The Nikkei 225 stock average fell 1.8% to 9,891.10 and Hong Kong’s Hang Seng index plunged 2.3% to 21,264.99 points. In Mainland China, the Shanghai Composite Index dropped 2.3% to close at 2,960.47.  All other major indices in the region ended in the red.   

On Wednesday, US stocks tumbled after a weaker-than-anticipated new home sales report aggravated concerns that the seven-month old rally has gone ahead of any economic recovery.  To add to the bearish sentiment Goldman Sachs lowered its projection for the third-quarter gross domestic product.  The government's report on third-quarter GDP is due Thursday.  Goldman Sachs said it now predicts third-quarter GDP rose at an annual rate of 2.7%, weaker than its earlier forecast of a 3% rise. 

This morning the Commerce Department reported the economy grew at a 3.5% rate.  The economy's return to growth follows four straight declines. The stimulus spending and the government ‘s cash-for-clunkers program is expected to have boosted consumer spending in the quarter, with residential investments also higher.

The Dow Jones industrial average dropped 119 points, or 1.2%, to close at 9,762.69 and the S&P 500 index declined 21 points, or 2%, to close at 1,042.63. The Nasdaq composite plunged 56 points, or 2.7%, to close at 2,059.61.  Volume on the NYSE jumped to 1.68 billion shares as declining issues ran ahead of those that advanced by a whopping nine-to-one margin.  The market's volatility index, the CBOE Vix, continued higher, up 12.4% Wednesday to 27.91.  Riding high on their safe-haven appeal, US Treasuries headed higher and the $41 billion 5-year note auction received good response. Prices on the 10-year increased 10/32 in price, dropping the yield to 3.415%.

All ten S&P500 sectors were in the red yesterday, led by falls in basic materials (-4.0%), oil and gas (-3.2%), financials (-2.9%) and industrials (-2.6%).  The US dollar continued its advance for the fifth straight day, trading up 0.5% against a basket of currencies.  The dollar’s rise saw commodities retreating. Crude prices fell 2.8% to $77.79.

Today's reports include: Allergan (NYSE:AGN), Eastman Kodak (NYSE:EK), ExxonMobil (NYSE:XOM), Monster Worldwide (NYSE:MWW), Procter & Gamble (NYSE:PG), and Sprint (NYSE:S).

According to industry sources, the chips will be used in a wide range of electronics such as game consoles, digital cameras, flat panel TVs and other electronic gadgets starting in April 2010. To meet demand by that period, Toshiba will have to ramp up production. Its customers include IT giants like Apple (AAPL), which has already purchased $500 million worth flash memory chips from Toshiba.

Toshiba currently manufactures chips at its plant in Oita, southern Japan and plans to outsource to expand its production if capacity is insufficient.

According to sources, Toshiba is holding discussion with Singapore’s Chartered Semiconductor Manufacturing Ltd. (CHRT) and Advanced Micro Devices (AMD) to spin off Globalfoundries Inc. and proceed with its outsourcing plan. This will help the company to reduce costs and fulfill customer supply orders.

Last year, Toshiba formed a joint venture with Sony (SNE) and SCEI (Toshiba owned 60% while Sony and SCEI owned 20% each) for the production of high-performance semiconductors, which include the Cell/B.E. processor, the RSX graphics engine and SoCs (System-on-Chip) for applications in digital consumer products. Moreover, to ramp up chip production, it bought Sony’s SoC line for about 90 billion yen ($968 million).

Toshiba competes with International Business Machines (IBM), which has technology alliances with Chartered Semiconductor, Globalfoundries, Infineon Technologies, Samsung Electronics, NEC Electronics and STMicroelectronics (STM) for developing 28 nm chips. In addition, NVIDIA (NVDA) plans to boost its 40nm technology, that is likely to improve margins and help the company take market share from Toshiba.

Toshiba is looking to bid for French nuclear group Areva's power transmission and distribution unit. This new line will help the company enter into a new line of power business for stable revenue and growth that will facilitate cost reduction at its loss-making chip division that has been under pressure due to economic recession.

Shares of Toshiba were up 3.2% to 481 yen outperforming a 1% rise in the benchmark Nikkei average.

The Shanghai Composite Index, which had declined nearly 3% on Friday, plunged 6.7% to 2,697.  Hong Kong's Hang Seng retreated 1.9%. In Japan, the Nikkei 225 stock average, which was up 200 points earlier in the session, fell 41.61 points, or 0.4%, to 10,492.53.  In Yesterday’s landslide victory, the Democratic Party of Japan came to power ending an almost half-a-century rule by the Liberal Democratic Party.  The yen strengthened, helped by the election results.

This morning’s U.S. stock futures show Wall Street is headed for a lower opening.  Dow Jones industrial average futures fell 59, or 0.6%, to 9,477. Standard & Poor's 500 index futures fell 5.70, or 0.6%, to 1,021.70, while Nasdaq 100 index futures fell 11, or 0.7%, to 1,631.50. 

On Friday, U.S. stocks closed mostly lower after a report showing a drop in consumer confidence offset a rally in technology stocks that was fueled by better-than-expected results from Intel (NASDAQ:INTC) and Dell (NASDAQ:DELL).  Also, Apple (NASDAQ:AAPL) announced that it entered into a deal with China Unicom to launch the iPhone in the country.  The rally in tech shares was also helped by signs of a bottoming in the personal computer market after Intel (NASDAQ:INTC) raised its third quarter sales forecast to at least $8.8 billion from its prior forecast of $8.1 billion.  The firm also raised its outlook on gross margin expectations.

The Dow Jones industrial average lost 36 points, or 0.4%. The S&P 500 index retreated 2 points or 0.2%. The Nasdaq composite added 1 point, or 0.1% and rose to its fresh 2009 high, closing at the highest point since October 1.  Trading was light as most traders remained out of the market due to the summer vacations.

Among the S&P500 industry groups, financials led the gainers rising 1.2% during the week; consumer services shares rose 1.2%, followed by technology shares (+0.8%), industrials (+0.1%), and telecommunication stocks (+0.1%).  The week saw financial stocks recording huge gains, helped by advances in AIG (NYSE:AIG), Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE).

Among the week's losers, basic material and consumer goods shares fell 0.8%; utilities declined 0.7%; oil and gas shares dropped 0.3%, and health care issues retreated 0.2%. 

Gains in retail stocks helped shares of consumer services companies record some gains.  Luxury jeweler Tiffany (NYSE:TIF) reported better-than-expected earnings for the quarter, and also raised its full-year guidance. Housing shares showed some strength, helped by a report on new home sales, which revealed a more-than-expected, 9.6% advance in July.

Shanghai's main index jumped 126 points, or 4.5%, to 2,911.58, while Japan's Nikkei 225 stock average climbed 179.41 points, or 1.8%, to 10,383.41.  Hong Kong's Hang Seng rose 374.63, or 2%, to 20,336.36.  South Korea’s Kospi advanced 2% to 1,576.39.

Stock futures pointed to a higher open on Wall Street Thursday.  Dow Jones industrial average futures rose 24, or 0.3%, to 9,300. Standard & Poor's 500 index futures edged up 3.70, or 0.4%, to 1,000.80, while Nasdaq 100 index futures rose 3.50, or 0.2%, to 1,602.25.

On Wednesday, the unexpected drop in crude inventories helped U.S. stocks wipe off early losses and finish the day with gains of less than 1% as investors looking for reassuring sings picked up oil and other commodity stocks.  Rumors that the Obama Administration was considering a second stimulus package also helped sentiments on the Street yesterday.  However, the rumors were later dismissed, with White House spokesman Gibbs noting, "There is no imminent economic announcement."

The 30-stock Dow Jones industrial average added 61 points, or 0.7%, to close at 9,279.16.  The NASDAQ added 13.32 points, or 0.7% for a close at 1,969.24, and the S&P500 ended 6 points higher at 996, up 0.7%.  Volume remained light with only 988 million shares trading on the NYSE and advancing shares ahead of decliners by a 3-to-2 margin.

On the earnings front, the picture was mixed as Hewlett-Packard (NYSE:HPQ), Deere (NYSE:DE) and PetSmart (NASDAQ:PETM) reported earnings that beat expectations, but outlook from these companies disappointed.  Some retailers, though, were optimistic, with BJ's Wholesale (NYSE:BJ) and Limited (NYSE:LTD) offering improved yearly outlook.

Among S&P500 industry sectors, oil and gas shares advanced 1.9% and were the leading gainers.  DJIA components Chevron (NYSE:CVX) and ExxonMobil (NYSE:XOM) moved higher, up 1.8% and 2.3%, respectively.  Commodity-related issues were not far behind, with basic material shares up 0.9%, following the broad-based gain in commodities. Freeport-McMoRan (NYSE:FCX) shares surged 2.7%.  However, Alcoa (NYSE:AA) led the decliners on the DJIA after Goldman Sachs (NYSE:GS) downgraded the stock, citing Alcoa's (NYSE:AA) recent appreciation and advised rolling positions into Freeport-McMoRan (NYSE:FCX), which is on its Conviction Buy List.

Health care issues advanced 1.3%, as Merck's (NYSE:MRK) 2.5% advance led DJIA component gains. A New Jersey court upheld the firm's patent for asthma drug Singulair, and ruled against Teva Pharmaceuticals (NASDAQ:TEVA).

Despite the day's reported increase in weekly mortgage applications, financial shares failed to gain in the market advance, and eased 0.03%. News of last week's rise in mortgage applications on increased refinancing requests did not have an impact on financial shares.  Bank of America (NYSE:BAC) shares dropped 0.9% and JP Morgan (NYSE:JPM) eased 0.7%.

Retailers scheduled to report include: Barnes and Noble (NYSE:BKS), GameStop (NYSE:GME), HJ Heinz (NYSE:HNZ), Hormel Foods (NYSE:HRL), Ross Stores (NASDAQ:ROST), Sears Holdings (NASDAQ:SHLD), and Gap (NYSE:GPS).

This morning’s US stock futures indicate a sharply higher opening, helped by positive signs emanating from overseas markets.  Today, Chinese stocks hit a 14-month high after data showed manufacturing activity is expanding in the country.  The Shanghai Composite Index rose 50.53 points, or 1.5%, to close at 3,462.59 points and Hong Kong's Hang Seng index rose 223.93 points, or 1.1%, to 20,807.26.  However, Japan's Nikkei 225 stock average bucked the trend, closing down 4.36 points, or about 0.1%.

On Friday, the Commerce Department said that U.S. gross domestic product – a measure of all the goods and services produced – contracted at a 1% annual rate last quarter, compared with economists’ expectations of a 1.5% contraction and markedly better than first quarter’s 6.4% pullback. 

The Dow Jones industrial average edged up a paltry 17 points, or 0.2%; while the S&P 500 managed to end the day in positive territory.  The tech-heavy NASDAQ, however, lost 0.3% to close the day at 1979.  Of the 67% S&P500 companies that have reported their earnings so far, about 76% have exceeded Street estimates and only 14% have reported a miss. On the New York Stock Exchange, 1.52 billion shares exchanged hands as advancing issues beat declining stocks three to two.  

Over the weekend, Treasury Secretary Geithner noted signs pointing to an economy starting to turn around, although echoing expectations that unemployment numbers may not begin to recover until the second half of 2010.  Economist Nouriel Roubini advised, "There is now potentially light at the end of the tunnel," with previous Fed Chairman Greenspan concurring, as he also noted the recession may be ending.

Today's primary posts include vehicle sales for July, which are expected to have risen from the prior month to their highest since September, with analysts expecting car sales could even top a 12 million annual rate. Ford (NYSE:F) may show sales up from the previous year on the late-month surge in the government's successful "cash-for-clunkers" program.  Key market-moving data this week could be ISM manufacturing, the service sector survey, consumer credit, personal spending, with Friday seeing the release of the month's non-farm payroll report. 

Companies reporting their earnings today include: Humana (NYSE:HUM), Marathon Oil (NYSE:MRO), MGM Mirage (NYSE:MGM), Tyson Foods (NYSE:TSN), Anadarko Petroleum (NYSE:APC), Chesapeake Energy (NYSE:CHK), and Principal Financial Group (NYSE:PFG).

In a bubble, Day and Night

Is it Bust or is it Boom

That frames thy fearful asymmetry?*

 (click on pictures to enlarge)

Can you feel it? That calm and soothing feeling of low volatility and heaven bound risky assets driven by green shoots and second derivatives. Well, if you can't you are excused since neither can yours truly, or more precisely; he has a distinctly difficult time seeing from where people get the idea that we are headed for a broad based global recovery. However, beauty as always lies in the eye of the beholder and whichever way you look at it would be difficult to completely deny that the three key ingredients for a global recovery (and a resurgence of carry trade) in the form of low volatility, steadily climbing risky assets, and benign credit wholesale market credit conditions certainly seem to be present in ample quantities.

Now, while it is true that the level of volatility is still higher now than it was pre Q4-2008 and indeed pre August 2007 the trend so far this year has been inexorably down which reflects the perception that the worst may be over as well as the discourse of second derivatives and green shoots which has been with us throughout Q2 2009. With respect to equities they have equally begun to nudge up and are up some 5-10% from the beginning of the year in relation to Europe and the US. If you count from the trough reach some time during the first quarter this year, the increase would of course be bigger. The strength of the recovery discourse has taken many by surprise or perhaps more precisely, it has frustrated many. For example, I take note of the fact that two of the most astute macro traders (at least in my book) are feeling decidedly puzzled by the way the market is behaving at the moment. I cannot say that I blame them. For someone who take pride in being up to date in terms of macroeconomic data and analysis one would find it difficult to track the amount of bullishness which currently appear to have taken hold.

Now, I should immediately point out that I am not blind to the existence of the second derivative. I mean, I took calculus and I can also eyeball a graph in changes when I see one. My only gripe is that it only takes the faintest of scratch in the surface of the second derivative/green shoot glamour image to see that the fundamentals have not changed and moreover that the crisis has now moved its locus away from the US and right smack into the mainland of Europe in the form of significant downside risks in relation to Southern Europe and the ongoing mess in the CEE.

Yet, who is listening to a Danish student of economics anyway?

Consider consequently that the past couple of weeks brought us Bernanke's "exit talk" testimony to congress, news that a certain Mervyn residing at Threadneedle street would beat Bernanke to the exit, news that Russia is actually seriously considering issuing (and expecting foreign investors to bite) debt to cover its 2010 deficit, news that Hungary actually lowered interest rates despite, one could easily infer, an abyss of downside in the form of a plunging forint and a liability side denominated in Swiss francs, and finally Timmy's trip to China where it seems that the main message carried was one of reassurance that the US most certainly intend to vigilant towards the rising deficit.

We could add the Q2 GDP print in the US (preliminary) put up a much better figure, - 1% annualised, than expected which has so far been interpreted as a sign of recover although yet again I think that narrating this as a sign of an impending recovery is somewhat of a stretch. Meanwhile, Europe is heading straight for deflation and although I know that some economists, especially those of the old academic guard, consistently have been pointing to the benign effects of rigidness on the downside it is very important to remember that those same prices will need to adjust in key Eurozone countries absent a currency to bear some of the burden and thus price/wage rigidity may turn out to be a curse rather than a blessing.

Where is the Recovery?

The easiest way to approach this question is perhaps to point out where the recovery isn't and here I am talking about the OECD in general. Surely, we may succeed to avoid future cataclysmic events but the something has changed and new fundamentals are taking over. For example, I seriously doubt that many people have considered what it means for the global economy that the US economy will need to run an external surplus and I also think that most people have not yet realized the consequences of the unfolding mess in Europe and the Eurozone. On the other hand I have also stressed before how I am not, after all, a permabear in the sense that I do indeed see positive signs in emerging economies such as for example Brazil, India, Chile, Turkey, and China (although the latter is different for a number of reasons). I won't call this decoupling because evidently it isn't. To stay in the jargon I would rather call it re-coupling since this is essentially what it is and one key issue is the extent to which the new global economic system will help to even out the present imbalances and what consequences this, in some sense, inevitable rebalancing will have on surplus and deficit economies respectively. In this context and although one should always be careful in quoting onself, the following from an entry back in May still sums up quite well how I see the world at the moment;

We are very much still stuck in the mire and especially so in the context of the so-called developed OECD economies where it is difficult to see where any speedy recovery is going to come from. On the other hand the world is not made up entirely by the OECD edifice and it is exactly the potential for an asymmetric "recovery" and how global monetary policy might serve to transmit such a recovery which is the topic of this entry.

For the specifics of how I see the role of global monetary policy and global liquidity I recommend you to visit the actual post. However, it is worth noting that in a world where major global central banks are destined to keep rates low for an extended period it does not take much creativity to imagine the dynamics by which the global economy may potentially move forward driven by carry trade flows financed in the developed world seeking yield in whatever economies that might be able (and willing) to absorb the tide which is coming.

As I have stressed on several occasions it is exactly this reshuffling of the global economy on the back of the financial crisis which is at the heart of the matter. One obvious consequence is thus that the global economy, at one and the same time, increasingly will be populated by an increasing amount of economies with the need (and desire) to deleverage as well as an increasing amount of economies dependent on exports to achieve economic growth. In wonkish terms, global economies will tend to move towards the same intertemporal preference for consumption and saving and since global intertemporal smoothing, by definition, occurs through current account imbalances it is not difficult to see how there is a constraint on many economies’ ability to smooth their consumption and saving decisions optimally in the case of a process of crowding in one end of the spectrum.

An obvious question here becomes; who, if any, will be the economies tilting the scale in the other direction through their ability to provide capacity (return) for other nations' desire to save more?

How are things in Emerming Market Land then?

Personally, I have tended to put my focus elsewhere than China most prominently because I think that the old narrative of the BRIC economies taking over the helm is not an adequate way to look at it. Essentially, I would put Brazil and India one one side and Russia and China on the other side since in the case of the latter they are about to grow old much before they become the economies so many people expect to become. Apart from Brazil and India I also see a fairly wide batch of emerging economies with the potential to do the heavy lifting as we move forward and I would include here economies such as Chile, Indonesia, Turkey, Morroco and a number of others. Much more than quibbling about the actual candidates here I want to emphasise the importance in realizing how this global realignment won't take place with the emergence of one single economy taking over from the US, but rather with a "basket" of economies/currencies driving the realignment.

Having said all this, it is pretty difficult to get around the fact that everything seems to be revolving around China at the moment. More specifically fears are growing that in an effort the counter the global recession and in a world where 6-8% growth rates are, in general, difficult to come by Chinese authorities as well as foreign investors are fuelling a bubble in China which may look like the one currently unravelling in e.g. the Baltics look minuscule [quote from Bloomberg and the FT]. Thus and even though I would argue that the analysis should have a different fundamental focus it is still cast in the perspective of, first China and then the BRICs in general.

The BRIC nations, which also include India and Russia, have the four best performing stock markets in dollar terms this year among the world’s 20 biggest, according to data compiled by Bloomberg. China’s Shanghai Composite Index has soared 85 percent in dollars while Brazil’s Bovespa Index rose 77 percent. India’s Sensitive Index, or Sensex, climbed 61 percent and Russia’s RTS Index gained 60 percent. The Standard & Poor’s 500 Index in the U.S., by comparison, is up 8.4 percent while Japan’s Nikkei 225 Stock Average rose 7.5 percent.

Investor appetite for emerging-market assets is building on speculation that countries such as China and Brazil will be among the first to recover from the worst global recession since World War II, said Vinicius Silva, New York-based emerging markets strategist for Morgan Stanley. “It highlights the fact that demand for emerging-market assets remain strong and that companies, particularly in the BRIC markets, are using the improvements in capital markets to raise capital,” Silva said.

(FT)

Shares in Shanghai and Hong Kong tumbled on Wednesday as investors snapped up two newly listed mainland construction groups while selling down the rest of the market after reports that China’s central bank might rein in bank lending. Shares in China State Construction Engineering rose by as much as 90 per cent on their debut before closing 56 per cent stronger in Shanghai. China’s largest house-builder had last week raised Rmb50.2bn ($7.34bn) in the world’s biggest initial public offering since Visa raised $19bn in March 2008.

It is way beyond the scope of this post to open the box on what is really going on China. In terms of that topic I reserve the right to deal with it later and refer, thus far, to my styling on Blake above. However, I did like the recent analysis by Morgan Stanley's Qing Wang in which he talks about whether China is over-investing or over saving as well as the very relevant question of where the money would be spent were it not being used to finance the massive infrastructure investment program. Or, what is the opportunity cost of China's fixed asset investment program?

Given China's high national savings rate, from the perspective of the economy as a whole, there are only three forms in which China can deploy its savings: 1) onshore physical assets; 2) offshore physical assets; and 3) offshore financial assets. Since China maintains tight controls over outbound capital flows, about 70% of China's total offshore assets are in the form of official FX reserve assets as a result of investment made by a single-largest investor - the central bank. Moreover, we estimate that about 65-70% of China's official FX reserves are invested in US dollar assets, the bulk of which are US government bonds.

In response to this I ask the simple question. What is actually the capacity in China to create return on current and future investment of the magnitudes we are talking about both in the context of money supplied by domestic stimulus packages as well as foreign money thirsty for yield? Wang touches exactly upon this question as he questions just how much China can suck up. I would put it much more bluntly. China's capacity is declining and will continue to do so as we move forward as a result of the ageing which the one child policy is set to produce. This is really the missing story on China at the moment I feel and one story which could go a long way to differentiate the story. In this respect I do agree wholeheartedly with Michael Pettis when he says;

I have warned for a long time that it would be very difficult for China to make the necessary transition to a consumption-led economy quickly enough to accommodate the global adjustment taking place. Unless it is willing to see its economy collapse, there is simply no way China can reduce its negative net demand quickly enough to match the contraction in US demand and so avoid squeezing the hell out of the global tradable goods sectors. That is why policy coordination is so important, especially between China and the USD, and of course that is why I continue to be a pessimist. I do not think this policy coordination is taking place. I will write about this more later this week.

The only thing I would add is that this is not simply a question of correcting US-China imbalances, but a more more deep rooted issue in terms of fundamental drivers of international capital flows and the future supply of net capacity.

Moving on to safer ground I recently did a lengthy analysis on Chile in which I concluded that the economy was one of to watch for relative good news in relation to the financial crisis. Recently, we learned how Chilean banks booked a healthy US 959 million profit in the first half of 2009 and although this number is useless in itself I think that it is pretty obvious from digging into the specifics (see article) that although Chile financial sector has seen its share of losses, the picture is a lot less dire than elsewhere. In fact, if we look at one of graphs that I showed in my analysis of Chile, we see that financial services have held up remarkably well during the financial crisis (see also here), no doubt due to strong underlying fundamentals as well as a very aggressive policy reaction from the central bank. 

Generally, analysts and local observers in Chile are beginning to notice green shoots with increasing regularity and unlike the ones observed in Europe or elsewhere in the OECD I am more confident that the ones in Chile are going to be long lived although 2009, in all likelihood, will be a tough year when the chapter is closed. The following quote is from Bloomberg;

Chile’s economy may be starting to recover from its slump as extra government spending spurs growth, Finance Minister Andres Velasco said today. Velasco has spent more than $4 billion this year on tax cuts and extra outlays. He will pull $8 billion from Chile’s offshore savings funds in 2009 to help pay for the stimulus as well as to plug the budget deficit caused by slowing growth and lower receipts from mining.

Chile is facing the deepest recession since 1999 after revenue from exports declined and a virus ravaged its salmon farming industry. The economy shrank faster than forecast in the first half and probably contracted in the second quarter from the first, the central bank said on July 8.

“These policies have effects, but they don’t occur overnight, they don’t happen in one month or one quarter,” Velasco said. “We have to continue working, we have to keep a cool head and at the same time be prudently optimistic.”

Now, Velasco has a distinct interest, of course, in spinning the story in a certain way but until evidence surfaces to the contrary I am willing to buy this story. More generally, the influence of China also pops up in the context of copper prices where many suggest that a large part of the recent increase in Copper prices (and indeed commodities) owes itself exactly to the stimulus money from China. As a side note on this, it seems that the link between rising Copper (and commodities in general) is being increasingly linked to a story of stockpiling in China and then of course, what will happen when China decides that it has had enough. This was a story I picked up on in my analysis of Chile (picked off from Macro Man) and it appears to be gaining traction as an actual analytical explanation.

Elsewhere in Latin America, Morgan Stanley's Latam analyst on Brazil Marcelo Carvalho simply throws in the towel, as it were, devotes an entire note to the link between Brazil and China and what this means for the economic growth of the former. As will come as no surprise Carvalho notes the strong link between Brazil's economic performance and commodity prices and since China certainly seems to be driving the latter, if not directly, then through its effect on overall global sentiment then the rampant growth in China may add positively to the outlook in Brazil.

Moving the perspective up a further notch and as a concluding remark on my, admittedly, selective tour of the emerging market edifice I will leave you with the recent general statement from Morgan Stanley's Manoj Pradhan;

The strong worldwide rally in risky assets since March reflects not just the relief that the worst is likely behind us, but also anticipation of a return to growth for most economies. Much is expected from Emerging Markets, particularly from Asia ex-Japan, which is expected to outperform the rest of the world. Markets and investors realize, however, that not all EM economies are alike, and some will show output growth that is lower than the 1.3% growth our global team expects from the G10 economies in 2010.

Thanks for nothing might be your immediate response here and although I agree that this is extremely general it does sum up the main discourse at the moment whether you agree or not.

Bottomline - What to Watch?

The answer to this question depends on your perspective of course but it seems abundantly clear that if the locus of the financial and economic crisis has moved from the US to the shores of Europe and in particular Eastern and Southern Europe, the corresponding locus of the recovery has moved to Asia (ex-Japan) and most forcefully China. I think it is important to understand how and why these two discourses may co-exist as we move forward.

I believe it is obviously clear that the global economy is not heading for a quick rebound here, but it is equally as clear that some economies will be able to post growth rates that are much above the mean of what the OECD is able to. In this way, one key theme to watch is how this difference is transmitted through to the global economy e.g. in the form of carry trade flows but also in the form of an evolving process by which some economies begin, and go through, their inevitable adjustment and rebalancing phase.

In this specific context I have to be more than a little bit skeptical about the capabilities of China. This is not out of an inherent disdain towards the country but, on the contrary, because I fear that China may ultimately succumb to all those hopes and subsequent load pinned on her shoulders. In this sense I think, although I acknowledge that I have presented no formal analysis to back it up, that the recovery is some way to really materialize and that it may just ultimately be bust and not boom that frames China's economy.

---

* Apologies to William Blake; and of course to Macro Man for encroaching on his territory.

On Friday, US stocks registered their fourth-straight week of declines as a dip in consumer confidence and Chevron’s (NYSE:CVX) bleak profit outlook highlighted concerns about the health of the global economy.  The Dow Jones Industrial Average lost 37 points, or 0.4%. Tech-heavy Nasdaq rose 3 points or 0.2% and the S&P 500 index eased 3 points or 0.4%.  Volume remained light with only 922 million shares trading and advancing issues ahead of decliners by a narrow margin.  For the week, the Dow slipped 1.6%, the S&P 500 fell 1.9% and the Nasdaq declined 2.3%.       

Although Alcoa (NYSE:AA) launched second-quarter earnings season with a smaller-than-expected loss, Chevron’s (NYSE:CVX) profit warning heightened concerns about second-quarter earnings and investors sold off stocks.  Crude prices continued their decline, remaining near $60 level.  Exxon Mobil Corp. (NYSE:XOM) slid 4.9%. 

Among the S&P 500 industry groups, telecom companies were the worst performers.  AT&T (NYSE:T) fell 4.7% to $23.44, and Verizon Communications Inc. (NYSE:VZ) declined 5.2% to $28.62 after Sanford C. Bernstein & Co. cut profit estimates for these companies, citing declining revenue from corporate customers.  Technology stocks got a boost after Goldman Sachs upgraded the U.S. hardware and software sectors to "attractive" from "neutral," citing potential growth in demand from businesses.  Goldman (NYSE:GS) also raised its price target on Apple Inc (NASDAQ:AAPL) to $160 from $145.  Apple rose 1.6% to $138.52.

Among the financials, results are expected from Goldman Sachs (NYSE:GS), Bank of America (NYSE:BAC), Citigroup (NYSE:C) and JP Morgan (NYSE:JPM).  Analysts expected Goldman Sachs (NYSE:GS) to report second-quarter profit of more than $2 billion on strength in the firms' bond, currency and commodity trading operations.  Among the technology companies due to report their earnings are: Intel (NASDAQ:INTC), Google (NASDAQ:GOOG), Nokia (NYSE:NOK) and IBM (NYSE:IBM).  Also among the key companies reporting this week are: Johnson & Johnson (NYSE:JNJ), General Electric (NYSE:GE), CSX (NYSE:CSX), and Abbott Labs (NYSE:ABT). S&P500 second quarter earnings are projected to have declined 35% in the quarter, compared with a 33% first quarter drop.

Dollar prices were under pressure after Russian President Dmitry Medvedev, speaking at a summit of the Shanghai Cooperation Organization, said the world needs new reserve currencies.  Wall Street futures point to a flat opening.  

On Monday, US stocks registered their worst slide in a month with the Dow Jones Industrial Average, which ended last week in a positive territory for 2009, went back in the red for the year. Among S&P 500 stocks, 95% registered losses. Commodities and basic material stocks declined, hurt by a rise in US dollar.  The morning session saw most of the declines and stocks traded sideways as the session advanced.  The NASDAQ, off 2.3%, and the S&P 500, down 2.4%, recorded their steepest declines since May 13.  Volume on the NYSE was light with only 1.1 billion shares trading.  Market breadth was negative with decliners outpacing advancing issues by a five-to-one margin.  The market's measure of volatility, the CBOE Vix, jumped the most since April 20, rising 9.5% to 30.81.

The National Association of Home Builders reported that confidence among U.S. home builders fell after rising for two months. A prime concern was the rise in mortgage rates that followed a recent selloff in U.S. Treasurys.  Meanwhile, US Treasuries moved higher for the third straight day, with the benchmark 10-year up 20/32 and the yield declining to 3.715%, falling back from their seven-month highs of last week.

A rising dollar reduced the luster of basic material and oil stocks as inflation hedges.  Positive comments at the G8 summit regarding the greenback's status as world's reserve currency helped the dollar, which rose 1.2% against a basket of currencies.  Copper prices declined 3.7% in New York trade and silver lost 5.7%.  Among DJIA components, only Microsoft (NASDAQ:MSFT) and American Express (NYSE:AXP) recorded gains.  Alcoa (NYSE:AA) led the decliners on the DJIA, dropping 6.5%.  Freeport-McMoRan (NYSE:FCX) fell 5.8% and US Steel (NYSE:X) shares declined 5.7%. Among energy stocks, ExxonMobil (NYSE:XOM) fell 1.3%, and Chevron (NYSE:CVX) declined 2.2%, with Schlumberger (NYSE:SLB) shares down 2.8%. Among S&P 500 components, only 22 advanced with all ten industry groups losing ground.    

The expected decline in industrial production of 1.0%, up from the drop of 0.5% prior, is largely attributed to the GM (NASDAQ:GMGMQ) and Chrysler bankruptcies. Capacity utilization rates are expected to have tightened to 68.4% from 69.1% prior, the lowest in 42 years since record-keeping began.

In overseas developments, ECB warned Eurozone banks on potential additional losses of over $283 billion this year and next.  In a report, the International Monetary Fund said exiting the fiscal stimulus programs will be challenging for the US.  The IMF Chief cautioned that the worst of the recession has yet to be felt. 

U.S. stock futures pointed to a lower open on Wall Street with Dow futures down 94 points, or 1.1%, at 8,696.

Friday saw a quiet trading week coming to a halt, in which the Dow Jones Industrial Average joined the S&P and Nasdaq in positive territory for the year.  The Dow, which has risen in 12 of the last 14 weeks, gained 28 points, or 0.3%, to close above its 2008 finish of 8,776.39.  The S&P ended the day flat and Nasdaq recorded a modest decline.  Decision by ten financial firms to repay US government funds was an indication that the worst of the credit crisis is over.  However, spiraling yields on government bonds and rising commodity prices kept sentiments under check. Dollar prices, however, got some boost following positive comments from Russia's finance minister and commodity-based stocks and oil prices declined.  

At the weekend meeting of G8 finance ministers in Italy, Russian finance minister Alexei Kudrin remarked that dollar's status as the world's main reserve currency was likely to continue in the near term.  The G8 finance ministers signaled that the worst of the financial crisis is over, raising the need for talks on central banks' upcoming exit strategies. However, they stopped short of painting a rosy picture, saying, "...the situation remains uncertain and significant risks remain to economic and financial stability". According to US Treasury Secretary Geithner, however, "I don't think we're at the place yet where we can say we have a recovery in place".

Hartford Financial (NYSE:HIG), which has asked for a $3.4 billion US Treasury aid, announced plans to raise $750 million through a stock sale to boost its capital position. 10-year government bond yields pulled back from their recent highs and declined to 3.75% from 3.80%.

Comments from the annual Paris Air Show pointed to an increasingly difficult environment for commercial aircraft manufacturers, with airlines looking at two straight years of losses.  Despite a contested election in Iran, profit-taking and positive US dollar statements from Japan and Russia sent commodity-based stocks lower this morning, as oil prices sank to $71 per barrel.

Key talks scheduled this week include Fed Governor Duke today on responses to the financial crisis; Fed Governor Warsh on economic policy Tuesday, Bernanke at the financial literacy summit on Wednesday, and Treasury Secretary Geithner Thursday on financial regulation.

Yesterday, Wall Street responded with a yawn to Obama Administration's announcement that 10 of the largest banks could repay $68 billion of government bailout cash.  Although Treasury Secretary Geithner, appearing before the Senate Appropriations Committee, noted the repayment of the bailout money was a sign of "financial repair," stocks swung back and forth in a narrow range, signaling the much-expected announcement from the Treasury packed few surprises.  Technology stocks, buoyed by Texas Instruments' (NYSE:TXN) better-than-expected earnings and sales outlook, pushed Nasdaq higher while the Dow Jones Industrial Average and broad based S&P 500 index ended the day mixed.  The Tech-heavy Nasdaq rose 17.73 points, or 0.96%, to close at 1860.13.  The DJIA slipped about 0.1% to close at 8,763.06.  The S&P added 0.4% to close at 942.43. 

Some big financial institutions have been eager to escape increased federal involvement and the restrictions that come with being part of the Troubled Asset Relief Program.  Although the Treasury did not name the banks cleared to pay back the TARP funds, the ten institutions quickly confirmed they have been allowed to exit the government's financial assistance program.  Morgan Stanley (NYSE:MS), American Express (NYSE:AXP), JPMorgan Chase (NYSE:JPM), Goldman Sachs (NYSE:GS), Bank of New York Mellon (NYSE:BK), BB&T (NYSE:BBT), Capital One (NYSE:COF), Northern Trust (NASDAQ:NTRS), State Street (NYSE:STT) and US Bancorp (NYSE:USB) were cleared to pay back the rescue funds.  Commenting on the move, JP Morgan Chase & Co (NYSE:JPM) CEO Jamie Dimon noted, "Paying back TARP at this time is the right thing for JPMorgan Chase, and it's the right thing for our country."  Financial sector shares edged up 0.4%, with American Express (NYSE:AXP) topping the list of gainers on the DJIA with a 5% jump, as traders were relieved that the industry's rising rates of card delinquencies and the potential for increased attendant loan losses had not prevented government approval of its repayments.

Following Texas Instruments' (NYSE:TXN) improved guidance, semiconductor shares rallied with Advanced Micro Devices (NYSE:AMD) closing up 3.1%, Intel (NASDAQ:INTC) rising 3.4%, and National Semiconductor (NYSE:NSM) closing up 4.4%. According to a Bank of America (NYSE:BAC) analyst note, Microchip Tech (NASDAQ:MCHP) has been witnessing improved China orders.  BofA raised its price target on the company to $23.

Crude prices went beyond $70 per barrel on hopes a stronger economy will lift demand.  Dollar prices continued to remain under pressure.  Although concerns linger over the state of the world economy, commodities have recorded sharp gains recently as investors have increasingly turned towards crude to hedge against a weak dollar.  Yesterday's $35 billion auction of 3-year Treasuries met with strong demand, however, as a yield of 1.96% topped expectations, and the bid-to-cover ratio equaled 2.8%. Today's calendar is for $19 billion in 10-year notes, with $11 billion 30-years slated for tomorrow.  However, investors remain concerned that rising short-term interest rates will squeeze banking industry's net interest margins, in a sector that has already seen a 73% price run-up over the past three months.

Meanwhile, late Tuesday, the Supreme Court rejected an appeal from three Indiana state funds, consumer groups and others, clearing the way for the sale of most of Chrysler's assets to Italy's Fiat Group SpA. 

Afternoon sentiment will reflect release of the Fed's latest take on regional economic conditions, revealed in its Beige Book at 2:00 AM ET. The report is likely to recount the well-aired areas of economic weakness, namely, depressed housing markets, soft consumer demand, deteriorating employment opportunities, and downward price pressures. Indications of an economic recovery's "green shoots" of growth may help boost sentiment.

Following the overseas gains, US stock futures suggest Wall Street is headed for a higher open.  Dow Jones industrial average futures rose 1.2% to 8,586. Standard & Poor's 500 index futures jumped 1.4% to 930.50, while Nasdaq 100 index futures gained 1.1% to 1,451.50.       

On Friday, a late-session rally pushed U.S. stocks to their biggest three-month run since 2007, as commodities recorded their highest monthly advance since 2007 and energy stocks rose, helped by a spike in oil prices.  The S&P 500 index, which recorded its steepest weekly loss since March during the prior week, rose 3.6% during the holiday-shortened week.  Sustained expectations that the economy is turning a corner have pushed global benchmarks higher and resulted in increased buying activity.  The Dow Jones Industrial Average jumped 223.01 points, 2.7% to 8500.33, capping an upbeat week for Wall Street.  Since hitting their 12-year lows in early March the indices have jumped nearly 30% on the DJIA, 36% on the S&P, and almost 40% on the NASDAQ.

All ten S&P industry groups recorded gains on Friday.  Since the beginning of the year, basic material shares have recorded the sharpest gains, up 23.8%, followed by a 20.5% jump in technology stocks. The Reuters/Jefferies CRB Index of 19 raw materials increased over 14% in May for its biggest monthly rise in 35 years.  U.S. Steel Corp. (NYSE:X) jumped 16% to $34.08 and Freeport-McMoRan Copper & Gold Inc., (NYSE:FCX) surged 13% to $54.43., leading gains among raw- materials companies.  Oil prices climbed above $66 to a six-month high.  Year-to-date, five sectors remain in negative territory, including: utilities, off 8.4%, telecom, down 6.7%, financials, off 4.1%, and industrials and health care, down 2.1%.

Shares of General Motors (NYSE:GM) plunged 48% to $0.75, the lowest since great depression, as the automaker appeared set to file for Chapter 11 bankruptcy protection. Some media reports suggested the company will sell most of its assets to a new entity. Late Sunday, a federal bankruptcy court cleared Chrysler to come out of bankruptcy and sell most of its assets to Italian car maker Fiat. 

Treasury Secretary Geithner travels to China for two-day talks with Chinese leaders, even as the weakness in US dollar keeps the focus on US economic health relative to its global partners. Traders, nevertheless, are expected to remain glued to developments on that front. Geithner, on his part, has tried to remain optimistic, noting, "The global recession seems to be losing some force; and "The financial system is starting to heal." Last week's OPEC meeting also revealed its members optimistic on the outlook for the economy and crude prices with Saudi oil minister Naimi asserted the world economy can withstand $75-$80 per barrel oil.

However, an increased appetite for risk has sent commodity prices higher, heightening fears of inflation. According to Barclay Capital's (NYSE:BCS) quarterly FX investor sentiment survey only 17.5% of the 605 central bankers, asset managers, hedge funds and international corporate clients interviewed expect the rally to continue, with six out of ten believing the rally is a bear market trap, and 69% describing a recovery as most likely to prove either u-shaped or w-shaped.

Stock futures show Wall Street is headed for higher open.  Dow futures rose 0.8% at 8,450. Standard & Poor's 500 index futures rose 0.7% to 911.80 and Nasdaq 100 index futures rose 1% to 1,433.00. 

Although government's ability to fund its massive debt requirements played in the minds of investors throughout the week, on Thursday traders chose to look at the bright side of things sending the DJIA up 1.3% to 8403.80; the NASDAQ up 1.2% to 1751; and the S&P higher by 1.5% to 906.83.  Stocks seesawed through the session as a better-than-expected auction of seven-year Treasury notes helped assure investors of an economic recovery.  And this optimism saw 26 of the DJIA's 30 ending higher and 77 of the NASDAQ 100 ending the day in the green. AT&T CEO, speaking at an investor conference yesterday, also sounded optimistic, noting, "I'm not seeing green shoots...But we haven't seen any deterioration either."

In last night's speech Dallas Fed President Fisher, speaking on the recent steepening of the Treasury yield curve, whether a result of burgeoning supply or improved recovery prospects, noted "I think it is probably a little bit of both, discounting the supply of new debt, but I detect...there is a pick up in confidence about the future."

As risk appetite grew, financials advanced and led the gainers on the DJIA.  JP Morgan (NYSE:JPM) jumped 5.7%; Bank of America (NYSE:BAC) was up 3.6%; and American Express (NYSE:AXP) recorded a 3.4% rise.  The oil and gas sector rose 3.0%, with Chevron (NYSE:CVX) increasing 1.9% and ExxonMobil (NYSE:XOM) rising 1.4% on the DJIA.  Weekly crude inventory levels posted a much sharper 5.413 million barrel drop than the -0.1 million drawdown anticipated, and deeper than last week's 2.1 million decrease. As expected, OPEC maintained production at current levels.  A rise in oil prices also boosted energy producers with Exxon Mobil Corp. (NYSE:XOM) adding 1.4% to $69.23. Schlumberger (NYSE:SLB) jumped 5.5% to $56.35. Occidental Petroleum Corp. (NYSE:OXY) advanced 4.2% to $65.47.

Stock futures suggest a higher opening on the Wall Street.  Dow Jones industrial average futures rose 0.4% to 8,327. Standard & Poor's 500 index futures rose 0.3% to 895.30 and Nasdaq 100 index futures were up 0.4% to 1,409.00.

On Wednesday, U.S. stocks sank amid growing worries over the fate of General Motors (NYSE:GM) and rising yields on longer-term US government debt.  An encouraging housing report did little to contain the selloff as yields on the benchmark 10-year jumped to a 6-month high. Energy shares declined but financials were the leading laggards.  Shaking investor confidence yesterday were yields on 10-year Treasuries which climbed 0.18 percentage point, or 18 basis points, to 3.732%.  According to Goldman Sachs (NYSE:GS) the US will sell $3.25 trillion in Treasuries by the end of the September fiscal year, as the US funds bank bailouts, stimulus spending and a record budget deficit.

General Motors' (NYSE:GM) bondholders turned down a $27 billion bond swap offer and many analysts said bankruptcy is imminent for the beleaguered automaker. The decline was broad based as all S&P sectors ended in the red.  The S&P 500 stock average declined 1.9% for its highest decline in two weeks.  The DJIA shed 173 points, or 2.1%, to close at 8300. Technology focused NASDAQ managed a 1.1% drop.  Volume on the NYSE remained low as only 1.3 billion shares exchanged hands.  The CBOE Vix, the measure of market volatility, however, surged 5.7% to 32.36.  On the NYSE, declining stocks outpaced advancing issues by a four-to-one margin.  SanDisk (NASDAQ:SNDK), which renewed a licensing agreement with Samsung Electronics, led the gainers on the S&P 500, with a 14.3% jump to $15.52.

This morning Moody's (NYSE:MCO) asserted the US AAA sovereign rating is "stable," despite a heavy debt burden.  Moody's cited a diverse and resilient US economy, strong government institutions, high per capita income and a fundamental position in the global economy for its stable outlook.  Wednesday's Treasury auction of 5-year notes met with successful demand, with a 2.3 bid-to-cover ratio; today $26 billion 7-year notes will be auctioned. The government plans to turn out $101 billion in debt this week.

On the DJIA, all but two components slid.  Among the declining issues, General Motors (NYSE:GM) led on the downside with a 20.1% fall.  Many fear bankruptcy of the automaker would add to already swollen unemployment numbers and wreak havoc on the economy.  JP Morgan (NYSE:JPM) shares plunged 5.2% after CEO Dimon's said credit card losses at its Washington Mutual unit could rise to 24% by year-end. Nevertheless, Dimon remained optimistic on company's earnings prospects, noting that reduced leverage would be more than offset by increased interest rate spreads, providing 18 to 20 per cent return on equity. Bank of America (NYSE:BAC) announced that it has raised almost $26 billion in capital since results of the government stress test found the bank needed $33.9 billion in additional capital.  The bank also noted the possible issuance of 564 million additional common shares through an exchange of perpetual preferred shares for common stcok. Wells Fargo (NYSE:WFC) declined 6.1% to $24.08. U.S. Bancorp slid 5.7% to $17.96.  PNC Financial Services, which said it has raised $600 million in a common stock offering, declined 5% to $41.11.

On Tuesday, U.S. stocks shot higher for the first time in five sessions as the Conference Board's consumer confidence index rose sharply in May, refueling hopes that the consumers are getting more optimistic about the economy.  The surprise rise in consumer confidence, which vaulted to 54.9 from 40.8 in April, offset dismal housing news and put investors back on buying track.  Traders, back after a long weekend, bought enthusiastically pushing every industry group on the S&P 500 stock index higher.  Nevertheless, declining home prices served a reminder that the economic outlook is yet to show signs of stabilization.  The consumer confidence index jumped to an eight-month high and marked its third rise in as many months. Volume on the NYSE was light as only 1.4 billion shares exchanged hands and advancing shares outpaced declining issues by a five to one margin.

The broad-based rally saw 28 of the 30 Dow components ending the day higher, with JP Morgan Chase (NYSE:JPM) leading the list of gainers, followed by a 5% rise in American Express (NYSE:AXP) shares.   Technology-focused Nasdaq surged 3.4%, helped by gains in computer manufacturers, Internet firms and search engines.  Apple (NASDAQ:AAPL) surged 6.7% after it was upgraded by Morgan Stanley (NYSE:MS) to "overweight."  Morgan Stanley (NYSE:MS) said analysts are underestimating demand for iPhones.  Qualcomm Inc. (NASDAQ:QCOM) jumped 4.8% to $43.29, after Barclays Plc raised its 2010 earnings estimates on the company.  Energy stocks also advanced as crude prices jumped to a six-month high, fueled by comments from Saudi Arabian Oil Minister Ali al-Naimi, who expects oil to hit as much as $75 per barrel between the third and fourth quarter on higher China consumption.  Exxon Mobil Corp. (NYSE:XOM) added 1.4% to $69.81.  Reuters expects crude inventory levels fell 1.1 million barrels over the past week, while gasoline levels dropped 1.8 million barrels. Tomorrow's OPEC meeting is generally expected to result in members maintaining current production levels.

Gains on the S&P 500 were led by financials and consumer-related stocks.  Financials were the leading gainers, up 4.1%.  Technology stocks rose 3.3%.  Industrials gained 3.3%.  Defensive areas of health care and consumer goods rose 1.6% and 1.2%, respectively.

J.C. Penny Co. (NYSE:JCP) rose 6.5% to $26.76 and Best Buy (NYSE:BBY) added 5.3% to $37.05.  Among financial shares, Wells Fargo (NYSE:WFC) added 5.5% to $25.65 and PNC Financial (NYSE:PNC) rose 5% to $43.25.  Restaurant chains and home builders also advanced.  Darden Restaurants Inc. (NYSE:DRI) rose 7.9% to $35.64. CKE Restaurants (NYSE:CKR) jumped 13.8% to $8.80.  Home builder KB Home (NYSE:KBH) rose 5.9% to $15.50, and DR Horton Inc. (NYSE:DHI) rose 5.1% to $9.47.

One of the bones of contentions of the past week had been the overhanging Treasury auctions scheduled for this week amid a ballooning budget deficit necessitating further sales to meet the $2 trillion in extra debt needs expected this year.  However, the record-tying $40 billion in 2-years auctioned yesterday met with bids 2.94 times the offered amount and the 2-year note sale received strong response, with $117.5 billion in bids coming in for $40 billion in debt.  The US dollar edged up 0.1% against a basket of currencies.

Today's data includes the expected turndown by General Motors' (NYSE:GM) bondholders of its offer to convert their holdings into company shares, making bankruptcy the foregone conclusion it has been for a while.

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).

Pre-market futures suggest a higher opening on the Wall Street, following better-than-expected earnings from Home Depot (NYSE:HD), which reiterated full-year guidance and reported a 44% jump in profit despite lower sales.

On Monday, U.S. stocks rallied as Lowe's (NYSE:LOW) improved earnings outlook fueled optimism of a rebound in housing sector.  Chief Executive Robert Niblock advised, "Encouraging signs in recent weeks that suggest perhaps the worst is behind us."  Lowe's (NYSE:LOW) jumped 8.1%. Shares of Home Depot (NYSE:HD) also rallied on the news and ended the day with a 6.6% gain.  Lowe's results beat Street expectations and the firm's full-year guidance was ahead of consensus views. Goldman (NYSE:GS) added Macy's (NYSE:M) to "conviction buy" list, citing its $400 million cost savings plan and a likely recovery in profits as the economic situation rebounds.

On Monday, the S&P 500 gained 3% to 909.71 for its steepest gain in two weeks. The Dow Jones Industrial Average added 235.44 points, or 2.9%, to 8,504.8.  The NASDAQ led the indices with a 3.1% advance to 1,732.

The National Association of Home Builders' latest Housing Market Index which rose to 16 from 14 in April suggested home builders are growing increasingly confident. Citigroup (NYSE:C) raised its rating on Lennar (NYSE:LEN) from "hold" to "buy;" Lennar (NYSE:LEN) shares jumped 13.7%.  Taking the cue, DR Horton (NYSE:DHI) rose 8.8%; Centex (NYSE:CTX) 8.4%, and KB Home (NYSE:KBH) 8.2%.

The 3-month LIBOR declined 4 basis points to 0.79%, its steepest fall since March 19 and market's volatility index, the CBOE Vix, plunged 8.70% to 30.24.  On the NYSE, advancing issues outpaced declining stocks by a seven-to-one margin.  Volume was relatively moderate at 1.42 billion.

Of the thirty DJIA components, twenty-nine closed higher on Monday.  Financials were the leading gainers, up 6.7%, followed by a 4.8% jump in basic materials stocks, 3.9% in consumer services, and 3.4% surge in oil and gas and industrial sector shares.

Among financial components, Bank of America (NYSE:BAC) led the advancing issues with a 9.9% gain, followed by a 7.8% jump in American Express (NYSE:AXP), and a 6.7% advance in JP Morgan (NYSE:JPM) stocks.  Morgan Stanley (NYSE:MS) shares jumped 8.2%, Goldman Sachs (NYSE:GS) added 6.5%, and Wells Fargo (NYSE:WFC) surged 8.3%.  Financials got a boost after Goldman Sachs (NYSE:GS) added Bank of America (NYSE:BAC) to its "conviction buy" list, citing confidence in the banks' ability to come out of the current credit crisis, as well as expectations of improved second quarter results due to strength in refinancing and capital markets.  Citigroup (NYSE:C) raised its price target on Goldman Sachs (NYSE:GS) shares 10% to $160, citing improved debt and equity underwriting activity.

Goldman Sachs (NYSE:GS), JP Morgan (NYSE:JPM) and Morgan Stanley (NYSE:MS) applied for permission to repay TARP funds worth $45 billion.  State Street (NYSE:STT) shares jumped 8.5% in spite of news the firm would take a $3.7 billion loss putting conduits on its balance sheet.  The company said it will sell stocks to pay back funds borrowed under TARP.  However, after the markets' close, American Express (NYSE:AXP) announced plans to cut 6% of its global workforce, or 4000 jobs, citing increased defaults generated by the weak economy.

Today's economic posts include the 8:30 AM ET housing releases on building permits and housing starts. Both the posts are expected to show modest improvements.  April permits are expected to have risen to 530,000 from 516,000, and starts to 527,000 from 510,000. Minneapolis Fed President Gary Stern speaks at 1:15 PM ET on financial conditions. Crude prices hit $60 this morning, following yesterday's 4.8% increase, upon reports of a Sunoco (NYSE:SUN) refinery fire impacting Northeastern US supplies, and Nigerian militant threats to block waterways.

India's Sensex jumped 2,099.21 points, or 17%, to 14,272.63, before trading was halted for the day.     

Stock futures showed a higher opening on the Wall Street.        

On Friday, U.S. stocks declined as lack of a clear economic data suggesting economic recovery and General Motors' (NYSE:GM) announcement that it will drop 1,100 dealers in the U.S. weighed on sentiments.  The Dow Jones industrial average declined 63 points, or 0.8% and the S&P 500 index lost 10 points, or 1.1%. Tech-heavy Nasdaq declined 9 points or 0.5%.  The Nasdaq declined 3.4% during the week, ending a nine-week winning run.

On a weekly basis, the DJIA lost 306 points or 3.6%; the S&P 500 lost 46 points for a 5.0% drop.  However, the official close of the earnings season saw a silver lining: about two-thirds of the companies that reported their results beat earnings estimates.  The three month LIBOR eased to a record low of 0.83%, down from 0.94% just a week earlier.  Companies from Intel (NASDAQ:INTC) to Ford (NYSE:F) sounded optimistic, saying things are better than expected.

Among S&P industry grouping, financials were the leading decliners last week with a drop of 11.3%, followed by industrials, down 7.2%, basic materials, off 6.7%, and consumer services that ended the week 5.8% lower. Oil and gas shares last week fell 7.2% on demand-related concerns.  On Friday, 24 of the 30 Dow components ended in the red, led by Chevron (NYSE:CVX), Exxon Mobil (NYSE:XOM), Boeing (NYSE:BA), Caterpillar (NYSE:CAT), Merck (NYSE:MRK) and Wal-Mart Stores (NYSE:WMT).

The week lacks many market moving economic data. Nevertheless, several big names, including: Deere (NYSE:DE), Hewlett-Packard (NYSE:HPQ), Home Depot (NYSE:HD), and Target (NYSE:TGT) are due to report their earnings. Tuesday's April Building Permits and Housing Starts reports, which expected to show a gain in permits from 516,000 to 530,000 and in starts from 510,000 in March to 527,000 in April, may have a major impact on markets.  On Wednesday minutes from the April 28-29 FOMC meeting may indicate updated growth, inflation and unemployment expectations. On Thursday Leading Indicators are projected to show a gain of 0.6% in April from a decline of 0.3% the prior month.

In a Q&A at 1:00 PM ET today, Treasury Secretary Geithner is scheduled to answer questions regarding economic conditions. However, according to media reports, up to 500 more banks face possible closure as stress test criteria migrates to the smaller banks, which, the report says, could result in additional capital-raising needs of $24 billion among such banks. Today's 1:00 PM ET activity index from the National Association of Home Builders is expected to have risen from 14 in April to 16 in May.

The Commerce Department reported yesterday that U.S. retail sales declined 0.4% in April.  Economists had expected the number to remain unchanged.  Purchases at U.S. stores had tumbled 1.3% in March.

On Wednesday, U.S. stocks declined with the New York Stock Exchange witnessing the broadest sell-off in three weeks.  The Dow Jones Industrial Average shed 184.22 points, or 2.2%, to 8,284.89. The S&P 500 Index declined for the third straight session, wiping off most of the gains it made last week.  The benchmark declined 2.7% to 883.92, and has lost 4.9% since the beginning of this week.  The tech-heavy Nasdaq declined 3%, or 51.73 points, at 1,664.19. Shares of industrial producers and consumer-related businesses bore the brunt. On the NYSE, volume was heavy as 1.76 billion shares exchanged hands and losing stocks outpaced advancing issues by a sixteen-to-one margin.

Treasury prices rallied as the unexpected decline in U.S. retail sales pushed investors towards risk aversion.  Dollar rose 0.7% against a basket of currencies.  Copper prices fell 3.2%; The DJ-UBS commodity index was off 1.2%.

Premarket futures are almost flat as inline earnings from Wal-Mart (NYSE:WMT) provided little boost to sentiments. According to a Financial Times article by a former US comptroller general, David Walker, the US' AAA debt rating is imperiled by the government's current excessive spending levels.

Optimism on the Street related to yesterday's retail sales was short lived as analysts failed to adequately assess the one-time, positive impact of January and February rebates from Social Security, which had helped revive consumer spending early this year.  Excluding autos, sales declined 0.5%.  As investors turned to cut positions, retail shares suffered, with Saks (NYSE:SKS) dropping 11.9%, Macy's (NYSE:M) plunging 6.7%, Target (NYSE:TGT) declining 4.8%, Costco (NASDAQ:COST) losing 2.3%, and Wal-Mart (NYSE:WMT) declining 1.2%. Office Depot (NYSE:ODP) shares plunged 15% after Moody's (NYSE:MCO) lowered the firm's debt rating.  Citigroup (NYSE:C) raised Home Depot (NYSE:HD) to "buy" from "hold," saying it expects the company to exceed this year's estimates; although fellow retailers declined, the shares bucked the trend with a 0.8% gain.

Basic materials led the declining sectors, off 5.8%, after weak demand assumptions from any economic recovery in the near-term hurt prospects. Alcoa (NYSE:AA) shares declined 8.8% on reports China may have restarted up to 1.4 million metric tons of capacity in April. Industrial shares fell 4.2%.  Caterpillar (NYSE:CAT) shares declined 5.2%, General Electric (NYSE:GE) lost 5.6%, 3M (NYSE:MMM) fell 4.4%, and United Technologies (NYSE:UTX) lost 4.2%.

Financial shares were once again under renewed pressure, falling 5.0%, as investors pondered over the banks' ability to raise fresh capital from private sources. Among DJIA components, Bank of America (NYSE:BAC) plunged 9.5%, Citigroup (NYSE:C) lost 6.8%, and American Express (NYSE:AXP) declined 5.3%. BB&T (NYSE:BBT) joined the growing list of banks tapping the market to raise funds, selling 75 million shares at $20 apiece, a discount to Tuesday's close of $22.50.  SunTrust (NYSE:STI) declined 6.9%, even as Goldman Sachs (NYSE:GS) upgraded the stock to "neutral" from "sell," citing better-than-expected stress test capital-raising needs.

Technology stocks showed signs of strength.  IBM (NYSE:IBM) said it expects 2009 earnings to be at least $9.20, versus consensus projections of $9.11, and noted it is "ahead of pace" to meet 2010 earnings projections of $10 to $12 per share.

Treasury Secretary Geithner's positive comments of "welcome signs" in the housing markets failed to convince investors as RealtyTrac reported increased foreclosures in April, with one in every 374 US homes receiving notices. Beazer Homes (NYSE:BZH) shares plunged 21.8%, and Hovnanian (NYSE:HOV) declined 12.2%.

Today's economic news covers wholesale prices for April, expected to show prices increased 0.1%. Besides the Wal-Mart (NYSE:WMT) inline post, weekly initial jobless claims are also expected to rate high on sentiment's Richter scale, with traders hoping for a continued diminished pace of claims.

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On Wednesday, U.S. markets advanced as some media reports suggested the balance sheets of major U.S. banks were not as bad as some had thought.  Financials rose sharply higher as details of the stress test, designed to gauge the capital needs of major banks, trickled out.  Cheering the mood further was Treasury Secretary Geithner who noted, ""I think the results will be, on balance, reassuring."  Citigroup (NYSE:C) jumped 17% amid reports the bank needs only about $5 billion. Stocks staged a rally by the closing bell as investors appeared determined to look at the bright side.         

The Standard & Poor's 500 Index jumped 1.7% to 919.53, its highest close since January 6. The Dow Jones Industrial Average rose 101.63 points, or 1.2%, to 8,512.28 and the NASDAQ inched 0.3% higher.  Trading volume on the NYSE was heavy with 1.9 billion shares changing hands and advancing shares outpacing declining issues by a seven-to-three margin. The Vix, market's measure of volatility, continued to ease with a 2.7% decline to 32.45, a seven-month low.

On the DJIA, Bank of America (NYSE:BAC) shares jumped 17.1% on assumptions that conversion of some of the government's $45 billion into common stock would be sufficient to cover the $34 billion that the bank reportedly needs. The company was also upgraded by Morgan Stanley (NYSE:MS) to "overweight." Morgan Stanley (NYSE:MS) also increased its price target on the stock to $25 from $16, stating the shares are "trading cheaply."  Some reports suggested China Sovereign Wealth Fund CIC plans to buy Bank of America's (NYSE:BAC) interest in CCB for $8 billion.  The stress test results are likely to suggest Morgan Stanley (NYSE:MS) needs $1.5 billion additional equity due to its acquisition of Smith Barney, GMAC requires $11.5 billion and Wells Fargo (NYSE:WFC) an additional $15 billion. Firms not expected to bolster their capital positions are: American Express (NYSE:AMX), Capital One (NYSE:COF), Bank of NY Mellon (NYSE:BK) Goldman Sachs (NYSE:GS), JP Morgan (NYSE:JPM), and MetLife (NYSE:MET). Treasury Secretary Geithner, Fed Chairman Ben Bernanke, FDIC Chair Bair and Comptroller of Currency Dugan present their views on the tests fifteen minutes before the results are officially released.

Yesterday's Challenger Gray jobs report and the ADP private sector report came in with less-dire-than-expected results. According to Challenger Gray's report, US employers cut 132,590 jobs in April, the lowest since October, falling for the third straight month, although still up 47% on the year.  This morning's weekly jobless claims are expected to show 635,000 new filings, up slightly from 631,000 prior.

Today's main economic posts cover weekly initial jobless claims, preliminary first quarter productivity reports and unit labor costs. Among major companies reporting their earnings are: American International Group (NYSE:AIG), NVIDIA (NASDAQ:NVDA), Allstate (NYSE:ALL), Sara Lee (NYSE:SLE), CBS Corp (NYSE:CBS), and General Motors (NYSE:GM).

The Hang Seng index in Hong Kong ended the day up 49.03 points, or 0.3%, at 16,430.08.  The Shanghai Composite Index in Mainland China edged up 0.3% to 2,567.34, its highest close in nine months.  Japan's Nikkei 225 Stock Average added 1.7% to close at 8,977.37.

On Tuesday, U.S. stocks advanced as better-than-expected housing data and comments from U.S. officials that the Obama Administration is not seeking additional funds for banks boosted sentiments.  Investors heaved a sigh of relief after White House spokesman Robert Gibbs remarked, "The administration doesn't believe we need to go to Congress right now."  The S&P 500 jumped nearly 3.4% to end above 900 for the first time since January 8. The index turned higher for the first time this year and joined tech-heavy Nasdaq in showing gains for the year. The Dow Jones Industrial Average added 2.6% and is now up 29% since testing its low on March 9.  Volume on the NYSE was brisk as 1.7 billion shares exchanged hands and advancing issues outran declining stocks by 2636 to 472.

Monday's better-than-expected housing news reignited hope the housing crisis may have touched its bottom.  The March pending home sales jumped 3.2% to 84.6, taking economists by surprise who had expected the index to hold steady. Construction spending increased 0.3% versus an expected drop of 1.6%, and compared with a 1.0% drop in February.

All ten sectors on the S&P posted gains yesterday, with financials, up 9.0%, topping the list.  Basic material stocks jumped 6.3%. Among metals, Alcoa (NYSE:AA) shares climbed 6.9%, Freeport-McMoran (NYSE:FCX) jumped 9.4% and BHP Billiton (NYSE:BHP) advanced 4.6%.

Banking stocks were the flavor of the day on the DJIA, with Bank of America (NYSE:BAC) shares rising 20%, American Express (NYSE:AXP) jumping 12.7% and JP Morgan (NYSE:JPM) recording a 10.2% advance. According to Reuters, the list of banks needing further capital has grown to ten as government methodology grew more stringent.

The S&P's bond-rating arm said 23 banks, including Bank of America (NYSE:BAC), Citigroup (NYSE:C) and Wells Fargo (NYSE:WFC), face possible downgrades. Others on the list are PNC Financial (NYSE:PNC), KeyCorp (NYSE:KEY), US Bancorp (NYSE:USB), BB&T (NYSE:BBT), Regions Financial (NYSE:RF), Huntington Bancshares (NASDAQ:HBAN), and Fifth Third (NASDAQ:FITB). Meanwhile, a Bank of America (NYSE:BAC) spokesman denied a media report that suggested the firm has been told by the regulators that it needs to raise $10 billion in fresh capital. JP Morgan's (NYSE:JPM) CEO Dimon reiterated the firm's desire to repay its $25 billion in TARP money as soon as possible after the test results are published. Wells Fargo (NYSE:WFC) shares jumped 24% despite an AP report that said the company may need additional capital.

Of today's key economic posts, the ISM services report is expected to indicate the economy's service sector improved for the first time in six months during April, with a 42.0 read, up from the prior month's 40.8 post. Fed Chairman Bernanke testifies before the Joint Economic Committee on the economic outlook (10:00 AM ET). Among additional Fed-speak are Rosengren, Stern and Yellen.

April collectively revealed the DJIA soared 7.4%, the NASDAQ 12.4%, and the S&P 9.4%, pushed higher by a 19.8% rise in financials. On a dollar basis, the gain in Dow Jones shares results into a 12% gain, the record since 1991 when record keeping began.  The S&P also fared well in April, rejoicing in its largest monthly increase in 9 years and now stands 29%higher than its March 9 closing low; the NASDAQ gain proved its best in six. Crude prices soared 18.5% despite record high inventory levels as demand prospects for the second half improved

Nearly 70% of the S&P earnings results reported ahead of analysts' projections. Thursday's mixed market action betrayed disappointment in results from ExxonMobil (NYSE:XOM), downside 2009 guidance from Procter & Gamble (NYSE:PG), a dividend cut from Black and Decker (NYSE:BDK) - a trilogy of Street concern: earnings, outlook and payout. However, Dow Chemical (NYSE:DOW) offered the palliative of a profit in the quarter, a surprise that added 18% to the shares.

In a marketplace given to looking forward six months or so, investors did not have enough reason to rejoice as the latest growth data showed GDP fell at an annual rate of 6.1% from January through March.  Nevertheless, investors looking for reassuring signs did find consumer data somewhat comfortable.  And U.S. Federal Reserve's observation that the rate of economic contraction was "somewhat slower" was an added relief.  Markets shrugged off reports suggesting Chrysler's imminent bankruptcy and media reports that at least one-third of the stress-test banks may require additional capital.  At the end of the day, the DJIA closed up 2.1% to its highest since February 9, the tech-heavy NASDAQ was up 2.3% to its highest since November 4, and the S&P up 2.2% to its highest since January 28. 

The NASDAQ has now surged 25% from February 27, for its best two-month run since 2002, and is up 34.9% from its March 9 closing low. The S&P has gained 29.1% and the DJIA 25% from March 9 levels. Also, the CBOE Vix "fear factor" index fell 4.9% in yesterday's trading to 36.08, signaling a less volatile environment. Exxon Mobil (NYSE:XOM) joined IBM (NYSE:IBM) in declaring a dividend hike, lifting its quarterly payout by 5% to 42 cents. Despite flu-related worries, a weak GDP report and a huge inventory build up, crude prices rallied 2.2% to $51. As investors took to risk assumption, the prices of Treasuries continued lower, with the 2-year off 0/32 to a yield of 0.954%, and the 10-year off 26/32 to a yield of 3.107%.

Among the ten S&P sectors, nine moved higher Wednesday, with only telecom stocks heading southwards, with a 0.3% drop.  Financial shares led the advance with a 4.6% gain. On the DJIA, banking stocks also topped the list of advancing issues, with Citigroup (NYSE:C) advancing 8.0%, Bank of America (NYSE:BAC) rising 6.5%, and JP Morgan (NYSE:JPM) recording a 5.2% gain. News that shareholders had stripped Bank of America's (NYSE:BAC) CEO Lewis of his Chairman title failed to dampen spirits, with the stock rising 6% in premarket trading. Last night's First 100 Days news conference revealed Obama anxious to lose the mantle of government involvement with the banking industry, ameliorating fears of a backdoor-entrance into banking nationalization.

Yesterday's earnings news also surprised on the upside with better-than-expected earnings from Aetna (NYSE:AET), Baker Hughes (NYSE:BHI), General Dynamics (NYSE:GD), Hess (NYSE:HES), Starbucks (NASDAQ:SBUX), Time Warner (NYSE:TWX), Visa (NYSE:V), Waste Management (NYSE:WMI), and Wyeth (NYSE:WYE).

Wednesday's economic posts indicated advance US GDP fell a worse-than-expected 6.1% during the first quarter, following the fourth quarter's 6.3% drop.  The decline widely missed the expected 4.7% drop. However, the data revealed businesses cut inventory levels at the fastest pace in the past decade, lifting hopes of a turnaround on future builds. Moreover, the key ingredient of consumer spending rose 2.2%, following a 4.3% fourth quarter drop, signaling resiliency in the segment, which represents 70% of the total economy. Wal-Mart (NYSE:WMT) added to such hopes, noting increased consumer purchasing of non-essentials such as sporting goods and bedding.

The FOMC monthly interest rate decision provided the as-expected news that the Fed plans to keep key interest rate levels at 0.00%-0.25% for an extended period as the fragile recovery gains footing.

Today's data include weekly initial claims, expected to show continued gains, with jobless claims up 5,000 to 645,000 from 640,000 the previous week. March personal income is expected to match the prior month's 0.2% decline; personal spending is expected to show an 0.1% drop versus February's 0.2% advance. The Chicago Purchasing Managers Index is likely to show an increase to 34.0 in April from 31.4.

Yesterday's marketplace was a clear picture of risk-aversion.  As worries grew that the swine flu outbreak could take the form of an epidemic, fearful investors turned to safe haven prospects like Treasuries, yen and US dollar bets, as well as defensive healthcare and utility plays.  The 2-year rose 4/32 despite Treasury's sale of $40 billion 2-year notes.  The yen shot up to a six-week high against the euro and the US dollar gained 1.1% against a basket of currencies.  The Vix, CBOE "fear factor" index jumped 4.1% to 38.32. Volumes on the NYSE sank to a cautious 1.4 billion shares, with decliners outpacing advancing shares by more than two to one. S&P shares sank 1.0%; NASDAQ dropped 0.9%; and the DJIA edged 0.6% lower.

The Dow Jones Transportation Average declined 10.6%, sending shares of airlines sharply lower for a 10.6% drop in the Amex Airline Index, with UAL (NASDAQ:UAUA) plunging 14.3%, and Continental Airlines (NYSE:CAL) registering an 11.6% decline. Consumer discretionary share prices also took a beating with Carnival Group (NYSE:CCL) declining 13.5% and Royal Caribbean Cruises (NYSE:RCL) plunging 16.3%. Crude oil prices, already under the pressures of falling demand and supply surfeits, dropped $1.41, or 2.7%, to $50.14, on fears of jet fuel demand drops caused by flu-induced air travel avoidance. Flu-fears pushed commodity prices lower, with the DJ-AIG Commodity Index off 2.2% to 108.603.  Some healthcare companies nevertheless appeared to be beneficiaries of the concerns.  Mylan (NYSE:MY) jumped 12.8%, and GlaxoSmithKline (NYSE:GSK) and Roche Holding (OTC:RHHBY) rose 7.7% and 4.3%, respectively.

The second week of heavy earnings reports continued with Corning (NYSE:GLW), Humana (NYSE:HUM), Verizon (NYSE:VZ) and Whirlpool (NYSE:WHR) reporting better-than-expected results.  General Motors (NYSE:GM) announced its latest viability proposal, including 21,000 additional job cuts and 40% dealership eliminations, requests for $11.6 billion in additional government rescue aid, which would put the government stake at over 50%, and plans to use stock to repay half of the $20.4 billion owed to UAW retiree health care funds, taking their share of the firm to about 39%.  Bondholders, asked to swap $27 billion debt for a 10% ownership position were reportedly unhappy with the deal, planning a counteroffer within 10 days. GM (NYSE:GM) shares, nevertheless, were at the top of the list of DJIA gainers with a 20.7% advance.

Reports that Bank of America (NYSE:BAC), Citigroup (NYSE:C), as well as Regions Financial (NYSE:RF), Fifth Third Bancorp (NASDAQ:FITB) and Wells Fargo (NYSE:WFC) will need to raise capital sent financials lower. Wells Fargo (NYSE:WFC) shares, off 5.1%, were also impacted by a Richard Bove ratings downgrade to "hold" from "buy."  US equities in general were struck by a Credit Suisse (NYSE:CS) ratings trim to "market weight" from "overweight," opining US shares overvalued against their peers.

Today's primary economic posts include an April read of consumer confidence, expected to show slight improvement to 29.9 from 26.0. Meanwhile the S&P/Case Shiller Home Price Index for February is expected to have matched January's 18.97% drop, with only a slightly lower decline of 18.7%.

On Friday, U.S. markets advanced with the Nasdaq ending higher for the seventh straight week, driven by several better-than-expected tech quarterly earnings reports.  The DJIA and S&P 500 ended the week slightly lower, trimming six-weeks of gains. On the DJIA, shares edged 0.7% lower for an 8.0% year-to-date decline; the decline on the S&P 500 totaled 0.4%, bringing its year-to-date fall to 4.1%.  The Nasdaq, however, ended the week 1.3% up for a 7.4% year-to-date gain.

Although company remarks failed to assure demand situation is improving, the steady stream of key earnings reports, nevertheless, beat the pessimistic Wall Street assumptions. Boosting the sentiment further were signals of a cyclical upturn and signs the rate of contraction is slowing, with commodity prices up, credit spreads improving, growth in money supply and a steepening yield curve.

Among sector gains last week: basic material shares rose 2.2%, taking their year-to-date jump to 9.4%; industrials added 1.9%; oil and gas edged up 0.7%; tech sector shares rose 1.4%, sending its shares to a 16.3% surge on the year; and consumer services gained 0.1% for a 3.4% year-to-date gain. With investors resorting to risk taking, defensive plays came under pressure, with health care, down 3.6% last week (-9.4% in 2009), utilities off 2.5% (-13.4% in 2009), telecommunications 2.3% lower (-6.9% in 2009) and consumer goods off 1.2% (-6.2% in 2009).

Among 143 S&P companies that reported earnings last week, eighty beat earnings estimates while 40 reported earnings that were below expectations; thirty revenue projections were exceeded and 70 missed. Of the thirteen DJIA components that reported results during the week, 10 either matched or exceeded Street expectations.  Of the notables, Microsoft (NASDAQ:MSFT) CFO's news that the launch of its new operating system is on schedule masked pessimistic remarks of "a broad-based slowdown across virtually all product lines and geographies." The CEO of American Express (NYSE:AXP), which reported better-than-expected results, warned the firm remains "very cautious about the economic outlook." Upside surprises from Apple (NASDAQ:AAPL), eBay (NASDAQ:EBAY) and Amazon.com (NASDAQ:AMZN) fueled assumptions the decline in consumer spending may be abating. Moreover, McDonald's (NYSE:MCD) CEO Skinner noted April same-store-sales "at least as strong as or better than first quarter sales in every area of the world."  Texas Instruments' (NYSE:TXN) better-than-expected results indicated demand beginning to stabilize.

Wednesday will offer the week's economic posts of most market-moving potential, the advance first quarter GDP stats and the FOMC rate decision.  The decline in GDP is widely expected to moderate from the fourth quarter's sharp 6.3% decline to a 4.9% decrease. Looking forward, however, traders will search for any Fed indication of signs of stabilization and a declining rate of recession. The calendar also covers a look at consumer confidence in April in reports on Tuesday and Friday; the housing market in February S&P/Case Shiller home prices on Tuesday, personal income and spending Thursday; factory orders, the ISM Index and vehicle sales on Friday. Investors may search for hints of any leakage on financials' stress test results, with Friday's post of white page assumptions leading to positive survival assumptions for most US banks.

U.S. stock futures suggested a lower opening at the Wall Street.

U.S. markets declined Monday, even as Bank of America (NYSE:BAC) announced a rise in its earnings that bettered analyst projections.  In one quarter the bank had earned more than the total recorded in 2008.  All thirty components on the DJIA fell as the index recorded its worst point loss since March 2.  The broad-based decline followed a six-week rally of 29% on the S&P after the index had touched its 12-year lows. The DJIA declined 290 points, or 3.6% and the NASDAQ was off 3.9%.  The S&P 500 plunged 4.3%.

Amid an uncertain environment, US Treasuries regained their safe-haven appeal, sending 2-year prices 4/32 higher to a yield of 0.920%, and the 10-year up 30/32 to a yield of 2.845%. The greenback advanced 0.9% against a basket of currencies. And the CBOE Vix, a widely-perceived indicator of risk sentiment in the markets, made its biggest single-day rise since January 20, up 15.4% to 39.18.

The dramatic fall that markets witnessed Monday reignited fears that the recent run was nothing but a mere bear market rally. Financials once again bore the brunt, declining 10.6%. On the DJIA, financial components Bank of America (NYSE:BAC) dropped 24.3%, Citigroup (NYSE:C) fell 19.5%, American Express (NYSE:AXP) declined 13.0% and JP Morgan (NYSE:JPM) was off 10.7%. Bank of America (NYSE:BAC) CEO Lewis added to concerns, warning of "challenges primarily from deteriorating credit quality driven by weakness in the economy and growing unemployment."

Larry Summers' comments on administration intentions to rein-in credit card abuses drew fire, as traders increasingly grew wary of Obama's intentions. Media reports suggesting the government may convert its interest in rescued banks from preferreds to common equity brought with it fears of nationalization and shareholder dilution. And another report that circulated yesterday said 16 of the 19 banks facing stress tests are "technically insolvent," a charge later denied by the Treasury.

Investors will need to digest this week's slew of earnings and guidance.  Though the numbers have exceeded the low bar of expectations, guidance has proven uncertain. IBM (NYSE:IBM) reported better-than-expected first quarter earnings on fewer shares outstanding, with revenues 11% lower as businesses cut back on computer purchases.  Texas Instruments (NYSE:TXN) also beat analysts' expectations.

Today's calendar will offer comments from investors at the Citi (NYSE:C) annual meeting, as well as a number of minor economic news including ICSC retail store sales (7:45 AM ET), Redbook (8:55 AM ET), State Street Investor Confidence Index (10:00 AM ET), and the ABC Consumer Confidence Index (5:00 PM ET). Treasury Secretary Geithner faces Congress on TARP, and Hoening testifies before the Joint Economic Committee, while Fedspeak remains mostly silent before next week's FOMC meeting.

Whether a rally for Asian stocks outside of Japan -- up more than 30% from their low in 2009, set on March 4 -- can be sustained remains in doubt, with analysts saying that the full brunt of the global recession has yet to be reflected.

In Japan, the Nikkei 225 Stock Average fell 0.9%, to close at 8,842.68.  The Japanese market remained weak  after Sumitomo Realty & Development Co. missed its profit target and on concern that valuations at a seven-year high overstated earnings prospects.  A senior equity analyst wondered if the recent gain in Japanese shares is reasonable relative to earnings prospects for this year. 

Singapore devalued its currency after posting, on Tuesday, its worst ever quarterly economic contraction due to shrinking global trade.  A forecast for weaker demand for oil by the International Energy Agency sent crude oil prices tumbling to below $50 a barrel.

Media reports pointing to higher odds of a bankruptcy outcome for General Motors (NYSE:GM), as well as a reduction in guidance from Boeing (NYSE:BA), were a drag on the continuing rally by financial-sector shares, following the announcement of good quarterly results by Goldman Sachs.  The DJIA clawed its way back from a 120-point loss shortly after the open to close with a 25-point drop. Trading on the NYSE was a moderate 1.5 billion shares, with advancing shares ahead of decliners by a 3 to 2 margin.  Sentiment is expected to be guided by the likes of Phillips Electronics and defensive play Johnson & Johnson (NYSE:JNJ).

Financial stocks in the DJIA turned in dramatic advances on Monday, as Bank of America (NYSE:BAC) breached $11 for the first time since January 12, rising 15.4%, and Citigroup (NYSE:C) rose 25.0%. Also posting sharp gains were American Express (NYSE:AXP) which moved up 8.7%, and General Electric (NYSE:GE) which rose 7.1%. On the downside, General Motors (NYSE:GM) shares fell 16.2% after the NYT reported that the US Government had notified the troubled auto maker that  it should plan for a June 1 bankruptcy filing, should its talks with bondholders and the UAW on restructuring plans fail to materialize.  Among other notable movers, Boeing (NYSE:BA) shares fell 5.1%, after Cowen & Co. downgraded the stock to "underperform" from "neutral," noting airlines' inability to finance purchases of new planes.

Four out of the ten sectors in the S&P showed gains, topped once again by advances in financials, up 4.1%, followed by gains of 1.4% in basic materials, 0.3% in health care, and 0.1% in consumer services.  On the downside, oil and gas shares fell 1.2%, utilities -1.3%, consumer goods -0.8%, telecommunications -0.7%, technology -0.6%, and industrials -0.03%. Oil and gas shares were adversely affected by Chevron's (NYSE:CVX) earnings warning based on lower oil prices and shrinking refined-product margins. Moreover, the latest oil inventory report is expected to reveal a 2.2 million barrel increase in US crude stockpiles.  Metal prices increased on hopes for an upturn in the global economy.  Gold prices gained $12.50 to reach $895.80 and copper prices rose 5% during the session, sending Freeport McMoran (NYSE:FCX) and Rio Tinto (NYSE:RTP) shares up 4%.

Goldman Sachs reported better-than-expected results of $3.39 per share, beating estimates by $1.79. The firm also announced plans to sell $5 billion of new stock in its effort to pare down the $10 billion in government aid. The case was different for Genworth Financial (NYSE:GNW), whose shares fell 17.8% after it was denied S&L status, necessary for recipients of TARP funding, and granted to its competitors including Hartford Financial Services (NYSE:HIG).

Today's economic releases include government reports on wholesale prices.  Retail sales for March are also on the docket, and expected to post a 0.3% gain, following the prior month's 0.1% decline.  At 10:00 am, ET business inventories are expected to be announced. Technology bellwether Intel (NASDAQ:INTC) will release results after the close.

While things were looking modestly brighter in China, the economic situation in Japan remained bleak.  Wholesale prices fell at their fastest rate, since 2002, in March, as weakening domestic demand on top of falling commodity prices drove Japan toward its second bout of deflation in this decade. 

Led by a 2.8% rise in the Shanghai Composite index, Asian share markets, in general, moved up toward six month highs on thin volumes due to the past holiday weekend.  The Nikkei 225 index was the main exception and ended the day marginally in the red. 

Strength among financial shares kept equity prices higher last week, despite fears that a poor earnings season may disturb the market's run of five straight weekly gains.  Investors remained fearful of missing their chance to participate in the current rally, although equally mindful of a possible pullback due to profit taking.  By the end of the holiday-shortened week, the DJIA had advanced 0.8%, the Nasdaq 1.9%, and the S&P 500 1.7%, trimming their year-to-date loss to 7.9% and 5.2% for the DJIA and S&P, respectively, while placing the NASDAQ's rise year-to-date at 4.8%.  Notably, the CBOE Vix "fear factor" index fell to 36.53 last Thursday, a 6% decline, to its lowest close since September, 2008.

Last Thursday, financials led S&P sector gains, up 11.9% on Wells Fargo's (NYSE:WFC) surprise preannouncement of record first quarter profits, which were more than double Street estimates; thereby taking the sector to a strong 12.3% increase for the week.  Earlier in the week, the group suffered from ratings cuts by key banking analyst, Mike Mayo, who warned of loan losses likely to exceed those during the Great Depression.  However, another leading analyst, Meredith Whitney rebutted with expectations for higher tangible book values likely to send share prices higher over the short term

This week will reveal key earnings results from Goldman Sachs (NYSE:GS) on Tuesday, JP Morgan (NYSE:JPM) on Thursday, and Citigroup (NYSE:C) and General Electric (NYSE:GE) on Friday.  Government intervention will continue to affect the group, with today's headlines pointing to a probe of possible TARP-rescued banks' higher interest rate charges and fees.   According to media reports, Goldman Sachs (NYSE:GS) is considering a multi-billion dollar stock offering to repay its borrowings.

President Obama joined those pointing to signs of a recovery in the US economy, citing as positive the 20% increase in government-backed lending to small businesses over the past month along with lower mortgage rates.  Such hopes for economic improvement may help investors look past a possible current ugly earnings season, as was the case last week with Alcoa's (NYSE:AA) second quarterly loss in a row.  Alcoa's results were offset by comments from its CEO that the industry may be on the verge of a recovery based on improving fundamentals in China. Moreover, much of the news is already factored into current stock prices, as noted by a Citigroup (NYSE:C) and American Express (NYSE:AXP) analyst.

Over the upcoming week, economic data will provide information on business activity through posts on February business inventories (on Tuesday), March industrial production (on Wednesday), as well as regional manufacturing data.  Consumer sentiment faces the tests of March retail sales (on Tuesday) and the University of Michigan's Consumer Sentiment survey (on Friday). Signs of budding health in housing may be established from March housing starts and building permits to be released on Thursday. March producer and consumer price reports are slated for release on Tuesday and Wednesday. 

Besides the results from financial firms this week, such market heavyweights are slated for release as: Johnson & Johnson (NYSE:JNJ) and Intel (NASDAQ:INTC) on Tuesday; Abbott Labs (NYSE:ABT) on Wednesday, Nokia (NYSE:NOK) and Google (NASDAQ:GOOG) on Thursday.  Today's calendar will contain results from Talbots (NYSE:TLB) and JB Hunt Transport Services (NASDAQ:JBHT).

Asian stocks recorded hefty gains on Thursday, including a 4% rally in Tokyo's Nikkei as Japan unveiled a big stimulus package aimed toward stimulating economic growth.  The Nikkei 225 stock average jumped 321.05 points or 3.74% to 8,916.06, after the government announced a $154 billion economic stimulus package and data showed an unexpected increase in the country's machinery orders. The Bank of Korea, which kept the rates unchanged at 2%, said it was keeping the option of cutting rates open. The comments sent benchmark Kospi up 4.3% to 1316.35, a six-month closing peak.  Hong Kong's Hang Seng index gained 2.3%.

U.S. stocks showed resilience yesterday as investors took heart from reports the Treasury will allow some troubled insurers access to remaining funds under the TARP program.  Today's post of retailers' March same-store-sales figures will also be closely watched for indications of consumer spending trends.

Premarket futures improved on the early release of Wells Fargo's (NYSE:WFC) quarterly numbers, coming in at a better-than-expected $3 billion, or 55 cents per share, versus consensus estimates of 26 cents.

On Wednesday's 18 of the DJIA components closed higher and 406 of the S&P 500 sectors ended in the green along with 93 of the NASDAQ 100. Volume stayed a low 1.3 billion on the NYSE, with advancing shares outrunning decliners by nearly three to one.  The CBOE fear factor index, the Vix, held below 40, off 3.8% at 38.85. Among sector action, only telecom shares closed lower, down 0.6%, with a 2.3% advance among consumer sector stocks leading the S&P industry groups, helped by increases among retailers and airline shares, followed by 1.9% increases in tech, 1.5% in basic materials, 1.3% in oil and gas and 1.1% in consumer goods sectors.

Release of Fed minutes from its March 17-18 FOMC meeting struck a note of caution among investors hopeful that the economy was showing signs of a recovery in housing and consumer spending. The report weighed in on the side of "downside risks" remaining to the economy, fearing an adverse feedback loop of unemployment and production would curtail any increases in spending, thereby threatening the economy and raising prospects of additional losses among financials, generating another round of credit tightening.  The Fed now expects a delay in the recovery until 2010, instead of 2009's second half, with unemployment rising at a steeper rate heading into 2010. However, traders chose to take the Fed's bitter concerns in stride, and instead focused on potential aid to insurers, and news that all nineteen banks undergoing stress tests currently will receive passing marks at month's end.

The Treasury is expected to extend remaining TARP funds to several insurers meeting program requirements of bank holding company status, including Hartford Financial (NYSE:HIG), Genworth Financial (NYSE:GNW) and Lincoln National (NYSE:LNC). News reports quote regulators as saying the stress tests show banks are recovering, although the reports do not rule out further losses are likely as economic weakness results in losses from real estate and corporate loans and credit card losses. Bank of America (NYSE:BAC) fell 4.1% Wednesday on an Oppenheimer report stating the company will need $36.6 billion further in equity-raising to increase its capital ratio to that of its peers. A WSJ report said Morgan Stanley (NYSE:MS) will take a $1.2-$1.7 billion hit on bonds when it reports first quarter results. American Express (NYSE:AXP) shares gained 4.7%, leading the DJIA, on a Citigroup (NYSE:C) upgrade to "hold" from "sell," as the expected news, though likely to stay negative, has already been priced into the shares.

Yesterday's economic reports indicated US wholesale inventories fell 1.5% in February, more than twice economists' expectations, and declining for the sixth straight month, as firms lowered stocks amid weak demand. The decline was the sharpest since record-keeping began in 1992, and brought the inventory/sales ratio to 1.31 from 1.34, although still up from 1.14 a year earlier. Today's economic posts include international trade, import/export prices, weekly jobless claims as well as monthly retail sales results. Investors hope that better-than- expected March sales numbers will point to improving consumer spending, although fearful of the impact from continuing gains in jobless rates. A closer look at Costco's (NASDAQ:COST) reported comparable sales decline of 5%, more than the projected 1.7% drop, shows the numbers in line with expectations when currency adjustments are excluded, according to one analyst. Weekly initial claims are projected at 660,000 versus 669,000 a week ago, but continuing claims may have increased to 5.8 million from 5.728 million prior. Comments from Lawrence Summers to the Economic Club of Washington are slated, as well as remarks from Minnesota Fed President Stern at 12:15 PM ET, and Kansas City Fed President Hoenig at 1:00 pm ET.

Japan's Nikkei 225 stock average closed up 108.09 points, or 1.2%, to 8,857.93, while Hong Kong's Hang Seng jumped 452.35 points, or 3.1%, to close at 14,998.04. South Korea's Kospi advanced 1.1% to 1,297.85.

Oil prices rose by almost $1 per barrel on hopes of economic recovery. US premarket futures suggest a continuation of equity interest this week, even as a dismal quarter for corporate results is anticipated.

Last week saw the DJIA registering a 3.1% advance on the week.   The index, which is now up 21.5% since March 6, recorded its best four weeks of gains since 1933.  The S&P 500, which rose 3.3% last week, has advanced 23.2% from its March 6 lows. And the tech-heavy NASDAQ jumped 5% for the week, with a 25.3% surge from its March lows. The CBOE Vix, the Chicago Board Options Exchange Volatility Index, closed below 40 on Friday for the first time since January.

Gold prices went below $900, off $11.60 on Friday as risk-appetite grew, resulting in shares of Harmony Gold (NYSE:HMY) to drop 13.9% on the week.  Rangold Resources (NASDAQ:GOLD) declined 5.4%.

Last week all but one of the S&P sectors recorded gains, led by a 7% advance among financials, and 6% increases in technology and basic material sector shares. Lagging the S&P sector action were health care stocks, which declined 1.9% during the week. Among financials, SLM Corp (NYSE:SLM) jumped 19.7%; Huntington Bancshares (NASDAQ:HBAN) 19.6%; ING Corp (NYSE:ING) 19.3%; and Friedman Billings and Ramsey (NYSE:FBR) 19.1%. On the DJIA, Citigroup (NYSE:C) rose 8.8% during the week, while JP Morgan (NYSE:JPM) jumped 6.9%, and American Express (NYSE:AXP) was up 6.1%.  Even though expected, FASB's moves to relax accounting standards for treatment of toxic assets were interpreted as likely to improve near-term results.

Commodity markets also jumped on hopes of economic recovery. Copper prices went above $4,000 per ton. Basic materials sector gains were led by a 22.8% weekly gain in Dow Chemical (NYSE:DOW), 21.7% in Arcelor Mittal (NYSE:MT), 21.1% in PPG Industries (NYSE:PPG), 16.1% in AK Steel (NYSE:AKS) and 15.1% in Celanese (NYSE:CE).

Technology shares, driven by increased risk appetites, advanced 6% during the week, led by a 32% jump in shares of Research in Motion (NASDAQ:RIMM), which reported better-than-expected results for the quarter on record revenues. Corning (NYSE:GLW) jumped 17.7% after several analysts' increased 2009 profit estimates and increased price targets, and in advance of a Barron's article noting a 39% increase in February flat-panel TV sales. Fairchild Semiconductor (NYSE:FCS) rose 14.4% and National Semiconductor (NYSE:NSM) gained 13.8%. 

However, health care sector remained the weak group, declining 1.9% on the week. Shares losing ground included Amgen (NASDAQ:AMGN), off 9.8% and Abbott Labs (NYSE:ABT), down 5.3%. Friday losses hit Bristol Myers (NYSE:BMY) shares, off 5.4% as analysts lowered expectations the company was a takeover candidate, and Humana (NYSE:HUM), off 5.7%, on analyst warnings that earnings would be hurt by changes in the US Medicare Advantage Program.

This week will indicate the market's ability to push beyond its month-long rally in the face of an earnings season likely to suffer first quarter declines of 36.9% from year ago levels, according to Thomson Reuters (NYSE:TRI), with a record nine straight quarterly declines. All S&P sectors are expected to post declines, led by a 97.4% drop in consumer discretionary earnings due to losses at General Motors (NYSE:GM) and Ford (NYSE:F). Material sector earnings are expected to have fell 74.9%, energy 56.7%, and financial firms - no longer at the top of the list - are projected down 33% according to FactSet. Alcoa (NYSE:AA) kicks off earnings season on Tuesday, with key corporate results also due out from Bed Bath & Beyond (NASDAQ:BBBY), Mosaic (NYSE:MOS), Constellation Brands (NYSE:STZ), Family Dollar (NYSE:FDO) and Pep Boys (NYSE:PBY).

Among key economic posts, February consumer credit is slated for Tuesday, February wholesale inventory data and the Fed minutes from the March 17-18 FOMC meeting on Wednesday, and weekly jobless claims and key February trade balance figures on Thursday. Fed Governor Warsh speaks on financial markets today at 5:00 PM ET, with Minneapolis Fed President Stern and Kansas City Fed President Hoenig speaking on Thursday.

Asian markets ticked higher Friday as leaders of the world's 20 biggest developed and developing nations presented a united front, pledging more than $1 trillion to combat the current economic crisis.  The G-20 meet fueled recovery optimism as leaders said rules would be tightened to stop a repeat of the current financial mess.  The Nikkei 225 Stock Average edged up 30 points and almost all benchmarks in the region recorded moderate gains.

Premarket futures point to a higher open on the Wall Street as latest unemployment numbers fell in line with expectations.  A government report said U.S. economy lost 663,000 jobs in March up from 651,000 in February, the fourth straight post above 600,000.  Unemployment rate rose to 8.5% from 8.1% the prior month.

Investors looking for silver linings found that in plenty as data hinted at economic stabilization.  News of a relaxation in accounting rules valuing illiquid assets, and a less-contentious-than-feared showing at the Group of 20 summit pushed the DJIA to its highest level since February 9.  The index recorded its third straight day of gains, with a 216-point rise of 2.8%. The S&P, up 2.9% Thursday, moved further from its 12-year lows reached in early March, up 23.2%, and narrowed its year-to-date decline to 7.6%. The NASDAQ jumped 3.3%, with Research in Motion's (NASDAQ:RIMM) better-than-expected numbers reported after yesterday's close helping to boost sentiment this morning. Volume on the NYSE picked up steam, rising to 1.9 billion shares as advancing issues outran decliners by nearly 7 to 1.

Among the S&P sector groupings, industrials spearheaded the gains with a rise of 5.4%, followed by 4.2% gains in basic material and consumer services sectors, as risk appetites increased. Defensive plays like health care lagged, with only a 0.2% rise, as pharmaceutical and biotech shares traded lower. On the DJIA, leading the gains were Caterpillar (NYSE:CAT), up 8.8%, DuPont (NYSE:DD) up 7.6% and Alcoa (NYSE:AA), up 7.6%, on hopes the economy may be in the process of bottoming. General Motors (NYSE:GM) shares jumped 8.3% on the less-than-horrific monthly sales numbers and news its finance arm will resume loans to subprime car buyers.

February factory orders climbed 1.8%, slightly above estimates of a 1.5% gain. Moreover, the as-expected FASB rule change, allowing financial firms more flexibility in their valuations of toxic assets, was viewed as positive to banks' near-term profit outlook. Bank of America (NYSE:BAC) CEO Lewis said the firm has a "huge" capital cushion, sending the shares up 2.7%, even as he noted the bank will take some time to repay funds borrowed under TARP.

Unemployment numbers remain a lagging indicator of potential economic progress. Weekly jobless claims rose 669,000 from 657,000 prior, beating estimates of 650,000, at their highest level in 26 years.

For some the poor March jobs numbers may represent the worst of the current recession and so may be offset by comments from Fed Chairman Bernanke, who will speak on rebuilding credit markets at 12:30 PM ET. Remarks of the effectiveness of quantitative measures on easing credit markets may bolster sentiment. At 11:00 AM ET Fed Vice Chairman Kohn speaks on financial crisis policies. Traders will also look for improvement in the ISM services index, expected to reveal a slight February uptick to 42 from 41.6.

For the moment, I'll take the middle ground and venture that having shed an awful lot of aggregate value (an entire year of global GDP according to the ADB!), we're a lot closer to where we're going than we were.

It may come to a surprise to my readers given the traditional very bearish sentiment expressed at this space, but I actually agree with Buttonwood and Cassandra here. However, I would simply add the important qualifier that there will be a significant asymmetry in terms of where individual economies are going as a function of where they are and were. No where is this more true in the case of Japan and as we progress to the data and analysis it should be abundantly clear that for all the talk of second derivatives and glasses being half full, Japan still look to be in an extraordinarily bad shape. Initial evidence of this comes from the headline GDP figures which don't seem to be blessed with any second derivative effects.

Final estimates from Q4 2008 suggested that Japan contracted at an annualized 12.1% which puts Japan in the dubious pole position of biggest GDP declines among industrialised economies. Q1 estimates are yet to be released, but no-one expects, I think, an improvement as the incoming data so far has been nothing but extraordinarily poor. Sociétè Generale expects Japan to contract sharply in 2009 with Q1 as an forecast bottom. I am not sure about the bottom in the sense that while it may be a bottom in the sense of the second derivative noted above, it won't likely mark a return to sustained growth.

In this note, I will provide an overview of the recent developments in the Japanese economy. Since we last convened some interesting points have emerged. For one, Japan is back in deflation measured on the US style core price index and for the first time in a very long time Japan is now running a current account deficit. This last point will be studied in some detail since it marks a very important issue for the export dependent Japanese economy both in a historical and a current perspective. Before we begin I should note that this post is very big with a lot of graphs and even an econometric model to boot. I understand full well if this deters some of my readers; I shall not hold it against you.

Prices and Consumption, where art thou?

If there is one thing which has been stable in Japan throughout this crisis it has been the persistent sluggish trend in domestic demand measured by top line household consumption expenditures as well as prices on the other hand. These two data points consequently tell an important part of the story of the lack of domestic demand in Japan or more specifically the lack of visible momentum to pull Japan out of the doldrums. One persistent feature of the initial phases of the crisis where markets and global policy makers primarily looked towards the risk of stagflation was that inflation in Japan exclusively was driven by cost-push factors in the form of headline inflation and not demand pull factors. This idea is a well established one at this point, and materialised itself in the fact that as headline inflation shot through the roof core inflation only budged slightly. It is important to point out that this inelasticity cuts both ways and as headline inflation has abated (for now), so has the spread between the two indices narrowed significantly. The underlying point here is thus two-fold. One the one hand it is dangerous to assume that inflation driven by domestic demand conditions will correlate with external headline inflation pressures which, due to global capacity constraints and global demand conditions, look set to shoot higher the minute we move even slightly beyond the current malaise. On the other hand however, we can clearly see, in Japan, that whatever trend we see for headline inflation domestically induced price pressures in Japan are virtually non-existing and now that the crisis is seriously biting Japan is set once again to retrench into deflation despite the central bank's most ardent efforts to apply measures of quantitative easing.

As I have argued before, I believe a large part of Japan's problem with deflation is demographic. In particular, I think that because Japan is basically unable to achieve growth based on domestic momentum a growth scenario strictly based on domestic activity as the one we are seeing at the moment will be de-facto deflationary. However, since Japan is largely dependent on energy imports in so far as goes its consumption of fossil fuels (i.e. a high passthrough effect) the overall inflation indice will diverge from the core of core index which, in Japan's case, is a good proxy for domestically induced price pressures. Now, I realize that my readers will be skeptical of the demographic link here, but let me at least present results that show the broken link between the general price index and core of core prices (which exclude energy and food). Thanks to a novel data set from Japan' statistical office giving us monthly inflation rates (y-o-y) for all three recorded inflation indices since 1971 we have plenty of ammunition on our hands to proceed. In the following all numbers will be based on de-trended time series which in this case simply means that I am using the first difference.

Consider then the very simple representation below which shows the correlation between the general index and core of core index over the entire sample, from 1971-1996 and from 1997-2008. 

Turning briefly to the consumption expenditures and thus the state of the Japanese consumer it really is (un)steady as she goes. Some analysts have expressed the opinion that the Japanese consumer has held up alright up until this point in the crisis. I am not sure what data these analysts are looking at. All I know is that the headline figure for consumption expenditures is still clocking in one negative number after the other and in this light it is difficult to see from where the much awaited boost in domestic demand is going to come from; note for example here that autosales dropped a healthy 27.9% in January. Add to this that retail sales dropped 5.8% on an annual basis with the subcomponent and you have firm evidence of a slump.

To be fair, the latest reading on consumer confidence did show an uptick in February compared to January as well as the economy watchers index which measures the performance of non tradables showed an improvement, but the accompanying comments from analysts on the ground do not provide much comfort for the outlook where most domestic companies are preparing their operations for a tough recession. Ken Worsley parses the entrails of the consumer confidence report and notes that the slight increase in the willingness to buy consumer durables is a welcome sign although the overall picture is weighed down by a mounting insecurity over job safety and thus income.

Investment, huddling up for hibernation?

If the charts for consumer spending shows us that the Japanese consumer is performing decidedly worse than past years' mean, the corresponding charts and numbers of industrial production and industrial orders resemble clear depression tendencies.

It is important to note the difference between the plots above. Consequently, what we are seeing in Japan at the moment is especially a massive slump in manufacturing and industrial production dragged down by the sharp drop in external demand. In this way, the export sector so important for Japan's growth is inexorably tied together with industrial production. In the last post the graph did not include Q4 2008 and as is readily clear from the charts above Q4 08 was the breaking point for Japan (and most others too).

This picture is confirmed if we look at the monthly reading. Since the data graphed above is from the METI, the data is lacking relatively to the present in that we only have data up until January 2009 (for the monthly chart). However, just look at that line go as if it is being pulled down by gravity itself. Needless to say that the overall index is being dragged down here even if the tertiary index, which accounts for 3 times as much as industrial production in the overall index, is holding up quite well. On an annual basis, industrial production dropped a full 31% in terms of production and 31.6% in terms of shipments. Inventories decreased on a monthly basis, but are still well above their 2000 levels which makes me wonder what kind of information the analysts claiming that Japanese companies had comparatively low inventories going into this were looking at. As for the small bounce in tertiary industry postal services seem to be the main culprit increasing with a full 11%.

As for the link between manufacturing and exports, I am going to let Danske Bank's analysts do the heavy lifting and display their wonderful graph plotting industrial production and exports.

I don't think this requires much interpretation and the main points is well articulated by Danske;

In Japan, manufacturing accounts for about  22% of GDP compared with just 17% and 12% of GDP in Euroland and the US, respectively. For that reason, there is a larger negative secondary impact on particularly investment demand from the recent collapse in global trade and industrial production.

The outlook here is thus completely dependent on where you think global growth is heading. Given the increasing indications that the slump will be prolonged the outlook is bleak. Of course, and coming back to that dreaded second derivative the decline will stabilise at some point, especially as inventories are cut. Yet, the key is the extent to which it will recover to anywhere near past levels. Surely Japan will be ready when the world is about to take off again but there is a lot to suggest that the margins on export led growth will be a lot thinner than they are now since everybody seems to be in the midst of a transition towards the same growth strategy. In this light it seems as if Japanese manufactures may indeed be tucking themselves in for a prolonged hibernation.

Evidence to suggest this came recently from the hands of Morgan Stanley analyst Takehiro Sato who had an excellent analysis looking forward to the upcoming Tankan survej of Japanese industry. The key is that companies are expected to revise down their capex and investment plans drastically. Finally and just to show that the crisis has had a notable effect in the market too just watch the absolute horrible performance of the main Nikkei index.

I am no equity analyst so I shall not belabour this point a lot, but merely note my personal inclination to disregard Japan in terms of the global market portfolio (beta) and in stead going for some alpha through stock picking which is obviously possible even if the overall trend is inexorably down. Go for the ones with exposure outside Japan is my advice, but that should be taken with a couple of truck loads of salt and I am ready to stand corrected any time by those much smarter than me in terms of trading equities.

The External Sector, Wither Growth

Perhaps one of the most interesting news points to come out of Japan since we last convened was the news that Japan had entered a current account deficit for the first time in a long while. This is significant for a number of reasons. First of all, it shows us the extent of the slump in that the trade balance balance has swung so fast and so much into negative territory. However, as I have argued endlessly we also need to look at income and here Japanese savers have been extraordinarily well endowed. Thus I also think that there is a technical issue to deal with here in that the income balance is likely to have swung into negative on the basis of the appreciation of the JPY we have observed in the latter part of 2008 and into the first months of 2009.

The CA deficit is not visible on the graph above but it does not take much imagination to see where the lines are going; especially not since we recently learned that Japanese exports dropped a whopping 49% year on year in February as shipments to the rest of world almost stalled completely. 

Needless to say, the move of Japan's current account into deficit territory has sparked all kinds of interesting points not least in the context of Japan's impending forced rebalancing. It comes to no surprise to me that the Economist was the first to jump the gun hailing Japan's rebalancing act.

Japanese households used to be among the world’s biggest savers and, as a result, the country ran a massive trade surplus. But no longer. They now save less of their income than American households, and Japan’s trade balance moved into deficit last year (see top chart). A long-overdue—and painful—economic rebalancing is under way.

To be fair to the Economist, they do make the important qualifier that since the external balance is coming due to a collapse in external conditions rather than a shift in actual growth path it may not be exactly what the doctor ordered. Yet, the Economist also applies standard life cycle theory to suggest that as Japan grows older so will we start to observe dissaving on aggregate and thus predicts, like all those famous economic steady state models, that Japan according to theory should be running a current account deficit. I think this is way to simple and in order to move forward on this field some important adjustments need to be made to Modigliani's life cycle hypothesis and, crucially, how it applies to aggregate economies. A lot of the confusion arises in the context of Japanese households their low savings rate and the fact that Japan exactly seems to suffering from a dearth in consumption (domestic demand) and surplus of savings. In a recent piece by the New York Times this view is articulated pointing towards the obvious effect that when you have no domestic demand of any meaningful proportion you become de-facto dependent on external demand. However, Stefan Karlsson retorts that low consumer spending in Japan is the result of low growth and not the cause pointing to the historically low household savings rate in Japan.

The plot thickens and at this point we simply need to get some data on the table to see what is actually going on. As a first stab let direct the attention to three crucial issues when applying individual life cycle theory to aggregate outcomes. First, you need to distinguish between working and non-working households as the savings dynamics are bound to differ markedly. Moreover, you need to incorporate some kind of uncertainty buffer to adjust for the fact that the transversality condition does not hold and thus that consumers do not dissave to 0. Secondly, you need to look at the overall stock of savings as well as the flow to increase or decrease this stock. This is very important relative to the measure of the saving rate out of disposable income. Thirdly and intimately related to point two you need to look at the evolution of income and the change in the stock of saving relative to the change in income. With these points in mind, let us consult the data. 

The first graph shows the evolution of annual income and the stock of savings and it represents an important picture since it shows us that Japanese households are indeed sitting on a large pile of savings measured as a stock even if as Scott Peterson showed us recently it is dwindling which indeed constitutes a worrying trend. The key point is of course what to do with those savings. Sure, one can spend them and dissave which is what would happen in a closed economy, but in an open economy the dynamics are likely to be strikingly different. Basically, this stock of savings represents a structural excess of savings on a stock basis and one of the only ways to make it count is to transfer it into income by investing abroad or by investing in export oriented domestic industries [1]. This is the only way that this saving can be transferred into investment and then into income. Consequently, Japan does suffer from a a chronic lack of domestic demand and consumption and it does so exactly because relying on consumption with the current demographic profile is not viable. Persons dissave, but societies do not since they don't have an end point or at least, a market economy has every interest in fighting off dissaving through the leakage of exporting excess saving. In this way, all the opinions introduced above get it wrong I feel because you really need to incorporate realistic assumptions on demographics. Take Mr. Karlsson's suggestion that Japanese households save more? Out of what I ask and assuming that these savings should be accumulated to invest later where would you invest it? At home (to what return) or abroad? This is exactly the key point since moving towards the NYT and their implicit narrative that Japan raises consumption the simple question is that she can't and understanding precisely why this is and what this means for the global economy is absolutely crucial. I shall spare no chance in pointing out this again and again.

Thus, if Japan wants growth it needs to make those savings count and oh boy have those Japs made it count.

Y = C + I + G + X and by definition net national savings defined as Y - C - G = I + X where X is the CA balance. [2]

“Japan’s toxic assets are essentially equities and any pick up in stock markets will be more significant for improving tier one capital,”

The ultimate dilemma for the government/BoJ is that, while a half-hearted fiscal expansion may fail to overcome the downward spiral of the economy, an overblown version risks depressing market confidence in the fiscal policy.

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[1] - the observed decline in home bias among Japanese investors is an important part of the picture here.

[2] - Readers with basic mathematical inclination will notice that expressing the spread between investment and net exports and foreign asset income as the addition to national savings from external demand, is just a detour of expressing the current account balance as a share of GNI. Thus basic algebra gives;

I/GNI - I+(X-M)/GNI = [I - I + (X-M)]/GNI; (cancelling out the I's) gives (X-M)/GNI.

Another equal-weight exchange-traded fund based on the S&P 500 is being proposed, this time using Select Sector SPDRs to carve up the index.

The ALPS Equal Sector Weight ETF would track a Merrill Lynch benchmark that divvies up the broad U.S. stock market by its nine major sectors, according to a recent filing still under review by the Securities and Exchange Commission. Each would be represented by a Select Sector SPDR fund. 

"At all times, the Merrill Lynch Equal Sector Weight index will be comprised of the constituents in the S&P 500, albeit in different weights," said the registration statement. 

The fund-of-funds ETF is expected to come with an annual expense ratio of 0.55%. 

The proposed ETF would compete against equal-weight sector portfolios both  from Rydex and ProShares. But one other, the Rydex S&P Equal Weight (NYSE: RSP), actually does much the same as the new ALPS fund would attempt to accomplish. Namely, it includes all sectors under one umbrella.

But there's a caveat. While RSP equal-weights each of the S&P 500's stocks, the new product is giving the same weights to each sector—on a cap-sized basis. 

That should make the new ETF correlate much closer to the actual S&P 500's performance. Also, RSP rebalances on a quarterly basis. 

"It's not a bad idea—we've been big fans of equal-weighting for years," said Anthony Welch, a portfolio manager at Sarasota Capital Strategies. 

He has been using separate Rydex equal-weight ETFs for each sector to come up with an overall mix to match the S&P 500. 

"We'll have to see what the internal costs are going to be for the new SSgA (State Street Global Advisors) equal-weight ETF and how much it rebalances," said Welch. "But with its closer correlation to the S&P 500, and RSP's greater emphasis on mid-cap stocks, it comes down to what you want to equal-weight.

He added: "It comes down to a choice of weighting your portfolio at the stock level or at the sector level."  

You can read the prospectus for the new ALPS/SSgA fund here.

On Tuesday, the media company filed a lawsuit in the U.S. District Court in Delaware accusing Amazon's electronic reader Kindle of infringing intellectual property rights of a patent it had registered in November 2007.

Amazon introduced the second version of Kindle last month for a retail price of $359, calling it the future of book reading. The first model of the wireless device was released in November 2007.

Discovery sought a "fair compensation" through damages for "any future infringement" of the patent but did not seek an injunction preventing sales of the Kindle.

Mylan Inc. (MYL), Barr Laboratories Inc. and Novartis AG (NVS) unit Sandoz Inc. have submitted abbreviated new drug applications (ANDAs) for Solodyn. Israel-based Teva Pharmaceutical Industries Ltd. (TEVA) has already received a nod from federal health regulators to market its generic version of the oral antibiotic and began shipment of the product.

Medicis filed its petition for a 30-month stay on ANDAs of Solodyn, after suing all the generic makers. Solodyn, which is scheduled to lose patent protection in 2018, contributes nearly 50% of the Scottsdale, Arizona-based company's total revenue.

Shares of the company are down more than 11% today.

Fidelity National Financial Inc (FNF) shares are experiencing unusually high trading volume. The Jacksonville-based company's stock jumped over 6% at noon.

Bank of America Corp. (BAC) sank to an 18-year low today on speculation that the company might need government support to resurface from losses it absorbed during its acquisition of Merrill Lynch.

In December, Bank of America said it might abandon plans of acquiring Merrill, due to more of the company's toxic assets coming to fruition in the fourth quarter. However, the government's insistence on closing the deal to bring stability to financial markets bore fruit in the end, and it now appears that the deal was completed at the cost of taxpayers.

This reopens the troubling chapter of the American financial crisis, with its reverberations being felt globally. The FTSE 100 index of Britain closed down 1.4% at 4,121.11, while Japanese Nikkei plunged 4.9 percent, to 8,023.31. The Dow Jones industrial average was trading down 43.49 points, or 0.53% at 8,156.65.

Investors all over the world are now questioning whether the big banks have enough capital to cover soaring credit losses as economic conditions worsen. Although many banks have already received huge bailout funds from the government, they are far from recovery.

Citigroup (C), which received $45 billion, is expected to shrink to about one-third its original size to save the company. Wall Street is now preparing for Citi's fifth consecutive multibillion-dollar quarterly loss this Friday.

One small silver lining was JP Morgan Chase & Co.'s (JPM) fourth-quarter results, reported this morning, with profit dropping 76% from last year but coming in ahead of the average analyst forecast. The company's quarterly earnings came in at $702 million, or 7 cents per share, while the consensus estimate was pegged at 2 cents. JP Morgan did however warn that its credit losses were mounting.

While JP Morgan gained modestly to trade up 12 cents to $26.03, B of A recovered some of its early losses to trade down 14% to $8.79. Citi shed 9% to $4.13 at noon on the New York Stock Exchange.