“Goodbye safe havens, hello risky assets.” This was the refrain of investors’ theme song during the past week. Safe-haven assets were out of favor as better-than-feared corporate earnings and signs of a budding economic recovery emboldened investors’ appetite for reflation trades such as equities and commodities.

Investors’ sentiment improved notwithstanding a number of influences that could potentially disturb financial markets. These included a three-day delay in the release of the stress test results of the 19 biggest US banks until May 7, the plight of the beleaguered US automakers with General Motors (GM) proposing a sweeping debt-for-equity restructuring and Chrysler filing for Chapter 11 bankruptcy protection, and fears of an escalation in the number of swine flu (H1N1) cases.

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Source: Vita

As to be expected given the countless catalysts, the past week’s trading was bumpy, but the major global stock market indices nevertheless managed to resume their eight-week rally. Further testimony of investors’ zest for risky assets came from the following:

• a solid performance by crude oil, base metal and agricultural commodities (with the exception of pork bellies and lean hogs – despite the fact that humans cannot contract swine flu by eating pig meat)

• tighter credit spreads (especially high-yield corporate bonds)

• a jump in Treasury Note yields to levels last seen in November

• a decline in the US dollar and Japanese yen as traders switched to high-yielding currencies such as the Australian dollar, New Zealand dollar and South African rand (all resource-linked currencies)

The performance of the major asset classes is summarized by the chart below, expanded to now also include Treasury inflation-protected securities (TIP) and investment grade (LQD) and high-yield corporate bonds (HYG).

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Source: StockCharts.com

Marking eight straight weeks of gains, the MSCI World Index advanced by 1.6% (YTD -2.6%) on the week, the MSCI Emerging Markets Index by 2.3% (YTD +16.9%) and the Nasdaq Composite Index by 1.5% (YTD +9.0%) – the Nasdaq’s longest advance since December 1999. After recording declines during the prior week, the Dow Jones Industrial Average (+1.7%; YTD -6.4%) and the S&P 500 Index (+1.3%; YTD -2.8%) also added to the gains notched up since the rally commenced off the March 9 lows.

Global indices also celebrated solid gains for calendar month April, with the MSCI World Index (+10.9%) recording its top monthly advance since January 1987 and the MSCI Emerging Markets Index (+16.3%) its strongest monthly showing since December 1993. The S&P 500 (+9.4%) had its best month since March 2000, placing the Index in the middle of its top 20 monthly gains since 1950.

Click on the table below for a larger image.

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Using four-day performances for markets that were closed for the May Day (International Workers’ Day) holiday on Friday, returns around the world ranged from top performers Indonesia (+8.7%), Ireland (+8.4%), Greece (+8.1%), the Czech Republic (+6.9%) and Turkey (+6.7%) to Luxembourg (-4.7%), Bulgaria (-4.0%), Malta (-2.7%), Macedonia (-2.6%) and Oman (-2.5%), which experienced selling pressure. The Mexican Bolsa Index surprised by only declining 3.0% amid swine flu fears. (Click here to access a complete list of global stock market movements, as supplied by Emerginvest.)

By the end of last week, more than 70% of the companies in the S&P 500 Index had reported first-quarter earnings. According to Bespoke, the Index’s annual decline in earnings (Q1 ‘09 versus Q1 ‘08) on Friday was of 32.3%. This compares with analysts’ estimates of -37.4% at the start of the earnings season. Also, as shown in the graph below, the percentage of companies beating earnings estimates has been rising steadily during the reporting period to 62% on Friday. ”With three quarters of companies having already reported, this earnings season is shaping up to be one of the best in years,” said Bespoke.

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John Nyaradi (Wall Street Sector Selector) reports that the strongest exchange-traded funds (ETFs) on the week were the Market Vectors Coal (KOL) (+15.1%), iShares MSCI Taiwan Index (EWT) (+13.8%) and Claymore US-1-The Capital Markets Index (UEM) (+11.4%). On the other end of the performance scale the SPDR KBW Bank (KBE) (-6.1%), PowerShares Active US Real Estate (PSR) (-5.8%) and Vanguard Extended Duration Treasury Index (EDV) (-5.7%) performed poorly.

For April, the “ETF of the Month” was the iShares Dow Jones Real Estate Fund (IYR) that gained +22.6%. Click here for a chart.

An interesting analysis on country ETFs was published by Bespoke last week, specifically indicating that markets around the world are extended into overbought levels from their normal trading ranges. Click here for the study.

On the credit front, the cost of buying credit insurance for US and European companies eased during the past week, as shown by the narrower spreads for both the CDX (North American, investment grade) Index (down from 175 to 163) and the Markit iTraxx Europe Index (down from 153 to 139).

Another indicator worth monitoring is the Barron’s Confidence Index. This Index is calculated by dividing the average yield on high-grade bonds by the average yield on intermediate-grade bonds. The discrepancy between the yields is indicative of investor confidence. There has been a solid improvement in the ratio since its all-time low in December, showing that bond investors are growing more confident and have started opting for more speculative bonds over high-grade bonds.

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Source: I-Net Bridge

The quote du jour relates to the stress test and belongs to Bill King (The King Report), who said: “A major problem with the ‘stress test’ is it depends on modeling and it’s the precise practice responsible for much of this economic and financial mess. It’s extraordinary that so many people believe that the Fed and Treasury, after missing the financial disaster, housing debacle, recession and derivative implosion, can now extrapolate economic conditions and resultant financial effects from its models. How did all that rocket-science modeling for subprime defaults and securitization workout? Yet many people already forget or ignore this reality.”

Next, a tag cloud of all the articles I read during the past week. This is a way of visualizing word frequencies at a glance. Key words such as “market”, “stock”, “economic”, “economy”, “bank” and “financial” again featured prominently. Let’s hope “flu” does not stake its claim among the dominant words over the next few weeks.

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But back to the stock market. In order to gather some perspective on the current stock market rally, Chart of the Day highlighted the duration (calendar days) and magnitude (percentage gain) of all significant Dow rallies that occurred during the 1929-1932 bear market (solid blue dots). By means of illustration, the bear market rally that began in October 1931 lasted 35 calendar days and resulted in a gain of 35%. “… the current Dow rally (hollow blue dot labeled ‘You are here’) is slightly below average in both duration and magnitude relative to the average 1929-1932 bear market rally (hollow red dot),” said Chart of the Day.

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Source: Chart of the Day, May 1, 2009.

As shown in the table below, the 50-day moving averages have been cleared comfortably by all the major US indices and the early January highs are the next important targets. As a matter of fact, the Nasdaq Composite Index is already above this level. It has to rise by a further 2.1% in order to reach the key 200-day moving average – an indicator often used to distinguish between primary bull and bear markets. On the downside, the levels from where the nascent rally commenced on March 9 should hold in order for the upward trend to remain intact.

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Two S&P 500 sectors – Consumer Discretionary (XLY) and Technology (XLK) – have actually just broken above their 200-day moving averages. Bespoke said: “This … signals the end to a long-term downtrend and the confirmation of an uptrend. It’s also a positive for the overall market that two cyclical sectors (one that is extremely tied to the consumer) are the first ones to break above their 200-days.”

Still talking technical analysis, Kevin Lane of Fusion IQ said: “The S&P 500 Index had stalled at the 878 level on three separate occasions over the past five months. However, prices then subsequently gave way to profit-taking and closed back below that level. Only a close above that level would open the way to higher prices.

“On the sentiment front, the CBOE Equity Put/Call Ratio, the AAII Bearish Sentiment Survey and the VIX’s deviation from its 50-day moving average have all moderated from constructive levels to more neutral levels. … these indicators are not at levels that would suggest sentiment is overly bullish yet, but their deterioration is enough cause for concern that a corrective wave may occur.”

“All the things are in place for the bear market to have ended,” Anthony Bolton, president of investments at Fidelity International in London, said in an interview with Bloomberg Television. “When there’s a strong consensus, a very negative one, and cash positions are very high, as they are at the moment, I’d like to bet against that.”

Remaining across the pond, David Fuller (Fullermoney) put matters in context as follows: “Base formations, confirming not only the ending of a bear market but the beginning of a new bull market, come in all shapes and sizes. The leading stock markets, which generally have better fundamentals, usually form smaller bases before commencing their uptrends, as we have seen with China and a number of other emerging markets from Asia to South America. Fundamentally weaker markets, such as the US and most of Europe, require a longer convalescence before a significant recovery occurs. This explains the new lows in late February and early March.

“This impressive rally is overextended in the short term, so we can expect it to spill over into a reaction and consolidation before long. The recent uptrend consistency will be followed by some choppy action as legitimate fundamental concerns remain.”

The last (cautionary) word goes to Richard Russell, writer of the Dow Theory Letters newsletter: “On the bear market decline, we never saw the great values that usually appear at major bear market bottoms. The ‘great value’ area is the place where I would normally suggest that investors load up with blue-chip stocks. For this reason, I would prefer waiting out this rally or making a limited trade with DIAs [Dow Diamonds ETF] with stops. I continue to believe this is an upward correction in an ongoing primary bear market. I note that many observers are saying that ‘this is a market that won’t go down’. Believe me, all markets go up – and all markets go down.”

And here is the venerable R man taking the bull by the horns!

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For more discussion about the direction of stock markets, also see my recent posts “Video-o-rama: Investors “look past the valley“, “Sell in May and go away: Fact or fallacy?” and “Donald Coxe – Investment recommendations (April 2009)” (And also make a point of listening to Coxe’s webcast of May 1, which can be accessed from the sidebar of the Investment Postcards site.)

Economy
“Global business sentiment is improving. Confidence remains very weak, but it improved last week to its best level since late last October. Much of the improvement has been in Asia and South America, although sentiment is more upbeat everywhere. Expectations regarding the outlook six-months hence are particularly buoyant,” said the latest Survey of Business Confidence of the World conducted by Moody’s Economy.com.

Although it is premature to conclude that the global recession is ending, a number of indicators, compiled by US Global Funds, could signal better times ahead.

• The inflation-adjusted inventory component of US GDP dropped by more than $100 billion in the first quarter of 2009. This figure represents nearly 1% of GDP. Such drops in the past have been associated with the end of recessions. At the least, it raises the chances of GDP growth in the current quarter.

• The latest industrial production (IP) numbers coming from Asia are positive. South Korea’s IP was up 5.2% from February, while Thailand’s IP improved by 2.5% and Japan’s gained 1.6%. Manufacturing inventories in South Korea and Japan continued their decline in March after peaking in late 2008.

• In China, the Purchasing Managers Index (PMI) rose for the fifth straight month in April (see blue line in chart below). The latest PMI figure is 53.5 – any reading over 50 indicates that the manufacturing sector is growing. The last time the PMI was this high was in May 2008. Another promising PMI figure, the employment sub-index, is also over 50, meaning that job growth in manufacturing is under way.

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Source: Kevin, Sinolise.com, May 1, 2009.

The April update of the ISM Manufacturing Index shows that the US manufacturing sector failed to grow for the fifteenth straight month, but the April reading of 40.1 was significantly higher than the 36.3 figure for March. The index has been improving for four straight months.

Rebecca Wilder (News N Economics) summarized the global economic picture as follows: “Overall, hope that key economies are no longer in free fall is emerging; however, the economic decline is ongoing.”

In an interview with The Washington Post, Nouriel Roubini said: “I don’t believe we are going to end up in a near-depression. Six months ago I was more worried about an L-shaped near-depression. Today, after the very aggressive policy actions taken by the US and other countries … we are, instead, in the middle of a U.”

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

May 01
• The ISM Manufacturing Survey points to imminent economic recovery, possibly in 2009
• Auto sales edged down in April

April 30
• Consumer spending and income decline
• Initial Jobless Claims declined but Continuing Claims advanced

April 29
• Federal Open Market Committee (FOMC) meeting ends with no surprises
• GDP growth – another quarter of deep and wide contraction in economic activity

April 28
• Case-Shiller Home Price Index confirms message from other reports
• Consumer Confidence Index improves mostly on surge in Expectations Index

The FOMC announced no change to monetary policy on Wednesday following the conclusion of its meeting. The communiqué said the Committee expected to keep the Fed funds rate target in the 0-0.25% range “for an extended period”. Moody’s Economy.com reported as follows: “The remarks on current economic conditions were less pessimistic than in recent months; the statement said that the pace of economic contraction ‘appears to be somewhat slower’ and that ‘the economic outlook has improved modestly’ since March.”

The FOMC included the following paragraph in the statement regarding its programs to buy agency debt, mortgage-backed securities and Treasuries: “The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets.”

The dire tone of GDP growth in the last two quarters has invariably caused analysts to draw comparisons with the Great Depression. The table below, courtesy of Asha Bangalore (Northern Trust) compares the behavior of real GDP, unemployment, inflation and stock prices during the early-1930s with the current situation.

Click the table below for a larger image.

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On the eve of the Berkshire Hathaway annual shareholders’ meeting in Omaha, Warren Buffett told CNBC that September’s “strike against the heart of the American system” was behind us, and that we have moved past the “economic Pearl Harbor”.

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

Date

Time (ET)

Statistic

For

Actual

Briefing Forecast

Market Expects

Prior

Apr 28

9:00 AM

S&P/Case-Shiller Home Price Index

Feb

-18.63%

NA

-18.7%

-19.00%

Apr 28

10:00 AM

Consumer Confidence

Apr

39.2

29.5

29.7

26.9

Apr 29

8:30 AM

GDP – Advance

Q1

-6.1%

-4.0%

-4.7%

-6.3%

Apr 29

8:30 AM

Chain Deflator-Advance

Q1

2.9%

1.7%

1.8%

0.5%

Apr 29

10:35 AM

Crude Inventories

04/24

+4053K

NA

NA

+3857K

Apr 29

2:15 PM

FOMC Rate Decision

0.00%-0.25%

NA

NA

0.00%-0.25%

Apr 30

8:30 AM

Initial Claims

04/25

631K

640K

640K

645K

Apr 30

8:30 AM

Personal Income

Mar

-0.3%

-0.2%

-0.2%

-0.2%

Apr 30

8:30 AM

Personal Spending

Mar

-0.2%

-0.2%

-0.1%

0.4%

Apr 30

8:30 AM

Employment Cost Index

Q1

0.3%

0.5%

0.5%

0.6%

Apr 30

9:45 AM

Chicago PMI

Apr

40.1

34.0

35.0

31.4

May 1

9:55 AM

Mich Sentiment –Revised

Apr

65.1

64.0

61.9

61.9

May 1

10:00 AM

Factory Orders

Mar

-0.9%

-0.4%

-0.6%

0.7%

May 1

10:00 AM

ISM Index

Apr

40.1

39.5

38.4

36.3

May 1

2:00 PM

Auto Sales

Apr

NA

NA

3.3M

May 1

2:00 PM

Truck Sales

Apr

NA

NA

3.8M

Source: Yahoo Finance, May 1, 2009.

In addition to Fed Chairman Ben Bernanke’s testimony before the Joint Economic Committee in Washington (Tuesday, May 5) and interest rate announcements by the bank of England and the European Central Bank (both on Thursday, May 7), the US economic highlights for the week, courtesy of Northern Trust, include the following:

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

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

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Source: Wall Street Journal Online, May 1, 2009.

J. Kenfield Morley said: “In investing money, the amount of interest you want should depend on whether you want to eat well or sleep well.” Hopefully the “Words from the Wise” reviews will assist Investment Postcards readers in properly assessing risks before making investment decisions.

Our thoughts are with those affected by the swine flu virus, and we pray that the spreading is contained. By the way, an interesting way of tracking the occurrences of the virus is by means of Google Maps (click on “Satellite” along the horizontal menu bar for the best image).

That’s the way it looks from Cape Town (yes, I’m actually back home for a change!).

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Source: Mike Keefe, The Denver Post.

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