John Nyaradi (Wall Street Sector Selector) reports that the strongest ETFs on the week were KBW Bank (KBE) (+34.8%), PowerShares FTSE RAFI Financial (PRFF) (+30.6%) and Rydex S&P Equal Weight Financial (RYF) (+26.5%). On the other end of the performance scale ProShares Short Financial (SEF) (-15.9%), iShares Goldman Sachs Semiconductor (IGW) ( 4.0%) and Vanguard Extended Duration Treasury (EDV) (-3.3%) were underwater.

On the credit front, the TED spread (i.e. 3-month dollar LIBOR less 3-month Treasury Bills - a measure of perceived credit risk in the economy) narrowed by 10 basis points during the past week. Since the TED spread’s peak of 4.65% on October 10, the measure has eased to an 11-month low of 0.76% - still well above the 38-point spread it averaged in the 12 months prior to the start of the crisis, but nevertheless a strong move in the right direction.


Click to enlarge

Also, the cost of buying credit insurance for US and European companies eased sharply during last week’s trading, as shown by the narrower spreads for both the CDX (North American, investment-grade) Index (down from 163 to 143) and the Markit iTraxx Europe Index (down from 139 to 124).

See the chart below of the CDX (North America, investment-grade) Index



Two important trend reversals deserve mention, namely US 10-year Treasury Notes having breached their key 200-day moving average, and likewise the US dollar. Treasuries fell out of favor as a result of a poorly received $14 billion auction of 30-year bonds on Thursday, with 10-year Notes and 30-year Bonds rising to 3.29% (+17 bps) and 4.27% (+23 bps) respectively on the week. As massive issuance overhangs the sovereign bond market, investors speculated about the Fed’s pain threshold for long-term rates. According to Reuters, PIMCO’s Bill Gross said: “In order to maintain a 4% agency mortgage rate, the Fed will likely have to step up its daily purchases of Treasuries and focus on the longer end of the curve.”



As far as the greenback is concerned, Richard Russell (Dow Theory Letters) said:

“I don't think most people understand the importance of the whole dollar, bond, interest rate syndrome. First, the US is creating and spending fiat dollars in the trillions. This wild creation of dollars is putting pressure on the dollar - after all, too much of anything will dilute its value. Dollar down = bonds down.”



The quote du jour relates to whether the stress tests were “stressful” enough and belongs to Barry Ritholtz (The Big Picture), who remarked:

“... the 25-to-1 leverage [Tier 1 capital equal to 4% of risk-weighted assets] is absurd, as is the worst case scenario of 9.5% unemployment. Odd, in my opinion, to show such largesse to those very same reckless banks that caused the entire financial mess.”

“Far be it for me to call the stress tests a charade, a dupe, a con game or an exercise in manipulation - I’ll leave that to others, like the Wall Street Journal, which noted this morning that the banks managed to browbeat the Fed into accepting much lower capital needs than the tests should have required. [For example, a decrease in required capital of 48.3% was negotiated by Bank of America, Wells Fargo, Fifth Third Bancorp and Citigroup when added together.] The entire exercise is turning out to be one giant joke – and the laugh is on the taxpayers.”