So far, the economy’s new cards have looked pretty good, at least compared to where we’ve been. Fed officials were on record last week claiming that the “worst” of the recession may now be past us and Treasury Secretary Geitner said he doesn’t see a second round of banks collapsing. (To be fair, I don’t think he saw the first round coming either.)
The capital markets also seem healthier, as evidenced by last week’s initial public offering of two companies, including Rosetta Stone. This morning, Oracle announced the intention to buy Sun Microsystems and Pepsi is buying up shares of independent bottling operations. These deals are important in that they show that the capital markets are functioning in their primary capacity and that companies may want to get deals done now before prices slip away from them.
ISI, an economics firm we closely follow, raised their Q2 GDP forecast to -2% from -3%, kept their Q3 estimate at -1 %, and increased their Q4 estimate to +1% from -1%. Barton Biggs, a well known strategist formerly from Morgan Stanley, sees the S&P making a move to 1050-1100 on further cyclical strength. This forecast fits with our game plan, calling for the market to trade between 740 on the low end and 1000-1100 on the high end this year.
Only a few players bought into this rally’s hand in early March, but those that did are likely still in the game, eager to see the economy’s next card. Unfortunately, today’s card, the “turn”, doesn’t confirm much of anything. March’s Leading Economic Indicators declined for the third month in a row and came in a little lower than expectations. While this is a negative data point, particularly as a leading indicator, there was some offsetting good news as February’s reading was revised upward and many expect an improvement in April.
The banks are led the markets sharply lower today on rumors that the government may force some to convert their preferred share holdings to common when the stress test results are announced in early May. With TARP funds running low, this rumor has some plausibility. But is it real, or merely a bluff?
With most investors watching from the sidelines, the burden of proof has shifted to the bears, where anxiety levels have likely risen to levels not seen in quite some time. If bull markets do indeed climb a wall of worry, this could be a positive sign.
A “river” of earnings reports is due out this week. Let’s see where it leads.