Forecasts and projections galore over the past 3-4 months as the DJIA (read market indicators) gradually worked its way almost inching up to the 10,000 mark. Thankfully, unlike the all-pervading gloominess in early March, the biggest question currently in the minds of market pundits and investors is whether the rally is sustainable. Led from the front by Roubini, there are several economists forecasting a double dip recession and the market reverting back to pre-rally levels. Though I personally agree more with Summers than Roubini, it's difficult to stretch the optimism at this point to say that the market is completely on track to a V-shaped reversal.

A quick look a factors which support the sustained rally camp:

Market movements and the direction of key economic indicators over the last 2-3 months clearly points to a tempering of the current downturn and possibly a quick uptick in activity across most sectors. Though the market's over-exuberance is not supported by any facts pointing to a drastic return to growth and profits, there are many economists who support this view. Last week, James Glassman at JP Morgan opined that 'Whenever we have plunged off a cliff and fallen into a deep hole in the past, for a while the economy has a tendency to bounce back very quickly' - a view supported by some others including Laurence Meyer, former Fed Governor.

This view is contradicted by several others who predict a slower uptick also leading to a 'new normal' where we would see higher savings rates, reduced consumer spending and tempered growth. I would sincerely hope the latter is true, despite all the immediate benefits and gains from the former trajectory.

It's surprising that merely two months after PPIP was announced, with foul play cries from critics on 'too much government/tax payer support', there are already indications of a lack of interest in the program from larger banks. The treasury secretary himself referred to this in a recent interview. This is primarily due to a rapid 30-45 day surge in stock market indicators, with early talks of the recession slowing down.

It's indeed good to see early-stage trend changes in unemployment, housing stats (new & existing), consumer spending, industrial spending - a possible early signal that the steepness of the downturn has been arrested. But that's just about it at this point - the economy as a whole is still showing negative growth, housing prices are still showing no signs of any significant bounce, and overall consumer sentiment is still negative. Given this background, it would be surprising if banks bask in the short term uptick in stock market indicators and show lax interest in participation in the PPIP program. None of the basic drivers - house prices, unemployment rate - have shown a marked movement towards positive territory, and hence its too early to expect quick reduction in credit card delinquencies, loan write-offs or foreclosures. Also, the credit market as a whole has been next-to-inaccessible for a larger part of the population due to extremely stringent lending norms and a sudden uptick in lending (especially mortgage) rates. This is dangerous - it increases the risk of at-the-brink consumers stepping in to delinquency due to insufficient means for availing short-term increases in credit, and thus flexibly manage their debt.

With Blackrock (BLK), TCW and most probably PIMCO submitting bids as Asset Managers for the legacy securities program, the PPIP program has definitely gotten the kick start it needed!

There is definitely still a lot of skepticism in the program - however some provisions that have become clearer as the program reaches execution phase should give some comfort to skeptics.

Tim Geithner unveiled a good amount of detail on the much-awaited financial sector resuscitation package over the last week. Apart from addressing the core issue of unfreezing the credit market and hence imrpoving liquidity, the Treasury also clearly articulated the broad guidelines of new financial sector regulation.

Let's try to make sense of the PPIP - the plan basically envisages the government putting its skin-in-the-game to push/incentivize private sector participants (read money managers) to take that elusive step forward - buy distressed assets and securities. The government's share of risk is through a mix of FDIC guarantees, direct Fed loans and Equity participation. To make sense of the program, let's look at the Legacy Assets and Legacy Securities program separately.

Last week saw an unprecedented amount of corporate CXO-bashing from politicians, public and the media in general. A sudden surge of moral anger seems to have been generated by the AIG bonus news. I don't personally support the AIG bonuses, but nonetheless, I cannot fathom the logic behind doing a witch hunt for the bonus recipients. We are living in a capitalistic economy and hence there's little merit in arguing on the lines of rich-getting-richer/ poor-getting- poorer.

Let's try to look at it from another angle. The past few decades saw unprecedented growth and as a result, an accumulation of personal wealth and a consistent increase in personal spending across most classes in society. This unfortunately came at the cost of lax supervisory oversight and poor market discipline. Everyone shared the gains, but leaders in the financial services space which drove or at least facilitated most of the economic expansion reaped the largest gains through windfall corporate profits and hence astronomical bonuses. We are seeing a drastic correction, which is forcing us to look at the value of fiscal prudence, savings and long-term sustainability. So, all of a sudden the same media and public voices which gaga-ed at Bill Clinton's talk of 'we do it large because we can afford it' turns around and moves to a position of extreme fiscal prudence and conservatism.

Despite the House passing the Recovery and Reinvestment act over the past week, there's been a persistent sense of doom and gloom in US and global markets. Though it is a fallacy to predict the effectiveness of such an initiative using a short-term stock market reaction, we cannot ignore the natue of the stock market reaction and the sector which bore all the brunt - financials. Let's take a quick look at the numbers.

The recovery and reinvestment act, in terms of size, looks quite dwarfed in context of overall macro economic numbers (all numbers as of the end of Q3 2008):

Economic statistics have been pointing only one way since the past 3-4 quarters - down! Though the NBER announced a few months back that we 'technically' entered recession some time in Q4 2007, we really didn't feel the intensity of the slow down till Q3 2008, especially after the Lehman-Merrill day in September '08. Almost all indicators are very bleak by now - retail sales fell by 1.8 and 1.2 percent respectively in November and December, with same store sales falling close to 2.2 percent on average as compared to the same period in 2007. This, along with an exteremly depressing unemployment rate of 7.2%, paints the picture of a deep, gloomy slowdown period. The big question in every one's mind is - is this the start of a deeper recession or is the worst behind us?

Without doubt, the slowdown has deeply impacted consumer sentiment and thus damaged the trend of the single largest factor which drives over two-thirds of this nation's GDP-consumer spending. However, I would personally argue this is more of a reversal of the exuberant trends seen from '05-'07 rather than point to anything that's inherently unhealthy in this sector. The consumer hasn't stopped spending - just to illustrate this point, let me mention an interesting experience I had when I was at an outlet mall south of Boston recently along with my spouse. We saw a long line of 15+ people waiting outside the door of an Uggs store and was curious as to why. Apparently, Uggs was offering some good deals, and there were more than enough people interested to make the folks who run the store 'control' intake of customers to prevent over crowding!

It's difficult to write anything on the economy or the market in the midst of such a horrendous week! However the very fact that 3 of the top 5 stand-alone investment banks ceased to exist independently (and probably one more in the offing) - all with in a span of 3 months - shows how ridiculously leveraged and reckless most of these shops would have been. And seeing an insurer the stature of AIG in such massive trouble makes it even more dreadful.

Everyone's now talking about regulation and the need for supervisory oversight - including the 2 presidential candidates - though more in populist terms! When the credit crisis unravelled (the early Citi (C) and Merill (MER) write-offs), I had written about the need to regulate the credit rating agencies, to avoid conflict of interest situations and also to ensure a robust methodology for ensuring forward-looking ratings. This week proves beyond a doubt that we need this and much more to lend some credibility back to the financial services sector.

The Treasury Secretary did what everyone expected - step in and propose an unfettered vote of confidence on Fannie Mae (FNM) and Freddie Mac (FRE). If the Fed could react with such promptness to save Bear Stearns (BSC) (which I feel was right anyway), there's no way anyone could expect the Fed/govt. reaction to be muted for these behemoths which together buy/package almost 50% of the 12 trillion+ mortgage loans outstanding in the U.S.. Any delay would further depress already low stock prices and cause more trouble for the already-shattered housing market.

Having said that, I personally don't agree with the whole precedence that such moves set, though given such a situation, there's pretty much nothing else that the Fed/govt. could have done.

After a brief spell of (unwarranted) upward bounce, last week saw the market erase most of its gains and swing back down to 12,600 levels. Though this is still significantly above the low touched on March 10, during the Fed-JPMorgan (JPM)-Bear Stearns (BSC) drama.

Oil continued it's nonchalant upward climb, touching as high as USD 133/barrel. It's difficult not to say that OPEC and the other supply side players are stretching their luck. Though there is no refuting the fact that industrial/consumer growth results in increased demand for several gas-guzzling 'instruments' across both the developed and developing worlds, an unreasonable spurt in prices raise red alarms. It's like a forewarning of future danger due to over-reliance on oil; this in turn shifts tremendous amount of attention on alternative energy - solar being the flavor of the day.

The last four weeks saw a significant upward correction, with the market touching the 13K levels, albeit for a short while. Technology and Oil & gas led sectoral gains, with names like Google (GOOG) and Apple (AAPL) recovering most of 2008 losses. Financials gained too - Merrill Lynch (MER), Lehman (LEH), Goldman Sachs (GS) etc. have all recouped enough to say that there's not enough immediate upside left in them now, till the economy as a whole is back on the growth track.

Citi (C) stands out though - it has been one of my perennial favourities in this recession cycle...Vikram Pandit's aggressive trim-down strategy across lines of business and asset segments should give it enough steam to demand far better valuations.

That should be the question in every investor's mind now, after a Fed-inspired run in the stock market over the past couple of weeks (post Bear Stearns (BSC)).

Home stats showed there might be some perk up in activity after a prolonged slow down, though job loss indicators did not indicate any meaningful reversal of trends. Confidence indicators and economic stats across Europe (notably Germany) indicated that the situation is not as bad as it was thought - adding to selling pressure on the US dollar.

Bear Stearns (BSC) covered the airwaves all of Friday, with its 'significantly deteriorated' liquidity position and the early morning announcement of a NY Fed-JPMC liquidity support package. The Fed has gone a step further now after its 200bn TSLF announced the past week. It is now taking a direct risk on MBS-heavy instruments that it will bank on as collateral for the indirect funding to Bear Stearns. It's indeed a daring step, considering the state of the debt markets. However, nothing short of this would have helped either: BSC going bust would have caused irreparable damage to the financial world and probably have caused a market freeze. Despite the Fed-JPMC intervention, apparently some capital market players found the liquidity situation so demanding that they couldn't even borrow money on Treasuries. How much more worse could it get?

Now that a significant part of market confidence over the short term depends on how the BSC saga unfolds, it is important to have a view on this story.

How can I not blog today?

We had the best day of the year by far Tuesday, with the Dow up more than 400 points! In a refreshing move at unleashing much-needed liquidity into the system, the Fed announced a Term Securities Lending Facility [TLFS], which provides for a line of up to $200 billion in treasury securities against collateral from its 20 prime dealers (banks, agencies etc.) in the form of MBS and other AAA paper. What does this mean?

Back in January when the Fed went ballistic by announcing a 75 bps cut & then a 50 bps rate cut within a span of 10 days, I thought it was an overreaction to the market's prevailing psychology.

A slew of recent economic developments indeed point to the risks associated with an overly liberal monetary policy. Per the latest price index releases, wholesale and consumer price indices continued to tread dangerous territory in January. Year-on-year, the January 2008 numbers are 4.6% over 2007 numbers. Oil continues to tread the 90-100 dollar range per barrel, and this does not create any room for inflationary pressures to ease. To add to the woes, the Euro broke a psychological barrier of 1.5 against the dollar last week (possibly accelerated by level-triggered program trading by currency desks)... which means imported crude oil turns even more expensive.

February has not been too bad so far for the markets, after what was a horrific start to the year. The market continues to show tremendous amounts of volatility, something we could expect for probably the next 3-6 months at the minimum. On the macro side, I still stand by big-ticket financials. Citi (C) has dropped back to the 25-26 range after reaching 29+ in the post-January rally - January options look attractive. GS at 175 looks interesting too. Considering the uncertainty associated with further write-offs triggered by potential bond insurer rating cuts, I would not be overly aggressive though – and not bet on mid-year calls.

Looking across the market in stocks I love to track, a couple of picks look interesting:

This is a continuation of the thoughts expressed in an earlier blog entry of mind from January(In Dire Need of 'Positive Economics').

As continued losses unwind in the mortgage sector, the resultant spillover has affected consumer loan portfolios, credit card portfolios and caused overall damage to the retail consumer psyche. It’s once again imperative that we at least reactively think of what could have helped avoid this credit avalanche – and what can help in the future.

We had some big action last week in the tech sector: bad results from Google (GOOG) and Microsoft (MSFT) proposing an acquisition for Yahoo (YHOO).

I do repent for not picking on the relentless rumors on a YHOO M&A upside. In fact, Pete Najarian or Guy Adami (don't remember who from Fast Money, CNBC) re-iterated this prior to Yahoo earnings day. The market reacted negatively to MSFT and pummeled it over 6% on Feb 1. YHOO is not cheap at a multiple of 40+ even at the pre-acquisition price, but the potential strength within the company is not small either. 500 million unique users - just imagine what wonders it could do to ad and content revenue if channeled the right way.