US Market Week Wrap Up

Uncertainty continued to rattle markets early this week as they struggled to absorb more credit turbulence. The week began a day early on Sunday with the Federal Reserve cutting the Discount Rate by 25 basis points to 3.25% in a surprise intervention, and JP Morgan announcing the terms of its deal for Bear Stearns. Goldman Sachs added to pessimism early in the week, releasing a report stating they expect the S&P 500 to fall 10% in the "near term."

In a sign of deepening concern over the liquidity crisis, the Fed's official statement on Sunday noted that it would open the discount window to investment banks and primary dealers in an attempt to foster liquidity and promote moderate growth, which came as welcome news to financial firms. Markets reacted unenthusiastically, with the S&P500 and Nasdaq hitting new lows for 2008.

JP Morgan officially announced that it had signed a deal to acquire Bear Sterns for the bargain-basement price of $240M, or $2 a share, with a hefty dose of funding provided by the Federal Reserve. The Fed additionally noted that it would take on up to $30B of BSC's bad debt. The riot among Bear's shareholders began first thing Monday morning, as investor Joe Lewis, who holds approximately 10% of the company, called the deal “derisory” and threatened legal action. Speculators pushed the share price above $8 by midweek, on speculation a white knight with a stronger offer could emerge.

More Fed easing came on Tuesday afternoon, as the FOMC cut the Target Rate 75 basis points to 2.25%, meeting consensus expectations, but cutting less than the 1% some market participants had hoped for. That coupled with stronger language about inflation ultimately earned the Fed kudos for refraining from giving away the candy store. Tuesday saw a 420 point rise in the DJIA.

More financial firms felt the cold hand of the credit crunch during the week, as CIT's shares lost nearly 60% of their value after the company said it was having trouble accessing short-term debt and would have to draw on unsecured long-term bank credit. Shares of MF Global losing nearly half of its value early in the week on fears that customers were pulling their investments out of the firm. Meanwhile, the rumor mill churned up chatter of further writedowns at Merrill Lynch (late in the week analysts said that Merrill may indeed need to write down as much as $8B more, leading many to cut Q1 estimates).

Yet for the first week in some time, the contagion didn't spread readily to the rest of the financial sector. Goldman Sachs, Lehman Brothers, and Morgan Stanley all posted big gains after beating Q1 estimates handily, with the firm's issuing strong assurances about their liquidity positions (Goldman saying its liquidity is "stronger than ever"). Fannie Mae and Freddie Mac were huge winners for the week, each rising more than 50% after OFHEO announced a plan clearing the GSE's to buy $200B more in mortgage investments and reducing capital requirements to 20% from 30%.

A welcome spot of relief arrived late in the week as commodities came back to earth, as hedge funds reportedly deleveraged, and as many analysts noted the effects of declining demand due to the overall slowdown were finally making themselves felt. Commodities prices began to fall on Wednesday, as gold had the worst one-day dollar decline in 28 years and oil had its biggest one-day loss in 17 years. By Thursday morning, gold had slid back to $905 an ounce, from highs above the $1,000 mark just two days earlier, while futures contracts for crude oil were trading below $100 for the first time in more than two weeks. Wheat, sugar, corn, copper and platinum also dropped from record highs.

For the week, the S&P500 was up 3%, the DJIA climbed 3.5%, and the Nasdaq rose 2%.

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