Weekly Review Of The US Markets

Just as the US equity market was in the process of a major breakdown over the issue of possible government takeover of Bank of America (BAC) and Citigroup (C), the White House made some comments that appeared to reject the notion of nationalization, and there was a sudden market turnabout. After Bank of America CEO Ken Lewis stated his bank was profitable and did not need government aid, BAC shares moved higher by about +20% in minutes. By the end of the session, however, the broad market rally ran out of steam.

By the end of the day, the DJIA (^DJI) (-100.28 -1.34% to 7365.67) and the S&P 500 (^GSPC) (-8.89 -1.14% to 770.05) were well underwater, but the NASDAQ Composite (^IXIC) (-1.59 -0.11% to 1441.23) closed flat.

Winning sectors were Tech (XLK +1.0%) and Basic Materials (XLB +0.8%), while the losers were Energy (XLE -2.6%) and Utilities (XLU -2.3%).

In Canada, although still swooning over the previous day’s visit of President Obama to Ottawa to talk about global warming issues, the Toronto Composite (-235.36 -2.88% to 7949.99) and the Venture Board (-9.20 -1.02% to 892.90) were hammered. Leading Canadian financial services company, Manulife (MFC -8.8%) and tech company (Research in Motion RIMM -7.0%) were among the worst losers on the day in the Cara 100. Vancouver-based precious metals companies Silver Wheaton (SLW +11.5%), Kinross gold (KGC +4.4%) and Goldcorp (GG +3.2%) were winners among the Canadians.

Others in the Cara 100 that moved a lot were Applied Material (AMAT +5.0%), Dell Computer (DELL +3.6%) and Amazon.com (AMZN +3.1%) among the winners, and Adobe (ADBE -7.7%) and General Electric (GE -6.8%) (GE to a multi-year low of $9.38) in the losers. In fact, adjusted for dividends, the present GE price of $9.38 was last seen almost 13 years ago, in May 1996.

A few Brazilians (ERJ -8.1%) (RIO -7.6%) (GGB -7.2%) were also big losers in the Cara 100. The Sao Paulo Bovespa closed down -2.6% at 38714.6.

Early in the day, the French CAC (-4.25% to 2750.6), the German DAX (-4.76% to 4014.7), and the UK FTSE 100 (-3.22% to 3889.1) also plunged as European-based banks like UBS were hammered. The problems for many of the European banks largely apply to loans made in Italy and Greece, apparently. But UBS is also presently under stress from US prosecutors who are dead-set on smashing Swiss bank secrecy. The global implications to international banking are enormous. Some of the motivation here is due to efforts to stop tax evasion, and some due to concerns about terror group money laundering.

Asia-Pacific equity markets were also losers Friday — except for Shanghai (+1.54% to 2261.5), which continues to show a bullish break-out pattern. The losses in other regional markets were large, but not as excessive as we have seen there in the recent past or as happened later in the day in Europe and then North America: Australia (-1.32% to 3353.0), Nikkei 225 (-1.87% to 7416.4), Hong Kong (-2.49% to 12699.2), and India’s Sensex BSE 30 (-2.21% to 8843.2).

US Treasuries reversed course for the day as the $USB long bond gained +1.05% to close at 127.59. Yields on the 30-, 10- and 5-year Treasuries closed at 3.565, 2.772 and 1.798 percent, respectively.

The US Dollar weakened a second day in a row ($USD -1.24% to 86.49) while the Euro gained +1.13% to 128.18. Other currencies that gained on the day against the USD were the Yen (+0.94% to 107.15), the British Pound (+1.09% to 144.37) and the Canadian Loonie (+0.56% to 80.10).

Precious metal futures closed off their highs of the day, but very strong nonetheless. April gold futures closed at 993.25 (+16.75). Spot (cash market) prices for gold, palladium, platinum and silver, closed at 989.85 (1006.20 high for the day), 212 (215.5), 1080 (1092.5), and 14.4025 (14.61), respectively.

West Texas Intermediate Crude Oil contracts for April closed the week at 39.41, reflecting both the North American economic weakness as well as the tight banking credit conditions that have put the squeeze on speculators. The DJIA futures were at 7350, indicating a small recovery from mid-afternoon, but still down at lows that approximate the Bear market cycle bottom of October 2002.

Unnerved by the prospects of creeping socialism and bank nationalization, worried investors unloaded financials (XLF -10.78% intra day, closing down -2.0%), knocking the S&P down -1.14% on the close. For a second day in a row, Bank of America (BAC -3.6% to 3.79, after being down well over -20% to a low of 2.53) and Citi (C -22.3% to 1.95, after hitting a low of 1.61) were utterly smashed. During the morning, many traders were discussing the prospects of either bank failure or nationalization over the weekend, but government and the banks later suggested otherwise.

Traders everywhere are really up in arms about the proposed securities transaction tax - all citizens should be - as market liquidity would dry up (goodbye volume, hello wider bid/ask differentials) and costs (direct tax, hidden fees, higher commissions) would be passed on by brokerage firms to all customers. Moreover, that tax would be the death knell for active trading, the end of US capital markets as we know it. Companies would take their listings elsewhere; traders would follow, and the NYSE would be forced to close its doors. Washington had better stop talking to economists on this matter before this nonsense goes past the point of no return.

If you think you’re lucky because you don’t own stocks, think again as the new Transportation Secretary proposed a new tax that is based on miles driven on the nation’s crumbling roads. Hey, like we have in The Bahamas, I am sure Americans would prefer consumption taxes if the government would only abolish income taxes and the IRS. How do you like taxation without representation? Sucks, doesn’t it?

After piercing the psychologically important $1000 barrier to just north of $1006, gold pulled back, settling for a gain of +18.40 on the day, closing at 994.40. Gold has now in our opinion crossed the threshold of global thinking from being a commodity like oil to being money - real money.

Miners of the precious metals firmed a bit on the day (especially SLW +11.53% on very large volume), but are clearly hesitating before coming to the party. Keep a close eye on them after the broad market puts in a bottom. They will probably lag by a day or two, as traders rotate out of miners and into higher beta names. However, once gold and silver stocks catch a bid, clearing defined resistance areas, the upside move could be quite dramatic.

We put some cash to work today in the broad market, and now look to aggressively increase positions if, as and when the market sells off sharply over the next few weeks, or alternatively if we see a breakout in the S&P 500 above the 850-850 technical resistance level. Once the US dollar begins to weaken, interest rates rise, and commodities lift, the stage will be set for an impressive advance. Blood is running in the streets, investors are unbelievably pessimistic, and buying opportunities have been emerging. We definitely see the glass half-full, and we avoid listening to the fear mongers on Financial Entertainment TV.

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