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Thursday, March 20, 2008

Crazy bear market

It has been a crazy week for the stock market. The Dow Jones Index went up by more than 400 points on Tuesday (3/18) quite unexpectedly, especially when the market had expected a 1% (100 basis points) rate cut by the Fed. The futures market before the opening bell has priced in a 1% cut. Instead, the Fed chose to reduce the rate by 75 basis points to bring the interest rate down to 2.25%. Perhaps helped by "better" earnings report by Lehman Brothers and Goldman Sachs, and other factors, the market rallied.

Dow Jones Industrial Average

Can you believe it? Lehman Brothers and Goldman Sachs first quarter profits plunging by -57% and -53% respectively, their stocks can still go up. Shares of Goldman Sachs soared by 16.3%.
Only last Friday (3/14), the market (especially the financial sector) panicked and plummeted as news of the fifth largest US securities firm, Bear Stearns, reported significant "deterioration in liquidity position". When Bear Stearns fall, this could mean many more firms are in similar crisis.

On Sunday night (3/16), the Fed had an emergency meeting to cut the discount rate by 100 bps to 2.5%, as well as opening the discount window. It is also injecting $30bil funds to Bear Stearns through J.P. Morgan Chase. The arrangement is like this: J.P. Morgan buys Bear Stearns for $2 per share with the $30bil financial backing of the Federal Reserve Bank. (Wow, this is a desperate act).

The Fed is also taken other measures such as injecting $200bil funds into the market by letting Fannie and Freddie Mae cut down on their capital reserve surplus.

On Wednesday (3/19), the Dow Jones Index plunged down over 290 points but recovered by over 200 points on Thurday (3/20). VISA managed to raised $19bil (?) on Wednesday. Pundits believe that the rallies during early this week has a lot to do with banks owning a stake in VISA. I read somewhere also that in fact there is no free market. The market is manipulated. Now, where did I find that article.

It has been a very volatile week. This financial volatility is also felt around the world like a wave moving out of US. Now, it seems UK banks will be having problems next week. Let's see if the rumors are true.

Some interesting links:

Treasuries offer negative yields! First time in 30 years?

The bottom is here? Analyst talking nonsense

UBS next to go? A forum discussion.

What is subprime mortgage? Let the comedians explain to you. Very funny but easy to understand.

Interview with Jim Rogers
- bailing out Bear Stearns is wrong when the executives are paid $39bil in bonuses.... plus commodities talk

Fed is too easy on Wall Street?

JP Morgan and Fed rescuing Bear Stearns. What is the connection between JP Morgan and the Fed?

Banking history

Pensioners suing Bear Stearns