Market Takes a Breather From Recent Relentless Rally

We're not off to a very good start this morning, as equity markets are down on the heels of some disappointing manufacturing news out of New York (seriously, why is anyone surprised that manufacturing is still shrinking?)  Also, international purchases of US assets slowed in April as our trade partners trimmed their holdings of US Treasuries.  Total net purchases of long-term equities, notes, and bond rose a net $11.2 billion, compared with $55.4 billion in March.  We rely on our friends in Asia to finance our massively exploding deficits so they need to be picking up the pace instead of pulling back.  If you include short-term securities, foreigners were actually net sellers to the tune of $53.2 billion, compared with net buyers of $25 billion the previous month.  Not the kind of help our nation needs right now.

The WSJ has an article today that poses the question of whether the current powerful stock market rally is a cyclical or secular bull market rally.  This seems to be the current debate among investors and regular readers should know where I stand on this issue.  In general I roll my eyes when commentators come on CNBC to pump the market and talk about how we're clearly in a new bull market.  I still maintain that if you're going to be on CNBC spouting your opinion, last year's returns for whatever fund you manage need to be stamped on your forehead so I can decide whether I care about your opinion about the market.  Because if you missed the top, you have no business commenting on the bottom.  FT's Alphaville posts a few interesting market datapoints courtesy of the chief investment strategist at Diapason Securities.  He picks a few examples of how markets behaved in the past such as the Dow in 1929 which fell 48%, rallied 48%, then fell 78% and Nasdaq 2000 which fell 40%, rallied 40%, then fell 81% and offers examples of a few of more recent market movement such as the Shanghai Comp '08 which fell 73%, then rallied 70% and the NDX '08 which fell 50% then rallied 48% with the future direction still up in the air.  Since the debate rages on, I'll let you draw your own conclusions. 

US Equity Futures Perk Up on the Heels of Global Rebound

Optimism about the Fed rate-cut? Renewed confidence that the government interventions are working?  Dead-cat bounce?  Whatever the underlying reason, equity investors around the world decided that stocks are a bargain, for today at least.  The Japanese Nikkei was higher by 6.4%, and Hong Kong soared 14.4%.  European stocks joined the party with sharp rallies across the board.  Germany's DAX jumped an astonishing 8.3% (related in part to a 90% surge in Volkswagen shares due to Porsche's plan to take three-quarter's of Volkswagen's stock.)  Germany aside, the FTSE 100 was 4.6% higher and the French CAC-40 rose 3.2%.  US futures are poised for a rebound.  

GM may receive a $5 billion loan to aid its planned merger with Chrysler.  Ordinarily I would spend at least a paragraph mocking the idea of two huge money-losing companies getting government aid to become one gargantuan money-losing company, but at this point, I am just relieved that they are ONLY receiving $5 billion.  If the government is giving $25 billion to Citigroup, might as well throw the US auto industry a small, but tasty, bone.  The only disheartening aspect of this news is that it indirectly aids the private equity firm Cerberus, who owns part of Chrysler and GMAC.  But at least the private equity guys are finally having to work their butts off to save an investment rather than just borrowing money to pay themselves dividends every few months.  If Cerberus can single-handedly turn the US auto industry around, then they've officially earned all the fees they've been collecting for operating in an easy-credit bull market for the past 15 years. 

US Equity Markets Muster a Rally, For Now

US markets were higher Monday morning, despite sharp declines in virtually every single foreign stock market.  A smattering of good news may have been cause for the return of equity investors, although volumes are still relatively light and recent history proves that the market could wipe out all of its gains before I even get a chance to finish this post.  First the good news:

• New home-sales were better than expected, although still pretty weak.  Sales were up 2.7% to a seasonally adjusted annual rate of 464,000, down 33% from September of last year.  Inventories fell to 394,000, representing a 10.4 months' worth supply of sales.  The median sales price fell to $218,400 down 9.1% in the past year.   
  
• Verizon posted a 31% rise in earnings on a 4.1% increase in revenues, handily beating earnings estimates.  
• CenturyTel announced a plan to buy Embarq in a $5.8 billion stock swap.  Why is this good news?  Because the local telecom industry is due for consolidation.  Investment bankers will tell you that the smaller players must merge due to the decline of the traditionally lucrative landline business.  The truth is, the telecom industry has to consolidate so it can do a bunch of spin-offs in a few years.  Why?  Because the telecom industry exists not for customers who need telecommunications services but for the investment banks, who need to do consolidations and spin-offs every few years to keep churning out those fees.  I have no idea why this is the case.  All I know is that telecom firms are the biggest contributors to the investment banking spin of "synergies" vs. "extracting value."  I can only offer you copies of my phone bill as evidence.  I get the same crappy service year after year but my telecom provider changes annually due solely to mergers.  As much as I try to avoid it, somehow I'm always doing business with AT & T.  But I digress...
• The Fed began buying commercial paper directly from issuers today.  Although credit conditions are still extremely tight, at least regular issuers of commercial paper have access to financing and there is less of a concern about a solvent company going bankrupt because of the money market panic.

It is interesting that the US markets have held it together today.  I can only speculate why this is case.  Once again, although our economic and financial problems are very scary and very serious, we are still viewed as some sort of a safe-haven.  Furthermore, the media's attention has shifted from pundits who kept unsuccessfully calling the bottom over and over again, to those who are incredibly bearish and are calling for all sorts of enormous market crashes.  If listening to Roubini and Taleb doesn't scare you half to death, then maybe the fact that they are all over the news these days could be some sort of indicator that sentiment is really bearish enough to expect a bounce.  Although it is too soon to know if their bleak forecasts will bear out, we can at least hope that this time they are wrong.     

Global Market Rout Continues

Markets around the world tumbled again on Monday as investors shed assets to raise cash to weather the impending global recession.  Emerging-market stocks received yet another beat-down following a difficult week last week.  News of a $16.5 billion IMF loan to the Ukraine and a planned "substantial financial package" for Hungary failed to assuage emerging market equity investors.   

Meanwhile, in the Persian Gulf, Kuwait's central bank guaranteed bank deposits and bailed out one of the country's largest banks.  The Kuwait intervention is the first bank rescue in the Gulf, as even the oil-rich countries face spillover effects from the worldwide financial crisis.  Of course, with oil prices off more than 50% from their peaks, "oil-rich" may soon turn into "oil-middle class." 

Asian markets continued to get slaughtered on Monday, with the Japanese Nikkei dropping 6.4% to a 26-year low.  Hong Kong's stock market dropped 12.7%.  Hong Kong's Financial Secretary John Tsang said that the government had prepared a series of measures that it was ready to implement if needed.  Investors were unimpressed.  South Korea's market rallied 0.8% after the central bank lowered its key interest rate by three-quarters of a point early Monday and South Korea's National Pension Service stepped in to buy shares before the close.

European stocks followed the Asian markets lower, with little positive news to buoy them.  All eyes are on US stock futures, which point to a lower open.  

Meanwhile, the Treasury handed out more cash to US financial institutions adding $7.7 billion to PNC on Friday, aiding its purchase of NCC.  Over the weekend, the Treasury handed over $3.55 billion to Capital One Financial.  KeyCorp announced a $2.5 billion investment from the Treasury this morning.  Huntintgon Bancshares and Suntrust will also receive billions from the Treasury.

With the Fed expected to slash interest rates again, and a slew of earnings reports on the docket, investors should expect another volatile week.