This week, caution and optimism from Clearbrook, TrimTabs, BlackRock and Barclay’s Wealth—plus, the LPL Crisis Conditions Index.

FORECASTS

A Stabilizing Consumer—from Tom Sowanick, CIO, Clearbrook Financial

We are also now beginning to see signs of either economic stability or a deceleration of negative economic activity. Perhaps the most important reading has come in the consumer confidence data which reveals that consumers are very constructive about their outlooks six-months forward despite the fact that their current readings of confidence remains quite low. Consumer spending seems to be stabilizing and housing activity seems to have bottomed, with existing home sales reaching bottom in January with an annualized sales pace of 4.49 million units versus the 4.64 million unit average of the past two-months.

Despite the recent market strength across many asset classes, investor sentiment remains cautious which in our view is a positive development. Cautious optimism will keep pent-up demand high, as many investors will continue to wait on the sidelines until either the market moves still higher or economic data develops a more positive and sustainable trend.


We’re Still Bearish—from Charles Biderman, CEO, TrimTabs Investment Research

There is finally some positive news to report on the corporate liquidity front. Last week, four new cash takeovers using a total of $10.3 billion in cash were announced, the third-highest amount this year.

Despite the flurry of mergers, we are not changing our stance because none of our other key indicators improved. On the buy side, stock buybacks and insider buying remain extremely weak. New stock buybacks have totaled only $750 million in April, and the year-to-date average of $250 million daily is 88% below the average of $2.0 billion daily in the same period a year ago. Similarly, insiders have purchased only $100 million in April, and the year-to-date average of $30 million daily is 79% below the $140 million daily in the same period a year ago. On the sell side, companies are taking full advantage of the rally to flood the market with new shares. New offerings have reached $18.6 billion in April, the highest since October 2008.

Given the horrific state of the U.S. economy, it will take a lot more than a few cash mergers for us to turn less bearish. Income tax withholdings dropped 3.1% y-o-y in the past four weeks adjusting for the “Making Work Pay” tax credit. We estimate based on withholdings that the economy is shedding close to 500,000 jobs per month. Confirming the labor market’s weakness, the TrimTabs Online Job Postings Index has fallen 4.2% in April, and weekly unemployment claims exceeded 600,000 in each of the past 12 weeks. Our key indicators do not support the widespread notion that the economy is on the road to recovery. Indeed, when the support to incomes from tax refunds and cash-out refinancings fizzles in May, American consumers are going to be in even more financial pain than they are now. We expect stock prices to drop to fresh lows as companies keep dumping new shares into the market and disappointed investors bail out of U.S. equities.

The Worst Is Over—from Bob Doll, vice chairman and global CIO of equities, BlackRock

We are now in the midst of first-quarter reporting season. More than one-quarter of S&P 500 companies have reported their earnings, representing almost half of the total market capitalization. Of those companies, almost 80% have met analysts’ expectations (which, incidentally, have been significantly lowered in recent months), with the cyclical sectors notching the best results. Also on investors’ minds this week is the upcoming Federal Reserve meeting. We expect the central bankers will use the occasion to convey a slightly less downbeat tone than they have in the past, reflecting signs of some improved economic data. Finally, investors are becoming increasingly focused on the bank stress test results, which are scheduled to be released in early May. Despite the Treasury Department’s statements that most banks appear to be well capitalized, many investors are concerned about the state of the banking system. We expect that the results, once released, will prompt some additional market volatility.

As we have been saying for the past several weeks, there have been increasing signs that the recession’s downside momentum is slowing. Importantly, this does not mean that the economy is set to recover, but we do believe that the period of peak weakness may be behind us. Reflation policy finally appears to be taking hold, and credit markets are beginning to thaw. Leading economic indicators are also starting to look better. When the economy does begin to recover (which we still believe will be a late-2009 or 2010 event), the recovery will likely be a subpar one, meaning that both corporate earnings and financial markets will still experience some volatility.

Since stocks bottomed on March 6, markets are up nearly 30% and our conviction is growing that this last bottom represents the low for the present cycle. Market breadth and volume have been strong since the current rally began, which suggests to us that upward momentum has increased to the point that it has become more difficult to derail the markets. Additionally, this current rally (unlike previous failed attempts) has been accompanied by signs of economic improvement, which provides a stronger fundamental base for the markets. We are not convinced that we are at the beginning of a new secular bull market, since there are still a number of downside risks and a high degree of uncertainty remains. We do, however, continue to believe that stock prices will be higher one year from now than they are today, and reiterate our view that a year-end target of 1,000 for the S&P 500 seems like a reasonable forecast.

Reasons for Hope (but watch the downside)—From Aaron S. Gurwitz, head of global investment strategy, Barclay’s Wealth

Ordinarily, if we were as confident of recovery as we are now, we would be urging investors to increase equity allocations to levels above their strategic norms. We are not doing so now. Instead, we are recommending that investors increase portfolio risk only modestly. The problem we see is not the 20% likelihood that the recession will not have ended by later this year. Instead, our main concern is the likely state of the world under that 20% scenario, which would not be just a matter of the recovery being postponed by a quarter or two. Rather, the psychological impact on consumers, businesspeople and investors of a failure of aggressive, global, multidimensional policy intervention could be devastating. Under those circumstances, a “lost decade” in the global economy would be the likeliest outcome.

The context for our investment recommendations as the second quarter begins is, therefore, of a gradually diminishing likelihood of a very bad outcome….Our current themes are:

• Start shifting to the tactical offensive.
• Asia will likely lead the global economic revival.
• Credit markets will outperform as risk appetite increases.
• Volatility will ease gradually.
• Don’t ignore the risks.

LPL Crisis Conditions Index: Improving—From LPL Financial

The LPL Financial Crisis Conditions Index is a weekly measure of the conditions that underpin our outlook for the markets and economy in 2009. We will publish this weekly index over the course of 2009 to provide real-time context and insight into the trends that shape our recommended actions to manage portfolios. We expect this index will become a useful tool to describe the conditions most relevant to investment decision making in 2009.

LPL Financial Crisis Conditions Index improved over the past week, extending the trend of improvement since the start of March. The improvement in conditions has been mirrored in the stock and bond market. The CCI is now inline with where it started the year – aligned with our basecase for the economy and forecast for modest gains in stocks and bonds this year.

Last week’s improving components of the CCI included:

• Narrowing credit spreads - generally better than expected first quarter earnings results bolstered the confidence of bond investors.
• Decline in the VIX - the outlook for stock market volatility has moderated.
• Resilient retail sales - chain store sales tracked by the International Council of Shopping Centers were down only -0.1% from a year ago.
• Surging mortgage applications - conforming mortgage rates are below 5% and at all time lows
• Consumer confidence – consumer sentiment improved along with an outlook for rising inflation suggesting consumers may no longer be willing to delay purchases in anticipation of lower prices for durable goods purchases such as homes and autos.
• Initial jobless claims have reflected some modest improvement in the past two weeks, but remain the weakest component of the CCI since the start of the year.

REPORT CALENDAR

Monday

• Earnings: Corning, Humana, Valero Energy, Verizon, Whirlpool

Tuesday

• April Consumer Confidence Index
• February Case-Shiller home price index
• Earnings Bristol-Myers Squibb, DreamWorks, E-Trade Financial, Office Depot, Pfizer, Sun Microsystems, United States Steel

Wednesday

• Earnings: Aetna, American Electric Power, Burger King Holdings, General Dynamics, Goodyear, Medco Health Solutions, Qwest, Starbucks, Time Warner, Visa, Waste Management, Wyeth

Thursday

• March personal income and spending
• Earnings: Cigna, Colgate-Palmolive, Comcast, Dow Chemical, Eastman Kodak, Exxon Mobil, International Paper, Kellogg, MetLife, Motorola, NYSE Euronext, Procter & Gamble, Safeway, Starwood Hotels, Viacom

Friday

• April U.S. auto sales
• April ISM manufacturing index
• March ISM factory orders
• Earnings: Chevron, MasterCard, Washington Post Co.

LPL Financial Crisis Conditions Index