By Greg Peel

The Dow closed down 293 points on its lows or 2.4%, while the S&P gave back 2.4% and the Nasdaq 2.6%.

It's heartbreaking stuff, but it may yet prove to be all part of a protracted bottoming process.

Just when Wall Street believed it was safe to go back into the financial sector water news came out that Merrill Lynch may have to write-down a further US$3bn which it had not anticipated. This is due to an insurance firm questioning its obligations to pay Merrills on coverage of US$3bn of credit default swaps. Merrill Lynch intends to sue the insurance firm to recover the money, but another seed of doubt has been sown in Wall Street's financial sector.

The news overshadowed a first quarter result from Morgan Stanley which mirrored the results of Goldman Sachs and Lehman Bros yesterday. Morgan lost 42% compared to the same quarter last year, but it did beat the Street on earnings estimates. Its shares rallied initially on the news, until Merrills-related selling saw them pull back to only a slight gain.

It was not the case elsewhere in the sector. After euphoric gains yesterday, Merrills lost 8%, Goldmans 5%, Lehman 9% and Bear Stearns 11%, for what the latter is worth. The commercial/investment banks held up better, with Citigroup only losing 1.5% and JP Morgan 0.5%.

But while the financial sector turnaround was disappointing, the sector that really copped a beating today was materials.

The word on the Street is that in light of the Bear Stearns collapse, the implications thereof for all investment banks, and the lifeline provided by the Fed rescue package, investment banks are telling their hedge fund clients that the days of extreme leverage are over. At the very least, positions running in the realms of 10x leverage will need to be pulled back to more like 5x. To achieve this, hedge funds are thus forced to reduce some of their high leverage investments.

And what has been the popular target of hedge fund investment lately? Commodities. Last night saw a major rout across the commodity spectrum, from gold to oil to metals and grains.

Gold fell US$37.90, or close to 4%, to US$943.50/oz. Silver fell US$1.28, or 6.5%, to US$18.37/oz. Platinum, which traded close to US$2300/oz this month, has now fallen to US$1907/oz.

Oil fell US$4.94, or 4.5%, to US$104.48/bbl. Oil was not helped by the weekly figures that showed demand for both heating oil and gasoline had actually fallen. Wheat fell 7.7%.

Aluminium and copper were down over 2%, nickel and zinc were down around 4%, and lead was down close to 5%.

The sell off in commodities hit the materials sector, which in turn dragged down the indices. Dow components Exxon, Chevron, Alcoa and DuPont accounted for 40% of the Dow fall alone. Another catalyst for the selling was the fact the US dollar had another stable-to-up day, falling against the yen but rising slightly against the euro and significantly against the pound.

Expectations are that while the US has had Bear and a Fed bail-out, the next market to feel such pressures will be the UK. In the meantime, yen buying and a higher US dollar elsewhere is a double-whammy for the Aussie, which lost over US1c to US$0.9125.

The good news in the financial sector last night was the listing of Visa. The credit card giant was expected to settle its IPO in the US$37-42 range but achieved US$44. On listing the shares immediately shot up 33% to US$57-ish and managed to hold that gain as the rest of the market crumbled. One might be reminded of the similar Blackstone listing - one which occurred just before the credit crunch hit and private equity deals evaporated - and thus one might also wonder at the popularity of a credit card company listing ahead of a likely consumer spending freeze. However, one of the great success stories on Wall Street these last two years has been that of rival Mastercard, which listed under US$40 in May 2006 and closed last night at US$208, having fallen only slightly (in a relative sense) from its 2007 high of US$227.

The other good news on Wall Street last night related to housing. There have been strong cries across the market that the government should stymie the housing crisis once and for all by jumping straight in and buying distressed prime mortgages. These cries have been met with visceral criticism from others who bemoan the socialising of the market. However, the government did reach a compromise last night by reducing the capital ratio requirement of the government sponsored mortgage lenders from 30% to 20%.

The result is a fresh US$2bn-odd of capital that can be used to buy mortgages. Throughout the credit crunch the Fed has been slashing the cash rate, but despite an initial drop, the 30-year mortgage rate began to rise again in 2008 as banks simply refused to lend money to mortgage securitisation, no matter how AAA, prime, safe-as-houses those mortgages were. This has meant that while the Fed has saved first the commercial banks, and now the investment banks, it has been incapable of actually getting any relief at all to the source of the problem in the first place - the housing market.

This news sent the Fannies and Freddies of the world shooting up 10-15% last night, and provided yet another element to the relief package being worked through between the Fed, the Treasury and the regulators. However, it could not save Wall Street, which still needs to go through the deleveraging process.

FNArena has suggested, right from the beginning of this crisis, that the crisis will not end until all the leverage is out of the market. Or at least back to the manageable levels of yesteryear. From margin lending in stocks, to margined mortgage securities, and now to margined speculative commodity funds, that process is still its way working through. Traders have spent the last several months switching between bonds and equities, between failing sectors (financials) and safe sectors (tech), and between traditional investments and new kids on the block (commodity funds). Then they have switched back again. Deleveraging means taking overblown valuation out of all markets.

The bad news is it takes the prices of all markets down. The good news is it ultimately takes prices down to where they are cheap.

The SPI Overnight closed down 100 points.

In keeping with the pagan origins of the Easter period, Wall Street will see quadruple witching tonight, meaning quarterly stock options, index options, stock futures options and index futures options all expire, in what could be a fun session.

A reminder that the US does not celebrate Easter Monday, so there will be an Overnight Report for both tonight's trading and Monday's trading before Tuesday morning. As to when exactly depends on whether I can squeeze in some kind of break. Happy Easter to all our readers.

By Greg Peel

Do not underestimate, say the wise heads on Wall Street, the monumental nature of the Fed's actions over the past few days. In invoking an obscure clause in its charter, unused since 1932, it has signalled to the market it is prepared to put its own balance sheet behind the US financial system in order to restore confidence.

In so doing, the Fed has not "bailed out" Bear Stearns, supporters are quick to point out, and not taken the "moral hazard" to new levels at the expense of the American taxpayer. Bear Stearns has effectively gone under, given its US$2 offer from JP Morgan which values the firm at US$236m against one analyst's quick calculation that its businesses if operable are worth US$7.7bn. Thousands of employees will lose their jobs and most were shareholders. Management, as individuals, have been financially wiped out.

That Bear could capitulate to a US$2 offer speaks volumes about the extent of toxic waste which must lie on its balance sheet - positions that were 30x leveraged, that sparked a run on Bear liquidity and, most importantly, a crisis of confidence around the world. It is this crisis of confidence that the Fed needed to address as swiftly and definitively as possible, for no longer was it a story of earnings potential or even available funds - it was a story of potentially destructive panic wrought by simple human emotion.

The Fed elected to throw its support behind JP Morgan - a commercial bank large enough to resolve the situation. The Fed provided backstop liquidity to Bear via JPM as the latter worked furiously over the weekend to come up with a package. That package ultimately is a big win for JPM, as not only has it picked up Bear (yet to be finalised, but not expected to be countered) for US$2, including its valuable brokerage and clearing operation, it has been given a guarantee by the Fed for US$30bn to cover "Level 3" assets - those assets which do not trade often enough to determine a market value, such as CDOs. It has further been granted indemnity from any class action that may be taken against the former Bear Stearns.

JP Morgan shares rose 10% last night.

The Dow closed up 21 points. It had opened down 195 points on the bell as the market's initial reaction was more doomsday than rescue. From there it rallied back into the green briefly before collapsing again. It turned positive once more and this time surged forward to be up 125 points. Finally it lost momentum toward the close.

The Dow's was the only positive result of the three majors. It was supported by component JP Morgan. In the broader market it was a case of more weakness in the greater financial sector. The S&P500 closed down 0.9%. Tech stocks were turned into cash as the Nasdaq fell 1.6%.

Financial sector panic was no more evident than in the day's trading of Lehman Bros. Lehman is another investment bank which specialises in mortgage securities, and despite being due to release its earnings tonight it lost 48% of its value at one point in the session, before recovering to be down 20%. Lehman was last night a bellwether of whether Bear Stearns would prove to be the whale that signals the bottom of the market, or the cockroach that indicates there is more trouble elsewhere.

Similar volatility was seen in other investment banking stocks, with Merrill Lynch down 5%, Morgan Stanley down 8%, Goldman Sachs down 4% and Citigroup down 6%.

While half of the market was in panic mode, the other half was noting bottoming signals. The VIX volatility index shot back above 30%, which is as high as it usually reaches and indicates a peak in the panic. Many stocks on the NYSE established new lows in the session, another occurrence that usually precedes a rally. And the Dow did actually close in positive territory - a good sign. Although we have had many a false dawn before now.

Lost in all the Bear Sterns mayhem has been the fact that one of the biggest IPOs the market has ever seen will list tonight - that of Visa. Traders will be watching closely to see whether this listing will be well supported, particularly given many missed out on what proved to be a very successful listing of Mastercard in 2006.

In the meantime, last night was all about a dash to cash. It was a time to deliver everything and restock the coffers for what could be another wave of disaster in the liquidity crisis or what could be an opportunity to pick up some shattered stock names cheaply. The victim last night was commodities. This was a bubble waiting to burst anyway, and clearly many speculators have been directing their leveraged funds towards this market while other markets have wavered, given the falling dollar and inflation fears.

Gold actually closed up US$2.50 from Friday's close to US$1005/oz. However, this belies a big sell-off in the New York session following an earlier rise as high as US$1028/oz in Asia yesterday.

Oil fell US$4.53 to US$105.68/bbl. Oil had earlier touched US$114/bbl.

Across the board, commodity prices fell for everything from platinum to grains and coffee. Many moves were substantial.

Base metal markets in London were similarly hit. Nickel fell 9.7% in the late London session. Aluminium was down 4.5%, copper 4%, and zinc and lead 5%.

Commodities markets were not assisted by economic data released last night. US industrial production fell 0.5% in January against a 0.1% expected fall. The Empire State (NY) manufacturing index fell to -22.23 in February from -11.72 in January. A figure of only -6.3 had been expected.

The global financial markets are now in a rush to deleverage. Bear Stearns has shown just what can happen if you find yourself overextended. Everyone is trying to get out at the same time. There was a familiar flight to quality, as the US two-year bond yield fell 14bps to 1.35% and the ten-year 14bps to 3.30%. The market expects the Fed to cut the cash rate tonight by 100bps.

Yen carry trade unwinding is part of that deleveraging process. As the US dollar fell to 97.35 yen over yesterday and last night, the Aussie fell US1.7c to US$0.9202.

Such a Fed cut will be another piece of the rescue package, and cement the view that the Fed has stepped up to a new level of pro-action. While all around are bringing cash back onto balance sheets, the share market is indicating a possible return to confidence. Deleveraging has already largely occurred in the share market, as share prices have been decimated by ongoing margin calls.

There was also a slight easing of credit spreads last night, which is also a good sign. Wall Street is heartened that the Fed has now moved away from its concentration on trying to reinvigorate the market via the commercial banks alone. It has effectively taken investment banks into its domain and granted them commercial bank status. The question now is to as whether the plan will work.

In the meantime, Congress will be working furiously on tightening up derivatives market regulations and mandatory capital requirements. But this will take time, and is still a case of shutting the gate after the horse. What will emerge from the dust, however, will be a very different US investment banking system.

Whatever happens, there is currently still no end in sight for the US housing crisis, which is at the heart of the entire global credit collapse. Until the Fed's actions are backed up by some equally extraordinary fiscal measures from the government in an attempt to save mortgages, then the problem has not gone away.

So it is a case of pure confusion and uncertainty. Some are calling Bears Stearns the whale which will ultimately mark the beginning of the end of the credit crisis. Others are terrified Bear is only the cockroach which appeared from under the fridge. Shift the fridge, and a whole lot more cockroaches will go running. In which case it may yet be another beginning.

The SPI Overnight was up 4 points.

By Greg Peel

Once upon a time, real commodities (as opposed to financial ephemera) used to trade quietly amongst wholesale suppliers and consumers, ticking up and down the odd cent each day. Only a handful of speculators played the market, patiently riding out bigger picture views. Today real commodities are no longer just "stuff", but an asset class all of their own. They have become as much a form of financial ephemera as any stock index or bond spread. Fund trading has taken control of the floor, and the real suppliers/consumers are just periphery.

OPEC recognises this fact. There had been expectation that OPEC would announce an increase in production at its meeting last night, given the price of oil was at US$100/bbl. OPEC, one the other hand, has scoffed at the inflated oil price, suggesting it was a mirage and that real demand was actually falling. OPEC even threatened to cut production. Whatever they might have decided, it is well known that the individual members will pump out as much oil as they can anyway - no matter what the quota - but it is also suspected that collectively OPEC is already running at peak levels, and actually has little scope to raise production even if it wanted to.

Last night OPEC decided to leave its production level where it was. At the same time, it was announced US inventories had actually fallen this week after several weeks of continuous increase. Observers have been waiting for the oil price to collapse, given the US slowdown and those rising inventories which point directly to reduced demand. While weekly inventory numbers tend to be fleeting and volatile, the market - now dominated by commodity funds - was not going to argue the toss. Oil rose a full US$5.00 last night to close at US$104.52/bbl. This was the biggest one-day rise since oil futures were listed in 1983. By just about any measure (and there are several) it was a new all-time high in real terms, surpassing the 1980 peak.

Suffice to say, the bout of profit-taking which occurred in commodity markets on Tuesday night was rapidly reversed and it was back to Inflation Central, helped along by renewed weakness in the US dollar. Gold rallied US$24.70 to US$988.70/oz. Silver jumped a remarkable US$1.04, or more than 5%, to US$20.78/oz. Platinum was higher, palladium was higher. Wheat, corn, rice and soybeans were higher.

Base metals exploded back to the upside, having started the session lower. The London official closing prices (which are marked mid-session) showed steep falls, on a catch up from Tuesday's late sell-off and early morning weakness. But the late session, which is best illustrated by the New York prices, saw a big turnaround. Copper, aluminium, zinc and nickel ultimately added around 3% each by the London close.

The Dow finished the day up 41 points, or 0.3%, having first been up 136 and then down 73. The S&P and Nasdaq both closed 0.5% higher.

The early strength in the Dow was a result of some not-quite-so-bad economic data. The Fed Beige Book - an anecdotal assessment of twelve separate economic regions - revealed two-thirds of the regions were experiencing a "weakening pace of business activity", while the other third was experiencing "subdued, slow, or modest growth". This was hardly a shock, but while indicative of weakness Wall Street seized on the fact that not one region was actually receding.

They also seized on the fact the ISM non-manufacturing index (about 85% of the wholesale economy) posted a 49.3 in February, bouncing back from the market-shattering January number of 44.6. It was a better than expected result, and a fillip for stock market gains. A 2.5% reduction in factory orders was overlooked, as was the ADP employment number which, when extrapolated, suggested only 2,000 jobs were added in February compared to the market's expectation of 20,000.

The ADP number can end up being vastly different to the government's number, which is released on Friday.

But the strength in the market was sapped at lunch time when monoline insurer Ambac announced a US$1.5bn issue of new capital. A consortium of banks has been working to save Ambac's AAA rating, which basically means propping up capital. This was the best they could do? Where were the sovereign funds, the billionaire white nights, the heroes come to save the day? By throwing it out to the market - an offer of picking up diluted capital in a distressed company which is still teetering on the brink - the consortium dumfounded Wall Street and the financial sector was rapidly sold off.

However, it emerged in the fine detail that US$1bn of the issue was in ordinary shares, which have been fully underwritten by said banks and, supposedly, already subscribed. The other US$500m was in convertibles, and said banks have themselves bought another US$500m. Weighing it up, Wall Street decided it wasn't quite as bad as it looked, and so the market recovered.

The US dollar fell to new lows against the euro, however, although it did post a bit of a rally against the yen. This allowed the Aussie to bounce, rising back a half cent to US$0.9325. The US bond market went back into inflation mode, as after another choppy day following the fortunes of the Dow the two-year closed unchanged at 1.65%, but the ten-year added 9bps to 3.70%. The curve continues to steepen.

The SPI Overnight added 57 points as it charged to a close. This is the second night in a row the SPI-O has moved in points terms more than the much higher-indexed Dow. Yesterday it was down 46 but the ASX 200 opened up about 75 before giving it all back. The Ausralian market is currently very volatile.

By Greg Peel

Last night the Dow closed at 12,213, down 45 points or 0.4%. At its low point it was down 226 points to 12,032. The post-subprime low close in the Dow is 11,971, posted on January 22. The intra-day low was 11,508, posted in the blink of an eye that morning when Wall Street came back from a long weekend to find Europe had collapsed (which later turned out to be due to SocGen's rogue problem). The Fed made its historic 75bps emergency cut that morning and the Dow came back from oblivion.

Last night the S&P 500 closed at 1326, down 5 or 0.3%. At its low point it was down 24 points to 1307, which is below the January 22 low of 1310. As the S&P is the broad market index, its movement has more currency as a stock market indicator than the 30-stock Dow. Thus the January low was breached. The similar blink-of-an-eye intra-day low was 1270.

Last night the Nasdaq closed at 2260, up 2 points or 0.07%. The January 22 close in the Nasdaq was 2292, so that level has already been breached, and indeed was breached on February 29.

Wall Street began to turn around after 2pm when the New York State Regulator announced the rescue deal for monoline insurer Ambac was "progressing". A consortium of banks has come together to restructure and recapitalise Ambac in order to save its AAA rating. Its first rescue package was rejected by the ratings agencies. There is no guarantee this second one won't be either, but Wall Street wasn't taking any chances. The turnaround gained extra encouragement, particularly in the Nasdaq, when the CEOs of Cisco and Amazon both independently came out with positive views on their businesses.

So why did Wall Street bounce? The answer lies in the speculative side of the market. Speculators are short, short, short. The open interest in index put options is currently off the dial. It has been a common theme that the stock market needed to retest the January lows. On the S&P move last night it did. What would it do next? Collapse or bounce?

As it was, it bounced on the above news. Technical levels are all well and good, but anyone with a coin has as much chance of finding them useful. The ASX 200 bounced several times off 5500 before gapping through. Support levels can be made of concrete one day and paper the next. The shorts responded specifically to the Ambac news, and staged a typical get-me-out rally as everyone else moved to the back of the room.

The reason the Dow was so weak earlier in the session was once again due to the financial sector. Firstly, Merrill Lynch analysts reduced their earnings forecast for Citigroup, suggesting the bank would write down yet another US$18bn of mortgage-related valuations in the first quarter. Citi is not finding this stuff under the rug. It is marking to market as required and the fact is the mortgage market is now worse than it was last year despite anything the Fed has thrown at it. The Fed cash rate is 3% and quickly heading to 2%. The 30-year mortgage rate for jumbo (specifically +US$417,000) loans is 6.82% and rising. Defaults are on the increase despite attempts by the government to promote mortgage relief.

In fact, so bad has the situation become that Fed chairman Ben Bernanke last night pleaded with banks to resolve the crisis by actually reducing the level of principal owed on mortgages. In other words, Ben wants the banks to effectively forgive part of a mortgage. Is he kidding? Not at all. With any equity in their houses totally blown away US home owners are simply walking away from their properties. The bank then has to sell that property at possibly 50% of its loan value. Were the loan value to be reduced, the home owner could continue to service the loan into the future and, eventually, the market would recover. Banks would ultimately stand to lose at lot less.

It was a daring appeal, and seemed like a panicked one. Back at Citigroup, management was busy denying a specific statement by its Dubai investors that the bank would need to raise yet more capital. Citigroup's shares are now at a nine-year low. The S&P Financial Index has breached its January low.

While it was a rollercoaster ride on the stock market, the bond market did not take to the sidelines. The two-year traded as low as 1.5% when the Dow was at its nadir (money flowing out of stocks will usually first flow into bonds). The last time the two-year was at 1.5% was in 2004 when the Fed funds rate was 1%. Last night it bounced hard with the stocks, closing back at 1.64%. But this hasn't stopped bond traders predicting the Fed will shortly make an emergency cut of 50bps ahead of the March 18 official meeting, at which it will make another 50bps cut. That would take the nominal cash rate to 2%, and the real rate well into the negative.

But now to commodities. It's always hard to know who was leading whom, but last night but Dow weakness was exacerbated by a sudden turnaround in across the board commodity prices. Yes - the inevitable happened as the recent parabolic trajectories of commodity prices reached a peak. Profit-takers moved in, and moved in fast.

In the last few weeks observers have suggested commodity prices had completely disconnected with fundamental demand/supply influences and become nothing more than speculative. Fund managers were rushing into commodities as an alternative asset class, as talk of spiralling inflation inspired funds to get on board the train rather than be run over by it. This, of course, is self-fulfilling and can only last so long. The reality is a good, sharp pullback in commodities is very healthy, and if it continues it should ultimately allow investors to re-establish positions for the bigger picture advance expected over a longer time horizon.

Oil fell US$2.93 to US$99.52/bbl. Aluminium fell 1%, copper, lead, tin and nickel fell 2-3%, and zinc fell over 3%. Upcoming option expiries was another reason for base metal traders to square up. Grains and beans fell. Silver fell close to 3%. Even platinum fell.

Gold is called a commodity, but its' not - it's a currency. Nevertheless, with the US dollar relatively steady last night and oil dropping, gold traders decided they wouldn't wait for US$1000 to start cashing in. Gold fell US$20.40 to US$963.70/oz.

The Aussie dollar was in a mind of its own however, having dropped like a stone on the RBA statement accompanying the rate rise yesterday. Economists agree RBA rhetoric now signals a pause at 7.25% when previously another 25bps hike was expected in May. Over 24 hours, the Aussie fell over US1c to US$0.9273.

The SPI Overnight fell another 46 points.

Last night's various pieces of news just go to prove this is not over yet. However, there is a prevailing view of exactly that now on Wall Street. While the longer term players are still touting the value in so many stocks, and have been since about August, the short term players have been playing the short side, trying to push the market as well as ride the market to lower levels that really will offer good buying value. When the first speculators begin to feel enough is enough, this market will turn. But it won't happen tomorrow, and may not happen this month. A large majority are signalling mid-year as a potential bottom, which means it is likely a bottom will be formed before then, if  bottom is going to be formed.

Buy in May and go away?