Bears are back. Despite strong performance in the key financial sector following BoA’s takeover of CountryWide Financial, all three major indices dropped by almost 2 percent following earning warnings from American Express and Tiffany. Consumer stocks were hammered as investors fear that consumers may finally pull back their wallet. Many restaurant stocks, for example, were down by more than 5 percent for the day. Tech stocks were also among big losers as tech spending from the business sector might be questionable following recent turmoil in the financial market. Treasury notes rallied and pushed the 2 year yield spread relative to the Fed fund rate to the widest since 1981. The spread between high yield bond and treasury continued to expand and now is well above 700 bps. On a positive note, the 3-month US LIBOR rate was down sharply during the past month and now is just a little above the Fed fund rate, indicating liquidity is back in the banking sector. US dollar was mixed against major currencies while gold price continued to advance. It closed the day just 3 dollars below $900 after earlier briefly breaking the $900 mark. Oil price, on the other than, dropped by $1. On the economic front, the trade balance for December widened more than expected to $63 billion due to higher petroleum costs. This may spur economists to revise down their estimation for Q4 GDP number. We are entering the busy earning reporting season next week. Investors are expected to pay close attention to earning announcements from several troubled financial firms, including Citigroup on Tuesday, Merrill Lynch and Wallington Mutual on Thursday. Any positive surprise from those names may be a trigger for the market to move higher. In addition, Intel (Tuesday) and IBM (Thursday)’s reports are also worth watching.
