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The Federal Reserve has its hands quite full at the moment. Defending the Bear Stearns bailout in front of a Senate Committee was difficult enough as was admitting how close the US was to a financial catastrophe, but their silence surrounding future potential risks is comparatively deafening.

Notwithstanding the derivatives issue, a problem so enormous and so mysterious that the Fed itself felt compelled to organize a private forum with hedge fund managers, investment firms, and large banking entities in order to better understand the situation and its inherent risks, there remains a tightening credit issue that was highlighted once more on Friday.

On the final day of the week, investors were shocked by comments made by Jeffrey Immelt, the CEO of General Electric, who blamed GE’s substandard quarterly results on the sharp decline in credit market conditions present in the aftermath of the Bear Stearns bailout causing them problems when selling financial assets and forcing GE to record losses while marking to market certain assets. At the end of the day, profits made by GE’s Commercial Finance and GE Money divisions were a combined 39% lower than a year ago.

What the esteemed CEO of GE revealed was that in spite of the massive injection of funds into the financial system of the US, the Federal Reserve had still been unable to prevent further cracks from occurring and hinted that Fed Chairman, Ben Bernanke’s claim that "the sub-prime mess is grave but largely contained" made almost one year ago, should be reconsidered in light of the present impacts. It is worth noting that several large financial firms will be reporting quarterly results this week shedding more light on the situation. According to some analysts, financial institutions worldwide have already written off approximately $300 billion in bad loans with various estimates of further write-downs ranging all the way up to $900 billion.

It is interesting to look back and evaluate the Fed’s actions of late. So far, the Federal Reserve has injected a total of $310 billion since the Term Auction Facility (TAF) was initiated in the middle of December. What began as bimonthly auctions involving $20 billion each has quickly evolved to auctions of $50 billion with virtually all types of mortgages representing acceptable collateral. While this upward trend appears dangerous in and of itself, with current assets of $895 billion, the Federal Reserve would seem to have little room to navigate these troubled waters.

Moreover, according to the 2006 census data (obviously outdated and probably on the conservative side of estimates), the housing stock of the US is valued at more than $20 trillion and if we were to assume that just 10% of this amount was at risk in a meltdown due to the ongoing crisis in the sub-prime market, we’d be discussing a problem that amounts to more than $2 trillion. We are simply left wondering where will the money come from.

For a different view of the sub-prime crisis, the Federal Reserve has indulged us with an extraordinary visual tool for analyzing the mortgage debacle. Follow this link:

http://www.newyorkfed.org/mortgagemaps/

Technically Speaking

Stock indices reversed course this week and did so at significant resistance points alluded to last week. In particular, the Dow Jones Industrials faltered Monday around its high of 12,734 and tumbled on higher than normal volume to close out the week on Friday. As for the Dow Transports, it too closed the week with a loss but remains just above its 200-day moving average. Technical analysts following Dow Theory are looking for some agreement in direction between these two averages as a reliable signal of future direction of the market as a whole.

The S&P 500 slid as well this week after having topped out at 1387 on Monday. Like the Dow Industrials, the S&P sped up to the downside on Friday with the release of GE’s quarterly report. For these broader markets, the charts have returned to a lateral movement and the late March lows would need to be broken before more serious technical deterioration was declared.

The Nasdaq brothers have mostly similar charts though once again we note that the ND-100 is marginally more bullish than the ND Composite. In the case of the Composite, the high from the previous Friday held at 2391, corresponding to resistance, and the week finished with a decline. Daily volume however was not as significant on Friday’s drop as Thursday’s move higher.

Stochastics for all of these indices is neutral allowing either direction to take hold or continue. Another interesting point is that all of the indices closed the week finding support at their respective 25-day moving averages.

New Buy Recommendations (in order of preference):

Curtiss Wright Corp. (CW) – Curtiss Wright has formed a nice W-bottom on the daily as a result of some substantial buying that began in the middle of March. Thursday’s move above the February high helped considerably as does the weekly MACD chart showing a turn in the fast MACD line. Perhaps the most important factor is the support of the 25-bar moving average on the monthly chart which has once again proved to be strong of late.

New Short Sales

None.

Stock Positions to Sell/Exit:

None.

Portfolio Comments:

New stops have been added to the list while others have been modified. Those that have blanks are being carried unstopped for now. Please see our complete list of stops in the table below.

List of Current Stock Recommendations:

Action Ratings. The following is the legend for designating immediate action
for our stock recommendations. The first is B, meaning the stock is timely
to buy but the case for doing so right here is not overwhelming. Either the
stock may have gotten ahead of itself and may be vulnerable to a retracement or
else the stock has been performing disappointingly but may simply be
regrouping. B+ and B++ indicate stocks for which there is a technical case
to buy now, with plusses adding weight according to how many there are, up
to a maximum of two. Stocks rated H are ones to hold, awaiting confirmation
to buy more or to sell. SELL, of course, means what it says. It seldom pays
to override this designation. In the case of stocks held short, the rating is S where positions should be retained. S+ and S++ indicate stocks for which there is a technical case to add to the positions with plusses adding weight similar to long positions. The maximum number of plus signs is 2.

N.B. There are no longer restrictions on foreign stocks held in Canadian retirement savings accounts.

New stops in BOLD

* Stop on a closing basis

** Buy if above entry price

*** Split-adjusted price