Five Investment Topics for This Week

by: The Aft Deck

Hot Topic: Corporate earnings will set the tone for stocks in weeks ahead

The start of Y 2009 Q-2 earnings season begins this week and may be a Key factor for determining how much faith investors will have in an economic recovery. After a rally of as much as 40% for the S&P 500 on expectations the economy will begin to turn around by year end, analysts will hone in on companies' projections to see if their hopes are corroborated. The light menu of economic data will help keep the spotlight on earnings releases, with bellwethers Alcoa (NYSE:AA) and Chevron (NYSE:CVX) posting their quarterlies. Of even more importance will be any outlook companies give for what they expect to see for the rest of the year. A large US Treasury auction could buoy the market if it shows there is good demand for government debt. Concern that the appetite for debt is waning as the government tries to fund its stimulus efforts was soothed by solid demand in last week's record US$104B auction of Treasury securities.

Hot Topic: Green stocks flourish

Since the New Bull began its charge on March 9, clean energy stocks have put together a mighty rally of their own, as they outpaced the US equities market as a whole. Savvy market observers believe that it reflects the benefits of being on the right side of political trends, thanks to initiatives from China, the United States and other countries. Three major indexes tracking green energy companies have risen sharply of late. The US -only Wilderhill Clean Energy Index, comprising 51 companies, is up 72% since the March 9 low. Its global counterpart, the Wilderhill New Energy Global Index, which tracks 88 companies in 21 countries, is up 66% in the same period. The CleanTech Index, which tracks a broader group, including industries like sustainable agriculture, is up 57%.

By comparison, the S&P 500 is up 35% since hitting a 12-year low on March 9. The Green stocks are recovery mode have being hammered on demand concerns brought on by the drop in the price of Crude Oil and the credit freeze, the Wilderhill indexes plunged 70%, and the Cleantech Index 50 %, in 2008. The indexes are still off 2007 peaks.

Hot Topic: Volatile Crude Oil prices stymies analysts

Crude Oil hit an eight-month high last Wednesday before reversing as investor sentiment waffled in the face of negative economic data from the US. Volatility in the energy markets defied predictions for a docile trading week cut short by US Independence Day, with Crude breaching US$73bbl during Asian trading before stumbling back below US$70. Weaker-than-forecast US consumer confidence data and the US$ rising against the Euro were seen by some as prompting the later falls, while others argued that the unusually high trading volumes overnight in Asia were evidence that large investment funds had been changing their Crude Oil positions for the end of the quarter, causing a temporary price rise.

Nevertheless, Crude Oil registered its largest quarterly gain since 1990. Barclays Capital argued that the surge in energy, metals and agricultural products that has pushed the Reuters/Jefferies CRB commodities index up 25% since the start of March marked a “revolution” in how investors view the commodities cycle. “The usual relationships between commodities prices and the economic cycle [have] been redefined,” Barclays Capital said in its summer 2009 outlook.

Hot Topic: Wall St.'s fear gauge suggests the worst is over as the reading of the VIX suggests that the correction may not happen

Growing confidence that the US economy is putting the worst recession in decades behind it has pushed the index known as Wall Street's fear gauge to its lowest level since just before Lehman Brothers collapsed last September. The CBOE Volatility Index, known as the VIX, provides investors with portfolio insurance against fluctuations in the S&P 500 index (SPX). It soared to historic highs in the weeks after Lehman's rapid failure pushed financial markets to the brink and left an already crippled economy in tatters. But amid numerous signs the economy is on the edge of a recovery, coupled with the best quarter for stocks in more than 10 years, the VIX has begun to look like its old self again."Investors see a lesser need for protection going forward; it looks like they don't see a revisit to the March lows," said Andrew Wilkinson, senior market analyst at Interactive Brokers Group in Greenwich, Connecticut.

The VIX, which is calculated from Standard & Poor's index options, tracks the market's expectations of volatility over the next 30 days. It often moves inversely to the S&P benchmark and goes up as options premiums are raised. The S&P 500 hit a more than 12-year low on March 9, 2009, down more than 57% from the record high it set in October 2007, after the bursting of the housing bubble spiraled into a credit crisis and then into a global recession. The VIX hit an intra-day record high of 89.53 in late October, but yesterday it closed at 25.35, its lowest level since September 11, 2008, before the weekend when Lehman collapsed. "The path forward appears a less treacherous one according to what the VIX is telling us," Wilkinson added.

Stabilization of key economic indicators such as payrolls, home prices, bond yields and consumer confidence, as well as the Obama administration's plan to reactivate the recession-hit economy, have boosted bets on the economy's outlook. Investors are looking forward to this week's key housing and job market data on expectations that it will show further signs that the worst is over. "I think (the VIX) is down primarily because the expectation is the economy is going to recover and we've started a bull market," said Hugh Johnson, chief investment officer of Johnson Illington Advisors in Albany, New York.

The S&P 500 has risen + 40% from its March 9 low, and is on path to close its best quarter since the fourth quarter of 1998. But even as some market players expect a correction in the near term, the reading of the VIX suggests that the correction may not happen. "The bears are beginning to throw in the towel on expecting a substantial stock market decline, so investors are beginning to sell implied volatility," Wilkinson said. "Investors do not perceive there's going to be another big crash." But although the VIX has returned to levels similar to those seen before financial markets imploded, analysts said that does not mean the economy has recovered from the hit it took last year.

Added Wilkinson:

We've gone through such a change in the economy that has required such drastic steps from both the Federal Reserve and the government that it is going to create a very different landscape going forward. We can't relate (today's) VIX measures to were we've come from.

Hot Topic: US Dollar Onstage for Italy Summit

World leaders will express the hope that the worst of the global economic crisis has passed when they meet this week in Italy, and they are now under heavy pressure to manage a Chinese challenge to the US$ supremacy. Beijing, which has floated the idea of an alternative to the US$ as world reserve currency, wants the matter, sensitive in financial markets wary of risks to U.S. asset values, brought up at the July 8-10 summit in Italy.

Leaders from the Western economic powers and Russia meet in Italy on Wednesday and are joined the day after by leaders from China, India, Brazil and others to discuss global challenges. German Chancellor Angela Merkel says not to expect any grand initiatives in Italy, largely because governments are already pumping trillions of dollars into bank stabilization and economic stimulus, and also because they have their eyes on a bigger G-20 summit in the U.S. city of Pittsburgh in September.