Weekly Recap - Week ending 13-Feb-09

Washington was in focus throughout the week with a flurry of activity on Capitol Hill: Treasury Secretary Geithner announced a new financial rescue plan and testified before lawmakers; major banking CEOs went before the House Financial Services Committee; Fed Chairman Bernanke went before the same committee to comment on the Fed's efforts to foster liquidity in financial markets; and the Senate debated and eventually passed the fiscal stimulus package.

In the end, the market was left disappointed with the S&P 500 dropping 4.8%, with the ten economic sectors dropping between 2.4% (healthcare) and 10.2% (financials).

This week started on the notion that the market would be getting more details regarding the Obama administration's new financial relief plan from Treasury Secretary Geithner on Monday.  The Senate, however, was still debating the fiscal stimulus package, so the much-anticipated Geithner speech was delayed until Tuesday.

As a result, trade was subdued Monday as market participants were in an wait-and-see mode ahead of Geithner.  On Tuesday, Geithner delivered his speech, but he did not deliver on details the market was expecting to hear regarding a "bad bank" that would take troubled assets off financial institutions' balance sheets.  Geithner said that he did not want to announce a plan until he was sure they had it right. The market took a dive on the lack of details, resulting in a sharp 5% drop in the stock market, with financials plunging 10.9%.

Geithner did say, however, that together with the Fed, FDIC, and private sector, the Treasury will establish a public-private investment fund to provide capital and financing to get private markets working. There is a range of different structures for this program, but the Treasury believes it should ultimately provide up to $1 trillion in financing capacity.

Meanwhile, Fed Chairman Ben Bernanke testified before the Financial Services Committee to talk about the Fed's lending program. His appearance had a muted impact due to the market's focus on Geithner.

On Wednesday, banking CEOs testified before lawmakers, mostly defending themselves and saying they were still lending.  The market eked out a modest gain.

On Thursday, stocks fell as much as 3.1% as market participants dismissed a better-than-expected January retail sales report (+1.0% versus -0.8% consensus) because the number of new unemployment claims remains at elevated levels. New jobless claims for the week ended Feb. 7 came in at 631,000, which was worse than the expected reading of 610,000 as business continue to slash operating costs. But a late session news report that the Obama administration is working on a plan to subsidize mortgages in order to help homeowners avoid foreclosures, resulted in a quick late session surge, lifting the S&P 500 from a 3.1% decline to a gain of 0.2%.

According to reports, the subsidy program will have $50 billion in funds to help prevent foreclosures. That amounts to 0.5% of all household mortgage debt outstanding, so the strong rally was somewhat questionable considering that 7% of total residential loans outstanding are delinquent.  Still, the fact that the government is taking a direct approach to helping homeowners is significant.

Financials were once again in focus on Friday, as the sector dropped 4.2%, capping a weekly loss of 10.2%. Weighing on financial stocks was word that U.K.-based lender Lloyds (LYG) said since its December 2008 trading update, HBOS's 2008 trading has been further impacted by increasingly difficult market conditions, an acceleration in the deterioration of credit quality and falls in estimated asset values. Lloyds expects HBOS to report an underlying loss before tax of some 8.5 billion pounds for the year ended Dec. 31, 2008.

Meanwhile, the fiscal stimulus package was in focus throughout the week, but had a limited impact on trade.  The Senate eventually passed a modified version of the bill, which was reconciled with the House version.  On Friday the House approved the updated version, with the Senate expected to vote Friday evening.

The government is expected to be in focus again in the coming week, with the G-7 finance ministers meeting in Rome to discuss the financial crisis.  Meanwhile, it's being reported that Obama will announce the details of the housing subsidy plan Wednesday.

Index	Started Week	Ended Week	Change	% Change	YTD %
DJIA	8280.59	7850.41	-430.18	-5.2	-10.6
Nasdaq	1591.71	1534.36	-57.35	-3.6	-2.7
S&P 500	868.60	826.84	-41.76	-4.8	-8.5
Russell 2000	470.70	448.36	-22.34	-4.7	-10.2