-quarter rally ahead. Having said that, volatility is still something we have to get used to for the next week or probably even longer.

It is one of those one-in-a-generation days on Wall Street. As one Wall Street veteran properly pointed out, "It'll be one of those days where people say in 10 years, 'Do you remember where you were?'" Indeed, with two of the top four US investment banks ending their 100-year long journey in an unexpected and somewhat sadly fashion, the Dow plunged more than 500 points and the S&P 500 hit a fresh 3-year low. Is this the final shoe investors have long been waiting for? Hardly. There is still plenty of uncertainy surrounding around AIG, the largest insurance company by revenue in the world. Although the Lehman bankrupcy has already replaced Worldcom back in 2002 to become the largest one in the US history, a bankrupcy in AIG will be a total different story given its massive derivative contracts with other Wall Street firms and a balance sheet with over one trillion dollar assets. Whether today's events mark the beginning of the ending or the ending of the beginning of the current credit crunch is open for discussion. But one thing is for sure: The Street will never be the same or should we say it will not feel like the same before?   
In other top financial news, the Fed along with ECB and BOE provided more liquidity to the market in an effort to soothe investors following Lehman bankruptcy filing. US Treasury Secretary Henry Paulson said that he never considered bailing out Lehman and that a government loan to AIG isn't currently an option. Paulson's words triggered a late-afternoon selling wave and essentially caused major indices to finish the session at the lowest level. Seperately, industrial production in the US fell 1.1% in August, the most in almost three years. Economists were looking for a mild drop of 0.3%. In addition, July's reading was revised down to a 0.1% gain from the 0.2% previously estimated. Capacity Utilization, meanwhile, decreased to 78.7%, the lowest level in almost four years and below 79.6 consensus. Finally, a report from the New York Fed showed manufacturing activity in that region worsened this month. The Empire State general economic index fell to -7.4 from 2.8 a month earlier.  
All 10 major sectors saw losses of at least 1%. Healthcare and consumer staple fared relatively better as they were considered to be safe-heaven during market turmoil. Financials, basic materials and energies each posted a loss of more than 6%. The latter two were hammered due to concerns of a possible global recession following the financial crisis. The CRB commodity index tumbed more than 3% and closed below 350 for the first time this year. The price for crude is not well below $100 mark and is down more than $50 from the highs reached merely 2 months ago. The US dollar dropped less than 0.5% against a basket of currencies. Treasuries had its best day since the September 2001 terrorist attacks as investors were increasing their bets that the Fed will cut interest rates at its regular FOMC meeting tomorrow. The VIX index jumped more than 23% to 31.7, the highest level since March 17th. New lows on NYSE and Nasdaq exceeded 1000 issues and the market breath was decisively bearish.