Sunday, March 02, 2008

Weekly Wrap

Here is a copy of's Weekly Recap:

If you remove Friday from this week's trading action, it was a reasonably good week for the market. However, unlike some economic reports, there are no exclusions when computing the returns that matter for equity investors. Friday counts just like the other days, and because it does, this week will go down as a losing one in the record books.

The week certainly began on a good enough note, as the major indices rallied Monday on the news Standard & Poor's took bond insurer MBIA (MBI) off CreditWatch and affirmed the triple A ratings for MBIA and Ambac Financial (ABK).

Bullish investors kept charging on Tuesday thanks to IBM (IBM), which announced a $15 billion buyback plan and raised its full-year earnings per share guidance.

The market had a roller coaster day on Wednesday before finishing roughly flat on the session. Fed Chairman Bernanke was in the spotlight all day, as he provided testimony on the economy and monetary policy before the House Financial Services Committee.

While Mr. Bernanke made note of the recent rise in inflation, he emphasized the Fed's view that growth risks remain the greater threat right now to the economy. The takeaway from his testimony was that the Fed will be cutting rates again at the March 18 FOMC meeting.

The stock market was on the defensive when the Fed Chairman began his testimony Wednesday. A weak new home sales report didn't help matters much either (more on this week's data in just a bit). Buyers, however, jumped back into the action following word from the Office of Federal Housing Enterprise Oversight that it would be removing the portfolio caps on Fannie Mae (FNM) and Freddie Mac (FRE). Removing the caps, presumably, will improve liquidity in the secondary mortgage market and help promote increased mortgage lending.

The latter news came shortly after Fannie Mae reported a $2.1 billion loss for 2007 and warned that it expects further housing market weakness in 2008 to lead to increased delinquencies, defaults and foreclosures on mortgage loans. On Thursday Freddie Mac followed suit, reporting a $3.1 billion loss and also warning about the housing outlook for 2008.

Unlike Wednesday, the stock market suffered a noticeable setback on Thursday. The retreat was driven by an inclination to sell into the previous strength and was attributed in part to concerns about the banking industry that were sparked by Fed Chairman Bernanke's observation before the Senate Banking Committee that there will probably be some bank failures as a result of the financial market turmoil. Interestingly, the market all but ignored his more important qualification that capital ratios remain good among the largest banks.

Thursday's weakness spilled over to Friday where the trading action reflected the release of pent-up angst about the financial sector's problems specifically and the economy in general.
This week saw several economic reports come in worse than expected. The new home sales report was referenced above and was joined in the disappointing category by the producer price index, consumer confidence, durable orders, weekly initial claims, and the Chicago purchasing manager's index. However, a closer examination of this week's data in aggregate, which also included better than expected reports for existing home sales and personal income and spending, reflected an economy that has clearly slowed but not one that is in recession.

Qualitative assessments didn't matter much, though, on Friday as a negative bias took root early on following disappointing earnings reports from Dell (DELL) and AIG (AIG), research from UBS that suggested total losses related to the subprime meltdown will reach at least $600 billion for financial firms, news that a bailout of Ambac Financial had hit a "snag," and reports of forced selling in the municipal bond market by hedge funds needing to meet margin calls.

The latter touched off a new wave of uncertainty that led to a 2.7% decline in the S&P 500 on Friday and a noteworthy flight-to-quality bid in the U.S. Treasury market where the benchmark 10-year note gained more than a point and saw its yield drop to 3.53%, down from 3.80% at the close of the prior week.

Aside from Treasuries, commodities were the other big winner on the week. The CRB Index surged 3.5%, led again by increases in oil and gold prices, both of which hit new, non-inflation adjusted highs during the week. Weakness in the dollar, which hit a new low against a basket of major currencies, fed the rally in dollar-denominated commodities.

Friday's session capped off another losing month for the market, which has now suffered a decline in each of the last four months. With a streak like that, it is easier to fear the worst, but as we noted in our Page One column Friday, the market needs time to stabilize until a better future emerges. Fortunately, time will bring the benefits of perhaps the most aggressive Fed policy easing ever and the boost from the huge fiscal stimulus package starting in early May.


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