Stocks moved sharply higher today, the first day of the second quarter.The rally was led by financial stocks as news broke that Lehman Brothers and UBS AG of Switzerland are issuing fresh stock to strengthen their balance sheets, the latter after reporting a first quarter write down of $19 billion to cover losses in its auction-rate securities business. The belief is gradually gaining ground that the markets have reached an intermediate trough, and if another Bear Stearns type collapse is avoided then they may even move higher.
Parallels were being drawn between the crisis that hit Japanese banks in the late 1980's and the current crisis facing American financial institutions. What most people overlook is that while Japanese banks did their best to conceal their losses, American and European institutions have been quite transparent about their difficulties.This has permitted timely and focussed intervention by the Fed to help solve the crisis. Ben Bernanke had faced intense criticism last year for his reluctance to lower interest rates quickly enough to help home owners in difficulty. However his handling of the wider crisis this year, which threatened a global financial meltdown, has been praised by almost everybody.
Stocks were also helped by the reading on the Institute for Supply Management's manufacturing index which increased to 48.6 from 48.3 in February. Economists had predicted it would fall to 47.5. This shows that although the economy is still contracting, it is not by a huge amount. The Commerce Department reported in Washington that construction spending in February also fell by less than expected at 0.3% against a predicted drop of 1%. There are also signs that Treasury Secretary Paulson is going to lead a concerted global effort to boost liquidity. Hopes of another rate cut at the next Fed meeting have declined, which has boosted the dollar and prompted a sell off in commodities, another positive for Wall Street. The present rally looks set to continue!