Global Markets in Review: Think Rationally Ahead

“Words from the Wise” this week comes to you in a shortened format as my traveling in the US precludes me from doing my customary commentary. However, a full dose of excerpts from interesting news items and quotes from market commentators is provided.

On Friday, Federal Reserve regulators released a white paper outlining the criteria they used to assess the financial health of the nation’s 19 biggest banks. On the same day they also briefed the banks about how their companies had fared in the examination. The banks will have until Tuesday to dispute any of the results before they are made public on May 4.

According to the Financial Times, senior Fed officials said US authorities will ask some of the country’s biggest banks to raise more capital following the completion of bank stress tests. The officials also indicated that a second, larger, group of banks will be asked to improve the quality of their capital by increasing their amount of common equity.

Last week investors’ mood was also influenced by tentative signs of economic stabilization in a number of countries and a barrage of earnings reports - generally better than feared. As the equity rally ground to a halt on some bourses, the US dollar and government bonds offered little safety appeal and edged weaker. Gold, on the other hand, advanced after China revealed it has almost doubled its gold reserves since 2003. Treasury Inflation Protected Securities (TIPS) also improved on the week.

The performance of the major asset classes is summarized by the chart below, courtesy of StockCharts.com. (Click to enlarge)

After rising for six consecutive weeks, global stock markets experienced a volatile week, including the worst losses since early March on Monday. In the end, the MSCI World Index gained 0.1% (YTD -4.1%) on the week and the MSCI Emerging Markets Index 0.7% (YTD +14.2%), but the S&P 500 Index shaved off -0.4% (YTD -4.1).

Click on the table below for a larger image.

As far as the earnings season is concerned, Bespoke indicated that 156 S&P 500 companies had reported earnings by Thursday, beating estimates in 67% of the cases. Also, so far earnings are down 16.6% versus the first quarter of 2008. While down, this is much better than the -37.3% expected at the start of the earnings season. “The earnings season still has a long way to go, but the current trend has investors optimistic,” said Bespoke.

In an attempt to cast light on the debate of whether we are dealing with a bull market or a bear market rally, William Hester (Hussman Funds) highlighted the following: “Contracting volume is not enough evidence to qualify that this is a bear-market rally with certainty. There are other measures that are showing more strength - such as various indicators of market breadth. But new bull markets, whether at their inception or soon after, have a history of recruiting noticeable improvements in volume. So far this rally lacks that important quality. Over the next few weeks stock market volume will be a metric to watch closely.”

The stock market will show its hand in due course, but it is crucial that the lows of March 9 hold in order for base formation development to remain intact. Should these levels - 677 for the S&P 500 and 6,547 for the Dow Jones - be breached, further downside movements may be in store.

For more discussion on the direction of stock markets, see my recent posts “Video-o-rama: Economy - Recovery or relapse?” and “Has stock market rally run its course?” (And do make a point of listening to Donald Coxe’s webcast of April 24, which can be accessed from the sidebar of the Investment Postcards site.)

Next, a quick textual analysis of my week’s reading. No surprises here, with key words such as “banks”, “market”, “economy”, “economic”, “government” and “prices” featuring prominently.

Economy

“Global business sentiment remains very poor, but it has taken on a slightly better hue in recent weeks. Broad assessments of current and prospective conditions have also moved up measurably since the beginning of the year,” said the latest Survey of Business Confidence of the World conducted by Moody’s Economy.com. “It is premature to conclude that businesses are turning measurably more upbeat, but recent survey results are somewhat encouraging.”

For a further perspective on the outlook for the global economy, also read my posts “Economic rate of decline slowing down?“, “Goldman raises China’s growth forecasts” and “Chinese economy on the rebound“.

A snapshot of the week’s US economic data is provided below. (Click on the dates to see Northern Trust’s assessment of the various data releases.)

April 24
• New Home Sales appear to be stabilizing
• Durable Goods Orders report - weak, but pace of decline is moderating

April 23
• Sales of Existing Homes appear to be stabilizing at a low level
• Initial Jobless Claims erase part of the improvement seen in recent weeks

April 22
• House Price Index points to moderation in pace of decline

April 20, 2009
• Leading Index - continues to send message of weak economic conditions
• Chicago Fed National Activity Index shows a small but noteworthy improvement

Week’s economic reports
Click here for the week’s economy in pictures, courtesy of Jake of EconomPic Data.

Date	Time (ET)	Statistic	For	Actual	Briefing Forecast	Market Expects	Prior
Apr 20	10:00 AM	Leading Indicators		Mar		-0.3%	-0.3%	-0.2%	-0.2%
Apr 22	10:35 AM	Crude Inventories	04/17	+3857K	NA	NA	+5670K
Apr 23	8:30 AM	Initial Claims		04/18		640K	620K	640K	613K
Apr 23	10:00 AM	Existing Home Sales		Mar		4.57M	4.70M	4.65M	4.71M
Apr 24	8:30 AM	Durable Orders		Mar		-0.8%	-2.0%	-1.5%	2.1%
Apr 24	8:30 AM	Durable Orders, Ex-Auto	Mar	-0.6%	-1.5%	-1.3%	2.0%
Apr 24	10:00 AM	New Home Sales		Mar		356K	340K	337K	358K

Source: Yahoo Finance, April 24, 2009.

In addition to interest rate announcements by the Federal Open Market Committee (FOMC) (Wednesday, April 29) and the Bank of Japan (Thursday, April 30), the US economic highlights for the week include the following:

Source: Northern Trust.

Click here for a summary of Wachovia’s weekly economic and financial commentary.

Markets
The performance chart obtained from the Wall Street Journal Online shows how different global markets performed during the past week.

Source: Wall Street Journal Online, April 24, 2009.

“To find yourself, think for yourself,” said Socrates (hat tip: Charles Kirk.) And we know the stock market is a dangerous place if you don’t think rationally and know your own investment personality. Hopefully the “Words from the Wise” reviews will assist Investment Postcards readers in crystalizing their thoughts to come up trumps with their investment decisions.

Comments

[HardwoodFlo...:]

Fun Read!

Apr 26 06:05 PM

[hksche2000:]

Outstanding work/info even on the run. Thanks!

Apr 26 09:26 PM

[Daniel Herkes:]

I hate to be the weasel, but the earnings have just started to be reported. Successful investors need to be bold, but the drubbing that many people have received has caused caution to be the byword. I suspect that many will hang back a little bit longer before taking the plunge. I wish the downturn was over, but wishing is not far from hoping. I will wait and see what the rational choices are at towards the end of earning season.

Apr 27 06:44 AM

[MarkitWacha:]

I hope one major bank goes under, before we see civil unrest due to the preferential treatment and socialized losses.

Apr 27 08:08 AM

[Zachary Sch...:]

Another interesting metric, is the fact that stocks with weak relative strength over the past 12 months (the truly beat up stocks) have led the market higher in the last 6 weeks (the junk has risen first).

This is typical of both bear market rallies AND early stage bull markets. So as Santoli noted in Barron's, this isn't a good metric to determine whether this rally is for real or not. But it DOES give us something to look for.

If the higher quality, financially sound companies begin to show their own strength, then that will help me be more confident in this rally, and put more capital to work.

Zach
zachstocks.com

Apr 27 08:59 AM

[Thrift Maven:]

The largest socialized institution in America is the Military.
A little socialism leavens the whole bread.

Apr 29 11:08 AM