FINANCIALS STILL DRAGGING DOWN THE DOW... We saw financial stocks were dragging down the Dow last week as well as the S&P 500, where a 6% drop for the week caused that whole index to fall 2.8%. Basically, it appears to us that the markets are still worried about problems in the financial sector. If you haven't notice already, any negative news gets magnified, to say the least.

Conversely, positive news is virtually ignored. Take Friday for example, when the Federal Reserve announced it will be increasing its term auction facility from $60 billion to $100 billion. This was big news that directly addresses liquidity pressures in term funding markets. So what did the stock market do? Dropped over 146 points on the day! Go figure.

While financials were wilting, sectors like consumer staples and utilities showed relative strength. Same-store sales for February were also better than expected, led by Wal-Mart's 2.6% boost. Finally, manufacturing and services indexes were higher than anticipated, although still below the level indicating expansion.

Friday's employment report was disappointing, but not nearly as much as the media was making it out to be. February layoffs ran BELOW the February level of a year ago and unemployment claims are still NOT signaling recession. Best of all, the recessionists were stopped in their tracks by a February unemployment rate that ticked DOWN to 4.8%. Even more disappointing to the gloom-and-doomers was the fact that average hourly earnings were up 0.3% for the month and up 3.7% over a year ago!

The focus on bad news prevailed, however, so the Dow ended at 11,893.69, down 3.0% for the week. The S&P 500 fell 2.8%, closing at 1293.37. The tech-heavy, financial-light NASDAQ only slid 2.6% to 2212.49.

All this slippin' and slidin' in the stock markets sent quality-minded investors flocking to bonds. But all was not perfect there, with inflation worries challenging prices. But things settled down in the end, with the benchmark 10-year Treasury holding its own enough to keep the yield down to 3.547%, just a tick over the previous week's 3.535%. It is our belief that mortgage rates should remain at attractive levels.