US Market dancing up and down

The US stock market opened sharply higher right after open (its second-largest open in the past four years) after the Fed announced its joint effort with the Bank of Canada, the Bank of England, the European Central Bank and the Swiss National Bank to establish a temporary Term Auction Facility in an attempt to improve liquidity. This is the effort that Fed tried to counter the disappointment from the market after a 25 basis point cut yesterday.

The Fed plans to use term funds auctions that will allow it to inject term funds through a broader range of counterparties and against a broader range of collateral than open market operations. The Fed also plans to utilize foreign exchange swap lines. The plan is more ambitious than added easing in the fed funds or discount rates. The operations are open to thousands of banks rather than the 20 or so primary dealers involved with the daily Fed operations. In addition, there should be no stigma against these operations as, like it or not, discount borrowing from the Fed still carries the presumption of troubled borrowing, leaving hesitancy from the market. However, the opening range highs have proven to be the highest prints of the day as the market has subsequently slid lower throughout the session.

Financials, which led yesterday's post-FOMC decline, are underperforming the broader market this session because of several reasons...

Bank of America (BAC) said this morning at a conference that it expects quarterly results to be disappointing. The company expects write-downs will be larger than reported, and described final write-downs of collateralized debt obligations are "unknowable."

Wachovia (WB) said at the same conference that it now expects fourth quarter 2007 provision expense to be $1 bln higher than charge-offs.

There is also a report that Morgan Stanley is picking Citigroup (C) as a stock to sell short as it believes Citi's earnings are deteriorating. The firm expects new management to deliver a dividend cut, and also expects further hybrid issuance, diluting current shareholders.

Finally, JP Morgan (JPM), Bank of America and Wachovia were downgraded at Merrill Lynch based on credit risks...