“Words from the Wise” this week comes to you in a shortened format as my traveling in the US precludes me from doing my customary commentary. However, a full dose of excerpts from interesting news items and quotes from market commentators is provided.

On Friday, Federal Reserve regulators have released a white paper outlining the criteria they used to assess the financial health of the nation’s 19 biggest banks. On the same day they also briefed the banks about how their companies had fared in the examination. The banks will have until Tuesday to dispute any of the results before they are made public on May 4.

According to the Financial Times, senior Fed officials said US authorities will ask some of the country’s biggest banks to raise more capital following the completion of bank stress tests. The officials also indicated that a second, larger, group of banks will be asked to improve the quality of their capital by increasing their amount of common equity.

Last week investors’ mood was also influenced by tentative signs of economic stabilization in a number of countries and a barrage of earnings report – generally better than feared. As the equity rally ground to a halt on some bourses, the US dollar and government bonds offered little safety appeal and edged weaker. Gold, on the other hand, advanced after China revealed it has almost doubled its gold reserves since 2003. Treasury Inflation Protected Securities (TIPS) also improved on the week.

The performance of the major asset classes is summarized by the chart below, courtesy of StockCharts.com.

After rising for six consecutive weeks, global stock markets experienced a volatile week, including the worst losses since early March on Monday. In the end, the MSCI World Index gained 0.1% (YTD -4.1%) on the week and the MSCI Emerging Markets Index 0.7% (YTD +14.2%), but the S&P 500 Index shaved off -0.4% (YTD -4.1).

Click on the table below for a larger image.

As far as the earnings season is concerned, Bespoke indicated that 156 S&P 500 companies had reported earnings by Thursday, beating estimates in 67% of the cases. Also, so far earnings are down 16.6% versus the first quarter of 2008. While down, this is much better than the -37.3% expected at the start of the earnings season. “The earnings season still has a long way to go, but the current trend has investors optimistic,” said Bespoke.

“The growth rate of the ECRI Leading Index has been steadily heading higher over the last month, pointing to the recession moderating or ending later in the year,” said Moody’s Economy.com. Interestingly, Chart of the Day compared the 26-week rate of change (ROC) of the ECRI Leading Index with the S&P 500 and found that, with a few exceptions (i.e. early 1974, early 2000s – which were ultimately not significant troughs) the stock market began to perform well soon after the ROC of the Index “troughed” in a significant manner.

“What all of this is saying is not that the economy is expected to improve, but rather that the deterioration is expected to stop. This glimmer of hope has in the past been enough to encourage forward-looking investors to move back into the stock market,” concluded Chart of the Day.

In an attempt to cast light on the debate of whether we are dealing with a bull market or a bear market rally, William Hester (Hussman Funds) highlighted the following: “Contracting volume is not enough evidence to qualify that this is a bear-market rally with certainty. There are other measures that are showing more strength – such as various indicators of market breadth. But new bull markets, whether at their inception or soon after, have a history of recruiting noticeable improvements in volume. So far this rally lacks that important quality. Over the next few weeks stock market volume will be a metric to watch closely.”

The stock market will show its hand in due course, but it is crucial that the lows of March 9 hold in order for base formation development to remain intact. Should these levels – 677 for the S&P 500 and 6,547 for the Dow Jones – be breached, further downside movements may be in store.

For more discussion on the direction of stock markets, see my recent posts “Video-o-rama: Economy – Recovery or relapse?” and “Has stock market rally run its course?” (And do make a point of listening to Donald Coxe’s webcast of April 24, which can be accessed from the sidebar of the Investment Postcards site.)

Next, a quick textual analysis of my week’s reading. No surprises here, with key words such as “banks”, “market”, “economy”, “economic”, “government” and “prices” featuring prominently.

Economy
“Global business sentiment remains very poor, but it has taken on a slightly better hue in recent weeks. Broad assessments of current and prospective conditions have also moved up measurably since the beginning of the year,” said the latest Survey of Business Confidence of the World conducted by Moody’s Economy.com. “It is premature to conclude that businesses are turning measurably more upbeat, but recent survey results are somewhat encouraging.”

For a further perspective on the outlook for the global economy, also read my posts “Economic rate of decline slowing down?“, “Goldman raises China’s growth forecasts” and “Chinese economy on the rebound“.

A snapshot of the week’s US economic data is provided below. (Click on the dates to see Northern Trust’s assessment of the various data releases.)

April 24
• New Home Sales appear to be stabilizing
• Durable Goods Orders report – weak, but pace of decline is moderating

April 23
• Sales of Existing Homes appear to be stabilizing at a low level
• Initial Jobless Claims erase part of the improvement seen in recent weeks

April 22
• House Price Index points to moderation in pace of decline

April 20, 2009
• Leading Index – continues to send message of weak economic conditions
• Chicago Fed National Activity Index shows a small but noteworthy improvement

Week’s economic reports
Click here for the week’s economy in pictures, courtesy of Jake of EconomPic Data.

Source: Yahoo Finance, April 24, 2009.

In addition to interest rate announcements by the Federal Open Market Committee (FOMC) (Wednesday, April 29) and the Bank of Japan (Thursday, April 30), the US economic highlights for the week include the following:

Source: Northern Trust.

Click here for a summary of Wachovia’s weekly economic and financial commentary.

Markets
The performance chart obtained from the Wall Street Journal Online shows how different global markets performed during the past week.

Source: Wall Street Journal Online, April 24, 2009.

“To find yourself, think for yourself,” said Socrates (hat tip: Charles Kirk.) And we know the stock market is a dangerous place if you don’t think rationally and know your own investment personality. Hopefully the “Words from the Wise” reviews will assist Investment Postcards readers in crystalizing their thoughts to come up trumps with their investment decisions.

That’s the way it looks from Cape Town (or, more accurately, from beautiful Dana Point, California, for the next few days).

Source: Slate.com

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Last 5 posts by Prieur du Plessis

• Gold bullion – overdue for a pullback? - November 25th, 2009
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