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Market Experts Discuss Geithner, Recovery, Rally

Wall Street professionals comment on Treasury Secretary Timothy Geithner's Senate turn amid positive signs in the economy and stock market

By BusinessWeek staff

Another week, another Congressional appearance by U.S. Treasury Secretary Timothy Geithner. On June 9, the Treasury chief appeared before the Senate Appropriations Committee to discuss the status of the Troubled Asset Relief Plan, the banks that are looking to exit TARP, and the ongoing recovery of the U.S. financial system.

What did Wall Street economists and strategists have to say about Geithner's appearance and other topics of import to the economy and financial markets? BusinessWeek compiled these comments on June 9:

Action Economics

Geithner cited signs of improvement in the economy and financial system, but said the challenges remained substantial. He also said the [Public-Private Investment Partnership] to remove toxic debt was about to go forward, while new systemic rules would be laid out within weeks to discourage large firms from taking too much risk. Geithner plans to streamline the out-of-date regulatory system as well and vowed to get the U.S. fiscal house in order, working with Congress to "make tax changes needed to cut deficits." Due to the global nature of the crisis, the U.S. recovery is dependent on a bounce abroad, requiring cooperation with other large economies to deliver on stimulus, etc.

[Geithner reiterated that] we're at the early stages of repair and recovery, and that the financial system is "substantially stronger" than where we were previously…He also added that banks are in a stronger position as well and are becoming more able to make "normal business decisions." That's been highlighted by today's announcements that 10 banks are repaying $68 billion in TARP funds. He also stated that the U.S. needs to instill confidence that the deficits will be brought down. In his streamlining of the regulatory system, he said changes won't be concentrated in one area. Officials are looking into areas where the system is most vulnerable to regulatory arbitrage. He will defer recommendations on the future of Fannie Mae and Freddie Mac until a later date.

Beth Ann Bovino, Standard & Poor's

U.S. wholesale inventories dropped 1.4% in April, weaker than the 1.0% drop that markets had expected. Wholesale sales fell 0.4% in April. The 2.4% drop in sales in March was not revised, while March inventories were revised lower to -1.8% (previously a 1.6% decline). Wholesale inventories are down 20% over last April, while sales are down 19.5%. The inventory-sales ratio narrowed slightly to 1.31, from 1.32 in March. The data are close to expectations and shouldn't have market impact, but will help economists adjust GDP forecasts.

Ed McKelvey, Goldman Sachs

Three months ago we published a road map of data points that we thought would be consistent with our forecast for stabilization in real [gross domestic product] at about midyear, which at the time was viewed with considerable skepticism by many market participants. Taking a six-month horizon, we set forth benchmarks for 12 indicators—three each for consumer spending and confidence, residential construction, industrial activity, and the labor market. Halfway along this road, most indicators have modestly outperformed our expectations, led by those covering the industrial sector. The consumer data also have outperformed on balance, with the notable caveat that the most recent readings on retail sales other than motor vehicles have sagged, and leading indicators for residential construction have also been better than expected. The laggards have been residential construction outlays and most of the labor market indicators, though payrolls have lately started to come around. Thus, while the U.S. economy is well along on the road to stabilization, it is not free of potholes.

The two most important patches to look for over the next three months are: (1) sequential increases in retail sales other than vehicles (to establish that the latest setbacks are not a resumption of last fall's downtrend), and (2) more evidence of labor market improvement, particularly in a lower level of initial claims and a significant slowing in the rate at which continuing claims are rising.

Edward Yardeni, Yardeni Research

It must be a bull market rather than a rally in a bear market. How else to explain that uber-liberal whiner Paul Krugman turned the market around [on June 8] from a triple-digit loss to close with a modest gain of 1.36 [points for the Dow Jones industrial average]? At least that was the lead story on Bloomberg after the market closed. In a lecture yesterday at the London School of Economics, the Nobel Prize winner said: "I would not be surprised if the official end of the U.S. recession ends up being, in retrospect, dated sometime this summer. Things seem to be getting worse more slowly. There's some reason to think that we're stabilizing."

A more likely explanation is another story that appeared on Bloomberg at 1:35 p.m. yesterday. It reported that a "remarkable change" in investor sentiment has doubled the price of some collateralized loan obligation securities in the past month, according to Morgan Stanley analysts. In addition, yesterday's Washington Post reported online that the "Obama Administration plans to announce as soon as today that some of the nation's largest banks can repay billions in federal aid.…" The financials rallied yesterday on all this wonderful news.

Not so wonderful was another Bloomberg story noting that yields on Fannie Mae and Freddie Mac mortgage securities climbed to their highest since Nov. 24, the day before the Fed announced plans to buy the bonds to drive down interest rates on mortgages. The 10-year Treasury yield rose to 3.91% yesterday. This is bound to depress mortgage refinancing activity, which has been a major source of bank profitability so far this year. This all adds up to a sideways moving stock market for a while, in my opinion.

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