MarketView for March 20

Summary 

Stocks slid on Friday as the Federal Reserve's plan to rekindle consumer and small business lending fell short of expectations and General Electric was hit by analysts' bearish comments. Apparently, less than 2.5 percent of the $200 billion the Fed pledged by the Fed for its Term Asset-Backed Securities Loan Facility (TALF), program was spoken for.

TALF was designed to help market participants meet the credit needs of households and small businesses by supporting the issuance of asset-backed securities (ABS) collateralized by student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration (SBA).

Banking shares were among the most heavily traded stocks, including Bank of America, which fell 10.7 percent to $6.19. At the same time, Chevron was among the largest losers on the Big Board, dropping 3.6 percent as oil prices fell.  

American Express fell 6.2 percent after Friedman, Billings, Ramsey warned of more losses and predicted the credit card company's dividend would be cut. According to the analysts at Friedman, Billings, they are looking for American Express to post a loss in 2009 and 2010, hurt by growing unemployment levels and rising credit card defaults. They also said American Express may slash its dividend.

Meanwhile, the S&P 500 finished its best two-week period since 1974 as markets extended last week's bounce off of 12-year lows. For the year, however, the S&P remains down 15 percent. However, for the week the Dow added 0.75 percent and scored its first two-week consecutive gain since early May. The S&P 500 rose 1.58 percent, and the NASDAQ ended the week up 1.80 percent.

Friday also marked the quarterly expiration and settlement of four different March equity futures and options contracts, an event often referred to as s quadruple witching, which made trading volatile.

One of the few bright spots of the day was Johnson & Johnson, up 3.2 percent at $51.67 after an anticoagulant drug from J&J and Bayer AG was backed by an FDA advisory panel on Thursday, despite concerns over possible side effects.

The dollar rebounded and the euro reversed earlier gains, lending further support to crude. The stronger dollar tends to weigh on commodities denominated in the greenback.

Bernanke Says Fed Will Taper Off Support

Federal Reserve Chairman Ben Bernanke on Friday said the Fed's buying of longer-dated U.S. Treasuries would "taper off" when the economy no longer needed help, allowing the Fed to cease its emergency support.

"The time will come when the economy will be growing, the housing market will be recovering, and that support will no longer be needed. And we will of course at that point taper off that support," Bernanke said on Friday.

The central bank on Wednesday stated that it planned to buy up to $300 billion of longer-term Treasury securities and an additional $850 billion of agency mortgage debt to ease a deepening recession. It also confirmed it would hold interest rates near zero for "an extended period".

"We are very much aware that we don't want to be in the credit markets forever. We need to help them now, but we want to have an exit strategy, and allow those markets to recover and become again fully private sector," Bernanke said in response to an audience question after delivering a speech.

It was the first time the Fed was embarking on a program to purchase longer-dated Treasuries since the 1960s. The news sent yields sharply lower, while on the foreign exchange markets it inflicted the biggest decline in the dollar in 25 years.

Bernanke said the Fed had decided to expand its aid for the mortgage sector and buy Treasury securities to "support the housing market, the broader economy." In terms of policy, it is equivalent to the quantitative easing strategies employed by Japan during the 1990s to end deflation and a decade of miserable economic performance.

Quantitative easing was needed, with rates already at zero and deflation a genuine threat, Federal Reserve Bank of St Louis President James Bullard. "Moving to quantitative approaches to policy is feasible and is going on right now," Bullard said.

He also emphasized the risks of deflation, citing the experience of Japan, where widespread declining prices following the collapse of a property and stock market bubble made the economic downturn much worse.

"Deflation is a real possibility in the current environment important near-term goal for monetary policy is to prevent this outcome," said Bullard, who is not a voting member of the Fed's policy-setting committee this year.

Crude Falls

The price of crude oil fell on Friday, dragged down by economic concerns, the stronger dollar and a dip in the stock market. U.S. crude for April, which expires on Friday, settled down 55 cents per barrel at $51.06. May crude settled up 3 cents per barrel at $52.07. London Brent crude settled up 55 cents per barrel at $51.22. Oil was up 7 percent on Thursday after the Fed announced its plan to buy long-term government debt and the dollar dropped in value.

Friday also saw Bank of America Securities-Merrill Lynch raise its 2009 oil price forecast to $52 per barrel from $50 on signs that supplies could tighten in the second half of this year, but cut its 2010 outlook to $62 a barrel from $70, citing weak demand.

The International Monetary Fund forecast on Thursday the world economy would contract in 2009 for the first time since World War Two by between 0.5 percent and 1.0 percent.

Crude stockpiles are up due to slumping consumption and if the recession does not improve in the not too distant future, it may be difficult for oil prices to sustain the recent rally. Nonetheless, steep cuts by producer group OPEC agreed to last year are starting to tighten markets.

Oil tanker shipping company Frontline said there are around 40 very large crude carriers storing oil offshore, each with a capacity of around 2 million barrels - a combined potential of one full day's worth of global oil supplies.