The weak market condition has created the necessity for such consolidation. The combined entity will create the largest publicly listed aircraft leasing company, controlling about 5% of the total leased market. With 358 commercial aircraft and 83 engines that are either owned, on order, under contract or letter of intent, or managed, the combined company is expected to significantly contribute to the recovery of the industry. It will also have 116 airlines as clients, with a lease portfolio value of about $6 billion.

According to the deal, Genesis shareholders will receive one AerCap ordinary for each Genesis share, at $8.81 per share, representing an average premium of 45% over the price during the 30-day trading period from July 31 to Sept. 11. Based on Genesis' assets, the deal was valued at $1.75 billion.

Over the next two years, AerCap will get access to $200 million of unrestricted cash of Genesis. Also, about $1.1 billion of Genesis’ debt facility will be transferred to AerCap.

Genesis was rolled out of General Electric Co.'s (GE) aircraft leasing unit in 2006, with GE Capital Aviation Services (GECAS) acting as servicer for the portfolio. GECAS will continue to provide most asset management services for Genesis in the near term. However, as part of the agreement, AerCap will also buy 13 aircraft from GECAS.

Among others, American International Group Inc. (AIG), Royal Bank of Scotland Group Plc (RBS) and CIT Group Inc. (CIT) are mulling the sale of their aircraft-leasing businesses as the financial crisis has made funding hard to come by.

Citigroup Inc. (C) advised Genesis on the deal, while Morgan Stanley (MS) and UBS AG (UBS) acted as financial advisors to AerCap.

Pending shareholder and regulatory approval, the deal is expected to close in the fourth quarter of 2009. We expect more consolidation in the industry in the upcoming quarters.

• Acuity Brands Inc (AYI)
• Administaff Inc (ASF)
• Advanta Corp (ADVNB)
• Aetna Inc (AET)
• American International Group Inc (AIG)
• Ametek Inc (AME)
• Belden Inc (BDC)
• Conmed Corp (CNMD)
• Developers Diversified Realty Corp (DDR)
• Dun & Bradstreet Corp (DNB)
• Exterran Holdings Inc (EXH)
• Flir Systems Inc (FLIR)
• FMC Corp (FMC)
• Gardner Denver Inc (GDI)
• Granite Construction Inc (GVA)
• The Hain Celestial Group Inc (HAIN)
• Harsco Corp (HSC)
• Hastings Entertainment Inc (HAST)
• LaBranche & Co Inc (LAB)
• Landstar System Inc (LSTR)
• Lufkin Industries Inc (LUFK)
• MGIC Investment Corp (MTG)
• Minerals Technologies Inc (MTX)
• Monsanto Co (MON)
• Northwest Pipe Co (NWPX)
• Old Second Bancorp Inc (OSBC)
• Omnicare Inc (OCR)
• Otter Tail Corp (OTTR)
• Pacific State Bancorp (PSBC)
• PetSmart Inc (PETM)
• Pitney Bowes Inc (PBI)
• Rexam Plc (REXMY)
• Smith International Inc (SII)
• Snap-on Inc (SNA)
• Superior Bancorp (SUPR)
• Symantec Corp (SYMC)
• UMB Financial Corp (UMBF)
• Vectren Corp (VVC)

The inquiry is in an effort to change the debate to focus on health insurers rather than focusing on the solutions to health care concerns. There was also dispute over the creation of a government-run health system along private insurers. The Democrats are trying to examine whether business practices of the industry oppose Obama’s proposal for a public health insurance plan.

The US House Energy and Commerce Committee chairman Henry Waxman sent letters to 52 insurance companies on Monday, asking them to provide details on CEO pay, profit and other data by next month. These include American International Group Inc. (AIG), Hartford Financial Services (HIG), Aetna Inc. (AET), Aflac Inc. (AFL), Humana Inc. (HUM) and Cigna Corp. (CI).

Banks and Wall Street investment firms have also faced criticism over executive pay and bonuses and corporate spending in the light of government bailouts. Even though some large financial firms have redeemed warrants issued under Troubled Asset Relief Program, most of them still have short-term debt guaranteed by the government. Thus, Bank of America (BAC), Goldman Sachs (GS) and JP Morgan Chase & Co. (JPM) were targeted by various political and media groups.

The New York-based insurer said it was selling Compania Financiera Argentina, Cobranzas y Servicios and AIG Universal Processing Center to Banco de Galicia and an investment group led by Grupo Pegasus. Financial terms of the deal were not disclosed.

As federal regulators increasingly probe the beleaguered firm for more details on its plan of action for returning taxpayers' money, AIG is now trying to spin off assets and emerge as a leaner organization as soon as possible. Last month, it had announced plans to sell a majority stake in Transatlantic Holdings Inc. (TRH).

The Zacks #3 Rank ("Hold") stock is down less than 1% today on low volume of 28 million, compared to the average of 119 million.

Along with this much anticipated move, which is a natural corollary of the beleaguered firm's entry into bankruptcy court, the benchmark stock index also removed Citigroup Inc. (C) from its lineup to make way for the second-largest U.S. commercial insurer Travelers Co. (TRV). Both GM and Citigroup will be formally taken out from the average at the opening of trade on Jun 8.

While swapping companies on the index usually takes years, the worst financial crisis since the Great Depression has claimed many of its components as victims. The last change came when Kraft Foods Inc. (KFT) replaced the ailing American International Group Inc. (AIG) in September.

Dow Jones Editor in Chief Robert Thomson, who plays a key role in deciding the composition of the index, said, "We were reluctant to remove Citigroup at the height of the financial frenzy, but it is clear that the bank is in the midst of a substantial restructuring which will see the government with a large and ongoing stake."

Citi was added to the index in March 1997 as Travelers Group Inc. The country's biggest financial firm by assets was formed by a merger of Travelers and Citicorp. In 2002, it spun off the Hartford, Connecticut-based Travelers Property Casualty Corp. through an initial public offering. The irony is that the same firm is now replacing Citigroup on the DJIA.

With the addition of Cisco to the index, the technology weighting of the DJIA now goes up to about 17%. Shares of Cisco rose 6% to $19.61 at noon on the NASDAQ, while Travelers gained nearly 4% to $42.20 on the New York Stock Exchange at about the same time. Responding to upbeat economic reports, the DJIA is currently up 2.67% or 227.24 points.

U.S. markets enter the holiday-shortened week with a number of key economic data that is likely to be of market moving potential.  Troubled automaker General Motor's (NYSE:GM) fate will also be in focus.  Stock futures point to a lower open on the Wall Street.  Dow Jones industrial average futures fell 10, or 0.1%, to 8,250. Standard & Poor's 500 index futures fell 1.40, or 0.2%, to 883.50. Nasdaq 100 index futures declined 9.75, or 0.7%, to 1,351.
    
On Friday, U.S. stocks declined for the third straight session, but ended the week slightly up, as investors appeared concerned with macroeconomic factors.  Volume on the exchanges remained weak as investors looked for fresh catalysts to help restart a rally.  The greenback slipped to its lowest level in five months against a basket of currencies as its safe haven appeal came under scanner following S&P's placement of the UK under negative watch for its heavy issuance of public debt.  A spike in oil prices also hurt the dollar, as higher oil prices reflected likely improved demand scenarios. 

Treasury yields Friday rose to six-month highs on the 10-year.  Treasury action this week includes today's auction totaling $40 billion in 2-year notes, $35 billion in 5-years expected Wednesday, and $26 billion in 7-years on Thursday.

Although Philadelphia Fed President Plosser opined the Fed's various stimulus packages have opened the door to inflation, Treasury Secretary Geithner sounded more optimistic, noting the Administration's dedication to control the fiscal deficit. 

The failure of Florida's largest bank, BankUnited, also hurt financials last week.  However, Morgan Stanley (NYSE:MS) raised its price target for Bank of America (NYSE:BAC) to $32 from $25, but reiterated its "overweight" rating.  Shares of American International Group Inc. (AIG) also declined Friday after Chairman and CEO Edward Liddy announced that he would step down from his position as soon as the company finds a replacement.

Corporate earnings slow to a trickle this week.  Among the few key companies to report are: Costco (NASDAQ:COST), Dell (NASDAQ:DELL), Staples (NASDAQ:SPLS), and Tiffany (NYSE:TIF).

U.S. markets enter the holiday-shortened week with a number of key economic data that is likely to be of market moving potential.  Troubled automaker General Motor's (NYSE:GM) fate will also be in focus.  Stock futures point to a lower open on the Wall Street.  Dow Jones industrial average futures fell 10, or 0.1%, to 8,250. Standard & Poor's 500 index futures fell 1.40, or 0.2%, to 883.50. Nasdaq 100 index futures declined 9.75, or 0.7%, to 1,351.
    
On Friday, U.S. stocks declined for the third straight session, but ended the week slightly up, as investors appeared concerned with macroeconomic factors.  Volume on the exchanges remained weak as investors looked for fresh catalysts to help restart a rally.  The greenback slipped to its lowest level in five months against a basket of currencies as its safe haven appeal came under scanner following S&P's placement of the UK under negative watch for its heavy issuance of public debt.  A spike in oil prices also hurt the dollar, as higher oil prices reflected likely improved demand scenarios. 

Treasury yields Friday rose to six-month highs on the 10-year.  Treasury action this week includes today's auction totaling $40 billion in 2-year notes, $35 billion in 5-years expected Wednesday, and $26 billion in 7-years on Thursday.

Although Philadelphia Fed President Plosser opined the Fed's various stimulus packages have opened the door to inflation, Treasury Secretary Geithner sounded more optimistic, noting the Administration's dedication to control the fiscal deficit. 

The failure of Florida's largest bank, BankUnited, also hurt financials last week.  However, Morgan Stanley (NYSE:MS) raised its price target for Bank of America (NYSE:BAC) to $32 from $25, but reiterated its "overweight" rating.  Shares of American International Group Inc. (AIG) also declined Friday after Chairman and CEO Edward Liddy announced that he would step down from his position as soon as the company finds a replacement.

Corporate earnings slow to a trickle this week.  Among the few key companies to report are: Costco (NASDAQ:COST), Dell (NASDAQ:DELL), Staples (NASDAQ:SPLS), and Tiffany (NYSE:TIF).

American International Group Inc. (AIG) Chief Executive Edward Liddy failed to appease US policymakers on Wednesday by claiming that the bailed-out insurer had made "substantial" progress in its restructuring efforts in spite of his sustained concerns about the commercial real-estate markets.

"We are hearing, 'Trust us,' but we are not willing to let $180 billion go just on trust," said Rep. Edolphus Towns, Democrat of Maryland and chairman of the House Oversight Committee. Towns said he was disappointed with AIG's lack of compliance regarding details of its restructuring plan, Project Destiny, and chided the company for not being forthright with answers on when it would finally refund billions of taxpayer dollars.

AIG CEO Liddy said if the current market conditions persist, the American taxpayer would be fully repaid within three to five years. However, that repayment could take longer if the economy deteriorates.

The New York insurer, which had to seek government aid after huge losses from credit-default swaps related to mortgage-backed securities, reported its sixth straight quarterly loss last week. Liddy is also on the line of fire for large bonuses paid to AIG executives last year.

"We will do everything we can to not require additional federal funding," Liddy told the Congress today. But till the company resuscitates, lawmakers would definitely continue to inquire into every step it takes towards reaching that goal.

"Looking forward, I believe a more macroprudential approach to supervision--one that supplements the supervision of individual institutions to address risks to the financial system as a whole--could help to enhance overall financial stability. Our regulatory system must include the capacity to monitor, assess, and, if necessary, address potential systemic risks within the financial system. Elements of a macroprudential agenda include:   

• "monitoring large or rapidly increasing exposures--such as to subprime mortgages--across firms and markets, rather than only at the level of individual firms or sectors;"

• "assessing the potential systemic risks implied by evolving risk-management practices, broad-based increases in financial leverage, or changes in financial markets or products;"

• "assessing the potential systemic risks implied by evolving risk-management practices, broad-based increases in financial leverage, or changes in financial markets or products;"

• "ensuring that each systemically important firm receives oversight commensurate with the risks that its failure would pose to the financial system;"

The solution to that is to make sure that no bank gets big enough to pose such a risk. It is time to break them up, both by function (i.e. reimpose a modern equivalent of Glass-Steagall) and perhaps by region. Ten mini Citigroups (C) would each would not pose an overall risk to the system if one of them were to fail.

Of course you would want to keep an eye on them, just as the military keeps an eye on its 1,000 lb conventional bombs. However, the consequences of one of those going missing is much less profound than a missing nuke warhead.

Unfortunately, in the largely ad-hoc response to the crisis, we have been moving in exactly the wrong direction. JP Morgan (JPM) swallows up Bear Stearns and Washington Mutual, Wells Fargo (WFC) takes over Wachovia, and Bank of America (BAC) now owns Countrywide and Merrill Lynch. All of them were too big to fail before this started, and now they are way too big to fail. Either we regulate them extremely closely -- to the point where they will be complaining that every credit card being issued has to be first cleared with the Federal Reserve Board of N.Y. (OK, I'm exaggerating for effect here) -- or we break them up.   

• "providing a resolution mechanism to safely wind down failing, systemically important institutions;"

Without being in bankruptcy, we had to honor the CDS contracts at 100 cents on the dollar. The result was a huge backdoor handout to the banks (a much bigger scandal than the bonuses, IMHO). This would have provided an intermediate step where the new 80% owners of AIG (aka the taxpayers) could have just returned the premiums on the CDS's and rewritten the bonus contracts when we came in.

We can do this with smaller banks, but not with big bank holding companies or huge non-bank financial firms. We need this, and we need it right away.   

• "ensuring that the critical financial infrastructure, including the institutions that support trading, payments, clearing, and settlement, is robust;"

• "working to mitigate procyclical features of capital regulation and other rules and standards;"

However, somehow I suspect that as soon as good times come back, the banks will flex all their political influence (they have a lot, as Sen. Durbin (D-Il) said of the bankers and the Senate, "they own this place") so the cushion is never built up in the good times. After all requiring more equity will result in a lower ROE, and that might result in bonuses that are only in the seven figures rather than in the eight figures. The horror, the horror!   

• "and identifying possible regulatory gaps, including gaps in the protection of consumers and investors, that pose risks for the system as a whole."

The OTS actively went looking for more institutions to fall under its supervision, and its key marketing policy was that it would be the most toothless and ineffective of regulators. It was the most gung-ho on deregulation, and many of the biggest failures were firms that it was the primary regulator for, including Washington Mutual, Indymac and of course AIG.

We have to find ways to stop shopping around for your regulator and regulatory capture. The Fed would be a very good place to start. It is not comforting that the head of the New York Fed comes from Goldman, and still holds over ten figures worth of Goldman stock when he is now the primary regulator of the firm. That is more than just an appearance of a conflict of interest.

The board of directors of each of the regional Federal Reserve Banks are all made up of bankers. That is because the Federal Reserve is not owned by the government, rather it is owned (literally, not just figuratively) by the banks. Perhaps it is time we reconsider that arrangement. 

The speech is a good start, but it does not go far enough. We need to return to the principals that were behind the financial regulatory reforms of the 1930's. The three-legged stool of good solid accurate information, including of potential conflicts of interest (the SEC), making it safe to keep your money in the bank (the FDIC) and making sure the bank does not take your money and use it to play the tables in Vegas (Glass-Steagall). The precise form will be different than the old regulations, but the new order should embody the same spirit.

Why wonder? Well, in the final chapter of the text, I outlined the use of Taylor rule fundamentals to explain exchange rates (see this paper and these posts [1], [2], [3]). However, the fact that several central banks have hit the zero interest rate bound, and instituted quantitative easing (QE), makes the plausibility of such models limited in the near future.

At the same time, we are witnessing a substantial increase in government debt, as documented in this post. Working off a portfolio balance model, as discussed in this post, one would expect a depreciation of the dollar or an increase in the exchange risk premium. However, all developed countries are expanding debt to GDP ratios.

(Notice that gross debt differs from net debt, so these figures are not comparable to those in this post.)

Deutsche Bank, in its most recent Exchange Rate Perspectives (March 27, 2009) [not online], concludes:

Fiscal expansion combined with QE

What is the implication of fiscal expansion combined with QE? We have argued that history suggests the implications of higher fiscal deficits for the dollar will depend on whether or not the higher deficits are accompanied by higher relative US longer-term rates (Fiscal Deficits and the Dollar, ERP, September 2008). So if relatively more activist fiscal policy in the US raises relative US yields, history suggests this should be positive for the dollar. But there is widespread concern that if the higher deficits are accompanied by expectations of or actual QE, this will be negative for the dollar. This is essentially a "risk premium" argument that even with higher relative US yields, because of or under QE, this will be negative for the dollar. Looking at historical experience for episodes of risk premia against the dollar by examining the correlation between daily returns in EURUSD versus the longer-term rate differential indicates six episodes of negative correlations between the differential and the dollar. Four of these are episodes of risk premium in favor of the dollar, with declines in the dollar rate differential associated with a higher dollar. There have only been two episodes—in the late summer and early fall of 1998 and in the summer of 2003 -- when a move in rate differentials in favor of the dollar was associated with a weaker dollar. There have thus historically been very few episodes of such a risk premium. Presently this correlation between changes in the yield differential and the dollar is running around zero to very modestly negative. This is consistent with the view that most of the recent sharp depreciation in the dollar has been in line with the decline in US rate differentials and there is little or no evidence that higher expected fiscal deficits in the US combined with QE have created a risk premium against the dollar …

Interestingly, this perspective contrasts with Charles Wyplosz's view, who argues that QE is basically a beggar thy neighbor policy. Perhaps it is, but when many countries are undertaking QE [4] [5] the effects cancel out.

What about China? As Brad Setser points out, China has slowed accumulation of Treasurys. How this will play out depends on how much the currency composition of assets changes as a consequence. And indeed whether the slowdown in accumulation persists.

Returning to the question that inspired this post, DB asserts that the long term yield differential will drive the dollar. That seems to be a hypothesis that one will be able to test as the data roll in. So I remain hopeful that the empirical methods of the past will prove yet again useful in the future, despite the changed nature of the world.

[Addition, 8:15pm Pacific It turns out that Barry Eichengreen has already observed this nullification effect -- but adds that it would be better to coordinate QE across countries. See this article from last month.]

By the way, if you're looking for estimates of increased debt-to-GDP stocks on interest rates, see Table 3.5 of the OECD, Economic Outlook (March 2009) [pdf]....you'll see a reference to this paper.

Technorati Tags: zero interest rate policy, quanitative easing, exchange rates, Taylor rule, and portfolio balance.

Chicago, IL - March 31, 2009 - Zacks Research Director, Dirk Van Dijk says that S&P 500 earnings are continuing to show red ink. He tracks companies on the Zacks.com web site, naming names, while forecasting trends for the months ahead.

Key Points from Van Dijk's Latest Earnings Assessment

Key Points:

• Very early first-quarter are results not encouraging with total net income down 6.8%
• After all reports are in, total net could fall 37.2%
• Revisions ratio falls back again as total estimate activity slows
• 2009 expectations down 3.7% over the last month; 2010 projections are down 4.0%
• Total net income expected to fall 10.9% for all of 2009, after 19.0% fall in 2008
• Bottom up estimate for S&P 500 now $60.44 in 2009, down from $62.74 a month ago, I think we will be lucky if it is over $50.
• S&P 500 now expected to earn $75.24 in 2010, down from $78.34 last month.

Total Net Income Growth

As total earnings estimate activity wanes due to the end of the earnings season, and old estimates drop off our 4-week moving totals, the revisions ratios have started to rebound, and with them the number of huge mean estimate declines. However, make no mistake, the direction of estimates is still down, just at a some what slower pace.

Looking ahead to the first quarter, every sector is expected to see a decline in total net income relative to the first quarter of 2008. For 8 of the sectors, the year over year declines are expected to be worse than the fourth quarter.

All told, a 35.3% year over year decline is currently expected. The only exceptions are the Financial and Materials sectors. While the Financials may break back into the black this quarter, and a year ago was not exactly a boom time for the sector, I suspect that they will do much worse than the 26.2% decline forecast. As for the Materials, its hard to get to excited about a 80.1% decline in earnings, even if that is not as bad as an 80.2% decline.

The early read on the second quarter is downbeat, with a 31.0% year over year decline expected. Consumer Staples are expected to post a slight gain in total net income, and the Health Care and Utilities sectors are expected to have only minor declines. Easy year ago comps will help keep the decline in the Consumer Discretionary sector to "just 19.2%". All other sectors are expected to see drops of more than 25%.

Looking at the full year data, the Financial sector is expected to return to profitability. Even though both the 2008 and 2009 numbers show negatives of over 100%, they mean very different things. In 2008 the sector went to a negative from a positive, and in 2009 the sector is expected to go to a positive from a negative. Mathematically it does not make any difference which direction you head through zero, but economically it sure does.

Mostly as a result of the expected rebound in the Financials (let us prey that there are no more massive losses like Citigroup (C) and American International Group, Inc. (AIG) posted in 2008) the total net income for the S&P 500 is only expected to fall 10.9% in 2009, after a 19.0% decline in 2008. Just because the entire sector is expected to not lose money in aggragate, it does not mean that they are going to be in good shape.

Aside from the special case of the Financials, this is shaping up to be a very bad year for earnings. For 8 of the 10 sectors, things are expected to be significantly worse in 2009 than in 2008. Or as is the case with 5 of the sectors, they saw earnings grow in 2008 and are now expected to see them decline in 2009.

Scorecard and Median EPS Growth Rates

• Early first-quarter results weak with median EPS down 9.2%
• Surprise ratio at 1.00, median surprise 0.00% with 11 firms reporting
• A 20.3% decline is seen in the first quarter
• Every sector but Health Care is expected to be down
• Second quarter to be only slightly better, down 13.9%
• Implied second-half rebound with full year 2009 expected to be up 6.7%

Only a handful of firms have reported their first quarter results. These are all companies with fiscal periods ending in February, and are hardly a representative sample.

However, from it early results it looks like we might be in for another tough quarter. Normally positive earnings surprises far exceed earnings disappointments, but so far they are equal. Median results can jump around quite a bit in the early going, so these are just very tentative clues as to the direction of the quarter. In some ways it is likely to get even worse than the current numbers show.

While the 11 that have already reported are showing a median EPS decline of 9.2%, the remaining 489 firms are expected to post a drop of 20.0%. The only sector that is expected to post positive EPS growth is Health Care. Utilities, Staples and Telecom are expected to hold up pretty well with low- to mid-single digit declines. Every other sector is expected to see a decline of well over 20%.

As things stand now, the expectations for the second quarter show a little bit of improvement, with year-over-year declines of "just" 13.9%. While the expectations for the third and fourth quarters are not shown (and the sample of direct estimates for those quarters is very thin in any case), we can infer a very dramatic rebound in median EPS growth in the second half.

For the full year the median EPS growth rate is expected to be a positive 6.7%. I find that to be extremely optimistic.

The Zacks Revisions Ratio: 2009

• Revisions ratio for full S&P 500 down to 0.29, from 0.30 last week
• All sectors back in negative territory
• 8 sectors have at least 2 cuts for every increase; 6 have at least 4 cuts per increase
• Ratio of firms with rising to falling mean estimates at 0.25, up from 0.23
• Total number of revisions (4-week total) down to 2,060 from 2,191 last week (-6.0%)
• Increases down to 465 from 511 (-9.0%), cuts down to 1,595 from 1,680 (-5.1%)
• Estimate activity nearing seasonal low

The revisions ratio reversed a gradual uptrend it had been in for several weeks, and remains in very negative territory. Generally we consider anything below 0.80 to be negative, and anything above 1.25 to be positive. Only health Care has made into neutral territory.

The overall pace of estimate revisions is slowing dramatically, as it usually does after earnings season is over. Since the revisions ratio is based on the 4-week moving totals of estimate changes, the rise in the ratio may have more to do with old estimate cuts falling off than it does with new estimate revisions.

The revisions picture, while still quite negative, has improved significantly in recent weeks for the Technology sector. Telecom is also relatively strong, but that is based on a small sample size of estimate revisions. On the downside, the Industrials sector is looking particularly weak with over 17 cuts for every increase. That is far worse than even the perpetual estimate revision cellar dweller, the Financials, where cuts outnumber increases by less than 5:1.

Keep in mind, that after an earnings season is over, the total number of revisions always falls. The revisions ratios are based on 4-week moving totals of estimate revisions. Thus when the total number of revisions is falling, changes in the revisions ratios are affected more by old estimate changes falling out of the totals as by new estimate changes being made.

The Zacks Revisions Ratio: 2010

• Sample size of 2010 revisions is thin, but starting off weak
• Revisions ratio rises to 0.27 from 0.26 last week
• More than 3 cuts per increase for 6 sectors, more than 2 per increase in 9 sectors
• Telecom, Health Care the "strongest"; Industrials, Financials weakest for 2010
• Ratio of rising to falling mean estimates rises to 0.28 from 0.24
• Total number of revisions rises to 1,326 from 1,299 (2.0%)
• Estimate increases rise to 283 from 267 (-6.0%), cuts rise to 1,043 from 914 (14.1%)

The 2010 revisions ratio story is pretty much the same as 2009. A gradual pattern of a low but improving revisions ratio was slightly reversed this week. In a bit of a surprise, the total number of revisions actually grew this week, counter the normal seasonal pattern.

The very small Telecom sector (23 total revisions) and Health Care the best on a relative basis, but nothing to really write home about. The Consumer Discretionary sector has also improved significantly in recent weeks, but still faces more than two cuts for each increase. As with 2009, the Industrials sector was far and away the weakest, with Financials, Energy and Materials also very weak. However, in recent days the price of oil has started to rebound. If that holds, it seems likely that the estimates could start to head up again for the energy sector. As it stands now, the size of the cuts in the sector is very large.

Earnings Shares and P/Es

• P/Es are too low since earnings estimates are too high
• Earnings shares, including historical, based on current make up of S&P 500
• Health Care expected to take earnings crown from Energy in 2009 and keep it in 2010
• Energy's earnings share expected to plunge to 12.8% from 23.8%
• Financials' 2009 earnings share expected to rise to 12.1% from -2.1% in 2008.
• Consumer Discretionary market cap share is far above earnings shares (overvalued?)
• Health Care's market cap share is well below earnings shares (undervalued?)
• 12-month forward S&P P/E of 13.1 equates to earnings yield of 7.63% and is very attractive relative to 10-year T-note yield of 2.63%. It is only mediocre relative to 5.68% A-rated 10-year corporate.
• T-note rates are rising and more realistic earnings yields of near 6.15% based on lower earnings ($50) means the spread, while still attractive is not overwhelming.

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Zacks.com is a property of Zacks Investment Research, Inc., which was formed in 1978 by Len Zacks. The company continually processes stock reports issued by 3,000 analysts from 150 brokerage firms. It monitors more than 200,000 earnings estimates, looking for changes.

Then, when changes are discovered, they're applied to help assign more than 4,400 stocks into five Zacks Rank categories: #1 Strong Buy, #2 Buy, #3 Hold, #4 Sell, and #5 Strong Sell. This proprietary stock-picking system continues to outperform the market by a nearly 3-to-1 margin.

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Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.

Visit http://www.zacks.com/performance for information about the performance numbers displayed in this press release.

Disclaimer: Past performance does not guarantee future results. Investors should always research companies and securities before making any investments. Nothing herein should be construed as an offer or solicitation to buy or sell any security.

Contact: Dirk Van Dijk, CFA
Company: Zacks.com
Phone: 312-265-9211
Email: pr@zacks.com
Visit: www.Zacks.com

Key Points:

• Very early first-quarter are results not encouraging with total net income down 6.8%
• After all reports are in, total net could fall 37.2%
• Revisions ratio falls back again as total estimate activity slows
• 2009 expectations down 3.7% over the last month; 2010 projections are down 4.0%
• Total net income expected to fall 10.9% for all of 2009, after 19.0% fall in 2008
• Bottom up estimate for S&P 500 now $60.44 in 2009, down from $62.74 a month ago, I think we will be lucky if it is over $50.
• S&P 500 now expected to earn $75.24 in 2010, down from $78.34 last month.

Total Net Income Growth

As total earnings estimate activity wanes due to the end of the earnings season, and old estimates drop off our 4-week moving totals, the revisions ratios have started to rebound, and with them the number of huge mean estimate declines. However, make no mistake, the direction of estimates is still down, just at a some what slower pace.

Looking ahead to the first quarter, every sector is expected to see a decline in total net income relative to the first quarter of 2008. For 8 of the sectors, the year over year declines are expected to be worse than the fourth quarter.

All told, a 35.3% year over year decline is currently expected. The only exceptions are the Financial and Materials sectors. While the Financials may break back into the black this quarter, and a year ago was not exactly a boom time for the sector, I suspect that they will do much worse than the 26.2% decline forecast. As for the Materials, its hard to get to excited about a 80.1% decline in earnings, even if that is not as bad as an 80.2% decline.

The early read on the second quarter is downbeat, with a 31.0% year over year decline expected. Consumer Staples are expected to post a slight gain in total net income, and the Health Care and Utilities sectors are expected to have only minor declines. Easy year ago comps will help keep the decline in the Consumer Discretionary sector to "just 19.2%". All other sectors are expected to see drops of more than 25%.

Looking at the full year data, the Financial sector is expected to return to profitability. Even though both the 2008 and 2009 numbers show negatives of over 100%, they mean very different things. In 2008 the sector went to a negative from a positive, and in 2009 the sector is expected to go to a positive from a negative. Mathematically it does not make any difference which direction you head through zero, but economically it sure does.

Mostly as a result of the expected rebound in the Financials (let us prey that there are no more massive losses like Citigroup (C) and American International Group, Inc. (AIG) posted in 2008) the total net income for the S&P 500 is only expected to fall 10.9% in 2009, after a 19.0% decline in 2008. Just because the entire sector is expected to not lose money in aggragate, it does not mean that they are going to be in good shape.

Aside from the special case of the Financials, this is shaping up to be a very bad year for earnings. For 8 of the 10 sectors, things are expected to be significantly worse in 2009 than in 2008. Or as is the case with 5 of the sectors, they saw earnings grow in 2008 and are now expected to see them decline in 2009.

Total Net Income Growth (Reported)
Sector	Q3 '08 A	Q4 '08 A	Q1 '09 A	Q2 '09 E	2007 A	2008 A	2009 E	2010 E
Technology	28.09%	7.10%	1.10%	-16.86%	18.46%	27.77%	-1.62%	6.32%
Cons. Disc.	-1.78%	-6.37%	-0.36%	-20.70%	11.40%	9.90%	-7.76%	2.46%
Cons. Stap.	4.40%	-0.52%	-17.93%	-7.78%	12.36%	5.76%	0.65%	8.71%
Industrial	-19.55%	0.53%	-64.45%	-55.47%	12.04%	-11.22%	-32.77%	-3.47%
Financials	-10.97%	-146.87%	-173.95%	-127.67%	-22.57%	-37.71%	-164.29%	-100.77%
S&P	5.25%	-3.88%	-16.43%	-22.54%	11.84%	10.16%	-9.54%	7.03%

Total Net Income (Reported)
Sector	Q1 '09	Q1 '08	Q4 '08	Q4 '07
Technology	$2,093	$2,071	$2,270	$2,120
Cons. Disc.	$1,653	$1,659	$1,066	$1,139
Cons. Stap.	$1,385	$1,687	$1,470	$1,478
Industrial	$169	$475	$565	$562
Financials	-$177	$239	-$91	$195
S&P	$5,124	$6,131	$5,280	$5,494

Total Net Income Growth (Not Reported)
Sector	Q3 '08 A	Q4 '08 A	Q1 '09 E	Q2 '09 E	2007 A	2008 A	2009 E	2010 E
Health Care	7.07%	8.51%	-4.19%	-2.10%	19.75%	11.75%	-2.00%	10.82%
Utilities	-5.72%	-0.63%	-6.14%	-5.27%	10.76%	2.96%	-0.67%	10.15%
Cons. Stap.	14.03%	1.70%	-14.95%	4.47%	6.82%	15.16%	1.18%	6.58%
Financials	-90.41%	-1017.09%	-24.15%	-29.13%	-18.11%	-107.61%	-646.50%	57.52%
Telecom	-15.97%	-16.59%	-26.70%	-27.10%	18.24%	-4.42%	-21.77%	9.62%
Industrial	1.17%	-20.26%	-35.82%	-31.50%	14.00%	1.52%	-24.73%	6.70%
Technology	6.09%	-20.77%	-38.92%	-33.84%	10.89%	17.48%	-24.03%	22.60%
Energy	56.73%	-25.55%	-56.52%	-60.30%	8.99%	21.80%	-52.12%	31.74%
Materials	2.03%	-80.22%	-80.14%	-72.51%	9.85%	-9.66%	-51.23%	54.40%
Cons. Disc,	-51.75%	-152.17%	-107.31%	-33.36%	0.50%	-65.89%	-8.88%	144.62%
S&P	-12.13%	-63.97%	-37.92%	-31.24%	3.02%	-20.02%	-10.60%	25.06%

Total Net Income Growth (Combined)
Sector	Q3 '08 A	Q4 '08 A	Q1 '09 E	Q2 '09 E	2007 A	2008 A	2009 E	2010 E
Health Care	7.07%	8.51%	-4.19%	-2.10%	19.75%	11.75%	-2.00%	10.82%
Utilities	-5.72%	-0.63%	-6.14%	-5.27%	10.76%	2.96%	-0.67%	10.15%
Cons. Stap.	13.38%	1.53%	-15.20%	3.60%	7.20%	15.34%	0.40%	6.72%
Financials	-90.03%	-990.58%	-26.17%	-29.99%	-18.13%	-107.24%	-668.23%	58.32%
Telecom	-15.97%	-16.59%	-26.70%	-27.10%	18.24%	-4.42%	-21.77%	9.62%
Technology	7.46%	-18.88%	-35.76%	-32.09%	11.41%	19.16%	-22.85%	20.96%
Industrial	0.64%	-19.77%	-36.48%	-32.04%	13.94%	1.05%	-24.85%	6.47%
Energy	56.73%	-25.55%	-56.52%	-60.30%	8.99%	21.80%	-52.12%	31.74%
Materials	2.03%	-80.22%	-80.14%	-72.51%	9.85%	-9.66%	-51.23%	54.40%
Cons. Disc,	-43.68%	-140.89%	-95.01%	-31.11%	1.40%	-57.83%	-11.20%	109.76%
S&P	-11.61%	-62.06%	-37.19%	-30.95%	3.24%	-18.96%	-10.86%	24.41%

Scorecard and Median EPS Growth Rates

• Early first-quarter results weak with median EPS down 9.2%
• Surprise ratio at 1.00, median surprise 0.00% with 11 firms reporting
• A 20.3% decline is seen in the first quarter
• Every sector but Health Care is expected to be down
• Second quarter to be only slightly better, down 13.9%
• Implied second-half rebound with full year 2009 expected to be up 6.7%

Only a handful of firms have reported their first quarter results. These are all companies with fiscal periods ending in February, and are hardly a representative sample.

However, from it early results it looks like we might be in for another tough quarter. Normally positive earnings surprises far exceed earnings disappointments, but so far they are equal. Median results can jump around quite a bit in the early going, so these are just very tentative clues as to the direction of the quarter. In some ways it is likely to get even worse than the current numbers show.

While the 11 that have already reported are showing a median EPS decline of 9.2%, the remaining 489 firms are expected to post a drop of 20.0%. The only sector that is expected to post positive EPS growth is Health Care. Utilities, Staples and Telecom are expected to hold up pretty well with low- to mid-single digit declines. Every other sector is expected to see a decline of well over 20%.

As things stand now, the expectations for the second quarter show a little bit of improvement, with year-over-year declines of "just" 13.9%. While the expectations for the third and fourth quarters are not shown (and the sample of direct estimates for those quarters is very thin in any case), we can infer a very dramatic rebound in median EPS growth in the second half.

For the full year the median EPS growth rate is expected to be a positive 6.7%. I find that to be extremely optimistic.

First-Quarter Scorecard (Reported)
Sector	1Q '09 (A)	2Q '09 (A)	2008 (A)	2009 (E)	2010 (E)	% Reported	Median % Surprise	# Pos Surprise	# Neg Surprise	# Match
Cons. Disc.	7.61%	-1.02%	7.51%	-1.64%	3.40%	6.33%	17.65%	5	0	0
Tech	-7.69%	-34.88%	25.97%	-32.09%	5.68%	6.67%	9.68%	3	0	2
Cons. Stap.	-9.20%	-2.27%	10.65%	7.62%	8.17%	12.20%	-2.99%	1	3	1
Industrial	-43.36%	-39.31%	-5.25%	-23.73%	-0.84%	3.39%	-18.06%	0	2	0
Financial	-172.00%	-130.90%	-37.71%	-164.30%	-100.80%	1.23%	-227.30%	0	1	0
S&P 500	-6.77%	-12.57%	9.07%	-7.05%	5.95%	3.60%	4.05%	9	6	3

First-Quarter EPS Growth (Not Reported)
Sector	1Q '09 (E)	2Q '09 (E)	2008 (A)	2009 (E)	2010 (E)
Healthcare	3.49%	5.20%	18.31%	13.56%	11.42%
Utilities	-3.21%	0.00%	9.28%	3.79%	8.47%
Cons. Stap.	-4.29%	-2.00%	12.61%	8.94%	9.32%
Telecom	-5.07%	-11.76%	-2.94%	3.03%	0.44%
Industrial	-23.49%	-20.72%	16.57%	13.88%	7.94%
Energy	-27.27%	-45.83%	12.83%	21.40%	19.63%
Financial	-29.17%	-25.49%	9.37%	-21.06%	8.32%
Cons. Disc.	-33.33%	-23.59%	11.51%	-12.60%	11.51%
Tech	-34.21%	-23.96%	14.19%	17.74%	9.16%
Materials	-59.26%	-41.95%	12.20%	-4.62%	13.85%
S&P 500	-20.28%	-13.92%	13.30%	6.65%	10.15%

The Zacks Revisions Ratio: 2009

• Revisions ratio for full S&P 500 down to 0.29, from 0.30 last week
• All sectors back in negative territory
• 8 sectors have at least 2 cuts for every increase; 6 have at least 4 cuts per increase
• Ratio of firms with rising to falling mean estimates at 0.25, up from 0.23
• Total number of revisions (4-week total) down to 2,060 from 2,191 last week (-6.0%)
• Increases down to 465 from 511 (-9.0%), cuts down to 1,595 from 1,680 (-5.1%)
• Estimate activity nearing seasonal low

The revisions ratio reversed a gradual uptrend it had been in for several weeks, and remains in very negative territory. Generally we consider anything below 0.80 to be negative, and anything above 1.25 to be positive. Only health Care has made into neutral territory.

The overall pace of estimate revisions is slowing dramatically, as it usually does after earnings season is over. Since the revisions ratio is based on the 4-week moving totals of estimate changes, the rise in the ratio may have more to do with old estimate cuts falling off than it does with new estimate revisions.

The revisions picture, while still quite negative, has improved significantly in recent weeks for the Technology sector. Telecom is also relatively strong, but that is based on a small sample size of estimate revisions. On the downside, the Industrials sector is looking particularly weak with over 17 cuts for every increase. That is far worse than even the perpetual estimate revision cellar dweller, the Financials, where cuts outnumber increases by less than 5:1.

Keep in mind, that after an earnings season is over, the total number of revisions always falls. The revisions ratios are based on 4-week moving totals of estimate revisions. Thus when the total number of revisions is falling, changes in the revisions ratios are affected more by old estimate changes falling out of the totals as by new estimate changes being made.

Sector	Avg. 4wk EPS Change (FY1)	Revisions Ratio	Firms With FY1 EPS Increase	Firms With FY1 EPS Decrease
Technology	-4.73%	0.63	29	43
Telecom	-2.96%	0.52	1	7
Consumer Disc	-3.16%	0.45	17	54
Health Care	-0.41%	0.39	16	33
Energy	-8.86%	0.25	1	38
Consumer Staple	-1.63%	0.23	8	31
Financial Services	-4.03%	0.21	10	68
Materials	-10.49%	0.19	4	20
Utilities	-3.62%	0.19	4	30
Industrials	-4.71%	0.06	4	51
S&P 500	-4.17%	0.29	94	375

The Zacks Revisions Ratio: 2010

• Sample size of 2010 revisions is thin, but starting off weak
• Revisions ratio rises to 0.27 from 0.26 last week
• More than 3 cuts per increase for 6 sectors, more than 2 per increase in 9 sectors
• Telecom, Health Care the "strongest"; Industrials, Financials weakest for 2010
• Ratio of rising to falling mean estimates rises to 0.28 from 0.24
• Total number of revisions rises to 1,326 from 1,299 (2.0%)
• Estimate increases rise to 283 from 267 (-6.0%), cuts rise to 1,043 from 914 (14.1%)

The 2010 revisions ratio story is pretty much the same as 2009. A gradual pattern of a low but improving revisions ratio was slightly reversed this week. In a bit of a surprise, the total number of revisions actually grew this week, counter the normal seasonal pattern.

The very small Telecom sector (23 total revisions) and Health Care the best on a relative basis, but nothing to really write home about. The Consumer Discretionary sector has also improved significantly in recent weeks, but still faces more than two cuts for each increase. As with 2009, the Industrials sector was far and away the weakest, with Financials, Energy and Materials also very weak. However, in recent days the price of oil has started to rebound. If that holds, it seems likely that the estimates could start to head up again for the energy sector. As it stands now, the size of the cuts in the sector is very large.

Sector	Avg. 4wk EPS Change (FY2)	Revisions Ratio	Firms With FY2 EPS Increase	Firms With FY2 EPS Decrease
Telecom	-1.89%	0.92	2	6
Health Care	-0.45%	0.48	19	30
Consumer Discr	-7.05%	0.48	16	53
Technology	-1.52%	0.46	20	47
Utilities	-5.09%	0.30	9	21
Consumer Staples	-1.28%	0.26	8	30
Materials	-8.87%	0.22	4	20
Energy	-11.17%	0.19	3	36
Financial Services	-7.17%	0.17	12	61
Industrials	-4.09%	0.05	6	48
S&P 500	-4.93%	0.27	99	352

Earnings Shares and P/Es

• P/Es are too low since earnings estimates are too high
• Earnings shares, including historical, based on current make up of S&P 500
• Health Care expected to take earnings crown from Energy in 2009 and keep it in 2010
• Energy's earnings share expected to plunge to 12.8% from 23.8%
• Financials' 2009 earnings share expected to rise to 12.1% from -2.1% in 2008.
• Consumer Discretionary market cap share is far above earnings shares (overvalued?)
• Health Care's market cap share is well below earnings shares (undervalued?)
• 12-month forward S&P P/E of 13.1 equates to earnings yield of 7.63% and is very attractive relative to 10-year T-note yield of 2.63%. It is only mediocre relative to 5.68% A-rated 10-year corporate.
• T-note rates are rising and more realistic earnings yields of near 6.15% based on lower earnings ($50) means the spread, while still attractive is not overwhelming.

Earnings Shares and P/Es
Sector	2008%	2009%	2010%	Market Cap %	P/E 2008	P/E 2009	P/E 2010
Technology	15.05%	14.88%	14.47%	18.30%	13.7	16.9	14.0
Health Care	14.76%	18.41%	16.40%	14.30%	10.9	10.7	9.7
Cons Staple	11.81%	14.89%	12.77%	13.84%	13.2	12.8	12.0
Energy	21.09%	12.81%	13.57%	12.90%	6.9	13.9	10.5
Financials	8.66%	12.14%	15.45%	10.84%	14.1	12.3	7.8
Industrials	12.68%	11.79%	10.09%	9.65%	8.6	11.3	10.6
Cons Disc.	4.11%	3.93%	6.62%	9.02%	24.7	31.7	15.1
Utilities	4.24%	5.13%	4.55%	4.03%	10.7	10.8	9.8
Telecom	3.96%	3.83%	3.37%	3.78%	10.7	13.6	12.4
Materials	3.63%	2.18%	2.71%	3.34%	10.3	21.1	13.7
S&P 500	100.00%	100.00%	100.00%	100.00%	11.2	13.8	11.1

Neil Malkin contributed significantly to this report.

Data in this report, unless stated otherwise, is through the close on Thursday 3/26/2009

Zacks Investment Research

I would suggest first that the new Fed balance sheet represents a fundamental transformation of the role of the central bank. The whole idea behind open market operations is to make the process of creating new money completely separate from the decision of who receives any fiscal transfers. In a traditional open market operation, the Fed buys or sells an existing Treasury obligation for the same price anyone else would pay for the security. As a result, the operation itself does not involve any net transfer of wealth between the Fed and the private sector. The philosophy is that the Fed should base its decisions on economy-wide conditions, and leave it entirely up to the market or fiscal authorities to determine where those funds get allocated.

Assets of the Federal Reserve, in billions of dollars, seasonally unadjusted, from Jan 3, 2007 to March 25, 2009. Wednesday values, from Federal Reserve H41 release. Agency: federal agency debt securities held outright; swaps: central bank liquidity swaps; Maiden 1: net portfolio holdings of Maiden Lane LLC; MMIFL: net portfolio holdings of LLCs funded through the Money Market Investor Funding Facility; MBS: mortgage-backed securities held outright; CPLF: net portfolio holdings of LLCs funded through the Commercial Paper Funding Facility; TALF: loans extended through Term Asset-Backed Securities Loan Facility; AIG: sum of credit extended to American International Group, Inc. plus net portfolio holdings of Maiden Lane II and III; ABCP: loans extended to Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility; PDCF: loans extended to primary dealer and other broker-dealer credit; discount: sum of primary credit, secondary credit, and seasonal credit; TAC: term auction credit; RP: repurchase agreements; misc: sum of float, gold stock, special drawing rights certificate account, and Treasury currency outstanding; other FR: Other Federal Reserve assets; treasuries: U.S. Treasury securities held outright.

The philosophy behind the pullulating new Fed facilities is precisely the opposite of that traditional concept. The whole purpose of these facilities is to redirect capital to specific perceived priorities. I am uncomfortable on a general level with the suggestion that unelected Fed officials are better able to make such decisions than private investors who put their own capital where they think it will earn the highest reward. Apart from that general unease, I have a particular concern about the motivation for the Term Asset-Backed Securities Loan Facility, whose goal is to generate up to $1 trillion of lending for businesses and households by catalyzing a revival of loan securitization. I grant that securitization was an enormously successful device for funneling vast sums into sundry loans. For example, securitization successfully turned 80% of quite shaky subprime loans into Aaa-rated assets. To put that in perspective, only five U.S. companies currently have the ability to issue Aaa-rated debt. So yes, a device that transformed weak loans into Aaa-rated debt was marvelously successful at attracting capital from all over the world into U.S. private lending.

Ratio of total mortgage debt (from Table L.2 of Flow of Funds Accounts) to nominal GDP (from BEA Table 1.1.5).

But the whole premise behind those Aaa ratings-- that securitization could isolate a "safe" component of a pool of fundamentally risky loans-- was deeply flawed. It is impossible to diversify away aggregate or systemic risk. All that the device did was to mislead investors into thinking they were protected from those nondiversifiable risks and push those risks onto the taxpayers and the Fed. Before we decide that securitization is the road out of our present difficulties, I would like a detailed and convincing explanation of why the past mistakes are not going to be repeated again.

A second concern I have with the new Fed balance sheet is that it has seriously compromised the independence of the central bank. To my knowledge, every hyperinflation in history has had two key ingredients: (1) budget deficits that could not be resolved politically, and (2) a central bank that assumed the obligations that the fiscal authority could not.

In the U.S. today, there is little question in my mind that repaying the projected deficits with tax increases or spending cuts will be extremely difficult politically. Each additional trillion dollars would roughly require doubling the personal income tax rate on all Americans for one year, something I cannot see the political process delivering. There is enormous pressure in the current situation to defer solutions and look for temporary fixes with off-balance-sheet measures. The reason that the Fed is sought as a partner for the Treasury in all these new actions is because the Fed is perceived to have deeper pockets than the Treasury. This is not a situation that a self-respecting central bank should let itself get into.

My third concern is that the new Fed balance sheet has handicapped the Fed's ability to fulfill its primary mission, which I see as promoting a stable and predictable low rate of inflation. Which of the Fed's new assets would it sell off when it needs to absorb back in the huge volume of reserves it has recently created? The Fed's hoped-for scenario is that the reserves won't need to be called back in until the situation has stabilized and the facilities are no longer needed. But I am concerned instead about the possibility of a dramatic shift in the perceptions of foreign lenders, in which case inflationary pressures could emerge in a situation that is far more chaotic than the one we currently face.

I recommend instead that the Fed should be buying Treasury Inflation-Protected Securities in the current situation. Tim Iacono says that's like the Mafia buying "protection" from itself. But my point is that TIPS represent an asset that would gain in value at a time the Fed needs to sell them, meaning that the logistical ability of the Fed to drain reserves quickly in such circumstances is without question.

What we need in the current situation is a central bank that is a bulwark of stability. A profound lack of confidence in the U.S. government itself would make our current problems look like a walk in the park. If the Fed had the means and the credibility to deliver a stable and low inflation rate, I believe that would go a long way to solving our current problems.

But it's not clear the Fed has either the means or the credibility.

Technorati Tags: macroeconomics, economics, Federal Reserve, deflation, inflation, credit crunch

Figure 1. Adjusted monetary base. Source: FRED.

To understand the explosion in the monetary base since September, let's begin with a little background. The Federal Reserve has the ability to purchase assets or make loans with funds (money) that are created by the Fed itself. To buy a billion dollars worth of assets, the Fed doesn't show up with new cash in a wheelbarrow. Instead the Fed pays for any assets it purchases or loans it extends by crediting the funds that the recipient bank has in an account with the Fed, known as reserve deposits. A bank can later withdraw those deposits in the form of green currency, if it chooses, and that's the point at which an armored truck from the Fed would be involved with physical delivery of cash.

The monetary base is essentially the sum of (1) the currency that's been withdrawn from private banks and is being held by the public, (2) the currency that's sitting in the vaults of private banks that could potentially be withdrawn by the banks' customers if they wanted, and (3) banks' reserve deposits, which you could think of as electronic credits for currency that the banks could ask for from the Fed any time the banks choose. Historically, newly created reserve deposits have usually shown up pretty quickly as currency withdrawn by banks and then by the public. Choosing a pace at which to allow that supply of currency to grow so as to accommodate the increased currency demands from a growing economy without cultivating excessive inflation is one of the main responsibilities of the Fed.

Figure 2 below plots the assorted "factors absorbing reserve funds" from the Fed's H41 release during the halcyon period from 2003 to the middle of 2007. At that time, currency held by the public was by far the biggest component in the liabilities side of the Fed's balance sheet, with the currency supply increasing 20% over these 5 years and with temporary seasonal bumps to accommodate the annual Christmas surge in currency demand. Reserve deposits (the sum of the "reserves" and "service" components in Figure 2) were quite minor relative to total quantity of currency in circulation.

Figure 2. Factors absorbing reserve funds, in billions of dollars, seasonally unadjusted, from Jan 7, 2003 to June 27, 2007. Wednesday values, from Federal Reserve H41 release. Treasury: sum of U.S. Treasury general and supplementary funding accounts; reserves: reserve balances with Federal Reserve Banks; misc: sum of Treasury cash holdings, foreign official accounts, and other deposits; other: other liabilities and capital; service: sum of required clearing balance and adjustments to compensate for float; reverse RP: reverse repurchase agreements; Currency: currency in circulation.

With this increase in newly created money, the Fed was over this period acquiring assets primarily in the form of short-term Treasury securities, which holdings grew 25% over this 5-year period. The Fed at that time used short-term repurchase agreements as a device for adjusting the supply of reserves on a temporary basis. Note that for each date the height of the components in Figure 3 below (essentially the asset side of the Fed's balance sheet) is exactly equal, by definition, to the height of the liabilities portrayed in the previous Figure 2.

Figure 3. Factors supplying reserve funds, in billions of dollars, seasonally unadjusted, from Jan 7, 2003 to June 27, 2007. Wednesday values, from Federal Reserve H41 release. Agency: federal agency debt securities held outright; swaps: central bank liquidity swaps; Maiden 1: net portfolio holdings of Maiden Lane LLC; MMIFL: net portfolio holdings of LLCs funded through the Money Market Investor Funding Facility; MBS: mortgage-backed securities held outright; CPLF: net portfolio holdings of LLCs funded through the Commercial Paper Funding Facility; TALF: loans extended through Term Asset-Backed Securities Loan Facility; AIG: sum of credit extended to American International Group, Inc. plus net portfolio holdings of Maiden Lane II and III; ABCP: loans extended to Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility; PDCF: loans extended to primary dealer and other broker-dealer credit; discount: sum of primary credit, secondary credit, and seasonal credit; TAC: term auction credit; RP: repurchase agreements; misc: sum of float, gold stock, special drawing rights certificate account, and Treasury currency outstanding; other FR: Other Federal Reserve assets; treasuries: U.S. Treasury securities held outright.

Beginning in September 2007, the Fed began a process of systematically changing the nature of its asset holdings. Over the course of the next year, the Fed sold off over $300 billion in Treasury securities (about 40% of its holdings of Treasury securities), and replaced them with $150 billion in direct bank lending in the form of term auction credit, $60 billion in loans to foreign central banks in the form of liquidity swaps, and $100 billion in repurchase agreements, used now not for temporary adjustments but instead as a device to create a market for MBS by accepting alternative assets as collateral.

Figure 4. Factors supplying reserve funds, in billions of dollars, seasonally unadjusted, from Jan 3, 2007 to August 27, 2008. Wednesday values, from Federal Reserve H41 release. Agency: federal agency debt securities held outright; swaps: central bank liquidity swaps; Maiden 1: net portfolio holdings of Maiden Lane LLC; MMIFL: net portfolio holdings of LLCs funded through the Money Market Investor Funding Facility; MBS: mortgage-backed securities held outright; CPLF: net portfolio holdings of LLCs funded through the Commercial Paper Funding Facility; TALF: loans extended through Term Asset-Backed Securities Loan Facility; AIG: sum of credit extended to American International Group, Inc. plus net portfolio holdings of Maiden Lane II and III; ABCP: loans extended to Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility; PDCF: loans extended to primary dealer and other broker-dealer credit; discount: sum of primary credit, secondary credit, and seasonal credit; TAC: term auction credit; RP: repurchase agreements; misc: sum of float, gold stock, special drawing rights certificate account, and Treasury currency outstanding; other FR: Other Federal Reserve assets; treasuries: U.S. Treasury securities held outright.

Because the Fed funded those measures through August 2008 by selling off its holdings of Treasuries, there was little effect on either currency in circulation or the monetary base through that time.

Figure 5. Factors absorbing reserve funds, in billions of dollars, seasonally unadjusted, from Jan 3, 2007 to August 27, 2008. Wednesday values, from Federal Reserve H41 release. Treasury: sum of U.S. Treasury general and supplementary funding accounts; reserves: reserve balances with Federal Reserve Banks; misc: sum of Treasury cash holdings, foreign official accounts, and other deposits; other: other liabilities and capital; service: sum of required clearing balance and adjustments to compensate for float; reverse RP: reverse repurchase agreements; Currency: currency in circulation.

Beginning in September of 2008, the Fed embarked on a huge expansion in its lending efforts and holdings of alternative assets. The biggest items among assets currently held are $469 billion in term auction credit, $328 billion in currency swaps, $241 billion leant through the CPLF, and $236 billion in mortgage-backed securities now held outright.

Figure 6. Factors supplying reserve funds, in billions of dollars, seasonally unadjusted, from Jan 3, 2007 to March 25, 2009. Wednesday values, from Federal Reserve H41 release. Agency: federal agency debt securities held outright; swaps: central bank liquidity swaps; Maiden 1: net portfolio holdings of Maiden Lane LLC; MMIFL: net portfolio holdings of LLCs funded through the Money Market Investor Funding Facility; MBS: mortgage-backed securities held outright; CPLF: net portfolio holdings of LLCs funded through the Commercial Paper Funding Facility; TALF: loans extended through Term Asset-Backed Securities Loan Facility; AIG: sum of credit extended to American International Group, Inc. plus net portfolio holdings of Maiden Lane II and III; ABCP: loans extended to Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility; PDCF: loans extended to primary dealer and other broker-dealer credit; discount: sum of primary credit, secondary credit, and seasonal credit; TAC: term auction credit; RP: repurchase agreements; misc: sum of float, gold stock, special drawing rights certificate account, and Treasury currency outstanding; other FR: Other Federal Reserve assets; treasuries: U.S. Treasury securities held outright.

Where did the Fed get the resources to do all this? In part, it asked the Treasury to borrow on its behalf, represented by the pale yellow region in Figure 7 below, and a sum that last week amounted to a quarter trillion dollars. Note that magnitude is not part of the monetary base drawn in Figure 1. Some of the Fed expansion has shown up as additional currency held by the public, which made a modest contribution to the explosion of the monetary base seen in Figure 1. But by far the biggest factor was a 100-fold increase in excess reserves, the green region in Figure 7. These excess reserves mean that for the most part, banks are just sitting on the newly created reserve deposits, holding these funds idle at the end of each day rather than trying to invest them anywhere.

Figure 7. Factors absorbing reserve funds, in billions of dollars, seasonally unadjusted, from Jan 3, 2007 to March 25, 2009. Wednesday values, from Federal Reserve H41 release. Treasury: sum of U.S. Treasury general and supplementary funding accounts; reserves: reserve balances with Federal Reserve Banks; misc: sum of Treasury cash holdings, foreign official accounts, and other deposits; other: other liabilities and capital; service: sum of required clearing balance and adjustments to compensate for float; reverse RP: reverse repurchase agreements; Currency: currency in circulation.

That idleness, as I read the situation, was something the Fed initially actually wanted, and deliberately cultivated by choosing to pay an interest rate on excess reserves that is equal to what banks could expect to obtain by lending them overnight. As long as banks do just sit on these excess reserves, the Fed has found close to a trillion dollars it can use for the various targeted programs.

But what would happen if those electronic credits start to be redeemed for actual cash? Then we would have a concern, and the Fed would need to call the reserves back in by selling assets or failing to renew loans. But that presents a potential problem, as noted by Charles Plosser, President of the Federal Reserve Bank of Philadelphia:

It is true that a number of the Fed's new programs will unwind naturally and fairly quickly as they are terminated because they involve primarily short-term assets. Yet we must anticipate that special interests and political pressures may make it harder to terminate these programs in a timely manner, thus making it difficult to shrink our balance sheet when the time comes. Moreover, some of these programs involve longer-term assets-- like the agency MBS. Such assets may prove difficult to sell for an extended period of time if markets are viewed as "fragile" or specific interest groups are strongly opposed, which could prove very damaging to our longer-term objective of price stability.

Last Monday's joint statement by the Treasury and the Fed indicated that the plan is for the worst of the Fed's assets (reported as "Maiden Lane" and part of the "AIG" sums in Figure 4) to be taken over by the Treasury, and Plosser for one wants the Treasury to take all the non-Treasury assets off the Fed's balance sheet. But as the Fed has declared its intention to raise its MBS holdings to $1.25 trillion it seems the current plan calls for more, not less of non-Treasury assets. And the following clause in the joint Fed-Treasury statement suggests that perhaps the Fed intends this, like most of the previous balance sheet changes, to not be allowed to impact total currency in circulation:

the Treasury and the Federal Reserve are seeking legislative action to provide additional tools the Federal Reserve can use to sterilize the effects of its lending or securities purchases on the supply of bank reserves.

John Jansen (hat tip: Tim Duy) construes that clause to mean that the Fed is going to request the ability to borrow directly as well as for exemption of any borrowing done by the Treasury on behalf of the Fed from the congressional debt ceiling. Also via Tim, FRB San Francisco President Janet Yellen offers this elaboration:

As the economy recovers, the Fed will eventually have to reduce the quantity of excess reserves. To some extent, this will occur naturally as markets heal and some programs consequently shrink. It can also be accomplished, in part, through outright asset sales. And finally, several exit strategies may be available that would allow the Fed to tighten monetary policy even as it maintains a large balance sheet to support credit markets. Indeed, the joint Treasury-Fed statement indicated that legislation will be sought to provide such tools. One possibility is that Congress could give the Fed the authority to issue interest-bearing debt in addition to currency and bank reserves. Issuing such debt would reduce the volume of reserves in the financial system and push up the funds rate without shrinking the total size of our balance sheet.

In other words, if the Fed decides that, as a result of inflationary pressures, it needs to undo some of the expansion in its liabilities at a time when it is not prepared to unwind its asset positions, Plan B is for the Fed to borrow directly from the public.

Which brings me back to the original question. Does the explosive growth of the monetary base in Figure 1 imply uncontrollable inflationary pressures? My answer: not yet, but stay tuned.

Technorati Tags: macroeconomics, economics, Federal Reserve, term auction facility, deflation, inflation, credit crunch

The Treasury is working with the Federal Reserve, the President's Working Group on Financial Markets, and Congress to put the rules in place.

The framework for regulatory reform will cover 4 broad areas: systemic risk, consumer and investor protection, eliminating gaps in the regulatory structure and international coordination.

Geithner will provide the details for each of these areas in the coming weeks while he focused on the systemic risk reforms in today's testimony.

The key elements of the plan to address systemic risk are:   

• 1) Establishment of a Systemic Risk Regulator    
• 2) More conservative capital requirements for important financial institutions  
  
• 3) Registration of private investment funds with assets over a certain threshold with the SEC    
• 4) Comprehensive framework for oversight of the OTC derivatives market    
• 5) Stronger requirements for money market funds to reduce the risk of withdrawals of funds    
• 6) Stronger resolution mechanism for potential failure of large complex financial institutions

Similarly, proposed oversight of exotic derivatives like the credit-default swaps (CDS) that were used both to hedge against but mostly to speculate on high-risk mortgage-backed securities. The market for CDS has ballooned to trillions of dollars, but has remained unregulated.

Other proposals like establishment of a systemic risk regulator, with authority to seize and restructure impaired firms like AIG (AIG) before they threaten the broader system are critically required. Equally important is the coordination among the national supervisors to properly oversee the risks of financial behemoths like Bank of America (BAC), JP Morgan Chase (JPM), Citigroup (C), which have operations all over the world. Please see Dirk's blog for more analysis on the issue

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Here are highlights from Monday's Analyst Blog:

Maxim Won't Chase Growth

Maxim Integrated Products, Inc. (MXIM) has had one of the most efficient business models in the technology sector, offering 65-70% gross margins in 4 consecutive fiscal years.

A few quarters ago, management decided to revise the corporate strategy, which had been focused on pursuing high-margin business, thus limiting expansion into high-growth markets. The company has now entered several high-volume markets such as the digital camera and display markets. Since these markets allow less attractive gross margins, management has reduced its targeted gross margin to the 63-65% range.

Another Take on the Bonus Tax

Yesterday, in response to the furor over the American International Group, Inc. (AIG) bonus situation, the House passed a 90% tax on all bonus payments from firms getting more than $5.0 billion in TARP funds.

There are 2 arguments that have been made against this tax, one serious and the other the height of hypocrisy.

Lions Gate an Entertainment Buy

Founded in 1997, Lions Gate Entertainment (LGF) is a film studio, which produces and distributes motion pictures for theatrical and straight-to-video release, and television programming for the cable and broadcast networks. Lions Gate's crown jewel is its film library of roughly 8,000 film titles and 4,000 T.V. episodes.

We are maintaining our Buy rating on Lions Gate. With a strong track record of producing critically acclaimed small and mid-budget specialty films, we think Lions Gate is well positioned to increase market share as the big studios continue to shrink production of specialty films. Further, Lions Gate's large film library should, in our view, spur renewed growth in home entertainment revenue in 2H FY10 as consumer adoption of the Blu Ray format accelerates.

Aventine Renewable Losing Juice

Aventine Renewable Energy Holdings, Inc. (AVR) reported its operating and financial results for the 4th quarter and full-year ended December 31, 2008. Net loss for the reported quarter was $36.9 million, or -$0.86 per diluted share, as compared to net income of $3.3 million, or $0.08 per diluted share, in the year-ago quarter.

Reported quarter results were affected primarily as a result of significantly higher corn costs, higher conversion costs, losses incurred on the sale of auction rate securities, valuation allowances established or increased for deferred tax assets, charges incurred from suspending construction at expansion sites, the impairment of plant development costs and a loss recognized on marketing alliance investments.

Cirrus Logic Still Makes Sense

Cirrus Logic, Inc. (CRUS) is a fabless OEM (original equipment manufacturer) of analog, mixed-signal and digital processing integrated circuits (ICs).

Although the company's Q3 2009 results were in line with the pre-announcement, we expect further weakness in top-line growth.

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This will be a quiet week for earnings, with just 58 companies confirmed to report. There are 10 S&P 500 members in this group, including Best Buy Co. (BBY), Gamestop Corporation (GME), Lennar Corporation (LEN), Tiffany & Co. (TIF) and Walgreen Company (WAG).

Housing data will headline the first half of the week with existing home sales published on Monday and new home sales published on Wednesday.

• Monday: February existing home sales
• Wednesday: February new home sales, February durable goods orders, weekly crude inventories
• Thursday: Final fourth-quarter GDP, weekly initial jobless claims
• Friday: March University of Michigan consumer confidence (revised), February personal spending and income

Fed Chairman Ben Bernanke will testify about American International Group, Inc. (AIG) in front of a House committee on Tuesday.

The markets are coming off of overbought conditions, so a continued pullback seems likely. Just remember that wildcard events (e.g. initiatives from the Obama administration, credit rating downgrades, bank announcements, etc.) still remain the primary drivers of market sentiment. It is also possible that we could get some first-quarter warnings as well.

Companies That Could Issue Positive Earnings Surprises

Fiscal fourth-quarter profit forecasts for Best Buy Co. (BBY) were revised higher by 5 of the 20 covering brokerage analysts during the past 7 days. The revisions pushed the consensus earnings estimate up 2 cents to $1.39 per share. The most accurate estimate is slightly more bullish at $1.40 per share. It is possible that the revisions reflect the market share gained from the demise of Circuit City. BBY has topped expectations during 3 out of the last 4 quarters. Best Buy is scheduled to report on Thursday, Mar 26, before the start of trading.

Last month, Gamestop Corporation (GME) narrowed its fiscal fourth-quarter guidance to between $1.33 and $1.34, the high-end of its previous forecast. In response, 5 brokerage analysts raised their quarterly projections. These changes moved the consensus earnings estimate 1 cent higher to $1.34 per share. The video game retailer has topped expectations for 8 consecutive quarters. GME is scheduled to report on Thursday, Mar 26, before the start of trading.

Companies That Could Issue Negative Earnings Surprises

Sonic Corporation (SONC) has missed expectations for 3 consecutive quarters. Ahead of the fast food chain's fiscal second-quarter report, the majority of the 17 covering brokerage analysts have cut their forecasts. The consensus earnings estimate of 9 cents per share is 2 cents below the average forecast of a month ago. Sonic is scheduled to report on Monday, Mar 23, after the close of trading.

Charles Rotblut, CFA is the senior market analyst for Zacks.com. He can be reached at crotblut@zacks.com.

Earnings Calendar

Here is a list of companies that we have confirmed will report during the week of Mar 23 - 27¹. Prices are as of Thursday's, Mar 19, market close.

Company	Ticker	Zacks Consensus Estimate	Year Ago Actual	Last Qtr Surprise	Report Date	Report Time	Price
Focus Media Hld	FMCN	$0.38	$0.47	(4.3%)	3/23/2009	AMC	$5.53
On Track Innov	OTIV	($0.18)	($0.29)	(9.5%)	3/23/2009	BTO	$1.20
Phillips Van He	PVH	$0.28	$0.55	1.53N/A%	3/23/2009	AMC	$18.59
Providence Svc	PRSC	$0.06	$0.35	(211.1%)	3/23/2009	BTO	$5.32
Rcm Tech Inc	RCMT	$0.04	$0.13	(63.6%)	3/23/2009	N/A	$1.08
Rubio'S Restrnt	RUBO	($0.02)	($0.02)	100.0%	3/23/2009	AMC	$3.36
Sonic Corp	SONC	$0.09	$0.15	(25.0%)	3/23/2009	AMC	$8.63
Taleo Corp-A	TLEO	$0.08	$0.08	33.3%	3/23/2009	AMC	$11.30
Tiffany & Co	TIF	$0.80	$1.27	34.61N/A%	3/23/2009	BTO	$20.77
Walgreen Co	WAG	$0.66	$0.69	(10.9%)	3/23/2009	N/A	$24.05
Carnival Corp	CCL	$0.18	$0.30	7.5%	3/24/2009	BTO	$22.39
Carnival Plc	CUK	$0.20	$0.30	16.21N/A%	3/24/2009	BTO	$23.07
Commercial Metl	CMC	$0.04	$0.67	44.11N/A%	3/24/2009	BTO	$11.56
Copel-Adr Pr B	ELP	$0.47	$0.64	N/A	3/24/2009	N/A	$9.99
Jabil Circuit	JBL	$0.08	$0.13	0.0%	3/24/2009	AMC	$4.26
Mccormick & Co	MKC	$0.45	$0.41	2.4%	3/24/2009	BTO	$32.25
Robbins & Myers	RBN	$0.40	$0.44	13.6%	3/24/2009	AMC	$16.42
Solar Power Inc	SOPW	($0.05)	N/A	0.0%	3/24/2009	AMC	$0.55
Talbots Inc	TLB	($0.61)	($0.22)	(1300.0%)	3/24/2009	BTO	$2.94
Williams-Sonoma	WSM	$0.16	$1.15	16.7%	3/24/2009	BTO	$10.40
Ada-Es Inc	ADES	($0.04)	$0.00	40.0%	3/25/2009	BTO	$2.72
Antares Pharma	AIS	($0.05)	($0.05)	16.7%	3/25/2009	BTO	$0.40
Citi Trends Inc	CTRN	$0.53	$0.59	54.54N/A%	3/25/2009	AMC	$14.48
Cke Restaurants	CKR	$0.07	$0.00	0.0%	3/25/2009	AMC	$8.51
Delias Inc	DLIA	($0.04)	$0.19	(228.6%)	3/25/2009	BTO	$1.76
Dsw Inc Cl-A	DSW	($0.12)	$0.02	7.13N/A%	3/25/2009	BTO	$9.66
Gammon Gold Inc	GRS	$0.02	($0.19)	(600.0%)	3/25/2009	AMC	$7.74
Heritage-Crystl	HCCI	$0.19	N/A	15.4%	3/25/2009	AMC	$7.20
Kana Software	KANA	$0.03	$0.01	0.0%	3/25/2009	AMC	$0.62
Orchard Enterpr	ORCD	($0.02)	($0.53)	90.9%	3/25/2009	AMC	$1.70
Paychex Inc	PAYX	$0.36	$0.39	(2.5%)	3/25/2009	AMC	$23.15
Red Hat Inc	RHT	$0.14	$0.10	84.6%	3/25/2009	AMC	$15.65
Saic Inc	SAI	$0.29	$0.25	0.0%	3/25/2009	AMC	$17.23
Solarfun Power	SOLF	($0.07)	$0.19	6.7%	3/25/2009	BTO	$3.84
Wuxi Pharmatech	WX	$0.06	$0.17	80.0%	3/25/2009	AMC	$4.45
Accenture Ltd	ACN	$0.62	$0.64	8.81N/A%	3/26/2009	AMC	$30.53
Aryx Therapeut	ARYX	($0.62)	($0.80)	(43.3%)	3/26/2009	N/A	$2.55
Best Buy	BBY	$1.39	$1.71	29.62N/A%	3/26/2009	BTO	$33.58
Conmed Healthcr	CMHM	$0.01	N/A	(200.0%)	3/26/2009	AMC	$2.15
Conns Inc	CONN	$0.60	$0.58	(38.9%)	3/26/2009	BTO	$13.59
Cornerstone Thr	CRTX	($0.21)	($2.70)	48.0%	3/26/2009	BTO	$3.01
Dr Pepper Snapl	DPS	$0.38	N/A	(13.5%)	3/26/2009	BTO	$14.67
Embraer Air-Adr	ERJ	$1.11	$1.08	(27.3%)	3/26/2009	AMC	$12.83
Finish Line-Cla	FINL	$0.31	$0.45	(33.3%)	3/26/2009	BTO	$5.78
Freds Inc	FRED	$0.22	$0.14	0.0%	3/26/2009	BTO	$11.77
Gamestop Corp	GME	$1.34	$1.14	2.7%	3/26/2009	BTO	$25.42
Lennar Corp -A	LEN	($0.71)	($0.56)	3.76N/A%	3/26/2009	BTO	$8.50
Lululemon Athlt	LULU	$0.15	$0.21	8.32N/A%	3/26/2009	AMC	$6.76
Rosetta Genomic	ROSG	($0.28)	($0.24)	7.40N/A%	3/26/2009	BTO	$2.50
Smart Modular	SMOD	($0.01)	$0.17	300.0%	3/26/2009	AMC	$1.30
Spectrum Contrl	SPEC	$0.20	$0.13	5.3%	3/26/2009	AMC	$6.52
Synnex Corp	SNX	$0.52	$0.51	14.28N/A%	3/26/2009	AMC	$16.99
Synta Pharmact	SNTA	($0.83)	($0.46)	(21.9%)	3/26/2009	BTO	$2.00
Tibco Software	TIBX	$0.06	$0.06	17.64N/A%	3/26/2009	AMC	$5.31
Uti Worldwide	UTIW	$0.24	$0.24	2.85N/A%	3/26/2009	BTO	$13.09
Vcg Holding Cp	VCGH	$0.08	$0.02	(9.1%)	3/26/2009	BTO	$1.50
Wet Seal Inc -A	WTSLA	$0.07	$0.13	16.7%	3/26/2009	BTO	$3.27
Xinyuan Real Es	XIN	$0.04	($1.46)	N/A	3/26/2009	BTO	$5.18

BTO = Before The Market Open, AMC = After The Market Close

¹Some of the companies listed in the earnings calendar may not be in the Zacks Rank universe.

Zacks Investment Research

There are 3 reasons why I'm bearish.

• The recession is getting worse. The ISM manufacturing index set a new 26-year low. Black Friday sales were not enough to prevent a steep drop in November retail sales. 553,000 jobs were lost last month - the biggest drop since December 1974.
• Valuations are not as cheap as they could be. The Dow Jones Industrial Average still trades at a double-digit P/E. There have been previous periods where the average has traded at single-digit P/Es.
• On a technical basis, the Dow had been setting lower highs and lower lows - a bearish trend. (Today's rally could break that trend, but we would need follow-through buying to support it.)

Despite these reasons, stocks are rallying. The only plausible reason is that traders are hoping the economy will recover sooner rather than later.
 
Here is why some bulls are hopeful.

• The government is not allowing most big companies to fail. American International Group, Inc. (AIG) was thrown a lifeline; albeit at a big cost. Citigroup, Inc. (C) was given a safety net as well. The automakers might just get a bailout.
• Central banks are cutting interest rates. The ECB and the Bank of England slashed rates on Thursday. Futures are pricing in a 75 basis point cut at the Dec 16 Fed meeting.
• New stimulus is forthcoming. President-Elect Obama wants to sign a massive economic package into law as soon as he takes office. The proposal being discussed includes new infrastructure spending as well as tax cuts.
• The housing market is near a bottom, or at least perceived to be so. Mortgage rates recently dropped and there were rumors about the U.S. government proposing a program that would allow for 30-year mortgages at 4.5%.

I do believe that the combination of central bank intervention and a big stimulus package will help, if both are used effectively. The big question is timing. If one buys into the argument that the markets look 4-6 months ahead, then the current rebound suggests that a recovery could occur in late spring.
 
I think such sentiment is very optimistic. There is just too much uncertainty right now and too much margin for error.

Let's hope my bearish sentiment proves to be overly pessimistic.