This week, Charles Biderman, Bob Doll, Stephanie Giroux, David Krein and Tom Sowanick weigh in on the markets’ direction…plus a calendar of the week’s most important stats.


LPL Current Conditions Index Turns Positive

The LPL Financial Current Conditions Index improved over the past week, moving above 0 for the first time to stand at 0.2. The improvement in the index over the past nine weeks has been mirrored by a stock market rally and narrowing of bond credit spreads in eight of the past nine weeks. The index reflects current conditions in line with our base case outlook for modest gains in the stock and bond market in 2009.

Only one of the 10 index components fell during the past week. Mortgage applications slipped as mortgage rates moved back up just over 5%. Most components improved during the week, some rose by the largest amount since the index was created earlier this year. Shipping rates are reversing the slump earlier this year even as dry bulk ship supply is starting to increase materially. In 2009, the dry bulk carrier fl eet capacity is expected to post a growth rate in the double-digits as new ships ordered years ago are completed. Capacity threatens to outstrip demand, even with increased rates of decommissioning and scrapping—potentially pushing down the cost of shipping. Despite this downward pressure, shipping rates have risen back to the highs of the past six months suggesting demand is resilient.

Encouragingly, initial jobless claims have continued to improve in recent weeks. The employment report for April, released on Friday, shows us that the pace of job losses has been slowing since the beginning of the year—from over 700,000 per month in January, into the 600,000s in February and March, and now to the 500,000s in April. The monthly tally of layoff announcements has also been on the decline.

FINANCIALS ANXIETY, From Stephanie Giroux, chief investment strategist, TD Ameritrade

Financials are both the best performing sector (monthly) and the worst (year-to-date). That indicates investors are buying beaten down stocks in the sector at what they see as bargain prices. But structural changes in the U.S. financial system may not restore the profitability investors are counting on. Better-than-expected first quarter results from many banks that had posted a massive fall in fourth-quarter earnings set the tone for the Financial sector in April. Wells Fargo, Citigroup, JPMorgan Chase and Goldman Sachs have all beaten consensus—and as a whole the Financials have outperformed expectations, with 58% of the companies beating estimates, which is a far cry from the last five or six quarters. But Treasury stress tests—which investors have shrugged off on the grounds that the bigger institutions remain too big to fail and the worst-case test scenario was viewed as too easy—could raise dilution problems. In all, 19 banks with assets over $100 billion participated in the stress tests, which started February 25 and were completed over the course of two months. Those banks hold more than two-thirds of the nation's assets and more than half the loans in the U.S. banking system. Banks received preliminary results last week, and many are now negotiating with the Fed over whether they have enough tangible common equity, a measure of capital strength. The public was to get results this week—but they may be once again delayed by back stage negotiations and the on-going threat of more dilution yet to come for ordinary investors.

COMMODITIES MAY NOT BE THE DIVERSIFIER YOU HOPED FOR, From David Krein, senior director, institutional markets, Dow Jones Indexes

The Sharpe Ratio, developed by Nobel Laureate William F. Sharpe, helps to make the performance of one portfolio comparable to that of another portfolio by making an adjustment for risk. This measurement is very useful because although one portfolio can reap higher returns than its peers, it is only a good investment if those higher returns do not come with too much additional risk. In general, a higher Sharpe ratio is preferred to a lower one.  (However, this does not hold true when interpreting negative Sharpe ratios.)  

Over the trailing 3 years ending April 2009, the only subindexes of the Dow Jones-UBS Commodity Index with positive Sharpe Ratios are Grains, Precious Metals and Agriculture. The chart below plots the subindex’s risk-adjusted performance relative to its correlation to the composite index. Precious Metals have been less correlated to the composite index than Grains and Agriculture. Also, Precious Metals have been up 6.00% per annum while the Dow Jones U.S. Total Stock Market Index has been down -10.73% per annum.

CONDITIONS REALLY ARE IMPROVING, From Bob Doll, vice chairman and global chief investment officer of equities, BlackRock

We continue to be surprised by the number of investors who believe that inflationary pressures are about to surface. In our opinion, we are unlikely to see such pressures for at least a couple of years, and we continue to believe that deflation remains the greater concern. The world is awash in excess capacity, which is putting downward pressure on prices, and as the unemployment rate moves higher, we are unlikely to see upward pressure on labor costs. If and when inflationary pressures do emerge, we do not believe the Federal Reserve will be shy about raising interest rates.

At present, there is a sharp debate between the holders of the bullish and bearish views of the stock market. The bears are convinced that consumers are burdened by debt and will be unable to spend, the banking system is dysfunctional, the real estate market remains in a free fall and higher taxes and government action will depress valuation levels. The bulls, on the other hand, believe that a global inventory upswing is beginning, reflation policy has taken hold, the housing market is bottoming, the recovery in emerging markets will drive global growth and bearish sentiment has already been discounted by the markets.