Following a drastic downturn in the United States financial sector, countries around the world began a synchronized decline in economic growth. International markets that were once believed to be uncorrelated have recently become dramatically dependent in the short-term on worldwide economic and market changes. As investors scramble to find a safe-haven in the global marketplace, they must first ask themselves one question: Which global economy is best prepared to emerge from this crisis and provide investors with long-term growth prospects for the future? A lack of dependence on exports, effective stimulus packages, increasing transparency, and a young middle-class population provide India with a strong economic platform that will make it the best prepared emerging market to recover from this crisis, and provide investors with the best long-term growth opportunities.

Many critics to the emergence and growth of India argued that there was too much uncertainty surrounding the recent political elections for the world’s largest democracy. If the Congress party were not to gain a majority of the parliament seats, it may leave too much power in the hands of the communist party which would significantly hinder future economic growth. We can now safely put that concern to rest, as the incumbent party won with a large margin, securing the country’s road to global integration and continued prosperity.

Over the past two months, light sweet crude oil has made a significant recovery from its 52-week low of $39.72 on 2/18/2009. However, after a dramatic price appreciation of nearly 30%, how much longer can this rally be sustained?

In the past four weeks crude oil prices have been trading sideways and slightly down from the 2009 high of $54.34, and this trend will most likely continue through the first half of this year. Historically, oil prices have had a significantly higher likelihood of price appreciation in the fourth quarter of the year, beginning in October. This will most likely be the case in 2009 as well, as global demand isn’t expected to recover until the second half of 2009, at the very earliest. Historical monthly data from 1976-2008 was used in the analysis to produce the following charts which depict the cyclical trends of the oil market. These charts support the case that we'll see stronger momentum during the last three months of the year.

Limited Brands (LTD) reported 2009 4th Quarter earnings last Thursday in-line with guidance, excluding a $0.63 per share impairment charge to write-down La Senza goodwill and intangibles; the market reacted with a 13% sell-off for the mid-cap stock, closing at $7.74, down 23% YTD. The stock has sold off from a 52-week high of $22.16 in September during one of the weakest consumer environments in decades and as margins continue to come under pressure. However, downside risk in the stock is limited (no pun intended), and the company is positioned to weather the storm.

Citi Investment Research analyst Kimberly Greenberger, CFA, reiterated her Buy recommendation with a $10.00 price target and 37% expected total return, in her report released on Thursday. The report (Positives Outweigh Negatives; Reiterate Buy) stated the following:

The Partner Asset Facility

Last week, Bloomberg announced that Credit Suisse (CS) created a new compensation plan for their investment banking executives that exemplifies the financial engineering which will keep investment banking a reliable source of profitability. The Switzerland-based financial services company announced that they would create a Partner Asset Facility that would use leveraged loans and commercial mortgage-backed securities to fund compensation packages. Directors and managing directors would receive an ownership stake in the fund rather than receiving compensation in the form of stock options. The fund will pay the investors semi-annual coupon payments at LIBOR plus 250 basis points.

Last month the nation debated the moral hazard of a rescue plan for the financial sector of the United States. Treasury Secretary Henry Paulson lobbied to Congress that House and Senate leaders needed to pass a bill authorizing the Treasury vast powers to purchase the distressed assets of banks across the nation. This plan would not only allow the banks to recover by drastically improving their balance sheets, but would restore confidence to our financial markets. That confidence is once again absent.

One Step Forward, Three Steps Back

At the heart of the financial system's problem is the existence of illiquid securities on the banks' balance sheet that inhibit the institutions' ability to lend. The government's $700 billion rescue plan, or the Troubled Asset Relief Program (TARP), was the solution to this problem. Instead, Paulson announced two weeks ago that he would use his vast authority for capital injections into the soundest financial institutions rather than to purchase the illiquid securities from banks' balance sheets.

Under Armour’s (UA) success over the past ten years has been impressive, yet serious threats to the company’s growth should concern investors. Investors are strongly discounting the fierce competition in the sports apparel industry that has the potential to seriously hinder the continued success of Under Armour. Since the company’s founding in 1996 by Kevin Plank, a former University of Maryland football player, the company’s sweat-wicking performance apparel has propelled Under Armour to the top of the industry.

As the first company to develop this widely popular and innovative product, it has allowed Under Armour to gain a strong following of satisfied and dedicated customers. Thus far, the company has remained dedicated to producing high-quality products that are focused on performance. For the past few years as the economy was expanding, this business model remained successful; however, as consumer confidence has plummeted, and as aggregate discretionary income has drastically depreciated, this model will be tested. 

In recent weeks the Treasury has taken a series of actions which have shaken the foundation of our free market economy, and have brought into question the market's ability to accurately price securities.  Recently, Treasury Secretary Henry Paulson has temporarily banned short selling of over 800 stocks, and has announced plans to start a $700 bailout fund which would potentially value distressed assets above their market value.  Through these actions, Paulson has brought about accusations that the market is seriously hindered in its ability to price assets.

The most dramatic action by the Treasury Department thus far has been their temporary ban of 799 financial stocks (the list has now been expanded to include over 800 stocks).  Short selling is a vital part of our financial markets and allows for accurate price discovery as markets price in risk.  Secretary Paulson decided that in order to stabilize financial markets and to prevent additional large institutions from failing, all short selling of these securities should be banned temporarily.  By restricting short selling, the market prices of stocks are artificially inflated.

The investment banking climate on Wall Street drastically changed after the Federal Reserve announced that Morgan Stanley (MS) and Goldman Sachs' (GS) application to become bank holding companies was approved.  The deal fundamentally changes the notion of independent investment banks, as the two largest remaining investment banks are now subject to increased regulation and scrutiny. 

The Federal Reserve announced the news on Sunday evening in a press release which can be found here.  According to a Bloomberg report, the Fed stated that the actions were taken "to provide increased liquidity support to these firms as they transition to managing their funding within a bank holding company structure."  The Fed's actions reinforce the impression that they will not allow Goldman Sachs and Morgan Stanley to fail.  Speculation crossed Wall Street in this past week on possible merger activity between Morgan Stanley and Wachovia (WB), as shares of the bank plummeted this week.  Goldman Sachs' shares dropped dramatically as well, crossing below the $90 per share price intraday on Thursday.  

Since the beginning of 2008, Chairman Henry Paulson and the United States Treasury have taken on enormous amounts of debt in order to contain the housing crisis and prevent a massive failure in the financial sector.  The U.S. taxpayers first saw the effects of a "too big to fail" Treasury mentality when the government-orchestrated bailout of Bear Stearns was announced in March of 2008.  More recently, the Treasury announced the takeover of the two Government Sponsored Entities (GSEs), Freddie Mac (FRE) and Fannie Mae (FNM). 

On September 7, Treasury Secretary Paulson seized control of the two immense finance companies in an attempt to support the U.S. housing market.  The Treasury will begin by immediately taking a $1 billion equity stake in each company, and if needed can inject an additional $100 billion in preferred stock in each company.  Under the announced program the Treasury will begin to buy back mortgage-backed securities later in September, and will have the authority to buy back MBS until December 31, 2009. 

As the forex markets opened at 6:00pm ET on Sunday evening, the U.S. dollar had a mixed reaction against the other major currencies.  Forex markets reacted to Treasury Secretary Henry Paulson's announcement that the U.S. government has seized control of the two mortgage giants, Fannie Mae (FNM) and Freddie Mac (FRE), as a surge of mortgage defaults in the past year has threatened the survival of the Government Sponsored Enterprises (GSEs). 

The U.S. Treasury's announcement of its plan to take over the mortgage giants will likely cause currency markets to be volatile in the short term.  Although the consequences of the Treasury's plan will most likely be negative for FNM and FRE equity investors, the plan should be supportive of the U.S. financial sector and signals a possible for turnaround for the mortgage crisis. 

Consumer Discretionary stocks have surged during the past month, more than any other Global Industry Classification Standard [GISC] sector, nearing their previous advance of 8.9 percent in October 2003. As of Thursday’s close, the S&P 500 Consumer Discretionary Index has risen 7.5% so far during the month of August.

Conversely, Bloomberg reported earlier this week that the bond market has signaled that investors are seeking increased risk premiums for consumer discretionary companies. The consumer discretionary sector demanded a 2.5 percent premium over U.S. Treasuries this week, and according to data compiled to Bloomberg, this move signals a broad based decline in consumer discretionary stocks. The data stated that when the yield spread widened to over 245 basis points, the consumer discretionary sector lost an average of 16 percent in 2000, 2002, 2005, and March of 2008 (image courtesy of Bloomberg).

Bank of China Ltd. released earnings for the second quarter which drastically underperformed its competitors due to exposure to subprime mortgages and other U.S. housing loans.  The third largest bank in China reported that it held $10.5 billion worth of securities backed by U.S. home loans.  Roughly 35% of those $10.5 billion worth of securities, or $3.64 billion, are tied to subprime U.S. mortgages. 

So far during the span of the global credit crunch, Bank of China has written down a total of $522 million of losses on Alt-A loans, and an additional $599 million of losses tied to other mortgage investments.  During the second quarter, the bank reported that it wrote down current subprime investments by $405 million.  Investments in U.S. subprime mortgages have led to a total of $3 billion in losses for Bank of China during the past year. 

As an increasing number of firms enter the bond market to raise capital, financial institutions and other companies are forced to pay a higher price.  Investors are requiring a higher risk premium to buy companies debt, revealed by higher yields in the bond market, as worries about rising defaults and credit quality grow. 

Yesterday, Freddie Mac (FNM) successfully sold $2 billion of short-term debt and received increased demand compared to a similar sale last week, as reported by Bloomberg.  Shares of Freddie Mac closed 17 percent higher as investor confidence rose following the sale of bonds.

Can you imagine having control of nearly $8 billion worth of oil – over three times the amount of oil that the United States consumes daily?  One trader knew that feeling this year, as a single energy company held 11 percent of all contracts on the New York Mercantile Exchange at one point last month.  Vitol Group is a Swiss energy company which was identified as the controlling entity, and the Commodity Futures Trading Commission [CFTC] reported that the company would be best described as a speculator in the energy markets. 

As oil prices rose dramatically during the first half of this year, congressional leaders, economists, and business leaders from across the country were quick to blame speculators in the energy futures market as the cause for the price appreciation.  As the price of oil has dropped over the past two months, the debate over speculators potential influence in energy markets has also diminished.  The news of Vitol Group controlling a large number of contracts brings back this debate, as a single energy company accountable for speculative bets in the market, was responsible for a large controlling stake in the oil futures market. 

Just about every investor and financial professional is familiar with the Security and Exchange Commission's Electronic Data Gathering, or EDGAR, database of regulatory financial filings.  On Tuesday, August 19, the Chairman of the SEC, Christopher Cox, announced that a new database would be introduced, called IDEA, short for Interactive Data Electronic Applications; described by one staff member as "financial disclosure meets the matrix."  

This new database will be similar to the previous EDGAR database, as it will also be provided free to investors, journalists, analysts, and regulators.  However, the EDGAR database is outdated, as it provides only one-dimensional financial reports that are still document-based. 

Chairman Christopher Cox of the Security and Exchange Commission announced yesterday that the SEC will propose new rules which would be focused on restricting naked short selling and market manipulation. 

Chairman Cox told reporters in Washington that:

Risk premiums for Fannie Mae (FMN) and Freddie Mac (FRE) debt rose this week as the spread between the yields on the 5 year bonds versus Treasury notes widened.    Investors began to question if Treasury Secretary Henry Paulson will step in to bail out the Government Sponsored Enterprises (GSEs) as the government reiterated that it doesn't plan to step in to the help the mortgage giants. 

On Monday, August 18^th's close, the spreads had widened 7.5 basis points to 103 basis points, the highest since March 17 according to Bloomberg data.  Fannie Mae and Freddie Mac equity performed poorly as shares have plunged 28.7% and 24% respectively, over the past two trading days. 

As credit markets around the world began to feel the effects of an illiquid US financial system, fears of further liquidity problems have surfaced.  Banks are required to maintain a certain level of capital assets to ensure continued operations, and when banks start writing-down billions of dollars worth of these assets, they need other forms of capital.  Without this capital, a rapidly evolving downward spiral could begin within an institution. 

With the lack of liquidity in the financial markets though, where are banks supposed to borrow money from?  The answer lays outside of the United States, in entities called sovereign wealth funds. 

A rough week for Goldman Sachs (GS) is finally over as the stock ended the week of 8/11 7.3% lower amidst numerous analyst downgrades.  Richard Bove from Ladenburg Thalmann began the week by cutting his forecast for the full-year and reiterating his "sell" rating for the company on Monday.  The highlights of downgrades for the week however, were on Tuesday when Mike Mayo from Deutsche Bank and Oppenheimer & Co. analyst Meredith Whitney lowered their rating and earnings expectations. 

According to an AP article, Mr. Mayo stated in his research report that, "In short, Goldman is no longer as much in the right place at the right time, at least compared to the past year."  He lowered his earnings forecast for the third quarter from $3.25 to $2.40 and cut his rating from "buy" to "sell."  Ms. Whitney cut her forecast for the quarter from $3.54 to $2.15.  Goldman Sachs shares ended down 6% on Tuesday. 

Public pension funds are reporting a large increase in their alternative asset class weightings as portfolio performances continue to suffer.  Public funds control over $2.45 trillion in assets and are increasing their portfolios risk levels, largely with increased investments in hedge funds, in an attempt to compensate for losses.  Hedge funds have reported their largest losses year to date in at least eighteen years with an average negative return of 3.5% according to Hedge Fund Research Inc.'s composite index. 

Public funds are placing investor capital at risk while a nonprofit public policy group estimated that at the end of 2007, states were short $361 billion in pension payments scheduled over the next 30 years.  South Carolina's retirement system announced in February that they were increasing their asset weighting in hedge funds to 45%; an increase from zero 18 months ago.