Investing Caffeine

Green Shoots or Spring Fever

May 1, 2009 at 7:45 pm Leave a comment

Experts are debating whether the recent bounce experienced in the equity markets is a function of a fundamental turnaround in the economy, or is this more a function of wearing rose-colored glasses after extreme price declines. Irrespective of your view, the S&P 500 Index rose +9.4% in April; the Dow Jones Industrials +7.3%; and the NASDAQ Composite Index +12.4%. After wholesale panic began last September green shoots now appear to be budding through the ashes:

Healthier Than Anticipated Corporate Earnings: Company earnings reports are beating expectations. A +17% bounce in the KBW Bank Sector Index during April is one validating piece of evidence. “The earnings season in general has been better than expected, with 68% of the S&P 500 reporting upside surprises, and we’re three-quarters of the way done,” said Art Hogan, chief market strategist, Jefferies & Co.

Improving Consumer Spending: Despite significant job losses and weak economic activity, consumer spending, which accounts for about 2/3 of Gross Domestic Product (GDP), was up +1.5% in the first quarter of 2009.

Stabilization in Home Prices: Although housing prices continue to decline, existing home unit sales have stabilized over the last four to five months at around 4.5 million homes.

Merger Marriages On the Rise: Merger activity is perking up now that a market bottoming process appears to have commenced. Oracle/Sun Microsystems in technology; Merck/Schering Plough in healthcare; and Pulte Homes/Centex in homebuilding are just a few examples of recent merger marriages.

Capital-Raising on the Rise: Capital markets are functioning much better with bond spreads tightening and the cost of issuance declining for corporations. Beyond the hundreds of billions raised through new bond deals, we are seeing troubled areas like the REITS (Real Estate Investment Trusts) raising vital equity capital as well. Prologis (PLD), Chimera (CIM), Kimco (KIM), Vornado (VNO), AMB (AMB), and Simon Property Group (SPG) have raised over $4 billion in the last few months.

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