The week in review - April 10, 2009

We've completed another net positive week in the markets. That gives us five in a row. As the Wall Streeters say, "the trend is your friend."

The S&P 500 index is up 27% since the 6th of March. This notably without any "stimulus" spending. Unfortunately, most investors are still using rear view mirrors and have already missed these significant results. By way of demonstration, for the week ending the 3rd of April, the balance in money market funds alone - not even counting checking, CDs, US Treasury bills or savings accounts - remains at $3.84 trillion. And that's after $22 billion had been reallocated into equities.

While any good bull market will have its shallow pullbacks, I believe that looking for stocks to return to their lows will definitely prove to be an exercise in frustration and futility.

High points / earnings

Wells Fargo, the country's number 2 bank in size, reported earnings for the first quarter that blew out its previous record for quarterly earnings and blasted the analysts estimates by more than double. The reasons? Two major ones. The first is huge numbers of mortgage applications. The other - and more important, long term - is the amazingly favorable interest rate spread environment for banks. Banks can borrow from the Feds at a zero percent rate and lend it at 5 or 6 percent. That’s a license to print money.

With inflation likely to continue to be a non-starter for many months to come, this is going to be hugely beneficial for the bottom line of banks.

Other earning reports will be coming more readily now. With corporate types having been talking down their expected Q1 results for some time, the focus is more on their projections. I feel that if many can foresee improvement, you'll see mostly favorable reaction to the reports and a continued upward market bias.

When you think about it, it's not going to be too hard for companies to beat last year's numbers - especially after the second quarter.

Is it toxic assets or toxic policies?

There was a report on Thursday that the Treasury was planning to allow insurance companies with banks, i.e., Hartford, Lincoln National, Prudential for example, to get access to TARP money. That got "mixed" reviews. Many banks are trying to give the money back due to the serendipitous and duplicitous manner in which the White House and Treasury keep changing the rules and working to intuit themselves into the daily workings of the companies.

A capitalistic economy lets the weak companies go down and other, more competitive companies to take their place. Government help - a true oxymoron in this instance - is neither wanted nor appreciated.

Further evidence of this lack of willingness to have the "government help" was the release this week of the latest TALF bidding. The Feds received only $1.7 billion in bids v. the $.7 billion the first time. The Feds claim to not understand why the lack of participation...

Good economic news

The Financial Accounting Standards Board (FASB) finally moved to minimize the impact of toxic assets on bank balance sheets on by greatly modifying the mark-to-market rule on 2 April. This week, we got the SEC to get off their duffs and propose 5 options for rescinding or moderating the short sale rule. It was the flippant elimination of this rule over the past couple years that helped lead to massive selling in the bank stocks, causing prices to be driven to stupidly low levels. It'll be 60 days for them to decide but at least they finally got going on it.

The flooding of money into the economy by the Federal Reserve is really starting to have its impact. The Wells Fargo numbers are but one small result of that. A bank recovery leads to an economic recovery and a stock market recovery…all based on this sea of liquidity being created by the Fed. Over the next year, Fed actions will give us stronger growth as the inflation rate remains around zero.

Initial unemployment claims are up less than expected. Mortgage applications are strongly higher, weekly retail chain-store sales are rising, the trade deficit is plunging and business inventories are going down. I firmly believe that, with the help of the Fed, free-market forces are going to generate an earlier and stronger recovery than almost anyone believes possible.

Conclusion

Many of the same same guys who gained notoriety telling us how terrible things were last year seem to be having trouble leaving the dark side. I would counsel you to keep in mind that they may be trying to keep that spotlight on them for just a little longer - and not adding any real value today.

Bottom line - don't let past events prevent you from participating in today's recovery. Even back in 1975 - 1976, in a tough recession that was further compounded by very high interest and inflation rates, we had a rally in the S&P 500 that ran up 57% - bottom to top.

Check the record yourself. In all our recessions since the end of World War II, the recovery from the low point of a recession always exceeded the previous high point from which the recession began. The lawyers say I have to tell you past performance doesn't guarantee future results. Okay. Here's my point.

History is on your side...

Closing values as of 9 April 2009: DJ 8038 NASDAQ 1652 S&P500 856 Oil$52/bbl Gold $880/oz