It’s hard to believe, but the Dow, S&P and NASDAQ all closed up for the week. Friday was a roller coaster day in the markets and, as they gyrated up and down, it was too close to call as to whether the indices would finish the week plus or minus. 

 

The Europeans are taking our credit problems more seriously than are we, witness the downward movements on their stock exchanges and the amount of liquidity the European Central Bank poured into the system. The fact that Europe is effected by our mortgage and securitization problems demonstrates the interconnectivity of world financial markets.

 

The Fed injected funds into the US financial system. (The Fed is acting responsibly, notwithstanding what Jim Cramer says. As much as I respect Jim, the Fed has no obligation to bail out hedge funds or attempt to eliminate – which it couldn’t do anyway – market corrections.) The Fed is essentially providing liquidity to the overnight financing market. These internments, Repos, will rollover again at the beginning of this week. If the market calms and the Fed can withdraw its excess liquidity, then the current stock market correction should be over. If the credit markets remain so illiquid that the Fed has to be the lender of last resort, then the stock market has another 2%-3% decline in store, along with continued high volatility. 

 

Speaking of stores, last week’s retail sales numbers were disappointing, particularly for chains catering to teenagers.  When have you known teenagers to curb their spending? One month’s data doesn’t make a trend, but we should add retail sales to new jobs creation for clues as to whether the economy will keep growing or slip into a recession (and the stock market declines another 10%). 

 

Right now, let’s wait to see what the Fed has to do this week before we declare the correction to have run its course.