Weekly Wrap

Here is the weekly recap from Briefing.com:

Once again, there were a host of market-moving headlines in the week that just concluded. Once again, too, there was a glut of headlines pertaining to the financial sector. The stock market's overall take on things was nothing short of exuberant.

The S&P 500 rallied just over 4.0% for the week. It was a striking move on a number of levels, not the least of which was the understanding that it came on the heels of the worst quarterly performance since 2002.

The financial sector led the charge, gaining 6.6% in a news rush that was triangulated between Europe, Washington and Wall Street.

Treasury Secretary Paulson got things going Monday with an announcement of a plan to enact a sweeping overhaul of the U.S. financial regulatory system. The intent of the plan is to streamline the bureaucracy in the regulatory system and to modernize the system so that the U.S. financial sector can be more competitive in the global marketplace. Those are laudable designs, yet no one expects the proposals, or even parts of them, to be implemented any time soon given (a) the higher priority of getting the current market and economic situation worked out first and (b) that this is a presidential election year.

Paulson's plan provided plenty of talking points throughout the week, but the real buzz surrounded the market's reaction to the news from a cadre of investment banks that included Swiss bank UBS (UBS), German bank Deutsche Bank (DB), and the Wall Street firms Lehman Bros. (LEH) and Merrill Lynch (MER).

Tuesday proved to be the market's turning point on the week as it rallied sharply in the face of otherwise bad news from UBS and Deutsche Bank. The former warned that it expected to report a first quarter loss on the order of $12 billion after taking a $19 billion write-down. Deutsche Bank for its part said it would be taking a write-down of approximately $3.9 billion and acknowledged that conditions had become significantly more challenging during the last few weeks.

The spin on these updates was that they were so bad that they stood out as indicators the financial sector must be nearing a bottom. Aiding in that assumption was the added disclosure from UBS that it was planning to raise $15 billion of new capital and word from Lehman Bros. that it was successful in raising $4 billion in new capital in an oversubscribed offering. On a related note, it was reported Thursday by a Japanese paper that Merrill Lynch CEO John Thain said his firm doesn't need to raise fresh capital.

The bulk of this week's gains were achieved on Tuesday, which also happened to be the first day of the second quarter (and April Fool's Day for good measure). Led by a 7.5% surge in the financial sector, and gains in all ten economic sectors, the S&P 500 jumped 3.5%.

In the grand scheme of things, what transpired in the financial sector Tuesday wasn't so much a function of something truly positive as it was an elimination of something truly negative. The capital raising efforts helped squelch liquidity concerns, which were truly a negative as far as sentiment is concerned. However, it's one thing to raise capital to be able to withstand future storms and quite another to raise new capital to deploy for growth initiatives.
The financial sector is still in a mode of weathering storms.

The market has been down this road before in thinking the financial sector is at a bottom, only to get lost in another wave of write-downs, so we won't be so bold as to suggest the bottom is in for the financial sector. This week's action, though, was certainly a welcome development for market bulls.

Equally as welcome was the market's resilience to selling efforts following the Tuesday rally. In fact, over the remaining three sessions the S&P 500 was basically flat, which was comforting for many to see given the tendency for some time now to sell into rallies.

In turn, it wasn't as if the market didn't have any excuses to sell the rally.

On Wednesday Fed Chairman Bernanke told the Joint Economic Committee in his testimony on the economic outlook that he thought real GDP wouldn't grow much, if at all, and could even contract slightly in the first half of 2008. That headline caused a stir, but the market took it in stride, cognizant that Bernanke wasn't telling it anything it hadn't already feared.

On Thursday it was reported that weekly initial claims rose 38K to 407K, well above the market's expectation of 365K. Meanwhile, the Dept. of Labor revealed on Friday that nonfarm payrolls declined 80K in March (consensus -50K) and that the unemployment rate jumped to 5.1% from 4.8%.

The market took a requisite dip following both of the aforementioned reports, but soon rebounded in keeping with the week's bullish bias.

With respect to the closely-followed employment report, it wasn't a good number from an economic standpoint, yet it needs to be stated that it isn't a number either that fits the recession label. Moreover, on a 138 million base of total employed, an 80K decline is fairly insignificant as it amounts to a mere 0.06% decline.

Admittedly, the direction of the payrolls numbers of late isn't great. Payroll employment has declined by 232,000 over the past three months, or an average of 77K per month.

In recessions payrolls decline 150K to 200K per month. We're still well off that mark. Today's report is consistent with Briefing.com's view that the data are bad, but not recession bad. The same can be said for the ISM manufacturing and services indexes released earlier in the week. Both were better than expected, and up from the prior month with readings of 48.6 and 49.6, respectively, but neither topped the neutral 50 level.

In the same vein, the S&P 500 had a very good week this week, but still has a ways to go to get back to neutral for the year.