Bears, Bulls, Chickens and Pigs: wOw’s Wall Street Weekly with Liz Peek (Week of 3/23) 

Editor’s Note: Liz Peek is a financial columnist and the author of wOw’s SHEconomics. 

Is the rally for real? Or, as your kids might say, are we there yet? The stock market has rebounded 21% from the lows hit on March 9, with financials leading the surge. The bounce has been fueled by some actual, good economic news and by a slew of policy initiatives coming out of Washington that have been deemed 1) not as bad as they might have been, 2) possibly helpful or 3) unlikely to survive – depending on who is voting.

Important to sentiment this week has been the rollout of Treasury Secretary Geithner’s public-private partnership designed to buy the banks’ toxic assets. The plan is still unfettered with details, but its proposal reassured many investors that, as distasteful as it is, the administration will have to work with Wall Street. Since the president has repeatedly slammed our financial industry leaders, this reality check gave bank stocks a pop. So – yes – I think the rally has substance. But – no – we are not there yet. Let me explain.

I’ve mentioned many times in this column that the housing sector has to recover before the economy and the banks can find firm footing. Of late, there have been indications that the industry may be hitting bottom. The latest readings show sales of existing homes up 5% in February from the prior month, while new home sales rose 4.7%. A 27% drop in prices on newly built houses (from their peak) surely helped fuel the increase, as did somewhat freer credit and record-low mortgage rates. Mortgage applications over the past week were up 32%. Importantly, inventories of new homes are off 42% from their peak in 2006. This is all good news.

Positive signs elsewhere include a surprising 3.4% jump in durable goods orders in February, which included a 13% hike in future purchases of heavy machinery. In addition, better-than-expected retail sales and a tick up in consumer spending, which is being reported as I write this, come on the heels of an above-consensus bounce in January’s outlays.

These unexpectedly positive signs point to a recession that at the least is not getting worse; in fact, it looks like the downward momentum may have eased. While the current quarter will likely post a GDP drop of 4% - 5% (but better than the fourth quarter’s 6.3%), some forecasters are now calling for modest gains by the fourth quarter. This is quite positive, and can presumably be traced to the dramatic increase in the money supply (up around 18% over the past six months) and somewhat looser credit markets. The Federal Reserve and the Treasury have literally pulled out all stops over the past nine months to inflate the country’s balance sheet, and the process is having the desired effect.

While undoubtedly positive in the short run, the ultimate impact of the administration’s policies is not so clear. Inflated spending may weaken the dollar – a process which is already underway – and may put us at odds with our trading partners. The head of China’s central bank caused a ruckus earlier this week by suggesting the creation of a new international currency reserve to replace the dollar. I don’t for a minute believe this was a genuine wish, but rather saw it as a warning shot over our bow. One of Geithner’s first comments on taking office was to rebuke China for keeping their currency artificially low — an accusation I thought preposterous at the time. In part, I view this latest Chinese troublemaking as payback. Not only has the low yuan contributed to an extended price break on imports for U.S. consumers, it is also impossible to imagine that the Chinese will purposefully trash their $1-plus trillion in U.S. Treasury holdings by revaluing their currency higher. Note to Mr. Geithner: At the moment we need the Chinese to keep buying our ever-escalating sales of bonds.