A Bit Of Good News Pushes The Market

A year ago Bear Stearns was trading at 30 and was getting unexpectedly ready to fall into JP Morgan's arms. That was the beginning of the financial crisis where one major financial institution after another began to crumble. Of course Thornburg Mortgage, Peloton Partners, and Carlyle's Mortgage entity all had evaporated at this time but the true wake-up call to the world sounded when the mighty Bear began to falter.

Bad news seemed to be coming out everyday for the past 12 months. The economy has steadily weakened and a major financial crisis has been upon us for about eight months. Stocks have dropped 50% from their highs and net worth for Americans dropped 18% last year. The government and the Federal Reserve have flooded the markets with liquidity and stimulus plans to avoid a depression and to reverse the crashing economy.

So far unemployment continues to rise and the economy appears to be getting weaker. However, most astute financial observers would bet that this country has avoided a depression. Many days the world seems bleak and as many of one's friends lose their jobs, it certainly feels like a depression.

We expect the economy to be weak throughout 2009 but it is still important to search for the positive Tea Leaves. Until yesterday, the markets have been driven by the crumbling auto industry, the toxic waste on banks' books, a depressed housing environment, and concerns about the stimulus plan. Yesterday we saw a few bits of positive news. GM said they won't need a $2 billion loan from the government in March as its cost cutting efforts have been working. B of A indicated that it was profitable for January and February. We have now had positive earnings news from Cit, JPM, and B of A in the last few days. GE got downgraded but S&P put the company at stable for the foreseeable future. All these little events are the positive signs investors have been waiting for.

To top off the corporate news, the President seems to be ready to discuss cutting corporate taxes which would be welcome. Finally, China made comments this morning about adding additional stimulus when needed. The DOW is up 9% this week and the S&P has risen 11%. We would expect commodity and infrastructure companies to perform well today. The financials could continue their run and more bears may rush to cover their shorts. Can we get four days of rising stocks? Perhaps but this is no time to be complacent. We started off this rally expecting a 10-20% rise. It looks like that is happening as tidbits of good news seem to be emerging every day. However, the economy is still weak and we would expect stocks to drift down again after this run ends.

The true bull market will likely resume when home prices stop declining and housing sales increase. The large banks have been able to spark a rally with some positive comments. If the home builders also weigh in with optimistic words, the economy will likely be bottoming and investors can breathe easier.