As the signals are looking up on Wall Street, warnings of a still fragile economy remain. In this week’s lineup: LPL Financial, Trim Tabs’ Charles Biderman and Clearbrook Financial’s Tom Sowanick. Plus: the week’s most important reports.

THINGS ARE LOOKING UP, from LPL Financial

The LPL Financial Current Conditions Index improved over the past week to
the highest level since we began tracking the index. After deteriorating in
January and February, the rise of the past three months has brought the index
well into positive territory to stand at 0.4. The index reflects current conditions
aligned with our base case outlook for modest gains in the stock and bond
market in 2009.

Most of the 10 components of the index are in positive territory for the year.  
Measures of stress in the corporate bond market (Baa Spreads) and lending
among banks (TED Spread) have shown the most improvement. However,
these two positives are balanced by the deterioration in first time filings for
unemployment benefits (initial jobless claims) and slumping demand for
housing (mortgage applications) as mortgage rates rise. While mortgage
applications remain above average, they are down from where they started
the year, the recent jump in interest rates as government bond yields have
climbed sharply has slowed the pace of refinance and purchase applications.  
In general, the other components have all improved since the start of the year.  
Notably, shipping rates have risen as demand has picked up. This rise has also
been seen in trucking and rail traffic.


WHERE WE WENT WRONG, From Charles Biderman, CEO, TrimTabs

We have been bearish on U.S. equities all year, and we completely missed the rally off the March lows. The past three months have been our worst run since mid-2003.

We were not wrong because we misread corporate liquidity or the U.S. economy.  Corporate liquidity has turned more bearish than at any time since we began tracking it almost 20 years ago. Since the start of April, new offerings of $116.6 billion have been 4.7 times higher than the $24.9 billion in new cash takeovers and new stock buybacks. Meanwhile, insider selling of $5.2 billion has been 6.9 times higher than the $750 million in insider buying. Also, as much as Wall Street wants to believe otherwise, the economy is still tanking. Income tax withholdings dropped 4.7% year-over-year in the past four weeks. Growth did not improve this spring despite the tailwinds of higher tax refunds, lower gasoline prices, and the “Making Work Pay” tax credit.

So where did we go wrong? We underestimated how much demand for shares would outpace the supply of shares. We did not consider until a few weeks ago how rebalancing by pension funds and investments of sideline cash by hedge funds could be driving stock prices higher. Our best estimate is that the equity buying power of hedge funds and pension funds was as high as $250 billion. Much of this money probably has been invested already. But the market’s resilience in the face of an onslaught of equity issuance suggests portfolio managers still have some dry powder.

Also, we did not take demand and sentiment more generally into account in our market calls. Vincent Deluard, our global equity strategist, developed the TrimTabs Demand Index in September 2008. This indicator combines a variety of sentiment and demand variables, and it has been consistently bullish since early April (it was bullish at 67.6 on Thursday, June 4). We did not use it in making our market calls because it was so new. If we had modified our market calls based on demand, our losses would have been lower.

GLOBAL WEAKNESS NEARING AN END, From Tom Sowanick, chief investment officer, Clearbrook Financial

Sharply lower than expected job losses for May is sending a very strong signal that the contraction in the U.S. economy has already bottomed. Though there were 345,000 jobs lost in the past month, this was considerably better than the consensus estimate of a job loss of 520,000. Corroborating the improving tone in the labor market has been the broad increase in commodity prices and a sharp increase in Treasury yields. Oil reached $70 per barrel, suggesting that inflation pressures may soon be on the rise. As such, Treasury yields are also continuing to rise, with the yield on the two-year note rising to over 1.20%.

We continue to believe that the financial markets are telling a story that global economic weakness is nearing an end. Strong performance from emerging market equities and commodity-based currencies are suggesting that emerging economies are leading developed countries out of weak economic growth. Brazil's Bovespa Index has now risen by more than 70% in dollar terms since the start of the year (30% of the gain is attributed to the strength of the Brazilian currency). China's equity market has risen more than 60% for the year, which strongly foreshadows the single digit returns garnered from the S&P 500.

Looking forward, investors need to pay close attention to the rise in Treasury yields to anticipate when they may see a shift in Federal Reserve monetary policy. Though we do not expect the Fed to lift interest rates before year-end, a rise in the yield of the Treasury two-year note to around 1.50% would suggest that the market is beginning to price in an upward shift in the Federal Funds rate. At the same time, corporate yields continue to move gradually lower providing strong returns for those investors who have already elected to move out of the safety of Treasury notes and bonds in favor of corporate debt. It is important to recognize that rising Treasury yields have been accompanied with declining corporate borrowing costs—which in turn suggests that Treasury yields are beginning to normalize and so too are corporate interest rates.


FINANCIAL CALENDAR

Monday

• Earnings: Navistar International
• * Federal government’s report card on banks