The Bull Moved Into Action

The Government finally announced details of its toxic asset partnership and Wall Street thinks it has merit. The financial crisis has dragged on as many banks have been stuck with loans and securities that are highly illiquid. This illiquidity has put a damper on lending activity not only in the United States but globally. We have all been waiting for this plan to roll out as the only way to improve the balance sheets of the banking system is to get private investors to buy some of the garbage that lies dormant on bank books. The joint public-private joint venture will provide investor's with about 95% leverage which should result in enticing returns.

The fix will not be over night but in a month or two investors will likely start to buy or at least bid on some of the illiquid depressed assets. We should also expect the banks to begin to raise additional equity to fully recapitalize their balance sheets and establish enough liquidity to begin lending again. Perhaps we will then see stronger credit markets and corporate access to growth capital. The bottoming of the economy should ensue.

We still expect corporate earnings to be weak this quarter and next but the light at the end of the tunnel might be getting closer. Higher stock prices should improve consumer confidence as the wealth effect kicks in. The S&P and the DOW were both up about 7% today with about 90% of all stocks rising on large volume. If the shorts haven't been scared out yet, another day or two of rising stock prices will certainly bring fear to those bears.

We still don't believe the new bull market has begun but it is hard to fight the tape. This bull could keep rising for another week as it is quarter end and many under invested portfolio managers may feel compelled to put money to work before they have to explain to their investors why they missed the big rally. As April approaches, earnings season will kick in and reality will set in as the dismal numbers temper everybody's enthusiasm. We are still in a bottoming process but the markets will still need to properly discount the end of the recession and we may move too fast on the upside as corporate earnings and outlooks are announced.

We continue to see positive tea leaves as existing home sales rose 5.1%. 45% of those sales were for distressed homes and prices continue to fall. On the negative side, the inventory of homes increased to 9.7 months which is above the normal levels of 5-6 months. At this point, we are happy to see that low mortgage rates and tax credits are at least driving first time buyers to purchase their dream homes at affordable prices.

If housing can continue to improve and the financial industry gets cleaned up, we can begin to see the economic environment improve. The result will be stronger corporate earnings and the next bull market. The depression scenario is now miniscule and the recession is likely to end within a year but caution is still in the air. Participate in the rally but be careful as earnings season is coming.