Weekly Financial Market Recap and Outlook

by Jeffrey Friedman

The stock market isn't seeing green this St. Patrick's day morning as more credit woes spread to Bear Stearns, prompting its sale to JP Morgan Chase at a fire-sale price of $2 a share. The Federal Reseve came in with a surprise move Sunday night ahead of its regularly scheduled meeting March 18, lowering the discount rate a quarter of a percentage point to 3.25 percent. It has not restored much confidence. Let's take a look back at last week's action, and where things might be headed next for the financial markets. 

The economy has grown softer with consumer sector turning negative in key recent reports. Growth clearly is flat, and possibly negative. But the key problem still appears to be the illiquid credit markets, and the problem of still-looming losses by banks and other financial firms. The Fed is using as many weapons as possible to support the credit markets and bolster the economy. The Fed has gotten more deeply involved in propping up the credit markets by extending credit to primary dealers and by indirectly extending credit to a key investment house, Bear Stearns. The Fed now needs to weigh whether additional interest rate cuts will really help that much, although Fed Chairman Ben Bernanke stated last week that lower rates are mitigating adjustable mortgage loan resets. That may be the only real reason the Fed is still cutting rates. 

The Fed funds futures market is now pricing in a 100 percent probability of at least a 75 basis- point cut in the Fed funds target rate at the March 18 policy meeting, and more than a 50 percent chance of a 100 basis-point cut. Regardless of the size of the rate cut, the big question is whether the Fed’s decisions will boost market confidence, or whether the rate decision will spook the markets. We will find out this Tuesday at 1:15 p.m. C.T.

Equity Market

Stocks took a wild ride last week and ended mixed. Even though there were some important economic indicators out, market swings were largely due to news from the Fed or the credit markets. Stocks started the week in a somber mood, still reflecting on the prior Friday’s negative jobs report. Rumors that large investment banks would be announcing additional large write-downs pushed financials and the broad market down. Bear Stearns in particular was the target of rumors of a cash crunch problem for the investment house. But stocks got their biggest lift in years mid-week after the Fed announced that it would lend $200 billion to banks by extending special auctions to primary dealers and other measures. The Fed’s move to extend auction rights to primary dealers was seen as dramatically improving liquidity in the credit markets. By week’s end, stocks dipped again over concern that record high crude oil prices could dampen economic growth. A drop in retail sales initially weighed on stocks and news that Carlyle Capital could not meet margin calls. 

News surfaced that investment house Bear Stearns was forced to arrange a cash infusion through JP Morgan going to the New York Fed’s discount window on behalf of Bear Sterns. The Fed Board approved the arrangement for an undisclosed amount to be loaned over a 28-day period, relying on a Depression-era law that allows the Fed to lend to non-banks. The news raised fears in the markets of further cash crunches in other financial firms and that credit market problems were a long way from being solved.

The S&P 500 futures staged a key reversal to the downside Friday, March 14, and this morning, the June S&P 500 contract briefly dipped to a new yearly low of 1253 amid rising concerns over the continued credit crisis which has now swallowed Bear Stearns. Momentum indicators, the relative strength index (RSI) and stochastics, are turning neutral, signaling sideways to lower action.

It could really ugly if this market closes at new lows. Major market averages are already down 12-15 percent for the year. If you are a trader, the volatility can be tempting, but put your fear hat on, not the greed, and be extremely cautious. From a technical point of view, June S&P futures need to see closes above the 20-day moving average at 1337 to suggest a short-term low has been posted. Look for pivot-point support at 1241.50 on the downside.

Crude Oil

Crude oil prices set new record highs in four of the five trading days last week. The big jump was on Monday as crude oil rose $2.38 a barrel to $107.90. The key factor was that crude oil appeared to be a more attractive investment than many alternatives – notably stocks. Prices continued to rise Tuesday and Wednesday, with Wednesday’s gain occurring despite a rise in crude oil stocks. Prices were led upward largely on speculation, and the week ended on an upswing with new record settlement at $110.21 per barrel. Record lows in the dollar helped crude oil reach a new peak, as the weaker dollar has been providing support for oil throughout the week, as it has for some time. The dollarsank to yet another all time low against the euro currency and to a 12-year low against the yen.

Will we see intervention in the currency markets to stem the dollar’s decline? Some analysts are predicting coordinated action by global policy makers to stem the dollar’s slide. In intervention, central banks buy and sell currencies to influence exchange rates. Abrupt currency moves are bad for economic growth and excessive currency movements are undesirable. Stay tuned for the Fed’s announcement this week, more rate cuts could send the dollar lower still.

Good luck and good trading!

 Financial Fundamental Reports:  Week of March 17 – March 21, 2008

Date	CT	Release	For	Actual		Consensus	Prior
Mar 17	07:30	NY Empire State Index	Mar			-5.5	-11.7
Mar 17	08:00	Net Foreign Purchases	Jan			NA	$56.5B
Mar 17	08:15	Industrial Production	Feb			-0.12%	0.1%
Mar 17	08:15	Capacity Utilization	Feb			81.2%	81.5%
Mar 18	07:30	Housing Starts	Feb			990K	1012K
Mar 18	07:30	Building Permits	Feb			1015K	1061K
Mar 18	07:30	PPI	Feb			0.28%	1.0%
Mar 18	07:30	Core PPI	Feb			0.21%	0.4%
Mar 18	13:15	FOMC Policy Statement
Mar 19	09:30	Crude Inventories	03/15			NA	6177K
Mar 20	07:30	Initial Claims	03/15			350K	353K
Mar 20	09:00	Leading Indicators	Feb			-0.28%	-0.1%
Mar 20	09:00	Philadelphia Fed	Mar			-18.5	-24.0

Jeff Friedman is a Senior Market Strategist with Lind Plus. He can be reached at 866-231-7811 or via email at jfriedman@lind-waldock.com. Join Jeff for his monthly webinar, Friedman’s Futures Forecast, by visiting Lind-Waldock’s events page.

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