Market Summary: Thurs. March 20, 2008

Today, financials led the way higher as gold, oil, and other commodities continued their slide. The yield curve also continued to flatten as investors have become less concerned about future inflation – the 30-year Treasury yield was down to 4.17%. The agriculture stocks that seemed so immune to the slow U.S. got hit hard as wheat, corn, and soybeans sold-off.

A little history lesson from January 2008: When the Fed aggressively cut rates 125bp everyone talked about new market leadership – retailers, homebuilders, and financials. However, the short squeeze rally in these stocks was short-lived because rate cuts simply were not enough to solve the country’s financial crisis. However, with the recent moves by the Fed to help the struggling financials institutions, I believe the rally in financials is sustainable. You have to remember that stock prices are based on future expectations of earnings, and if the future looks brighter (or appears to be brighter) because the Fed is doing everything within its power to prevent a collapse of our financial system, current stock prices will be higher. A lot of the rally can be attributed to short covering and the big move won’t come until the earnings estimates at banks get revised higher which won’t be for a few quarters. Yes, the banks still have problems and the recent Fed moves won’t solve them immediately, but at least investors have confidence that the Fed will be at the banks’ side to prevent further disaster – something that wasn’t present when the Fed was just cutting short-term interest rates.

The day contained mixed economic and earnings news. The weekly initial jobless claims number was 378K when economists were looking for 360K. The previous week’s reading was 356K. The Philly Fed manufacturing survey had a reading of -17.4 while economists were expecting -18.0. Last month’s reading was -24.0. A negative number indicates a contraction in the manufacturing industry (Source: Briefing.com).

Nike reported strong numbers after Wednesday’s close as “Sales in China surged more than 50%...that helped push up earnings 32% from a year earlier” (Source: Bloomberg.com). FedEx reported a 6% decrease in Q3 earnings while revenues increased 10%. The company made $1.26 per share while the consensus estimate was $1.22 per share. “The company now predicts a fourth-quarter profit of $1.60 to $1.80 per share. Analysts expect $1.95 per share” (Source: CNBC.com).

News regarding financial companies was mixed. Punk Ziegel (specialty investment bank) wrote to its clients explaining that the “financial crisis is over” and it is a “once in a generation opportunity to buy” (Source: Bloomberg.com). Cit Group (a consumer finance bank) announced it is drawing upon its $7.3B of emergency “credit lines to repay debt and finance its commercial lending business” since it “cannot obtain financing from other sources” because it was “shut out of short-term debt markets” (Source: Bloomberg.com). This is a move to improve the company’s liquidity position and it will use the cash to repay debt maturing this year. Credit Suisse warned it may have a quarterly loss due to potential write-downs – shares were down 11% (Source: CNBC.com). Finally, the Fed announced a modification to its Term Securities Lending Facility – banks will be able to use a broader range of collateral than previously thought. Collateralized mortgage obligations (CMOs) and AAA-rated commercial mortgage-backed securities will be accepted in exchange for government Treasuries. The first auction will be March 27^th with $75B available and the second auction will be April 3^rd (Source: Bloomberg.com).

In other news (courtesy of Briefing.com)…

- GE (up 5%) was upgraded to “buy” at Merrill Lynch

- Intel raised its quarterly dividend 10% to $0.14

- Fannie Mae and Freddie Mac were upgraded to “out-perform”

- Citigroup will cut more than 5% of its securities unit staff (Source: CNBC.com)

- Google’s price target was cut to $530/share from $675/share at RBC

- Here’s a great CNBC.com article talking about the dollar and its recent rebound

- According to Bloomberg.com, the stock market is the most volatile is has been in the last 70 years – 52% of the trading sessions this year have had a +/- 1% move

DJIA 12,361.32 +261.66 (+2.16%)
Nasdaq 2,258.11 +48.15 (+2.18%)
S&P 500 1,329.51 +31.09 (+2.39%)
NYSE Volume 6,314,664,000

2-Yr Bond 1.59% +0.05
10-Yr Bond 3.34% -0.04
30-Yr Bond 4.17% -0.05

Dollar Index 72.770 +0.626
Crude Oil (May) 101.47 -1.07
Nat Gas (May) 9.152 +0.040
Gold (Apr) 910.20 -35.10