Published March 16, 2009

WALL STREET INSIGHT
Finally, a glimmer of optimism, but can it last?

Investors looking to second-quarter results for signs of corporate stability

By ANDREW MARKS
NEW YORK CORRESPONDENT
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FOUR consecutive days of gains and a 10 per cent bounce for the US stock market have worked a remarkable magic on Wall Street, where by last Friday's closing bell a glimmer of optimism was finally seen after the overwhelming fear and pessimism that has sunk stocks by more than 20 per cent in the first three months of 2009.

Good sign: Wall Street had its best day of the year on Tuesday after Citigroup said it operated at a profit during the first two months of 2009

'This is the classic reaction of a deeply oversold market that suddenly realises how much of the recent selling has been based more on sentiment than fundamentals,' said Marc Pado, chief market strategist at Cantor Fitzgerald.

'This rally may or may not be the beginning of the end for the bear market, but it is fair to say that the market established a bottom last week that investors were finally able and willing to start building up from.'

Wall Street was buoyed by a series of positive developments last week, starting with commentary from the heads of Citigroup and Morgan Stanley that their banks are currently turning a profit - albeit without taking into account their ongoing massive write-offs - news that embattled carmaker GM did not need an additional US$2 billion in aid, and the imminent suspension of the so-called uptick rule that many traders blame for the massive volume of short selling that has contributed mightily to the stock market's woes in recent months.

Less bullish investors attributed last week's rally to 'short covering'.

Said Gary Reasons, a portfolio manager at Nike Capital Management: 'We desperately needed a week like this to remind everyone who has their money in cash and gold and Treasuries that stocks are still a viable way to invest. But my feeling is that all that sideline money stayed on the sideline and most of the 10 per cent gain was the 'shorts' covering their positions. So I'm not ready to start shouting 'buy' to my clients. I think we'll re-test the bottom, possibly more than once, before any substantial move upward.'

Could this rally turn out to be a bear market rally trap rather than a sustainable bounce off of the bottom?

'I'm not ready to say which it is at this point,' said Jim Awad, managing director of Zephyr Management, who was encouraged by investors' positive reaction to downgrades for Berkshire Hathaway and GE Capital debt and some signs of flattening in the economy, as in the improvement in retail sales.

The key for Mr Awad will be the second quarter, not the upcoming first quarter. 'By now everyone has accepted that the first quarter will be as bad as the fourth quarter, so the big question becomes what companies say over the coming weeks about their outlooks for the second quarter. If we see stabilisation in earnings, we'll be in good shape, but if signs point to revenues still in a freefall we'll test the lows again,' he said.

Friday provided some cheer. The Dow Jones Industrial Average rose 53.92 points, or 0.8 per cent , to 7,223.98, while the S&P 500 added 5.81 points, or 0.8 per cent , to 756.55. The Nasdaq also ended Friday's session with gains, tacking on 5.4 points, or 0.4 per cent , to 1,431.50.

For the week, the Dow rose 9 per cent , the S&P 500 rose 10.7 per cent, and the Nasdaq added 10.6 per cent .

This week, with today marking the one-year anniversary of the fall of Bear Stearns, investors are likely to have a variety of reasons to push stocks higher.

One catalyst for the market could be the launch tomorrow of the Federal Reserve's Term Asset-Backed Securities Loan Facility, or TALF, a US$1 trillion programme aimed at prodding hedge funds, private equity funds and mutual funds that underwrote this decade's massive expansion in credit to return to the asset-backed securities market, a source of funding for the providers of credit card and car loans.

The Fed's policymaking committee will deliver its decision on interest rates on Wednesday following a two-day meeting.

The Federal Open Market Committee established a target range for the federal funds rate of zero to 0.25 per cent in December, leaving investors to wonder about Fed chief Ben Bernanke's next moves, which could involve adding vast amounts of liquidity to the financial system and buying Treasury notes from the open market.

The first signals of how the corporate sector sees the second quarter shaping up might be found in first- quarter earnings reports due from economic bellwether FedEx, as well as Nike and Oracle this week.

Some key economic releases are due, including the February reading on industrial production and capacity utilisation today. The New York Fed will post its Empire State manufacturing index reading for March.

Tomorrow will see the release of two important reports in the form of housing starts and the producer price index for February.

Wednesday will bring the consumer price index for February, along with the current account balance for the fourth quarter.

On Thursday, February leading in``dicators will be made available while the final day of the week will bring the weekly jobless claims data as well as the Philadelphia Fed's latest reading on manufacturing activity.