Reassurances over the health of the U.S. banking industry have sparked something of a recovery in investors’ appetite for risk and Wall Street looked set to join Asia and Europe with strong gains at the open.

Executives from Citigroup , Bank of America and JPMorgan Chase said last week their banks had been profitable for the first two months of the year.

Federal Reserve Chairman Ben Bernanke also said on Sunday that he sees the U.S. economic decline moderating and recovery beginning in 2010, though he said risks remain that politicians will lack the will to do everything needed to fix the fractured financial system.

Global stocks as measured by MSCI rose more than 1.3 percent, bringing gains to more than 11.5 percent since hitting a low a week ago.

“The eternal battle between the bulls and the bears will intensify this week,” said Chris Hossain, senior sales manager at ODL Securities.

“Whilst it is hard to say if we have seen the worst, we certainly haven’t seen a week like last week in a long time.”

European shares also rose for a fifth straight session, led higher by financial stocks.

The pan-European FTSEurofirst 300 and 14 percent this year after plunging 45 percent in 2008.

Earlier, Japan’s Nikkei average gained 1.8 percent to post its highest close in a month, with banks such as Mitsubishi UFJ Financial Group  jumping amid the easing fears about the health of U.S. lenders.

The benchmark rose 134.87 points to 7,704.15, its highest finish since Feb. 16. The broader Topix  climbed 2.4 percent to 741.69.

BONDS FOR SALE

The equity charge undermined demand for government bonds with June Bond futures down 73 ticks, two-year Schatz yields rising 5 basis points to 1.381 percent, and 10-year Bond yielding 3.127 percent, up 8 basis points.

“At least risk aversion is decreasing and there was no disappointment on the back of the G20,” said Patrick Jacq, interest rate strategist at BNP Paribas in Paris.

“Clearly, as financial stocks still remain the driving force, this is helping stock markets to rebound further.”

Over the weekend, finance ministers and central bankers from Group of 20 countries pledged to use their full fiscal and monetary firepower to combat the economic crisis, but the decisions taken focused more on funds for the IMF and regulating hedge funds.

The dollar fell broadly, reversing earlier gains made in the Asian session, as stock markets rallied.

The currency market was also looking ahead to policy meetings by the Federal Reserve and the Bank of Japan later in the week.

The dollar fell 0.65 percent against a basket of currencies to 86.687, while the euro rose 0.8 percent from U.S. trade on Friday to $1.3022 .

The U.S. currency, however, gained 0.49 percent to 98.43 yen .

March 16 (Reuters)

The cuts are on top of the 23,000 jobs eliminated so far this year. Chief Executive Officer Vikram Pandit plans to whittle the company’s workforce down to 300,000. By the time Pandit puts down the machete, he’ll have lopped off about 20% of the company’s headcount since Citigroup’s peak.

Just last week, Citigroup announced the release of 10,000 employees in addition to hiking interest rates an average of 3% for about one-in-five of its credit card holders.

Since the subprime market caved in last year, bank and brokerage firms around the world have shed nearly 160,000 jobs, Bloomberg reported. Citigroup’s plan to let go 50,000 is the largest workforce reduction in the U.S. financial industry since it first started to unravel.

Since the crisis started in June 2007, Citigroup’s shares have dropped like an anchor, falling more than 83%.

Still, that’s not enough to shake Pandit’s confidence that his executions will produce results and redeem the company’s stock. Last week, Pandit and another top manager scooped up about 1 million shares between the two of them. Pandit bought 750,000 shares at prices between $8.92 and $9.45, Dow Jones reported.

In Citigroup’s presentation, the company pointed out that it has the lowest exposure to U.S. consumer mortgage market of the country’s top four banks. Citigroup has $218 billion in U.S. mortgages, Bank of America Corp. (BAC) has $461 billion, Wells Fargo & Co. (WFC) has $340 billion, and JPMorgan Chase & Co. (JPM) has $302 billion.

Other banks are expected continue cutting jobs. The London Times reported over the weekend that JPMorgan is planning to cut thousands. Goldman Sachs Group (GS) is planning to cut 10% of its workforce.

Fidelity Investments, the world’s largest mutual fund manager, plans to shed 1,700 jobs in the first quarter – in addition to the 1,300 it cut last week.

Source: Citigroup Whacks Another 50,000 Jobs; Cuts Expenses by 20%

“We are somewhere in the twilight zone between an expansion and a recession,” Michael Feroli, an economist at JPMorgan Chase & Co. (JPM) in New York, told Bloomberg News. “We will have a poor pace of growth through the year.”

The preliminary estimate of GDP represents an increase from the Apr. 30 advance estimate of 0.6% and is based on more complete economic information.

Economic expansion was primarily due to a boost in exports due to the combination of a weak dollar and strong overseas sales. Imports also declined, as the trade deficit shrank to its lowest level in five years.

The slight boost in GDP could be just what the U.S. Federal Reserve needs to hold off on any further interest rate cuts.

“The underlying domestic demand in the economy showed slight improvement. It’s probably consistent with the Fed being on hold in June and several months after that,” Nick Bennenbroek, currency strategist with Wells Fargo & Co. (WFC) in New York, told Reuters.

The Fed’s aggressive rate-cutting campaign has brought the Fed Funds rate down to 2.00% from 5.25% last September. But while it seems the cuts are helping the U.S. economy skirt a true recession – defined as two consecutive quarters of negative GDP growth – those same cuts have added fuel to the inflation fire.

The minutes of the last policymaking Federal Open Market Committee (FOMC) meeting showed that the Fed’s inflation forecast was raised from a range of 2.1%-2.4% to a range of 3.1%-3.4%.

And many analysts, including Money Morning Contributing Editor Martin Hutchinson, feel the Fed will need to raise rates to combat that escalating inflation.

“The nation’s central bank will soon have to reverse course and start raising interest rates – and probably in a hurry, too, if the Fed wants to keep oil prices on this side of the stratosphere,” Hutchinson said in a recent Money Morning investment analysis.

And with the economy still growing, even at a sluggish pace, the Fed might be able to take Hutchinson’s advice. The upward revision to GDP comes close on the heels of other recent economic reports that were better than expected, including April durable goods orders and April retail sales.

“Data reported so far point to continued expansionary growth in the second quarter,” Sam Bullard, a Wachovia Corp. (WB) economist in Charlotte, North Carolina, said in a research report, Reuters reported.

The economic stimulus checks sent out to over 130 million U.S. households could provide a nice boost to the economy. If consumers spend that money, rather than using it to pay down debt or pad their savings, it could turn into a nice shot of growth for GDP in the second quarter. The third (and final) estimate for first quarter GDP will be released on June 26.

By Jennifer Yousfi
Managing Editor

Source: U.S. Economy Expanded Faster than Reported, With First Quarter GDP Revised Upward to 0.9%

Retail gas hit its 22nd consecutive daily high yesterday (Thursday), according to AAA’s Daily Fuel Gauge Report.

The average nationwide cost for a gallon of regular unleaded was $3.952, while the average cost for a gallon of diesel was $4.787.

According to the AAA survey, gas prices have increased nearly 10% from a month ago and are up almost 24% from one year ago, CNNMoney.com reported.

Connecticut has the highest average by state at $4.223 for a gallon of regular, while Missouri has the lowest at $3.761.

The average cost of gas has crossed the $4 threshold in 11 states and Washington, D.C.

The cost of gas has climbed steadily higher, following in the wake of soaring oil prices. Oil reached a record high of just above $135 per barrel on May 22, but since then the price has dropped.

Crude oil for July delivery fell $4.31, or 3.3%, to $126.72 a barrel at the 2:30 p.m. close of floor trading on the New York Mercantile Exchange, according to Bloomberg data, as the high cost of gas is finally acting to curb consumer demand.

“There’s a lot of demand destruction taking place,” Nauman Barakat, senior vice president of global energy futures at Macquarie Futures USA Inc. in New York, told Bloomberg News. “We are probably headed for $120 in the near term.”

But the slight reprieve we’re currently experiencing is likely to reverse itself just as quickly as we head into the summer driving season and speculators continue to push up the price of “black gold.”

Both Goldman Sachs Group Inc. (GS) and JPMorgan Chase & Co. (JPM) recently released reports that have oil soaring over $200 a barrel within the next two years.
Money Morning Investment Director Keith Fitz-Gerald – one of the first investment gurus to predict triple-digit oil prices – has boosted his own target, suggesting that oil could go as high as $225 a barrel.

“The math is really simple here,” Fitz-Gerald said in a recent e-mail interview from China. “We are burning through supplies at a rate that’s four times to five times faster than we’re discovering new reserves. Throw in a few [surprises]… perhaps a terrorist event… and add in the accelerating use of oil and gasoline in Third World countries, and we have the recipe for far higher prices.”

Source: Gas Prices Roar to a New Record for the 22nd Straight Day

• Shareholders of The Bear Stearns Cos. Inc. (BSC) approved the government-assistant $2.3 billion acquisition by JPMorgan Chase & Co. (JPM), Bloomberg reported. The all-stock deal is expected to close today (Friday), though shareholders who sought more than the buyout’s price of $10-a-share may file suit.

• Shares of Sears Holdings Corp. (SHLD) – owner of Sears and K-Mart department stores – dropped 3.6% yesterday (Thursday) as the company posted a net loss of $56 million, or 43 cents a share, for the quarter ended May 3. “Given that we do not expect any significant near-term improvement in the overall retail environment, we believe that our sales and gross margin for the balance of fiscal 2008 will continue to be pressured,” the company said in a statement.

• Meanwhile, the same economic slump that’s crippling Sears has benefited warehouse retailer Costco Wholesale Corp. (COST), which posted a estimate-beating profit gain of 32% for its fiscal third quarter, Reuters reported. Net income was $295.1 million, or 67 cents a share, as shoppers took advantage of its members-only discounts on clothes, gasoline, food and big-ticket items such as televisions and furniture.

• Taiwan’s economy grew an estimate-beating 6.06% for the first quarter, as exports grew more than expected and consumer spending continued its strength. Bloomberg reported that Taiwan joins Japan, Hong Kong and Malaysia in having reported GDP growth that exceeded expectations.

• General Motors Corp. (GM) announced yesterday (Thursday) that 19,000 workers accepted voluntary buyouts, MarketWatch reported, as the struggling automaker looks to cut costs. The departing employees represent 24% of GM’s Auto Workers Union-represented staff.

Source: Global Investing Roundups Friday, May 30th, 2008

“Whatever claims might be made about the uniqueness of current circumstances, it seems inevitable that the nature of the Fed’s response will be taken into account and be anticipated, by officials and market participants alike, in similar future circumstances,” Volcker said in prepared testimony before Congress.

This from The Wall Street Journal:

Volcker hinted at the Fed’s recent role facilitating the rescue and proposed takeover of Bear Stearns by J.P. Morgan Chase. The Fed, he said, “felt it necessary to extend that safety net” to systemically important institutions by “providing direct support for one important investment bank experiencing a devastating run, and then potentially extending such support to other investment banks that appeared vulnerable [to] speculative attack,” Volcker said.

“Hence, the natural corollary is that systemically important investment banks should be regulated and supervised along at least the basic lines appropriate for commercial banks that they closely resemble in key respects,” he said.

Still, he stopped short of criticizing the Fed’s response to the Bear Stearns collapse. “I can understand why they felt they had to act,” Volcker said.

He said heavily “engineered” financial markets, using sophisticated mathematical models, led to “enormous complexity” and “opaqueness” in markets.

“Volcker cast out the devil of inflation during his term [as head of the Fed],” says Bill Bonner in The Daily Reckoning.

“Thus interest rates could come down. Thus, began a quarter century of falling interest rates and increasingly accessible credit. This eventually produced the absurd and pernicious consequences we describe here in the Daily Reckoning. Just as teenaged kissing leads to petting…which leads to…well, you know how it works, dear reader…success leads to complacency which leads to excess. But the long bull market in bonds (bonds go up when interest rates go down) also vastly increased the supply of capital available for new industries…and caused an explosion in output capacity.”

According to a report in The Huffington Post blog, Dimon said at a conference in New York: “Even if the capital markets crisis resolves, it does not mean that this country will not go into a bad recession. The recession just started.”

“We don’t know if it’s going to be mild or severe,” he continued. “We’re thinking there’s a third of a chance that it’s going to be pretty bad … closer to the 1982 recession than the very mild recessions we had in 2001 and 1990.”

While the US economy limps on, China continues to grow at breakneck speed, says Bill Bonner in The Daily Reckoning.

“Every detail about China a superlative…bigger, faster, higher, more…more…more. Things are happening so fast that in just 10 years, China will be the world’s biggest economy. We don’t have to tell you what that means, dear reader. Give a guy some money and it’s not long before he thinks he can tell other people what to do and how to live. The United States became the world’s largest economy around 1900. By 1918, Woodrow Wilson was headed to France with his ‘14 Points.’”

• Chief Executive Alan Schwartz, forced to sell liquidity-starved The Bear Stearns Cos. Inc. (BSC) to JPMorgan Chase & Co. (JPM) in a fire sale less than three months into his tenure, has been invited to stay on as a senior dealmaker, Reuters reported, citing a person familiar with the situation. A formal agreement has yet to be reached and it is still possible Schwartz may leave the bank, the source said.

• The Commerce Department announced yesterday (Monday) that retail sales increased 0.2% in March, Bloomberg News reported, slightly exceeding economists’ average expectations of no change. The increase was due to higher gasoline prices, as purchases excluding gas remained flat.

• Joseph Brandon has stepped down as CEO of General Re Corp., a Berkshire Hathaway Inc. (BRK.A, BRK.B) subsidiary. Brandon was once considered a potential successor to Warren Buffett, but prosecutors have named Brandon as an unindicted co-conspirator in a scam to defraud investors, Bloomberg News reported. Four other former General Re executives have been convicted.

• General Motors Corp. (GM) announced yesterday (Monday) that it would begin construction on a $200 million plant in Joinville City, Brazil. The plant will employ 500 workers and begin production of engines and other automotive parts by fourth quarter 2009, MarketWatch reported.

• Exxon Mobil Corp. (XOM) announced yesterday (Monday) that it would begin drilling in southeast Hungary in search of oil reserves. Exxon recently signed a $75 million new energy development pact with MOL Hungarian Oil and Gas PLC to begin exploration in Hungary’s Mako Trough region, MarketWatch reported.

• Restaurant-chain operator Denny’s Corp. (DENN) reported a 0.4% drop in first-quarter same-store sales for the first quarter. Same-store sales, or sales in stores open at least one year, rose 0.7% at company restaurants and fell 0.9% at franchised restaurants.

• Goldman Sachs Group Inc. (GS) is slashing an undisclosed number of positions in mortgage and investment banking this month, Reuters reported.  These latest cuts are in addition to the 1,500 employees, or 5% of Goldman’s work force, who lost their jobs since December because they were deemed the company’s poorest performers.

• Fremont General Corp. (FMT) will sell the its retail banking assets to CapitalSource Inc. (CSE) for as much as $198 million. The sale includes $5.6 billion in deposits, $3 billion in cash and liquid investments and Fremont’s $2.7 billion stake in commercial real estate loans, Fremont said in a statement today. CapitalSource, the Chevy Chase, Maryland-based commercial lender, also agreed to loan Fremont as much as $200 million.

After a private bid went unanswered, Blockbuster made an unsolicited $1 billion acquisition bid for wounded electronics retailer Circuit City Stores Inc. (CC) for at least $6 a share – a move that sent Circuit City’s shares up 60% in pre-market trading Monday.

Blockbuster said it first approached Circuit City Chairman and Chief Executive Officer Phillip Schoonover with the offer on Feb. 17, but when the movie-rental giant didn’t get a response, Blockbuster decided to take its proposal public “because it believes the shareholders of Circuit City should have the opportunity to participate in determining the destiny of the company.”

However, Blockbuster already has an outline with regard to what that “destiny” would be: The merged companies would create a $18 billion retail enterprise that would benefit from their complementary products, marketing, distribution and financial synergies.

“Our vision for the ‘new’ Blockbuster is to be the most convenient source for media entertainment,” Blockbuster Chairman and Chief Executive Officer James Keyes wrote in a letter to Schoonover.

A Blockbuster Deal for a Browbeaten Market

Circuit City is the second-largest electronics chain in the United States, but the company has struggled recently. Over the past year the company has slashed retail management positions, eliminated jobs at its corporate offices and laid off 3,400 retail workers.

Making matters even worse: Circuit City not only lost more market share to industry leader Best Buy Co. Inc. (BBY), on March 28 it lost its spot in the Standard & Poor’s 500 Index.

Blockbuster hasn’t faired much better. Once an innovative icon in family entertainment and a cornerstone in the realm of media distribution, Blockbuster has more recently been the victim of increased competition and such technological changes as “video-on-demand” that have threatened its business. So it’s cut marketing costs and shed unprofitable customers in a desperate bid to fend off the Internet-based Netflix Inc. (NFLX).

The company’s troubles have led some – including Circuit City – to question whether or not Blockbuster even has the capital to follow through on its $1 billion all-cash offer.

“To date Blockbuster has been unable to satisfy Circuit City and its advisers that Blockbuster’s proposal could be financed,” Circuit City said in a statement.

The statement also questioned whether the proposed acquisition would require debt financing (and, if so, what the terms and structure would be) and how large a rights offering would be required to fund the transaction.

In a conference call, Blockbuster’s Keyes said the company has the support of billionaire board member Carl Icahn.

Presuming Blockbuster does indeed secure the proper financing, Louis Basenese, an mergers and acquisitions (M&A) expert and the editor of The Takeover Trader newsletter, said the deal bodes well for both companies, but mainly because independently, they are headed for the trash heap.

“This is clearly a merger to fight off extinction,” Basenese said. “Combining forces might only delay the inevitable.”

Technology business blog, the Digital Home, called Blockbuster’s proposal “laughable.”

“Blockbuster is nothing more than an irrelevant shadow of its former self. For years, the company stood atop the rental business and destroyed any and all competitors in its path,” Digital Home author Don Reisinger wrote. “But once Netflix saw it fit to change the way the rental business works, Blockbuster couldn’t adapt and its once booming business turned into an overpriced cesspool of old business models.”

A 2008 M&A Revival

A recent report from Thomson Financial indicated that the global volume of M&A plunged 31% to $661 billion in the first quarter of 2008. But that drop-off comes after a banner year for M&A activity. Total global deal volume checked in at $4.5 trillion in 2007, up 24% from the previous high-water mark set in 2006.

Since then, credit conditions have tightened significantly as many banks were badly burned by credit defaults. But while an era of “easy money” has come to an end, there is still ample opportunity for takeovers and tie-ups.

Basenese attributes most of the drop-off in M&A to a shift in the balance of power. Over the past several years, private equity firms had established themselves as the main drivers behind M&A activity by outbidding companies for assets.

However, it was those same buyout firms that led to the collapse in first quarter deals, with a 77% drop in acquisitions. And that has opened the door for companies flush with cash to get back down to business.

“Corporations are sitting with almost near record amounts of cash on their balance sheets,” Basenese said. And with that, they can “take advantage of the depressed stock prices of competitors without the fear of being outbid by overly aggressive private equity shops.”

Deals on the Docket

Microsoft made its move with an unsolicited $44.6 billion bid for Internet portal operator Yahoo! Inc. (YHOO). So far, Yahoo has done its best to thwart Microsoft’s advances, but most analysts believe Microsoft will get its way if it ups its $31 a share offer.

If that buyout goes through, it will be the largest-ever acquisition in the high-tech sector, exceeding even Kohlberg Kravis Roberts & Co.’s $26 billion buyout of First Data Corp. However, Yahoo’s explicit opposition to the takeover makes it impossible to rule out a narrow escape.

Among the Dow components reporting are Citigroup and JPMorgan Chase. The importance of these earnings reports cannot be stressed enough as investors look for any kind of sign that the credit crisis is over or at least coming to a close. There are a number of other financial companies due out this week: Merrill Lynch, Washington Mutual, Wachovia, and Wells Fargo to name a few.

I know expectations for the financials have been brought down over the last five or six months, but have they been lowered enough? I don’t think they have. When I look at the chart of the S&P Select Financial Spyder, and the rally over the last four weeks, I question whether or not the expectations meet the reality. In fact, the rally simply brought the XLF back up to its downward-sloped trend line and back up to an overbought level.

This is just covering the financials, but there are seven other Dow components reporting this week. Johnson & Johnson (JNJ) reports on Tuesday, along with Intel (INTC). Wednesday, Coca Cola (KO) and IBM (IBM) both report, and on Thursday, we will hear from Pfizer (PFE) and United Technologies (UTX). The lone Dow component reporting on Friday is Caterpillar (CAT).

There was a clue sent out last week about what we should expect in the earnings. Did you see the clue? You probably did and may not have known it was a clue. When UPS issued an earnings warning last week, that was your clue.

For consumer products companies like Johnson & Johnson, Intel, Coca Cola, and IBM, having UPS come out and announce that the demand for package shipping is down, is an ominous sign. If UPS’s services are not needed to ship products, are products selling? More than likely, the products are not selling like they were a year ago.

While the sentiment towards the overall market has grown more pessimistic over the last three months, in the last three weeks the bearish sentiment has slipped from its peak in mid-March. I am basing this on the 21-day moving average for the CBOE Equity Put/Call Ratio and Investor’s Intelligence. The moving average for the put/call ratio peaked out on March 20 at 0.93 and has since slipped back down to 0.81. The bearish percentage on the Investor’s Intelligence report peaked at 44.7 on March 19. It is now down to 38.5.

What this tells us is that the overall sentiment, while still bearish, it has slipped a little over the last 3-4 weeks. Are investors looking for the earnings season to rescue the market?

If they are, I have the feeling they are going to be disappointed. And in the words of Ozzy Osbourne, we may be “going off the rails on a crazy train.”

Good luck and good trading,

Rick

P.S. To let me know what you thought of today’s article, send an e-mail to: feedback@investorsdailyedge.com.

[Ed. Note: Subscribers to Rick’s KISS Investing service recently closed out gains of approximately 150% on Continental Airlines and 175% on the Diamonds Trust. Click here to learn more about KISS Investing]