5.08.09

5.08.09

            The market has been up 8 out of the last 9 weeks for the Dow and the S&P500, and 9 out of the last 9 weeks for the Nasdeq. This past week the Financial Sector was far and away the best of all being up +23%.  The Stress tests for banks was finally released and the traders ran the stocks up big time. Remember one thing, the stress tests were for the pure purpose of trying to instill confidence in the banking system. And for the short term it looks like it has worked.

This could be viewed as the passing of a significant catalyst for investors, who seem to believe a bottom has formed in the sector and it's safe to invest there once again. On that note, the idea that the economy has started to bottom has lured money in from the sidelines in recent weeks. Recently released data indicate that the end of March brought the biggest sequential inflow of funds into mutual fund assets on a percentage basis since April 2003, and the biggest inflow of absolute funds since April 2008. We have not however seen a lot of large institutions stepping up to the plate with big chunks of money to put to work. That is one of the things we are waiting for.

   But  wait a minute, the Wall Street Journal has an interesting article this       morning that is liable to attract some attention next week.

 It claims that the Federal Reserve “significantly scaled back the size” of its findings before releasing the results “following two weeks of intense bargaining with the banks”. The article says the government officials defend that activity by saying they were “just being responsive to industry feedback”. But the Journal article says the banks pushed back hard after seeing the Fed’s findings, which one senior bank official is quoted as saying were “mind-numbingly” large capital holes in the banks’ conditions, considerable anger from the banks, with the results that the numbers were scaled back dramatically in the final two weeks before they were leaked out a bit at time for reaction. It would seem there is need for some debate, seeing as how the stress tests say the 10 major banks need another $75 billion, while the International Monetary Fund (IMF) says that U.S. banks will need an additional $275 billion. So far, the answer on Wall Street has been that the IMF doesn’t know what it’s talking about.

            We need to step back and look at look at the facts. When we do, it doesn’t support any good reason to think that the Risk in the market has lessened.

             Bank of America, the largest, and supposedly strongest and healthiest of the nation’s major banks, needs another $34 billion to survive a worsening recession, on top of the $44 billion it already received from the TARP rescue package; that 10 of the nation’s largest banks also need additional billions; and that if the recession lasts longer than the end of the year bank losses could reach a staggering $599 billion next year.           

            We need to wait and see what comes forth early next week to dispel the conflicting numbers between the IMF and the Fed. We are still sitting on the sidelines with 100% in CASH. We could be getting close to a signal change if a couple of things happen.

Till next week

The MTA Staff