Spring is in the air - at least in the Northern Hemisphere and on global bourses. Last week marked the sixth consecutive up-week for stock markets as investors' risk appetite returned amid signs of global economies and the financial sector embarking on the road to recovery.

Source: Tom Toles, The Washington Post.

Speculation that the unprecedented stimulus measures are starting to take root saw the safety appeal of government bonds diminishing, despite the buying support from central banks' buying programs. Similarly, gold bullion struggled to find traction as investors continued to unwind positions. Silver and oil also languished in the red, but copper, other industrial metals and soya beans surged ahead.

The performance of the major asset classes is summarized by the chart below, courtesy of StockCharts.com. A picture tells a thousand words ...

Equity investors breathed a sigh of relief with Goldman Sachs (GS), JP Morgan (JPM), Citigroup (C) and General Electric (GE) all reporting better-than-expected first-quarter results. Goldie also announced a $5 billion capital raising. Meanwhile, the US Federal Reserve has told banks to keep mum on the results of "stress tests" that will gauge their ability to weather the recession, Bloomberg reported. This is to ensure the report cards don't leak during earnings conference calls scheduled for this month.

The quote du jour belongs to Elizabeth Warren, chairperson of the Congressional Oversight Panel on Tarp, who said (as paraphrased by Jon Stewart): "Capitalism without bankruptcy is like Christianity without hell." Fed chairman Ben Bernanke was in agreement, saying that "... any firm that cannot meet its obligations should bear the consequences of the marketplace. But recent circumstances have been truly extraordinary."

Global stock markets, led by financials, added to the gains of the rally that commenced on March 10 (see table below). The MSCI World Index gained 2.3% (YTD -4.2%), the MSCI Emerging Markets Index 1.7% (YTD +13.5%) and the S&P 500 Index 1.5% (YTD -3.7%). These indices have risen by 28.0%, 32.6% and 28.5% respectively since the March lows.

Returns around the world ranged from top performers Ukraine (+15.2%), Denmark (+12.3%) and Norway (+11.4%) to Côte d'Ivoire (-7.0%), Kenya (?2.8%) and Ecuador (-2.6%) experiencing selling pressure. The Japanese Nikkei 225 Average (-0.1%) was the only major index not making headway, notwithstanding the government's announcement to support the stock market. (Click here to access a complete list of global stock market movements, as supplied by Emerginvest.)

Focusing on the US stock markets, it is interesting to note that stocks across a broad front have participated in the six-week old rally. This is also illustrated by the graph below which, in addition to the customary market breadth measures, shows the outperformance since the March lows of the Rydex S&P Equal Weight ETF (+40.8%) compared with the S&P 500 Index (+28.5%) - a market-capitalization weighted index.

Source: StockCharts.com

John Nyaradi (Wall Street Sector Selector) reports that the strongest exchange-traded funds (ETFs) on the week were the Claymore/Delta Global Shipping (SEA) (+14.8%), iShares Dow Jones US Home Construction (ITB) (+11.9%) and SPDR S&P Homebuilders (XHB) (+11.2%). On the other end of the performance scale the Market Vectors Gold Miners (GDX) (-6.3%), ProShares Short Financials (SEF) (-4.9%) and United States Oil (USO) (?4.0%) performed poorly.

On the credit front, the cost of buying credit insurance for US and European companies eased during the past week as shown by the narrower spreads for both the CDX (North American, investment grade) Index (down from 183 to 177) and the Markit iTraxx Europe Index (down from 156 to 146).

Next, a tag cloud of all the articles I read during the past week. This is a way of visualizing word frequencies at a glance. Key words such as "economic", "economy", "market", "prices" and "China" featured prominently, with others such as "bank" and "government" just a notch behind.

Turning to the stock market again, the chart below from Ron Griess's The Chart Store puts the movements of the S&P 500 since the beginning of 2007 in perspective.

As shown in the table below, the 50-day moving averages have been cleared comfortably by all the major US indices and the early January highs are the next important targets. As a matter of fact, the Nasdaq Composite Index is already 1.2% above this level. It has to rise by a further 6.7% in order to reach the key 200-day moving average - an indicator often used to distinguish between primary bull and bear markets. On the downside, the levels from where the nascent rally commenced on March 9 should hold in order for the upward trend to remain intact.

From a technical perspective, a primary bear market still exists as long as the major indices remain below the January highs and the 200-day moving averages. Many of the rally's leaders (indices and sectors) seem to be running into major resistance at these levels and look susceptible to retrace at least a portion of the gains since the March low.

Further evidence of a short-term top in the making comes from a chart showing the percentage of S&P 500 stocks trading above their 50-day moving averages. Altogether 90% of the stocks are currently trading above their 50-day lines - higher than the 80% level typically seen at prior peaks during this bear market. This looks overdone in the short term, but for a primary uptrend to manifest itself the bulk of the index constituents should remain above the 50-day line and also trade above their 200-day averages (26% at the moment).

Source: StockCharts.com

Still on the topic of whether stock markets are running out of gas, Adam Hewison of INO.com prepared a short technical analysis of the S&P 500's most likely direction and important chart levels. Click here to access the video clip.

The sharp fall (-4.0%) on Friday in Taiwan - one of the strongest stock markets over the past few weeks - may be a precursor of short-term downside potential in other markets. (Click here for a chart.)

"Mistaking a temporary jump for a sustained bull market can be costly. In 41 so-called bear market rallies since 1928 - gains of more than 10% that are later wiped out - equities fell an average 25% after peaking," warned Laszlo Birinyi (Birinyi Associates) via Bloomberg. "Buying stocks is like crossing Fifth Avenue when the light is red. You might make it, but the odds are not with you."

David Fuller (Fullermoney) summarized the outlook as follows: "We are seeing nothing less than the greatest global asset reflation in history. This is bullish and all that bearish sentiment tells us that there is still plenty of cash on the sidelines, capable of fuelling additional gains in stock markets and commodities over at least the medium term.

"On a short-term basis, stock markets are technically overbought as the rally continues for a sixth consecutive week. However, this persistent, non-volatile strength provides clear evidence that demand has regained the upper hand. Consequently, downside risk should be limited to a temporary reaction and consolidation of recent gains, before cash on the sidelines supports additional strength."

Interestingly, analyst earnings revisions for the S&P 1500 Index and most sectors have once again improved during the past week. According to Bespoke, analysts have cut estimates for 772 companies in the S&P 1500 and raised estimates for 290 over the last four weeks. This works out to a net of -482, which represents 32.1% of the Index - the highest level since late September. "... rather than dismiss these numbers as negative, we would continue to note that it's a start, and before things start to get better, they have to get less worse," said Bespoke.

Dozens more companies report on their first-quarter results next week, including heavy-weights like Bank of America (BAC), IBM (IBM), Apple (AAPL), Boeing (BA) and Morgan Stanley (MS).

For more discussion about the direction of stock markets, also see my recent posts "Video-o-rama: Are stock market gains built on solid foundations?", "Moving averages - indicating bull or bear markets?", "Technical talk: Buying power not tapped out yet" and "Commodities have turned the corner". (And do make a point of listening to Donald Coxe's webcast of April 17, which can be accessed from the sidebar of the Investment Postcards site.)

Twitter
In case you missed last week's paragraph on Twitter, I regularly post short comments (maximum 140 characters) on topical economic and market issues on this fascinating medium. For those not doing so already, you can follow my "tweets" by clicking here. The Twitter posts also appear on my Facebook page and in the sidebar of the Investment Postcards site.

Economy
"Global business confidence remains very weak. Survey responses regarding sales, hiring, and equipment investment are notably poor. Businesses also report little pricing power," said the latest Survey of Business Confidence of the World conducted by Moody's Economy.com. However, it is encouraging that businesses are becoming steadily less negative about the economy's prospects later this year.

Fed chairman Bernanke introduced the term "green shoots" a few weeks ago and it has since become a part of economic and financial vocabulary.

Source: The New York Times, April 7, 2009 (hat tip: Northern Trust).

How widespread are the green shoots? I posted a short article last week on a recent research report by the Goldman Sachs Global Economics team, showing that the global economy appears to be stabilizing. To monitor whether economic data are indeed improving they have developed a simple Diffusion Index, recording whether a particular data series has increased or decreased relative to its previous reading. Thirty-four monthly economic data points from the US, Europe, China, Japan, Brazil, Russia, Korea and India are analysed.

After having languished below 50 since the spring of 2007, the Diffusion Index increased to above 50 in February and March. Any reading between 0 and 50 indicates the data are deteriorating, whereas above 50 implies improvement.

When looking regionally, the Goldman Sachs economists believe the worst of the cycle has been seen in the US and the UK, but this does not appear to be the case in Euroland and Japan.

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

April 17
• University of Michigan Consumer Sentiment Index - improvement in outlook for consumers

April 16
• Housing Starts appear to be establishing a bottom
• Jobless Claims - mixed news
• Philadelphia Fed Factory Survey - is regional progress a precursor of nationwide progress?

April 15
• Lower energy and food prices help to contain inflation
• Factory sector remains significantly weak
• Home Builders Survey shows optimism

April 14
• Retail Sales - story of weak consumer spending
• Wholesale prices report - benign figures
• Small businesses remain gloomy about the future

According to Moody's Economy.com, the Federal Reserve's Beige Book report - covering most of March and early April - indicated that overall economic conditions continued to deteriorate or remained weak. However, nearly half of the 12 reporting Fed Districts noted that in some sectors, conditions appeared to be moderating or stabilizing. Reports of a deceleration in the pace of decline or some levelling off appeared mainly in manufacturing and residential real estate.

Pulling the strings together, Asha Bangalore (Northern Trust) said: "... 'green shoots' are appearing simultaneously with spring and we will be watching for more signals that will herald the economic recovery. For now, it is not self-sustaining economic growth yet. Stability in the financial sector with clean balance sheets of banks and a working credit machine will be necessary for self-sustaining economic growth. The positive economic signals are small but significant because a further slide in economic activity is not the scenario one would want to envision in the sixth quarter of a recession."

Back to the global economy, real GDP growth in China slowed from 6.8% in the fourth quarter of last year to 6.1% in the first quarter, the slowest year-over-year growth rate in about nine years.

Source: Financial Times, April 16, 2009.

Jay Bryson (Wachovia Economics Group) commented as follows: "In our view, the Chinese economy probably bottomed in the first quarter and growth should strengthen over the next few quarters. Although the global economy is very weak at present, many economies appear to be nearing inflection points. Therefore, exports should exert less drag on the Chinese economy over the next few quarters.

"In addition, there is still a fair amount of fiscal and monetary stimulus in the pipeline in China. Although the Chinese economy is not large enough to have a significant effect on the US economy, stronger growth in China should help American exports on the margin."

Source: Dilbert.com, April 16, 2009 (hat tip: News N Economics).

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

The US economic highlights for the week, courtesy of Northern Trust, include the following:

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 17, 2009.

Bernard Baruch said: "If you get all the facts, your judgment can be right; if you don't get all the facts, it can't be right." Hopefully the "Words from the Wise" reviews will assist Investment Postcards readers in gathering the most pertinent facts and making the right calls.

That's the way it looks from Cape Town (from where I will be departing for Newport Beach, California in three days' time).

Source: Peter Broelman, April 16, 2009.

Robert Shiller (Bloomberg): Depression lurks unless there's more stimulus
"In the Great Depression of the 1930s the US government had a great deal of trouble maintaining its commitment to economic stimulus. 'Pump- priming' was talked about and tried, but not consistently. The Depression could have been mostly prevented, but wasn't. Ultimately, the reason for this policy failure was inadequate understanding of the relevant economic theory.

"In the face of a similar Depression-era psychology today, we are in need of massive pump-priming again. We appear to be in a much better situation due to the stronger efforts to date. Still, there is a danger that, because of a combination of faulty economic theory and inadequate appreciation of human psychology, as well as deep public anger, we will not continue with such stimulus on a high enough level.

"We desperately need to be persistent, keeping our government response adequate for the problem at hand on a sufficient scale and for sufficient time.

"It is now time to stimulate demand. It is also time to repair the credit system. Those are the two targets that must be hit to get us out of the current economic slump, and to restore confidence. It will be costly to meet both of these targets, and it will require new legislation to give enhanced regulatory powers to deal with a greatly changed financial system, now in a systemic slump."

Click here for the full article.

Source: Robert Shiller, Bloomberg, April 15, 2009.

The Wall Street Journal: Bank stress tests, explained
"Gauging a bank's health by seeing how much capital it would need to get through a deep recession seemed a good idea at the time, says WSJ economics editor David Wessel. But things have not gone as planned."

Source: The Wall Street Journal, April 15, 2008.

Bloomberg: Fed said to order banks to stay mum on "stress test" results
"The US Federal Reserve has told Goldman Sachs Group, Citigroup and other banks to keep mum on the results of 'stress tests' that will gauge their ability to weather the recession, people familiar with the matter said.

"The Fed wants to ensure that the report cards don't leak during earnings conference calls scheduled for this month. Such a scenario might push stock prices lower for banks perceived as weak and interfere with the government's plan to release the results in an orderly fashion later this month.

"'If you allow banks to talk about it, people are just going to assume that the ones that don't comment about it failed,' said Paul Miller, an analyst at FBR Capital Markets in Arlington, Virginia.

"Regulators are using the tests to determine whether the 19 biggest banks have enough capital to cover loan losses during the next two years if the economy shrinks, unemployment surges and housing prices keep declining. The tests are a linchpin of the plan Treasury Secretary Timothy Geithner announced in February to bolster confidence in the nation's banks and restore financial-market stability."

Source: Bradley Keoun and Scott Lanman, Bloomberg, April 10, 2009.

CNBC: Bove & Ely - bank crisis over?
"Better than expected results from Wells Fargo, JPMorgan and Citi has investors wondering whether financials have turned a corner, with Dick Bove, Rochdale Securities and Bert Ely, Ely & Company."

Source: CNBC, April 17, 2009.

CEP News: Fed's beige book reveals glimmers of hope
"The Federal Reserve's Beige Book revealed all 12 central bank districts saw weakening economic activity in the previous six weeks. However, the detailed report released Wednesday said five districts reported the pace of economic contraction was moderating.

"The manufacturing sector continues to suffer in most areas of the United States.

"The pharmaceutical industry in Boston and Chicago Fed regions saw solid demand and in the Dallas region, orders for petrochemical products are rising.

"The US real estate industry saw some small signs of improvement as well. While most districts reported depressed conditions, low mortgage rates and home prices meant some regions were reporting more buyers.

"An improvement in home sales was registered in the Richmond, Atlanta, Minneapolis, Kansas City and San Francisco area reports.

"The nonresidential real estate industry, however, was weak across the board.

"There was an increase in home loan demand in Kansas City, New York and Richmond regions. However, most areas reported meager demand for loans, and increasingly strict requirements for commercial loans.

"As for the labour market, the report read, 'reports of layoffs, reductions in work hours, temporary factory shutdowns, branch closures and hiring freezes remained widespread across Districts.'

"In agriculture, most areas reported improving planting and harvesting conditions, save the Dallas and San Francisco area which are experiencing drought. Severe losses for dairy farmers in the Chicago and Dallas districts were also reported.

"All districts reported downward pressures on prices.

"All the data in the report was taken on or before April 6.

"The Beige Book is the central bank's summary of economic news over roughly the past six weeks from the 12 Federal Reserve Bank districts."

Source: Megan Ainscow, CEP News, April 15, 2009.

CNBC: Bernanke speaks - the financial crisis
"Fed Chairman Ben Bernanke discusses bank mergers, mortgage crises, the stimulus package and consumer confidence at Morehouse College in Georgia."

Part 1:

Part 2:

Source: CNBC, April 14, 2009.

Asha Bangalore (Northern Trust): Bernanke's speech
"Chairman Bernanke's speech at Morehouse College in Atlanta was a succinct description of the events that have unfolded since August 2007. It was presented as answers to four questions: (1) How did we get here? (2) What is the Fed doing to address the situation? (3) Does the Fed's response risk a surge in inflation down the road? (4) Why did the Fed and Treasury act to prevent the bankruptcies of major financial firms?

"Answers to these questions have been addressed on prior occasions. These are important questions and answers to each one of them clarify the Fed's position and response as the crisis is being tackled. The response to question 3 about inflation stands out because how the Fed unwinds the aggressive steps will determine the credibility of the central bank going forward.

"'We have a number of effective tools that will allow us to drain excess liquidity and begin to raise rates at the appropriate time; that said, unwinding or scaling down some of our special lending programs will almost certainly have to be part of our strategy for reducing policy stimulus once the recovery is under way.

"'We are thinking carefully about these issues; indeed, they have occupied a significant portion of recent FOMC meetings. I can assure you that monetary policy makers are fully committed to acting as needed to withdraw on a timely basis the extraordinary support now being provided to the economy, and we are confident in our ability to do so.

"'To be sure, decisions about when and how quickly to proceed will require a careful balancing of the risk of withdrawing support before the recovery is firmly established versus the risk of allowing inflation to rise above its preferred level in the medium term. However, this delicate balancing of risks is a challenge that central banks face in the early stages of every economic recovery. I believe that we are well equipped to make those judgments appropriately.

"'In addition, when the time comes, our ability to clearly communicate our policy goals and our assessment of the outlook will be crucial to minimizing public uncertainty about our policy decisions.'"

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, April 14, 2009.

Asha Bangalore (Northern Trust): Retail sales - story of weak consumer spending
"Retail sales fell 1.1% in March following a 0.3% increase in February (previously estimated as a 0.1% decline). Retail sales of January were revised up slightly to a 1.9% gain from a 1.8% increase. In March, the 1.6% drop in gasoline sales accounted for some of the decline. In addition, auto sales were reported as a 0.9% drop despite the increase in unit sales to 9.8 million units from 9.2 million in February. Excluding autos and gasoline, retail sales fell 0.8% in March after a 0.7% jump in February.

"The widespread weakness of retail sales in March leaves the level of spending less than the quarterly average which is an arithmetical disadvantage for second quarter retail sales. Retail sales fell at an annual rate of 4.9% in the first quarter after a 25.5% plunge in the fourth quarter. Excluding gasoline, prices of which led to sharp drop in retail sales in the fourth quarter, retail sales edged down 0.4% in the first quarter compared with a 10.6% drop in the fourth quarter."

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, April 14, 2009.

Asha Bangalore (Northern Trust): Jobless Claims - mixed news
"Initial jobless claims fell 53,000 to 610,000 during the week ended April 11. The four-week moving average stands at 651,000, down from the cycle peak of 659,500. Historically, the four-week moving average peaks at the end of recession (see chart). If the four-week moving average were to post larger declines in the weeks ahead, it would be a meaningful signal that labor market conditions are turning the corner. It is premature to declare that a peak for four-week initial claims has been established.

"Continuing claims, which lag initial claims by one week, moved up 172,000 to 6.022 million, the first reading in excess of 6 million, and the insured unemployment rate rose to 4.5% from 4.4% in the prior week. These mixed signals should be sorted out in the weeks ahead."

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, April 16, 2009.

Asha Bangalore (Northern Trust): New home construction appears to be bottoming
"Home construction appears to have established a bottom in January. Total housing starts fell 10.8% to an annual rate of 510,000 in March, the second-lowest on record. The record low is the 488,000 mark of housing starts in January 2009. It appears that housing starts readings of January 2009 could be the cycle low.

"The elevated level of inventories of unsold new homes is the main reason to be less optimistic about the March data of housing starts. There was a 12.2-month supply of unsold new homes in the marketplace as of February 2009; the record high of a 12.9-month supply of inventories was recorded in January 2009."

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, April 16, 2009.

Asha Bangalore (Northern Trust): Home Builders Survey shows optimism
"The Housing Market Index (HMI) of the National Association of Home Builders increased to 14 in April from 9 in March, which is the first encouraging sign about the housing market in addition to the increase in sales of homes in February."

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, April 15, 2009.

Asha Bangalore (Northern Trust): Factory sector remains significantly weak
"Industrial production fell 1.5% in March, matching the decline recorded in the prior month. In the first quarter, industrial production has dropped at an annual rate of 20%. Total capacity utilization was 69.3% in March, a historical low for the series which dates back to 1967."

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, April 15, 2009.

Asha Bangalore (Northern Trust): Wholesale prices report - benign story for March
"The Producer Price Index (PPI) of Finished Goods fell 1.2% in March, inclusive of declines in prices of energy (-5.5%) and food (-0.7%). Energy prices fell at an annual rate of 2.7% in the first quarter after a 76.7% plunge in the prior quarter. Excluding food and energy, the core PPI of Finished Goods held steady in March. By contrast, food prices have fallen more sharply in the three months ended March (-10.1%) versus the three months ended December 2008 (-4.8%)."

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, April 14, 2009.

Asha Bangalore (Northern Trust): Lower energy and food prices help to contain inflation
"The Consumer Price Index (CPI) fell 0.1% in March, following a 0.4% increase in February. The 0.38% year-to-year decline of the overall CPI is the first deflationary reading since 1955. Additional year-to-year declines are conceivable for the months ahead. The 3.0% drop in the energy price index and 0.1% decline of the food price index helped to bring down the overall CPI.

"Excluding food and energy, the core CPI moved up 0.2%, matching the gains seen in each of the prior two months. On a year-to-year basis, the core CPI increased 1.8%, down from the cycle high of a 2.54% gain in August 2008.

"Inflation, a lagging economic indicator, is contained for now. Concerns about inflation are growing in light of the size of the Fed's balance sheet, which has expanded rapidly to support the financial system and stem the decline of economic activity. Chairman Bernanke has noted that the Fed has the policy tools and will to unwind the aggressive easing that is in place before inflationary trends become entrenched in the economy."

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, April 15, 2009.

Dshort: Inflation - figures lie, and government liars figure

Source: Dshort, March 18, 2009.

The Wall Street Journal: Banks ramp up foreclosures
"Some of the nation's largest mortgage companies are stepping up foreclosures on delinquent homeowners. That will likely lead to more Americans losing their homes just as the Obama administration's housing-rescue plan gets into gear.

"JPMorgan Chase, Wells Fargo, Fannie Mae and Freddie Mac all say they have increased foreclosure activity in recent weeks. Those companies say they have lifted internal moratoriums which temporarily halted foreclosures.

"Some mortgage companies had stopped foreclosing on borrowers as they waited for details of the Obama administration's housing-rescue plan, announced in February, which provides incentives for mortgage companies and investors to reduce borrowers' payments to affordable levels. Others had temporarily halted foreclosures while they put their own programs in place, or in response to changes in state laws.

"Now, they have begun to determine which troubled borrowers are candidates for help, and to move the rest through the foreclosure process.

"The resulting increase in the supply of foreclosed homes could further depress home prices and put additional pressure on bank earnings as troubled loans are written off."

Source: Ruth Simon, The Wall Street Journal, April 15, 2008.

Rebecca Wilder (News N Economics): More evidence that loan modifications may not put a floor under foreclosures
"The LA Times reports the broad results of a research paper produced at the Boston Fed, Reducing Foreclosures by Christopher L. Foote, Kristopher S. Gerardi, Lorenz Goette, and Paul S. Willen. According to the Times:

"'Policies aimed at easing home loan terms for troubled borrowers may not be as effective in preventing foreclosures as more direct aid to homeowners, Federal Reserve economists have found.

"'Job losses and falling home prices have a bigger effect on delinquencies than mortgage terms, and modifications aren't necessarily a better deal for investors than foreclosures, two current and one former economist at the Boston Fed Bank and one Atlanta Fed researcher say in a paper posted Friday on the Boston Fed's website.

"The results of this paper suggest that policies that encourage moderate, long-term reductions in DTIs [debt-to-income ratios] face important hurdles in addressing the current foreclosure crisis.

"Increasingly, borrowers are walking away from their mortgages, while at the same time, lenders may be unwilling to modify. This study suggests that Obama's loan modification package may face some hurdles. To date, the results of government efforts to stem defaults are not encouraging."

Source: Rebecca Wilder, News N Economics, April 11, 2009.

The New York Times: Big profits, big questions
"The question many Wall Streeters are asking is just how Goldman once again snatched victory from the jaws of defeat. Many point to Goldman's expert manipulation of the levers of power in Washington ... the firm has come to be known, as a headline in this newspaper last October put it, as 'Government Sachs'.

"How can one ignore, the conspiracy-minded say, the crucial role that Henry Paulson, who followed Mr. Rubin to the top at both Goldman and Treasury, played in the decisions to shutter Bear Stearns, to force Lehman Brothers to file for bankruptcy and to insist that Bank of America buy Merrill Lynch at an inflated price? David Viniar, Goldman's chief financial officer, acknowledged in a conference call yesterday the important role the changed competitive landscape had on Goldman's unexpected firstquarter profit of $1.8 billion: 'Many of our traditional competitors have retreated from the marketplace, either due to financial distress, mergers or shift in strategic priorities.'

"But he was largely mum on American International Group, which, Goldman's critics insist, is the canvas upon which the bank and its alumni have painted their great masterpiece of self-interest. A few days after Mr. Paulson refused to save Lehman Brothers last September - at a cost of a mere $45 billion or so - he came to AIG's rescue, to the tune of $170 billion and rising. Then he decided to install Edward Liddy - a former Goldman Sachs board member - as AIG's chief executive. Goldman has since received some $13 billion in cash, collateral and other payouts from AIG - that is, from taxpayers ...

"December 2008 was not included in Goldman's rosy first-quarter 2009 numbers. In that month, Goldman lost a little more than $1 billion, after a $1 billion writedown related to 'non-investment-grade credit origination activities' and a further $625 million related to commercial real estate loans and securities. All told, in the last seven months, Goldman has lost $1.5 billion. But that number didn't come up on Monday. How convenient ..."

Source: William Cohan, The New York Times, April 14, 2009.

CNBC: Bove - Goldman raising $5 billion is wrong
"Goldman Sachs' $5 billion capital raising is wrong, says Richard Bove, financial strategist at Rochdale Securities. He explains why to Michael Yoshikami, president & chief investment strategist at YCMNET Advisors & CNBC's Maura Fogarty."

Source: CNBC, April 14, 2009.

The New York Times: China slows purchases of US and other bonds
"Reversing its role as the world's fastest-growing buyer of US Treasuries and other foreign bonds, the Chinese government actually sold bonds heavily in January and February before resuming purchases in March, according to data released during the weekend by China's central bank.

"China's foreign reserves grew in the first quarter of this year at the slowest pace in nearly eight years, edging up $7.7 billion, compared with a record increase of $153.9 billion in the same quarter last year.

"China has lent vast sums to the US - roughly two-thirds of the central bank's $1.95 trillion in foreign reserves are believed to be in American securities. But the Chinese government now finances a dwindling percentage of new American mortgages and government borrowing.

"In the last two months, Premier Wen Jiabao and other Chinese officials have expressed growing nervousness about their country's huge exposure to America's financial well-being.

"Chinese reserves fell a record $32.6 billion in January and $1.4 billion more in February before rising $41.7 billion in March, according to figures released by the People's Bank over the weekend. A resumption of growth in China's reserves in March suggests, however, that confidence in that country may be reviving, and capital flight could be slowing.

"The main effect of slower bond purchases may be a weakening of Beijing's influence in Washington as the Treasury becomes less reliant on purchases by the Chinese central bank.

"Asked about the balance of financial power between China and the US, one of the Chinese government's top monetary economists, Yu Yongding, replied that 'I think it's mainly in favor of the US'.

"He cited a saying attributed to John Maynard Keynes: 'If you owe your bank manager a thousand pounds, you are at his mercy. If you owe him a million pounds, he is at your mercy.'"

Source: Keith Bradsher, The New York Times, April 12, 2009.

Hans Lorenzen (Citigroup): High-grade credit's turning tide
"The tide may finally have turned for the high-grade credit market, says Hans Lorenzen, strategist at Citigroup.

"'Over the last two years, credit markets have stumbled from one bad headline to the next,' he says. 'However, we now get a sense the consensus has become so bearish that events may actually begin to surprise on the upside.'

"Mr Lorenzen notes credit spreads on investment-grade corporate bonds remain at levels not seen since the Great Depression. 'So the mere improvement in the rate of decline in economic activity we expect later this year should allow a reduction in credit risk premia,' he says.

"He also points to several other positives. 'The G20's commitment to boost funding to emerging markets is encouraging, and the market is more upbeat on the prospects for policy intervention.'

"But he still has concerns. 'New issuance continues at a blistering pace, soaking up much of the cash coming into the sector. A long-anticipated rise in defaults is also occurring, and rating agencies are downgrading at a near record pace.

"He also acknowledges that many banks remain constrained in their ability to lend. Above all, economic activity data will stay dire for now. 'Yet, we are inclined to think all this is factored in. While many problems still lie ahead, for the first time since the credit crunch began, we believe high-grade credit spreads have reached their peak.'"

Source: Hans Lorenzen, Citigroup (via Financial Times), April 14, 2009.

Rebecca Wilder (News N Economics): Corporate spreads still seriously elevated
"I hadn't looked at corporate spreads in a while - the firm's borrowing costs relative to the government's borrowing costs. Recently, the government's cost of borrowing for a term of 10 years, the 10-year Treasury rate, decreased with the Fed's efforts to buy longer-term Treasuries. And the reason that the Fed is buying Treasuries is to lower borrowing costs faced by firms and households (corporate rates, mortgages, auto loans, etc.), which has evidently helped ...

... but corporate spreads are still very, very elevated.

"The chart lists the 10-yr Aaa and Baa yields over the likewise Treasury rate (the corporate spread) in basis points (bps, essentially rate*100) reported by the Federal Reserve. Corporate spreads surged in March 2008 when the Fed lent money to JPMorgan in order to facilitate the takeover of Bear Stearns. That was a year ago; and since then, credit spreads have risen to record highs and then ebbed only slightly."

Source: Rebecca Wilder, News N Economics, April 12, 2009.

Financial Times: Credit quality of global groups at 25-year low
"The credit quality of global companies has deteriorated to levels not seen for more than a quarter of a century, according to Moody's Investors Service.

"The ratings agency said the ratio of companies having their credit ratings cut versus the number of companies being upgraded - an indicator of declining credit quality - had reached its highest level since 1983.

"During the first quarter of 2009, the rate at which borrowers were having their ratings cut reached 13.8%, highlighting the negative credit climate in the first part of the year, analysts at Moody's said.

"'This downgrade rate is higher than pre-economic crisis figures,' said Jennifer Tennant, Moody's analyst. For the whole of 2006, the downgrade rate was 10.2%, and the average rate from 1983-2009 was 12.5% per year.

"The fall in the ratio of companies' credit ratings being upgraded was also grim. During the first quarter of 2009 the upgrade rate was just 0.5%, compared with an average upgrade rate between 1983 and 2009 was 7.9%. There were only four upgrades for every 100 downgrades."

Source: Anousha Sakoui, Financial Times, April 12, 2009.

Reuters: Pimco to launch fund linked to US asset plan
"Pimco, the world's largest bond fund manager, plans to launch a closed-end asset-backed fund linked to the US asset plan, TALF, in the next 30 days, and is exploring business opportunities in China, its Asia president and director said on Wednesday.

"Under the US plan to sop up bad assets now choking bank balance sheets, public-private funds will get opportunities to buy so-called 'legacy' securities with a combination of private and government capital, possibly levered up by the government.

"Pimco's TALF Investment and Recovery Fund will borrow from the Term Asset-Backed Securities Loan Facility, or TALF, to buy securities backed by consumer receivables and loans, and will deliver income flows to investors via interest payments from the purchased assets, Brian Baker told Reuters in Shanghai.

"'We believe this financial crisis will be resolved by the US and other core financial market rehabilitation. So we want to invest in these core countries where the financial rehabilitation will be led and where policy makers will be most aggressive in addressing the financial crisis,' Baker said.

"Pimco, the world's best known bond manager under chief investment officer Bill Gross, manages $747 billion, according to the company's website."

Source: Reuters, April 15, 2009.

Continue to Part II