The Rally Not Sustainable without Bank Recovery

The U.S. stock markets rallied for a third week. The S&P 500 index was up 6.2% last week. Stocks have now rallied approximately 25% up from their lows of less than three weeks ago. The rally has pushed the S&P 500 index into single digit losses for the year (down 9%) and for a few days moved the Nasdaq briefly into positive territory until it fell on Friday.

The market loved all the positive economic news it received last week starting with the 5.1% increase in existing home sales followed by a 4.7% increase in new home sales. Durable goods orders rebounded 3.4% and consumer spending rose 0.2%. All these indicators came in at better-than-expected levels. These could be signs that the economic recession may be moving past its peak but it is still too early to tell.

The market also rose last week because investors enthusiastically embraced the Obama’s Administration bank recapitalization plan. The Treasury Department outlined the Public-Private Investment Plan [PPIP] which gives banks the means to remove toxic assets from their books freeing up capital to make new loans. This plan should help the banks and the credit markets to recover and begin lending.

Nonetheless, these market rallies cannot be sustained over the long run until the banks are on sound footing. This is not to say that the success of the PPIP is guaranteed. There are numerous details and glitches that need to still be worked out if the PPIP is to be successful. There are, however, numerous reasons to be optimistic about the prospects of this program. The PPIP combined with all the government fiscal programs should eventually bring about a resolution to the credit crisis.

The recent rallies have been encouraging from a technical perspective. Trading volume has been increasing on upward moves and declining on pullbacks. This is crucial to building a bottom, but it creates painful volatility as the markets over shoot on the latest news. There is still much negative news out there, including high levels of unemployment, a very troubled auto industry and an extremely fragile financial system that could still be subject to negative shocks. A market like this will create exciting rallies and sickening declines. These market gyrations are an important part of the bottom building process as the market challenges asset pricing over and over again. So it is important for investors to keep a long term perspective despite the excessive level of volatility.

Comments

[drbob66:]

This seems to be a fair and objective account of our current situation. The upcoming earnings announcements should give us better insight as to whether our banks are "finding their footing." Until then (and probably some time after that), volatility is likely to remain elevated.

Apr 01 01:14 PM

[ArkansasAngie:]

And then there is the little matter of record seasonal adjustments being applied -- Fuzzy Numbers: Extent of the Deception Revealed in Barron's In Dante's Footsteps(online.barrons.com/art...).

Throw in CITI and BofA CEO public statements about making money the first 2 months -- forgetting to mention that it was AIG funneled profits.

Don't forget Treasury's refusing to testify to a Congressional panel and ... AND ... I'm not going to assume this is the bottom.

Nope.




Got to say ... my conspiracy radar is going off.

Apr 01 03:28 PM

[Mad Hedge F...:]

Thi says a lot. If you want to finance any new business ventures in the San Francisco Bay Area, go to the Bank of Marin. They were one of the first four banks to repay TARP money to the Treasury today. Apparently they didn’t want to undergo the full proctologic exam the Feds were threatening.

Apr 01 04:13 PM