In the United States, insurance risk manager Verisk Analytics Inc. pocketed $1.88 billion in its Tuesday IPO – the largest IPO take by a U.S. company since Visa Inc. (NYSE: V) took its business public in March 2008.

Shares for Verisk were sold by the company's existing shareholders and fetched for $22 apiece, higher than the expected $19 to $21 price range.

The second major IPO came from Banco Santander SA's (NYSE ADR: STD) Brazil unit, which yesterday (Wednesday) raised more than $8 billion (14.1 billion reais) in the country's largest IPO ever and the biggest of the year so far.

Verisk and Santander's offerings follow an unexpected one-week spree IPOs in September that raised $3.5 billion.

And more IPOs are scheduled in the near future.

One is Hyatt Hotels Corp., the major hotel and resorts operator and owner. Its 413 properties in 45 countries all bear a name that travelers have known since the 1960s. Despite the woes of the travel and hospitality industries, the Hyatt IPO is likely to draw strong interest from investors. Hyatt plans to raise about $1.15 billion.

Dole Food Co. Inc., taken private six years ago, will bring one of the world's most recognized food brands back to public hands. With more than 150 years of marketing insight and a major international presence, the Dole name is a strong draw.

On the retail front, Dollar General Corp., an operator of discount department stores, also filed for an IPO. Tennessee-based Dollar General is a staple of small towns across the nation. Dollar General's sales were up 13% in the second quarter, despite the recession's impact on consumer spending. And it hopes to raise about $750 million in its IPO.

Meanwhile, Poland's largest power utility company, state-owned PGE SA, is planning to raise $1.8 billion in an IPO next month, which would make it the Poland's biggest in five years.

In the M&A market, the elephant in the room is Kraft Foods Inc.'s (NYSE: KFT) unsolicited $16.7 billion takeover bid for Cadbury PLC (NYSE ADR: CBY). For Kraft, Cadbury's allure is its stable of established brand names – and a strong local identity in each of the markets it sells to.

A handful of M&A and major financing deals totaling $14 billion were also inked in September – namely Xerox Corp.'s (NYSE: XRX) plans to pay $6.4 billion for outsourcing specialist Affiliated Computer Services Inc. (NYSE: ACS).

Some of the same factors that jump-started the M&A market are now also helping to drive new IPOs, said Louis Basenese, an IPO and M&A specialist who's also editor of The Takeover Trader investing service.

"The best cure for an IPO lull is a bull market," Basenese told Money Morning. "Companies want to tap into the enthusiasm. And a 50% rebound [in U.S. stocks] certainly qualifies. So it's no wonder we're witnessing an uptick in recent weeks."

All this boils down to one thing: Large-scale economic activity is coming back online, and it is driving stock markets higher and increasing investor appetite for risk.

The initial public offerings may be steroids for stock market, but their broad implications are equally huge as the global economy crawls out of financial crisis.

Verisk first wanted to go public last year, the IPO market's worst year in three decades. Not only that, but its original IPO was planned a month before the collapse of Lehman Brothers Holdings Inc. (OTC: LEHMQ), which triggered a wave in losses for insurance companies.

The wait proved wise for two other reasons.

First, Verisk was able to improve its revenue and net income by 15% and 12%, respectively, in the first six months of 2009 compared to the same period a year earlier.

And second, its IPO occurred during a market with upward momentum and with higher-than-anticipated investor interest. Had Verisk went public last year, the pool of investors would have been shallower, and appetite for risk much lower. And then there would likely have been a considerable selloff when Lehman had gone under.

"The market is starting to open up," John Fitzgibbon of IPOScoop.com told The Associated Press. Verisk's performance "is a normal expectation when the IPO market arises from its ashes. It's the phoenix."

As far as Santander's IPO goes, it's just the first step in expanding its business from Spain – currently in its worst recession in 60 years – into Brazil, where the economy is expected to grow by 4.5% in 2010.

What's more, Brazil economic foundation is built on commodities – including agriculture, metals, and oil – that are expected to be in big demand over the next decade.

Santander has more than 2,000 branches in Brazil and hopes to open 600 more by 2013. And it plans on using 70% of the proceeds from the IPO to do so. Santander's expansion gives it more and better access to business and personal lending in red-hot Brazil.

In fact, by 2011, Santander may earn more money in Brazil (an estimated 4 billion euros) than its estimated profits in its homeland retail business (3.2 billion euros), according to Evolution Securities Ltd.

And its shareholders no doubt like the fact that Santander's IPO is on the Bovespa stock index, which has rocketed 67% this year.

"Santander is giving investors something they want, which is exposure to Brazil, a play on growth through demand for commodities and also the development of China," Inigo Lecubarri, a manager at Abaco Financials Fund in London, told Bloomberg News. "There's an element of Brazil being in fashion."

Most importantly, both of these IPOs are in the financial-services sector, which was considered poison less than a year ago. And if investors are willing to place $10 billion bets on the sector largely blamed for the global financial crisis, it's hard not to feel optimistic about how they'll respond to IPOs in hot sectors such as tech, biotech and commodities.

News and Related Story Links:

• Reuters:
  Verisk IPO prices above range, raises $1.88 bln

• Bloomberg:
  Santander's Brazil Unit Raising $8 Billion in IPO

• Money Morning:
  Trusted Brand Names Will Point the Way to the Top IPO and M&A Profit Plays

• Money Morning:
  How to Find the Best Potential Profit Plays in the Resurgent M&A and IPO Markets

• CNBC:
  IPOs Are Returning – And So Is Confidence in the Stock Market

• Bloomberg:
  PGE Seeks $1.8 Billion in Poland's Second-Biggest IPO

• The Wall Street Journal:
  Hyatt Registers Share Sale of Up to $1.15 Billion in IPO

• The Associated Press:
  Verisk Analytics IPO soars in trading debut

• Money Morning:
  Kraft's Bid for Cadbury Not Sweet Enough

On one hand, the $130 billion he spent on acquisitions – FleetBoston Financial Corp., MBNA Corp., LaSalle Bank Corp., Countrywide Financial Corp., Charles Schwab Corp.'s (Nasdaq: SCHW) U.S. Trust private banking unit and Merrill Lynch – that more than tripled the size of Bank of America, making it the largest U.S. lender both by assets and deposits.

On the other, his open-wallet policy and the example it set forth almost perfectly encapsulates the boom, bust and nascent rebound of the U.S. housing and banking crisis – which later became the financial plague that devastated markets all over the world.

In the second half of 2007, the extent of the U.S. housing crisis began to crystallize when Countrywide's freewheeling subprime-lending policy irreversibly sank the nation's largest home lender. Lewis moved in and acquired the troubled lender for $4 billion the following January, and in doing so, he put Bank of America on the hook for Countrywide $1.5 trillion loan portfolio.

In the second half of 2008, the extent of the how much havoc the destruction of investment banks and brokerage firms would wreak upon the world became clear. The vortex of it was Sept. 15, the day the Lehman Brothers Holdings Inc. (OTC: LEHMQ) declared bankruptcy and Bank of America agreed to pay $29 billion for world's largest brokerage firm, Merrill Lynch, which probably would have failed had it not found a partner.

Lewis' spending got Bank of America into this mess. The question now is whether continued  spending – using the $45 billion bailout courtesy of the U.S. Treasury's Troubled Asset Relief Program (TARP) – will get BofA out of it.

And Lewis seems to acknowledge both in the news release announcing his voluntary departure.

"Bank of America is well positioned to meet the continuing challenges of the economy and markets," Lewis said. "We are in position to begin to repay the federal government's TARP investments. For these reasons, I decided now is the time to begin to transition to the next generation of leadership at Bank of America."

Lewis naturally defends his actions just as much as critics chide him for them.

"Their loan portfolio is horrible looking and it's not going to be easy for them," Mike Williams, research director at Gradient Analytics in Scottsdale, Arizona, said in a Bloomberg News interview before Lewis announced his departure. "They would have been better off without the Merrill and Countrywide acquisitions over the next few years."

Money Morning Contributing Editor Martin Hutchinson, a leading banking expert, says that Bank of America has a very difficult journey ahead of it.

"Lewis followed [predecessor CEO Hugh] McColl's strategy of expanding BofA by acquisition," he said. "The trouble is that his last 2 deals were both lousy. Countrywide was at the epicenter of all that was bad about housing finance, and that was obvious in January 2008, when he bought it. Just a terrible deal."

In fact, Hutchinson believes there's only one viable option for Bank of America.

"BofA will have to be broken up, but may need to be sorted out by a liquidator/ the government," he said.

Spinning Merrill

The Merrill merger was perhaps the defining moment in Lewis' tenure, and he Lewis has played the victim and hero of the saga.

Lewis testified that U.S. Federal Reserve Chairman Ben S. Bernanke and former U.S. Treasury Secretary Henry M. "Hank" Paulson Jr. pressured him not only to move ahead with a merger with Merrill Lynch despite reservations, but also to stay quiet about the mounting losses at the crumbling investment bank.

And in a note to employees announcing his departure, he took credit for the fact that Merrill has contributed 24% to the Bank of America's first-half profit, boosted trading and investment-banking revenue, Bloomberg reported.

"I am gratified that even some of the critics of our acquisition of Merrill Lynch have come to acknowledge how well the deal is working out for our clients," Lewis wrote. "This journey has been a rocky one and not for the faint of heart, but perseverance is paying off."

But to the rest of the world, Lewis was most often seen sitting under the hot light of probes by Congress, the U.S. Securities and Exchange Commission (SEC) and New York's attorney general all trying to determine if Lewis misled investors about Merrill's losses and bonuses.

And even if shareholders agreed with Lewis' decisions, they didn't prefer him to be the company's face. In April, shareholders voted 50.34% in favor of stripping Lewis of his chairman title.

Changing of the Guard

When Lewis steps down from his post Dec. 31, he joins the ranks of fellow financial firm executives – James Cayne of The Bear Stearns Cos., Charles Prince of Citigroup Inc. (NYSE: C), Stanley O'Neal of Merrill, Kennedy Thompson of Wachovia and Richard Fuld of Lehman Brothers, John Thain of  Merrill Lynch – that resigned, many in disgrace, either during or in the aftermath of the global financial crisis.

Among the survivors, Lloyd Blankfein, CEO of Goldman Sachs Group Inc. (NYSE: GS), and Jamie Dimon, CEO of JPMorgan Chase & Co. (NYSE: JPM).

Bank of America said it will find a replacement by Lewis' last day, and media outlets have already began making lists of possible successors.

Among the names frequently mentioned:

• Brian Moynihan, head of Bank of America's consumer and small business banking unit.
• Sallie Krawcheck, former Citigroup Inc. (NYSE: C) CFO and president of Bank of America's global wealth and investment management unit.
• Tom Montag, former Merrill executive and head of Bank of America's corporate and investment banking unit.

An outsider might well be the best choice, says Money Morning's Hutchinson.

Lewis is "leaving a company that no human being could manage, with vast problems, and far too broad a franchise," Hutchinson said. "North Carolina retail bankers haven't a clue how to run a top international investment bank like Merrill and vice versa. There's nobody available to succeed him that can do the job."

News and Related Story Links:

• Bank of America:
  Ken Lewis Announces His Retirement.
• Money Morning:
  Bank of America Will Buy Countrywide for $4 Billion in Stock.
• Bloomberg News:
  Bank of America's Lewis Resigns After Bet on Rebound.
• Money Morning:
  Bank of America's Lewis Says Paulson, Bernanke Forced Merrill Takeover.
• Reuters:
  Bank of America CEO Lewis: Fallen hero.

Mounting job losses have pushed mortgage delinquencies and foreclosures to new records in the first quarter.

According to the Mortgage Bankers Association (MBA), the U.S. delinquency rate increased to a seasonally adjusted 9.12%. Meanwhile, the share of loans entering foreclosure rose to 1.37%. Both are the highest figures on record going back to 1972, Bloomberg reported.

The numbers are especially grim when taking account the U.S. Federal Reserve's gradual and extraordinary measures to prop up the housing market. Since September 2007, Fed policymakers have cut the benchmark Fed Funds target rate 10 times – taking it from its starting point at 5.25% to the current rate range of 0.00% to 0.25%, hoping to encourage bank-to-bank lending, as well as bank-to-consumer lending.

But low interest rates won't help as long as job losses mount and consumers stay out of the housing market. According to government figures, the unemployment rate rose to 8.1% in the first quarter, the highest level in 26 years.

"If people don't have a paycheck they can't support a mortgage," Jay Brinkmann, the MBA's chief economist, told Bloomberg. "The longer the recession lasts, the more people run through their savings reserves, leading to higher delinquencies and higher foreclosures."

Also alarming, the biggest share of new foreclosures came from fixed-rate mortgages, which are given to the most credit-worthy borrowers. Fixed-rate mortgages accounted for 29% of new foreclosures, as opposed to adjustable-rate mortgages, given to people of poorer credit, which accounted for 24% of new foreclosures.

A National Association for Business Economics (NABE) survey released Wednesday)  showed the recession will likely end in the third quarter, but the rebound associated with the turnaround will be a tempered one. The report also downgraded growth forecast for the next few quarters – with the second quarter contracting 1.8%, followed by a meager 1.2% growth in the second half. The end result will be an overall 1.2% contraction for 2009.

April Home Sales

One glimmer of hope for the housing and mortgage market lay in April home sales figures.

New home sales rose 0.3% and prices rose 3.7% in April. The modest gains are far outweighed by the 34% sales decline from last year, but have been cautiously cheered by economists nonetheless.

"The one good piece of news is that the average sales pace for the past five months is just about where the April number came in.  That tells me that demand, while still bouncing around, has pretty much hit bottom," Joel Naroff, president of Naroff Economic Advisors, wrote in a note to clients.

But the housing market will rebound from the bottom up, with first-time homebuyers scooping discounted homes from those looking for new or bigger houses. That means April's new home sales, while positive, won't bulldoze forward until demand for them picks up significantly.

"With confidence rising, mortgage rates low and affordability high, I expect to see that happening over the next few months.  Even so, don't expect any major jump in construction soon," Naroff said. "Of course, given how much the residential sector has subtracted from (gross domestic product) over the past year, I will take stability."

News and Related Story Links:

• Bloomberg:
  Mortgage Delinquencies, Foreclosures, 30-Year Rates Increase

• Money Morning:
  Business Economists Predict Recession Will End in Third Quarter

A detailed report from the National Association of Business Economics (NABE) says the U.S. economy will recover in the third quarter after a continued contraction in the second.

NABE said the near-term setback will be a result of a "sharp retrenchment" in business investment, but the billions in government efforts to invigorate the economy will soon offset that.

"While the overall tone remains soft, there are emerging signs that the economy is stabilizing," said NABE president, Chris Varvares, who is also president of Macroeconomic Advisers. "The survey found that business economists look for the recession to end soon, but that the economic recovery is likely to be considerably more moderate than those typically experienced following steep declines."

NABE also downgraded its growth forecast for the next few quarters – with the second quarter contracting 1.8%, followed by a meager 1.2% growth in the second half. The end result will be an overall 1.2% contraction for 2009.

However, NABE believes a trio of key factors scaring consumers – job losses, tight credit conditions and declines in home values – are here to stay.

In fact, unemployment will likely reach as high as 9.8% by the end of the year while inflation moderates and oil prices remain "relatively depressed."

NABE's outlook is the consensus of a 45-person panel of economists.

Mixed Forecasts

NABE's report joins a chorus of national and international institutions (both government and private) that have issued their own predictions of when the clouds will part over the global economy.

Earlier this month, U.S. Federal Reserve Chairman Ben Bernanke testified to the congressional Joint Economic Committee that the U.S. economy will begin to "turn up later this year," Reuters reported.

But such recovery is contingent upon the financial sector's continued improvement, Bernanke said.

"We continue to expect economic activity to bottom out, then to turn up later this year," Bernanke told the committee. "An important caveat is that our forecast assumes continuing gradual repair of the financial system; a relapse in financial conditions would be a significant drag on economic activity and could cause the incipient recovery to stall."

Though Bernanke's general timeframe for recovery is similar to NABE's, there are a few differences in their outlooks. Bernanke said the housing market may be bottoming out and pointed to improving consumer spending, two areas NABE said will continue to remain depressed.

More broadly, the International Monetary Fund (IMF) recently slashed the growth forecast for every major country and urged more recovery actions. In its latest global outlook, the IMF said the global economy will likely contract 1.3% this year and post a 1.9% gain next year, Reuters reported.

And while the World Bank sees the global contraction easing and expects a recovery in late 2009, its report, "Swimming Against the Tide: How Developing Countries are Coping with the Global Crisis," warns that 94 out of 116 developing countries have experienced a slowdown in economic growth. Of those, 43 have high levels of poverty.

Moreover, only one quarter of the most vulnerable countries have the resources to prevent a rise in poverty, the World Bank said.

"We need investments in safety nets, infrastructure, and small and medium size companies to create jobs and to avoid social and political unrest," World Bank President Robert Zoellick said in the report.

News and Related Story Links:

• National Association of Business Economics:
  NABE Outlook: Recession End in Sight, but Subpar Recovery to Follow June 2009

• Reuters:
  Bernanke says U.S. recovery ahead, housing near bottom

• Reuters:
  World economy in severe recession, IMF says

• World Bank:
  Swimming Against the Tide: How Developing Countries are Coping with the Global Crisis

Home prices continued their two-year decline in March, with prices down 18.7% for the month compared to last year, and a record 19.1% decline for the first quarter compared with the first quarter last year.

All 20 metro areas measured by the S&P/Case-Shiller Home Price Index showed annual declines. Seventeen of them posted record monthly declines. Nine of them posted record annual declines.

"On a positive note, nine (metro areas) are reporting a relative improvement in year-over-year returns and nine of the 20 metro areas saw an improvement in their monthly returns compared to February. Furthermore, this is the second month since October 2007 where the 10- and 20-City Composites did not post a record annual decline," David M. Blitzer, Chairman of the Index Committee at Standard & Poor's, said in a statement. "Based on the March data, however, we see no evidence that that a recovery in home prices has begun."

The combined 20-city index fell 2.2% in March from February. Minneapolis led all areas with a 6.1% monthly decline in March, its steepest monthly drop ever and nearly double its 3.2% decline from January to February.

Detroit and New York also reported record monthly declines of 4.9% and 2.5%, respectively. S&P says these cities represent of the extremes of the national housing boom and bust.

Since January 2000, home prices in New York are still up 73.4%. In that span, however, prices in Detroit are down 29.0%. In fact, Detroit home prices are back to their mid-1995 levels.

The biggest annual drops came in Phoenix (-36.0%), Las Vegas (-31.2%) and San Francisco (-30.1%). Denver, Dallas and Boston saw their home prices fall the least in the past year, -5.5%, -5.6% and -8.0%.

Economists blame the continued price declines on tighter lending standards, the glut of unsold homes and record foreclosures.

And many of those with enough money to buy a new or used house are staying on the sidelines waiting for prices to bottom and a clearer idea of an overall economic recovery.

"The housing market still has somewhat of a ways to go before it completely bottoms," Celia Chen, an economist at Moody's Corp. (NYSE: MCO) Economy.com, told Bloomberg. "Prices I think still will fall a little bit further."

News and Related Story Links:

• Standard & Poor's:
  Nationally, Home Prices Began 2009 with Record Declines According to the S&P/Case-Shiller Home Price Indices

• Bloomberg:
  Home Prices in 20 U.S. Cities Fall More Than Forecast

Gold prices are sitting near their highest point since March, and their fourth-highest price point ever, as a result of a global weariness of stimulus-induced inflation and a stock market pullback. 

According to a recent report from the World Gold Council, gold demand rose 38%, or 1,016 tons, in the first quarter compared to the year earlier. Consequently, prices rose 36% in that span.

The majority of that demand came from investment vehicles – exchange-traded funds, coins and bars. Collectively, their demand rose 248%, or 596 tons, in the first quarter.

But demand for ETFs is especially astounding. Demand for ETFs soared 540%, or 465 tons in that same span.

Compare that to the other "retail" demand for gold – jewelry and industrial uses. Consumer spending has been discretionary to say the least, causing jewelry demand to fall 24% and industrial demand to fall 31%. Of course, it doesn't help matters that gold prices were going up all the while.

"There has been a seismic shift away from capital appreciation towards wealth preservation and we believe this trend will define investment behavior in the next decade," said Aram Shishmanian, Chief Executive of the World Gold Council. "The shift in the balance of demand that we have witnessed this quarter, where the gold price has risen despite a severe drop in jewelry and industrial demand, perfectly demonstrates the robust nature of gold's fundamental supply and demand dynamics."

Thus, it's no surprise that most gold analysts are still bullish on the metal. 

"The fact equity markets appear to have stalled and inflation fears are on the increase should give gold increased upward momentum," James Moore, an analyst at TheBullionDesk.com, wrote in a note last week.

Short-Term Gold Bears

Few analysts doubt gold's long-term potential as an investment. But it is possible gold prices may have a few blips by the year's end, and those could be some excellent buying opportunities if you're looking to invest. 

For one, U.S. interest rates are still sitting on record lows. The rate-cutting spree shredded the value of the dollar, and bolstered demand for gold. As the economy improves, however, the U.S. Federal Reserve will turn the dial up on interest rates, strengthening the dollar and weakening gold.

Another reason – put forth by Asset Strategies International's Glen Kirsch – is that the International Monetary Fund (IMF) will sell some of its gold holdings to aid the growing list of nations that need financial help.

The IMF is the world's third-largest official holder of gold, with 3,217 metric tons (or 103.4 million ounces). At Friday's prices, that's about $98.9 billion.

"If it suddenly dropped a significant portion of that on the market, the effect on the price would be dramatic," Kirsch wrote in a note to clients.

The Catch 22 here is that the IMF – fearful that gold prices will rein back – could cash in its holdings while gold's hovering at high levels. But in doing so, it would be strapping an anchor to gold prices.

News and Related Story Links:

• World Gold Council:
  Gold demand surges as investors turn to wealth preservation

• Bloomberg:
  Gold Rises to Two-Month High as Equity Drop Spurs Metal Demand

India's annual inflation clocked in at a shockingly low 0.61% in the week ended May 9, and 0.48% the week prior, opening a window for policymakers to resuscitate the economy without worrying about consumer unrest.

Inflation in India – a rampant problem for years – is hovering near a 30-year low. In fact, it's stayed below 1.0% for the past two months. This after reaching a 16-year high of 12.91% last August, Bloomberg reported.

And the timing couldn't be more perfect.

Many economists and world leaders believe the worst of the global financial crisis has passed. Most of the world's largest economies are showing signs of improvement after trillions spent in stimulus measures.

More specific to India, the country is coming off a landslide election that reseated Prime Minister Manmohan Singh's Congress Party and a host of new policymakers eager to make their mark on the second most powerful emerging market in the world.

Immediately after the election, India's benchmark stock index launched a record 17% in one day. Those gains leapfrogged India's Sensitive Index (or Sensex) past all other world indices – except Peru's – in year-to-date gains.

But such a remarkable one-day run only puts more pressure on reelected and newly elected officials to keep momentum going.

Since October, the Reserve Bank of India has lowered the primary interest rate six times, from 9.0% to 3.25%. The last was a quarter-point reduction on April 21.

India has already passed two stimulus packages, and Singh said that the new government's top priority is to earmark 1.5% of the country's GDP for a third.

"Inflation is not a primary concern at this point of time and that gives policymakers leeway to focus on policies that will help stimulate slowing demand," Sonal Varma, a Mumbai-based economist with Nomura Securities Co., told Bloomberg. "While inflation can post negative readings, this cannot be characterized as deflation."

Singh will begin forming India's government this week. But despite the wave of popularity Singh is riding right now, Money Morning's Martin Hutchinson is skeptical his Congress Party will deliver the economic reform the economy needs.

In fact, it's "likely that the Indian government will continue as an ever-increasing drag on the economy, with a funding crisis possible if public spending increases too much," Hutchinson wrote early this week.

The result could spell a 4% to 5% growth average over the next five years, with "possibly with an acute foreign exchange crisis at some point," Hutchinson said.

These problems are short-term, however, Hutchinson said, as not even the strongest chains could keep India's economy from growing over the long-term.

"Indian shares will once again be worth looking at, if only because of the country's immense long-term-growth potential – an upside great enough to overcome even the immense drag of most of its governmental shortcomings," Hutchinson said.

News and Related Story Links:

• Bloomberg:
  India's 0.61% Inflation Gives Singh Room for Stimulus

• Commodity Online:
  'Earmark 1.5% of GDP for stimulus package'

• Money Morning:
  With India, Long-Term Profit Potential Trumps Near-Term Concerns

The U.S. Treasury Department's is pressing the go button on its Public-Private Investment Program and re-expanding the $1 trillion Term Asset-Backed Securities Loan Facility (TALF). 

Treasury Secretary Timothy Geithner said to the Senate Banking Committee that he expects the programs to start by early July, Bloomberg reported.

"Working with the Federal Reserve and the FDIC, we expect these programs to begin operating over the next six weeks," Geithner said in prepared testimony.

The Public-Private Investment Program is a coordinated effort with the Federal Reserve and Federal Deposit Insurance Corp. (FDIC) to help banks sell as much as $1 trillion in distressed mortgages and other assets.

Announced in March, the Public-Private Investment Program will be funded with $75 billion to $100 billion of U.S. Federal Reserve and Federal Deposit Insurance Corp. (FDIC) debt guarantees, as well as the funds remaining in the U.S. Treasury Department's Troubled Asset Relief Program (TARP).

Geithner is betting this plan will finally establish market values for the toxic debt left over from the U.S. housing bust, and that getting the private market involved will minimize the risk that taxpayers will overpay for assets.

"Leverage has declined, the most vulnerable parts of the non-bank financial system no longer pose the same risk, and banks are funding themselves more conservatively," he said.

TALF Expanded, TARP Reserves Revised 

Earlier this week, the Federal Reserve announced it would add older real estate to TALF. And Geither reiterated that the Treasury and Fed intend to expand programs to help asset-backed securities markets, such as TALF, Bloomberg reported.

"The Treasury and the Federal Reserve will continue to monitor and enhance the ABS programs to bring in new, more niche asset classes and make sure that the number of eligible borrowers and issuers continues to increase," Geithner said.

In late March, the Federal Reserve kicked up TALF's capacity from $200 billion to $1 trillion and began accepting mortgage-related securities as loan collateral.

Geithner also said the Treasury has about $124 billion of the $700 billion Troubled Asset Relief Program (TARP) left, $11 billion less than his previous estimate in March. He also said he expects about $25 billion to be repaid over the next year.

News and Related Story Links:

• Bloomberg:
  Geithner Says Toxic-Asset Plan to Start in Six Weeks

• Money Morning:
  Will Obama Administration's Banking Sector Fix-It Plan Finally Break the Toxic-Asset Logjam?

• Reuters:
  Geithner says making headway in battling crisis

Like most investors, Harvard University's billion-dollar endowment fund took a beating during the global financial crisis. Many investors cashed out, opting for the safety of the sidelines.

But Harvard called a new play.

During the first quarter, Harvard engineered a dramatic shift in its endowment-fund investment strategy – boosting its stakes in some of the most prominent emerging market exchange traded funds (ETFs). Indeed, its largest first-quarter investments included:

• $50.9 million in Vanguard Emerging Markets ETF (NYSE: VWO)
• $1.5 million more iShares MSCI Brazil Index ETF (NYSE: EWZ)
• $1.1 million more into in iShares FTSE/Xinhua China 25 Index ETF (NYSE: FXI)
• $877,700 into Van Eck's Market Vector Russia ETF Trust (NYSE: RSX)
• $817,300 into iShares MSCI Mexico Index Index (NYSE: EWW)
• $390,400 more into iShares MSCI South Africa Index (NYSE: EZA)

Harvard's fund also took a first-time, $45.5 million position in iShares MSCI South Korea Index ETF (NYSE: EWY), as well as two foreign titans – a $16.7 million stake in China Mobile Ltd. (NYSE ADR: CHL) and a $12.6 million stake in Israel's Teva Pharmaceuticals Industries Ltd. (NASDAQ ADR: TEVA).

Obviously, an institution such as Harvard does its homework before making such an aggressive play call, and committing so much money to the emerging economies of the world – global regions whose stock markets took even bigger hits than the United States' Standard & Poor's 500 Index.

Since the market bottomed out at 676.53 on March 9, the S&P 500 has gained an impressive 34.2%.

During that same span, however, the ETFs that received Harvard endowment dollars have handily trounced the performance of that U.S. bellwether index. Just as an example: Vanguard Emerging Markets ETF is up 58.1% and iShares FTSE/Xinhua China 25 Index ETF has gained 51.2%. 

And the overall MSCI Emerging Markets Index ETF (NYSE: EEM) – which measures a 26-country-tracking index of the same name – is up 55.2% since the bottom.

Emerging Market Professors

One of the market professors Harvard is listening to is Robert G. Doll Jr., vice chairman and chief investment officer for private equity fund BlackRock Inc. (NYSE: BLK). Doll said earlier this week that the global economy has likely seen the worst of the worldwide financial crisis, and that developing economies are already emerging from recession.

"If, in fact, we have seen a bottom in markets and economies are going to recover, the emerging parts of the world will recover the most and the fastest," Doll told Bloomberg News. "After all, their recessions were largely unwanted inventory build-up and not the credit bust in the Western world."

Earlier this month, Doll said he believed the S&P 500 would fall from its current levels (which it had), and then rally to end the year at around 1,000 – for a gain of about 11%.

"Emerging markets, if they are going to do better than that, are going to do closer to 20%," Doll said. "There are some that already have. Some have done better than that."

A couple weeks before Doll's vote of confidence, Mark Mobius, famed investor and head of Templeton Asset Management Ltd., said that emerging-market stocks are building a base to enter a bull market at the end of the year, Bloomberg reported.

"We are at the base-building period for the next bull market," Mobius told Bloomberg while attending a conference in Indonesia. "What I see happening is perhaps this continuing till the end of the year, and then a breakout."

Many of these emerging and developing economies are on the cusp of breaking out, but are being held back by the drought of others. The ultimate catalysts that set them loose will be falling interest rates and easing inflation, Mobius said. 

In the first week of May, about $4 billion was pumped into emerging-market equity funds. It was the largest weekly inflow since December and the eighth-largest on record, MarketWatch reported. Most of that went into ETFs, and long-term positions at that.

Not coincidentally, the specific countries seeing the largest inflows are represented in Harvard's portfolio. Brazil posted its second-largest weekly inflow on record. China, India and Russia also saw huge gains, MarketWatch reported.

Those four markets – Brazil, Russia, India and China – comprise the so-called "BRIC" economies of the world.

Emerging Market ETF Plays 

How to capitalize on emerging markets reemergence from recession depends on your risk tolerance. And risk levels can vary by country and investment sector.

Carl Delfeld, head of global investment advisory firm Chartwell Partners, noted that while the U.S. financial sector is the chief culprit of the global financial crisis, some healthy-capital foreign banks are currently very nicely positioned because they didn't get involved in the bad U.S. debt, and because they have the fastest-growing growing base of consumers in the fastest-growing markets. 

And a good way to play this trend could be the soon-to-be available Global Shares Dow Jones Emerging Markets Financial Titans ETF, Delfeld writes in the May 25 issue of Forbes magazine. Of the fund's top-10 holdings, four are China-based, three Brazil and two India.

More speculative investors might be interested in another new ETF, the WisdomTree Dreyfus Emerging Currency Fund (NYSE: CEW), a basket of 11 equally weighted emerging market currencies that are rebalanced every quarter.

The currencies in the fund are the Brazilian real, Mexican peso, Chilean peso, Israel shekel, Turkish lira, Polish zloty, Chinese yuan, South Korean won, Taiwan dollar, Indian rupee and the South African rand.

For more general plays on specific countries, Harvard's list of new investments could be a good starting point.

Money Morning Contributing EditorHoracio Marquez recommended iShares MSCI Brazil Index (EWZ) in his popular "Buy, Sell or Hold" column last October. It's also one of the five emerging market ETFs that Money Morning's Martin Hutchinson recommended earlier this year. Others included iShares MSCI Chile Investable Index (ECH), iShares MSCI Taiwan Index (EWT) and iShares MSCI Singapore Index (EWS). 

News and Related Story Links:

• Yahoo! News:
  Harvard Looks to ETFs, Emerging Markets to Fuel Turnaround

• Bloomberg:
  Emerging Markets Stocks May Rise 20% in 2009, BlackRock Says

• Bloomberg:
  Emerging Markets May Rally by Year-End, Mobius Says

• MarketWatch:
  Huge flows into emerging-market funds in past week: Merrill

• ETF Trends:
  It's Here: An ETF That Bundles Emerging Market Currencies

• Money Morning:
  Buy, Sell or Hold: iShares MSCI Brazil Index

• Money Morning:
  The Five Most Promising Emerging Markets ETFs for 2009.

• Money Morning Special Investment Report (Part II of II):
  Special Report: Hit the BRICs for a Global-Investing Double Play.

• Money Morning Special Investment Report (Part I of II):
  Special Report: Hit the BRICs for a Global-Investing Double Play.

• Money Morning:
  As Problems in India and Russia Escalate, Let's Drop the BRIC.

U.S. housing starts and permits unexpectedly plummeted to record lows in April, torpedoing hopes of a housing market recovery as well as hopes the overall economy is regaining traction.

Starts for privately owned homes clocked in at a 458,000 annual rate, a 12.8% decline from March's revised rate of 525,000 and a 54.2% dive from April 2008's annual rate of 1,001,000 starts, according to a report from the U.S. Department of Commerce.

Meanwhile, building permits for privately owned housing units were applied for at a seasonally adjusted annual rate of 494,000, 3.3% below March's revised rate of 511,000 and a 50.2% plummet from April 2008's revised rate of 991,000.

The Commerce Department report also sheds light on the complexity of the housing market's fallout and path to recovery.

Most strikingly, while starts in the West have dropped 52.9% from last year, they actually rose 42.5% from March 2009. The Northeast, Midwest and South all posted double-digit monthly declines and steeper annual losses.

Also, the drop in building permits isn't necessarily a bad thing, says Peter Kenny, managing director at Knight Equity Markets. Like the retail sector's recovery, the first step for the ailing housing market is getting rid of all the houses already on the market, he said.

"There is so much inventory on the market that the sooner we stop building and start eating into existing inventory the better off we'll be," Kenny told Reuters.

For the short term, April's housing figures won't help the country's top home-repair retailers, The Home Depot Inc. (NYSE: HD) and Lowe's Cos. Inc. (NYSE: LOW).

Each company posted quarterly earnings that beat analysts' forecasts, but not because they've been blessed by a return of consumer demand.

Rather, the retailers discounted items and cut costs across the board.

Earlier this year, Home Depot announced plans to cut 7,000 jobs, freeze officers' salaries and close some specialty outlets – moves that shed 16.4% from operating costs, Reuters reported.

In April alone, building-material and garden-supply stores, shed 7,500 jobs, according to the U.S. Department of Labor.

The moves have clearly been effective, but also entwined with a bitter irony.

And as long as unemployment continues climbing, there won't be a consumer base for every element for the housing market, including the merchandise on their shelves.

News and Related Story Links:

• U.S. Department of Commerce:
  New Residential Construction in April 2009

• Reuters:
  U.S. housing starts, permits hit record lows in April

• Reuters:
  Home Depot profit beats Street, but shares fall

• Wall Street Journal:
  US Retail Industry Has Record Unemployment As Cuts Continue

Right now many investors probably don’t want to shoot for the moon. The global financial crisis gave their portfolios one the fiercest beat downs since the Great Depression, draining investors’ resources and mood for anything but safe investments.

But it’s unfair to associate small-cap investing as moon shooting, especially as the global economy pulls itself back together. Historically, small caps have beaten the socks off blue chips as both emerge from recession.

After the 1973-74 recession, small stocks beat larger ones for the following 10 years. Going back further, to 1932, the year before the Great Depression ended, small cap stocks beat the market for 11 of the following 13 years, CNNMoney reported.

More recently, however, the Russell 2000 Index (the most common benchmark of publicly traded small-cap companies) has gained 40.2% since the market bottomed on March 9. In that span, the blue-chip-weighted S&P 500 has chugged 24.2%

The difference isn’t extraordinary, but institutional investors who pour millions into these companies know the difference between those figures could spell fortunes.

And even on an individual level, you’d be hard-pressed to find an everyday investor unsatisfied with sitting on a 40.2% gain after a year and a half drought.

Small caps rebound faster because they are typically saddled by less debt and have fewer people on their payrolls – making it easier to restructure and regain footing.
                       
Compare that to behemoths like Ford Motor Co. (NYSE: F) and General Motors Corp. (NYSE: GM), which have been reducing overhead, downsizing and streamlining operations for years.

Also, small caps’ operations and revenue streams are more regionally based, whereas a global titan like General Electric Co. (NYSE: GE) has operations all over the world. While a globally diversified business model ensures better overall stability, it also means more vulnerability at a time when the global financial crisis has crippled nearly every economy in the world.

What’s more, a recent study from the Paris-based Organization of Economic Cooperation and Development (OECD) shows that the United States’ economic deterioration is slowing down at a faster rate than Italy, France, England and China.

In Small Caps We Trust

For practical purposes, small caps can be defined as publicly traded companies with a market capitalization between $250 million and $1 billion. But that’s just an approximation, since there is no official definition or internationally accepted market-cap boundary.

Small cap stocks have fewer shareholders than mid-cap ($1 billion to $10 billion) or large-cap companies ($10 billion and up), and their lack of liquidity makes it much easier for the share price to spike, or plunge, with a major shift in trading.

Think of it them as boats in an ocean. The winds and waves will cause a small boat to rock much more than they would a tanker. But a strong current will push a smaller vessel to its destination faster than it would a larger ship.

Investors are attracted to small caps because they can take a larger stake in a company (and usually at a lower entry price) with the expectation that as the company grows – or gets bought out – their small investment will reap a large reward.

And right now – as the economy and stock market rebound from the vicious recession – it’s an especially good time to eye small-cap companies. Small caps have already proven to be the more profitable investment as global economies are licking their wounds.

Of course, there are two things to consider before investing a dollar in small caps.

The first is volatility. Because they companies are vulnerable to shifts in market sentiment, it is not advisable to apportion a large block of your portfolio in small-caps.

Secondly, now may not be the best time to jump in. Those closely watching small caps believe they have overshot their values – meaning a pullback is expected soon, if it’s not happening already.

Small caps stocks have risen 40.2% since March 9, but they are also down 5.9% from their May 8 peak.

“All in all, we think [small-caps] have moved too far, too fast,” Bank of America Merrill Lynch small-cap strategist Steven Desanctis recently wrote to investors.

Desanctis expects the small-cap pullback to continue because small companies’ price-to-earning ratios have moved above average compared to those of larger companies.

Also, analysts expect at least a few more months of market-wide volatility – and the tossing and turning of small caps stocks may not sit well with many investors.

Medium-to long-term though, small caps have proven their profitability, especially when investors amass positions in a recession’s late stages. 

Here are six ways to invest in a variety of small cap stocks, should the current pullback present a favorable opportunity.

The iShares Russell 2000 Index ETF (NYSE: IWM) is a fund that tracks the movements of the Russell 2000 Index. The Fund invests in a representative sample of securities included in the index that collectively have an investment profile similar to the index.

The iShares Russell 2000 Value Index ETF (NYSE: IWN) tracks an index that measures the returns of safer, less speculative small-cap stocks. And the iShares Russell 2000 Growth Index ETF (NYSE: IWO) tracks an index that measures the returns of riskier, more growth-oriented small-cap stocks.

Vanguard also has variety of small cap funds, but they track the movements of a different index of small U.S. companies, the MSCI US Small Cap 1750 Index.

The Vanguard Small-Cap ETF (NYSE: VB) tracks the movements of the MSCI US Small Cap 1750 Index not only by amassing a position in nearly every company traded in the index, but attempts to mirror the proportions of those holdings as well.

The Vanguard Small-Cap Value (NYSE: VBR) tracks safer, less speculative small-cap stocks on the index. And the Vanguard Small Cap Growth (NYSE: VBK) goes for more growth-oriented returns on the index.

News and Related Story Links:

• OCED:
  Composite Leading Indicators (CLIs), OECD, May 2009 update
• CNNMoney:
  Small-caps poised for a comeback
• The Wall Street Journal:
  What Small Caps Are Saying

One business day removed from the government's bank stress tests, four of the largest U.S. banks – BB&T Corp. (NYSE: BBT), Capital One Financial Corp. (NYSE: COF), U.S. Bancorp (NYSE: USB) and KeyCorp (NYSE: KEY) – announced plans to raise capital through stock offerings.

BB&T said it plans to raise $1.5 billion by selling common stock, combine it with "other funds," and repay all the capital from the U.S. Department of the Treasury's Troubled Asset Relief Program (TARP).

The Winston-Salem, N.C. bank also said it will cut its divided 68% to 15 cents a share, an action that will save $725 million in capital a year. Chief Executive Officer Kelly King said the dividend reduction is temporary, and making the decision was marked "the worst day in my 37 year career."

"However, we firmly believe this action is in the long-term best interests of our shareholders and our company because of the risk and uncertainty associated with being a TARP participant… When market conditions improve and our earnings provide for an increase in the dividend, we are committed to increasing it accordingly," King said in a statement.

Capital One said it plans to raise about $1.75 billion by selling 56 common stock shares at $27.75 a piece. The bank expects net proceeds "to be used for general corporate purposes" and repaying the Treasury.

U.S. Bancorp plans to raise $2.5 billion by selling common stock to the public with the intention of repaying the Treasury with the proceeds. The Minneapolis-based bank also said it may offer medium-term notes in a benchmark amount in a public offering.

KeyCorp filed with regulators a plan to offer up to $750 million in common shares to raise capital.

Disdain for Government's Eye

On Friday, the government's stress test revealed that these banks are four of 10 that need to raise more capital if they were to survive a prolonged deterioration of the U.S. economy.

U.S. Bancorp borrowed $6.6 billion from TARP, Capital One took $3.55 and BB&T received $3.1 billion. In taking the billions in emergency loans, the banks also agreed to have tighter government control of their operations – including clamping down on executive pay.

The capital-raising plans – combined with the previously announced plans by Citigroup Inc. (NYSE: C), Morgan Stanley (NYSE: MS) Wells Fargo & Co. (NYSE: WFC) to pay back TARP money – show just how much these banks disdain working on the government's dime and under the government's eye. And it shows that they're willing to further suppress their stock value and possibly upset their shareholders to break the government's chains.

"Rational, objective lending is one of the most important purposes of the banking system, and when you inject Congress and the administration into it, it effectively politicizes the process, which is not healthy," BB&T's King told Reuters.

News and Related Story Links:

• Reuters:
  Four big U.S. banks selling stock

• Money Morning:
  Bank Stress Tests: The Results Are in; Now What?

PetroChina Co. Ltd. (ADR: PTR) said it hopes to raise as much as $22 billion (150 billion yuan) to fuel its expansion plans and pay its dividend.

The world's second-largest company – which raised 50 billion yuan in the first quarter though bond issues and bank borrowing – plans to raise 100 billion yuan more by issuing more bonds, Bloomberg reported. That figure could be lower if the price of oil rebounds this year, but before the company takes action, it must get shareholder approval next week.

PetroChina originally earmarked 233 billion yuan for capital expenditure this year, but that was on expectations that domestic demand for oil would stay strong. Since then, the International Energy Agency said it expects China's oil demand to fall 0.8% in 2009, a downward revision from its original forecast of a 0.6% contraction.

Falling oil prices and demand squeezed its revenue stream, causing a drop in free cash flow, which is the cash available after meeting operational expenses. PetroChina actually posted a negative free cash flow of 44.9 billion yuan last year, Bloomberg reported.

The state-controlled oil titan didn't have an easy first quarter, either. Net profit fell 35% and revenue fell 30% from a year earlier. Its crude output fell 5.7% to 205.7 million billion barrels, made worse by the fact that the average selling price of its crude oil sunk 57.8% to $37.10 a barrel, The Wall Street Journal reported.

"We believe better times lie ahead as the first quarter marked the bottom of the earnings cycle for PetroChina," Gordon Kwan, head of energy research at Mirae Assets, told the Journal. "China's March oil imports and refinery throughput statistics suggested that fuel destocking is well underway amidst recovering fuel demand, thanks to the country's economic stimulus measures."

Projects in the Pipeline

PetroChina's expansion should play a large part in China's historic infrastructure stimulus.

Now, more than ever, it wants to scoop up assets and expand its reserves while prices are still suppressed by the global financial crisis.

Among the assets in PetroChina's crosshairs, a 142 billion yuan pipeline from the northwestern Xinjiang province to the southern province of Guangdong in the south.

It also recently received government approval to invest $1.22 billion to expand its Hohhot refinery, which will more than triple the refinery's production capacity from 30,000 barrels per day (bpd) to 100,000 bpd, Reuters reported.

Wang Jing, chief oil analyst with Orient Securities Ltd., told Bloomberg that adding and securing energy supplies is "politically important" for the world's second-largest oil consumer. 

"Cash flow reduction is not going to jeopardize the company's investment plans," he said.

News and Related Story Links:

• Bloomberg:
  PetroChina Needs as Much as $22 Billion in Financing

• The Wall Street Journal:
  PetroChina 1Q Net Pft Down 35% On Oil Prices, Demand

• Reuters:
  PetroChina allowed to triple small Hohhot refinery

Chrysler LLC has asked court approval for a May 22 exit from bankruptcy, outlining Fiat SpA's (OTC ADR: FIATY) plan to scoop Chrysler assets and urging that a quick bankruptcy is vital to keep suppliers, dealers and consumers' trust in the brand.

According to its filing in New York bankruptcy court, Chrysler seeks approval of a plan where creditor objections must be submitted by May 11, competing bids must be submitted by May 15, and a May 21 hearing to rubber stamp the winning bid, Bloomberg reported.

"Key suppliers and dealers simply cannot survive a prolonged period of uncertainty," Chrysler said in its motion seeking approval of the sale process. "Consumers will look elsewhere for vehicles if delays persist."

Chrysler entered Chapter 11 bankruptcy protection last Thursday and listed assets of $39.3 billion and liabilities of $55.2 billion.

Chrysler will receive $10.5 billion in U.S. and Canadian government financing – $8.08 billion from the U.S. government and $2.42 billion from Canada and Ontario. The U.S. government will receive an 8% stake in the company, and Canada and Ontario will jointly receive a 2% stake.

Fiat has a 20% stake in Chrysler, and it could increase it to 35% if Chrysler meets a set of milestones.

The leading bid for Chrysler's assets is an unnamed entity owned by Fiat, the U.S. Treasury, the Canadian government and an employee association.

If other potential buyers are out there, they've remained silent on topping the leading $2 billion bid.

"No potential buyers have expressed an interest in acquiring Chrysler as a going-concern as an alternative to the proposed transaction with Fiat," Greenhill Managing Director Bradley Robins said in an affidavit filed with the court in support of the sale, Bloomberg reported. "Chrysler has insufficient funds to continue operating and no other providers of financing."

However, opposition to the deal comes from within Chrysler. A group that calls itself Chrysler's non-TARP lenders, is also contesting the $4.5 billion in addition TARP money the car company will receive to help reorganize under bankruptcy, Bloomberg reported.

Fiat Plans to Buy GM Assets

If Fiat has its way, Chrysler isn't the only American carmaker it wants a piece of.

Less than a week after landing a partnership deal with Chrysler, Fiat Chief Executive Sergio Marchionne has sought approval from Germany's government support to buy Opel, the core brand of General Motors Corp.'s (NYSE: GM) European operations.

Fiat said such a merger would create a automotive group that rakes in about 80 billion euros ($107 billion) in revenue.

The board-approved initiative would evaluate several operational options – including the potential of spinning off the new auto company with its own listing, the company said.

GM hasn't commented on Fiat's plan, but it did release a statement saying it is actively trying to offload its Saturn brand and retail network to a number of potential buyers.

GM said it is hoping to secure a deal with a buyer "later this year."

News and Related Story Links:

• Bloomberg:
  Chrysler to Seek Court Approval to Sell Its Assets by May 22

• Bloomberg:
  Chrysler Non-Tarp Lenders Object to Auction, Bankruptcy Loan

• Money Morning:
  U.S. Auto Industry Spins Out of Control, as Chrysler Goes Bankrupt and GM Struggles to Reverse Course 

• Reuters:
  Car industry shake-up looms as Fiat readies Opel bid

• Fiat:
  Fiat Board of Directors

• General Motors:
  GM to proceed with efforts to sell Saturn
   

The results of the bank stress tests are in, but instead of releasing them today (Monday), the U.S. Federal Reserve is holding them close to its chest until after the markets close Thursday.

The amount of information awaiting disclosure seems to have grown, as have the reasons to postpone the potentially damaging data.

Not only will the government unveil which banks require more capital, it will also disclose potential loss estimates for certain loan categories and the banks’ ability to “absorb those losses” assuming economic conditions worsen through 2010, a government official told The Wall Street Journal.

Negative results could deal a huge blow to both the banks and government, as a sub-par grade may be viewed as an indictment not only of the failed management of the banks, but the government’s decision to loan them billions of taxpayer money. The banks also are concerned that anything but a tactful release of the results will cause internal and investor panic.

Government and banking industry officials told Bloomberg that both sides needed the extra time to debate preliminary results, as well as plans regarding how banks can recover capital.

On April 24, the government showed the tests’ preliminary results to the 19 U.S. firms it reviewed – from behemoth banks like Bank of America Corp. (NYSE: BAC) and Citigroup Inc. (NYSE: C) to the smaller GMAC LLC (NYSE: GMA) and MetLife Inc. (NYSE: MET). The banks involved in the stress tests hold more than half the loans in the U.S. banking system and two-thirds of the assets. 

“Everybody understands they’ve got a tiger by the tail here,” Mark Tenhundfeld, a senior vice president at the American Bankers’ Association in Washington, told Bloomberg. “If they don’t let him go gently, there will be a lot of mauling going on.”

Already, reports have leaked that two specific banks need more capital, and reaction hasn’t been pleasant.

After showing Bank of America and Citigroup test results, the government told the banks to raise more capital despite receiving a combined total of $95 billion in bailout loans.

At least three more banks need more capital, either from converting common shares to equity and/or receiving more government cash, sources told Bloomberg.

Sensing blowback from Congress, as well as the public, Federal Reserve chairman Ben S. Bernanke said that banks requiring more capital will have to attempt to raise it on their own before receiving another lifeline loan from the government.

Confusion On Evaluation’s Methodology

Debate over the results isn’t the only reason for the postponement. Disputes and confusion over the Fed’s methodology has also erupted.

According to a Fed’s test criterion, common shareholder equity should be the “dominant” portion of Tier 1 capital. Officials favor tangible common equity of about 4% of a bank’s assets and Tier 1 capital worth hovering around 6%.

But The Wall Street Journal reported last week that some bank executives got mixed signals during a meeting with regulators.

The regulators are asking “a million questions” and it’s “very unclear what they’re aiming at,” a senior executive told The Journal. “We can’t discern a pattern.”

Citigroup officials argued that regulators haven’t given the bank enough credit for its efforts to offload large asset chunks, such as Smith Barney and its Japanese brokerage arm Nikko Cordial Securities.

On Friday, Citigroup agreed to sell Nikko Cordial Securities, its Japanese brokerage arm to Sumitomo Mitsui Financial Group (OTC: SMFJY) for about $5.5 billion. The deal, which is to be completed by Oct. 1, also includes a transfer of about $2 billion in excess cash from Nikko Cordial to Citigroup.  

The deal will boost the bank’s Tier-1 capital ratio by approximately 27 basis points.

Individual Result Releases

One insider told Reuters that the government is leaning toward releasing individual results for each bank involved in the stress test – a move away from issuing a summary of results.

The source said the plan “is not very far along,” and that regulators also aim to disclose a lot of confidential supervisory information about the banks.

One analyst says that test results could be so specific to a bank’s portfolio that it’s not wise to use them as a litmus test for the overall health of the banking sector.

“Once you try to take that information and extrapolate it, it gets very complicated and it's dangerous," Kevin Petrasic, who served at the Office of Thrift Supervision from 1989 to 2008 and is now an attorney at law firm Paul Hastings in Washington, told Reuters.

Whatever the results – or how they are disclosed – Money Morning’s Shah Gilani, a former Wall Street hedge fund manager, said the evaluation process has several flaws.

“What’s missing, unfortunately, is an assumption of how much additional capital would be necessary to facilitate credit expansion – which, in turn, would serve to fuel economic growth. That, after all, should be the ultimate stress-test objective,” he wrote.

And the end result is more stress added to an already stressed banking sector, as too much information and/or misinformation only makes a sound assessment more difficult.

Money Morning’s Stress Test

The government’s pushback of stress test results only made the public more hungry for the their release. But you don’t have to wait until Thursday to know which of the 13 biggest U.S. banks are diamonds or duds.

Last week in “Money Morning’s Bank Stress Test,” Martin Hutchinson highlighted the four secrets that will let you separate the winners from the losers in the U.S. banking system

• Banks that made profits in the very difficult fourth quarter of 2008 and first quarter of 2009 are probably in good shape, especially if their loan-loss provisions exceeded their charge-offs (the amount actually lost.)
• Banks that lost money in the fourth quarter and first quarter may or may not be in terminal trouble; it depends on the amount of those losses and whether the red ink is expected to continue to flow going forward.
• With the run-up in bank stocks in recent weeks, there’s been an accompanying rise in the ratio of share price to book value (stock price per share/book value per share). If that ratio is still below 30% – even after the recent price increases – the market lacks confidence in the bank’s ability to solve its own problems. Unfortunately, the market currently appears to be overly optimistic about some of the banks that still have considerable ongoing problems.
• Management’s dividend policy is less of an indicator than it was just a few short months ago; several banks have sharply cut their dividends in order to repay the Troubled Assets Relief Program (TARP) capital they got in late 2008. Reasonably, profitable banks don’t want the government meddling in their business or compensation structures

Hutchinson also gave an individual analysis of each bank, highlighting their strengths and pulling a curtain on their weaknesses. 

News and Related Story Links:

• The Wall Street Journal:
  U.S. to Release Stress-Test Results on May 7
• Bloomberg:
  U.S. Bank Stress Test Results Delayed as Conclusions Debated
• Money Morning:
  Bank of America’s Lewis Says Paulson, Bernanke Forced Merrill Takeover.
• Reuters:
  Individual "stress tests" may be unveiled
• Money Morning:
  Controversial Stress Tests Reveal Only One Bank Needs Capital, but Worries Remain.
• Money Morning:
  Money Morning’s Bank Stress Test Says These Three Banks Are the Strongest

Bank of America Corp. (BAC) shareholders cast 50.34% of their votes in favor of stripping Kenneth Lewis of his chairman title.

The historic vote was cast at the BofA's annual shareholders' meeting for a resolution to change company by-laws so that the offices of chairman and chief executive are separately appointed.

Shareholders voted 67.33% in favor of Lewis keeping his title as chief executive.

"The board unanimously expressed its support for Lewis to continue in that role," Bank of America said in a statement.

Lewis' undoing as chairman is largely the result of shareholder grumbling over his decision last year to acquire Merrill Lynch & Co. Inc. (MER) – as well as his failure to disclose information about Merrill's condition before Bank of America scooped it up.

The merger, originally valued at $50 billion, was announced on Sept. 15, about an hour before Lehman Brothers Holdings Inc (LEHMQ.PK) went bankrupt. Afraid the collapse of Merrill Lynch would cause further deterioration of panic-stricken markets, the government helped facilitate the deal with $25 billion of capital from the U.S. Treasury Department's $700 billion Troubled Asset Relief Program (TARP).

In his defense, Lewis testified to New York's attorney general that Federal Reserve Chairman Ben S. Bernanke and former Treasury Secretary Henry M. Paulson pressured him not only to move ahead with the Merrill merger despite reservations, but to also stay quiet about the mounting losses at the crumbling investment bank

But it wasn't enough to appease shareholders, who began rallying around fellow shareholder Jerry Finger and his campaign to oust Lewis from his post.

Finger's bullhorn must have blared fairly loud considering he and his family hold only about 1.5 million of Bank of America's shares, which is about 0.02% of total outstanding shares.

Lewis didn't comment directly on the vote, but touched on the subject in comments on efforts to rebuild the company after the subprime fallout and ensuing financial crisis.

"We are building this company and managing for the long term. I continue to believe we have built the best financial company in the industry, and that our results over the long term will bear that out," Lewis told shareholders.

Lewis dually acknowledged the difficulty of running a bank in 2008 and the "heavy burden" shareholders have carried throughout.

"My strong feeling is that organizational integration – and a renewed focus on organic growth – will be the almost exclusive focus of our efforts in the coming years," he said.

Massey Fills In

After Lewis' removal, the board elected Walter Massey as Bank of America's new chairman.

Massey has been a director on Bank of America's executive board since 1998 and is a member of its Audit Committee.

Massey is also a director of McDonald's Corp. (MCD), and a former director of Delta Airlines Inc. (DAL), Motorola Inc. (MOT) and BP plc (ADR:BP).

From 1995 to 2007, Massey served as president of Morehouse College. Before then, President George H.W. Bush appointed Massey director of the National Science Foundation – a government agency that supports math, science and engineering research and education.

News and Related Story Links:

• Bank of America:
  Bank of America Announces Results from Annual Meeting

• Money Morning:
  Bank of America's Lewis Says Paulson, Bernanke Forced Merrill Takeover

• Money Morning:
  Bank of America Investor Calls for CEO Lewis' Ouster

Faced with pending deadlines to restructure or resort to bankruptcy, General Motors Corp. (GM) and Chrysler LLC each made a series of dramatic moves to trim fat, reduce debt and improve efficiency.

GM's cost-cutting measures are perhaps its most encompassing since the company began its turnaround process. Among GM's announced restructuring plans:

• GM asked bondholders to exchange $27.2 billion of bonds for 10% of the equity of the restructured company. Bondholders would receive 225 shares of GM common stock for each $1,000 equivalent of principal amount. 
• The top U.S. carmaker will close 17 assembly, power train and stamping plants by the end of 2012.
• It will reduce its hourly workforce from about 61,000 to 38,000 by 2011. It also anticipates job cuts among its salary and executive workforce.
• GM will reduce its number of dealers by 42% to 3,600 by the end of 2010.
• And the 101-year-old automaker will eliminate its Pontiac brand.

"We are taking tough but necessary actions that are critical to GM's long-term viability," GM president and Chief Executive Officer Fritz Henderson, said in a statement. "Our responsibility is clear – to secure GM's future – and we intend to succeed. At the same time, we also understand the impact these actions will have on our employees, dealers, unions, suppliers, shareholders, bondholders, and communities, and we will do whatever we can to mitigate the effects on the extended GM team."

These measures will help GM cut its structural costs by $55.8 billion by 2010. 

The bond swap is the biggest of these measures, and it's one that isn't guaranteed to work. GM needs to exchange 90% of its bond amount to satisfy the U.S. Treasury.

And if it can't do that – or reach an alternative arrangement with the Treasury – by its June 1 deadline, GM said it expects to file for bankruptcy.

Chrysler Fighting Against the Clock

Meanwhile, GM's privately held rival Chrysler announced it reached tentative agreements with U.S. and Canadian auto unions – previously tall roadblocks to its restructuring efforts.

The Canadian Auto Workers union agreed to give up tuition rebates and its car-buying program. Base wages and pensions won't change. The CAW, which represents about 8,000 Chrysler workers in Ontario, said in a statement that 87% of its members voted in favor of rubber stamping the concessions.

Details of the new contract with United Auto Workers haven't been made public, and union members will vote on it Wednesday. Chrysler employs 26,800 UAW workers.

The U.S. government gave Chrysler a May 1 deadline to merge with Fiat SpA (OTC: FIATY) or enter bankruptcy protection. 

Two weeks ago, Fiat Chief Executive Officer Sergio Marchionne said his company would walk away from merger talks with Chrysler LLC unless American and Canadian unions agree to take substantial pay cuts.

"The chances of them pulling this off are much better now," Erich Merkle, an independent auto analyst in Grand Rapids, Mich., told Bloomberg. "I wouldn't say they are completely out of the woods yet."

Chrysler is currently 80% owned by Cerberus Capital Management LP and 20% owned by Daimler AG of Germany, owner of Mercedes-Benz.

Chrysler still has to convince lenders to erase most of its $6.9 billion in secured debt.

News and Related Story Links:

• General Motors:
  GM Accelerates its Reinvention as a Leaner, More Viable Company

• General Motors:
  GM Launches Exchange Offers and Consent Solicitations for Outstanding Notes

• Money Morning:
  Fiat CEO Gives 50% Chance of Chrysler Merger, Demands More Labor Cost Cuts 

• Bloomberg:
  Chrysler Reaches Labor Accords With U.S. Union, CAW

Morgan Stanley (MS) posted its second consecutive loss, missed earnings estimates by a mile and slashed its dividend, while Wells Fargo & Co. (WFC) beat estimates with a $3.05 billion net income for the first quarter.

The separate earnings reports pushed and pulled investors who've been cheering first-quarter earnings from the banking sector.

Morgan Stanley posted a net loss of $578 million, or 57 cents a share, compared with a $1.4 billion profit in the first quarter of last year. Revenue came in at $3 billion, a 62% decline from a year ago.

Analysts surveyed by Reuters estimated the investment bank would post $4.9 billion in revenue and a loss of 9 cents a share.

"People had expected the credit desk trading profits to be a pleasant surprise, and I think they were OK, but they were just overwhelmed by the negative surprises in the write-downs," Michael Holland, founder of New York money management firm Holland & Co., told Reuters.

Real estate accounted for $1 billion of Morgan's net losses, and a $1.5 billion more was tied to changes in the value of the bank's liabilities.

The carnage caused Morgan to slash its quarterly dividend 81% to 5 cents a share, a move the company said will save it $1 billion a year.

Chief Executive John Mack said last month in a conference that he didn't think now is the time to begin paying back the $10 billion it borrowed from the U.S. Treasury under the Troubled Asset Relief Program (TARP).

Meanwhile, fellow top-six U.S. bank Wells Fargo came through on its rosy outlook earlier this month, recording a 53% first-quarter profit on an increase of home refinances brought on by record low mortgage rates.

Net income was a record $3.05 billion, or 56 cents per diluted share, up from $2 billion, or 60 cents a share, a year earlier.

Wells Fargo's revenue nearly doubled to $21 billion, a figure helped greatly by more than $100 billion originated in mortgages in the quarter.

With the December acquisition of Wachovia Corp., Wells Fargo upped its exposure to serving about one out of every three U.S. households. But it also brought a truckload of risky adjustable-rate home loans. Wachovia topped all U.S. banks with $101.9 billion in losses and write-downs.

Wells Fargo's earnings report contrasted sharply with that of Morgan Stanley and the other four large U.S. banks – Citigroup Inc. (C), Bank of America (BAC), Goldman Sachs Group Inc. (GS) and JPMorgan Chase & Co. (JPM).

The two investment banks of the six, Goldman Sachs and Morgan Stanley, don't have the more reliable revenue of mortgage loans, and instead are more dependant on the health of the stock market and overall global economic health – both which aren't expected to recover for at least another two quarters.

"Wells Fargo, in short, is becoming a model of what a nation should require of its behemoths under the too-big-to-fail doctrine. It does mostly conventional retail and corporate banking, and provides economically useful services to its nationwide network of clients. It takes few huge risks, and is emerging from 2008's disaster in pretty good shape," said Money Morning Contributing EditorMartin Hutchinson.

News and Related Story Links:

• Reuters:
  Morgan Stanley posts loss, shares fall

• Bloomberg:
  Wells Fargo First-Quarter Profit Rises 53 Percent on Mortgages 

• Money Morning:
  U.S. Banks: Why Only the Simplest Will Succeed

By Mike Caggeso
Associate Editor
Money Morning

Capital venture firms in the Unites States invested only $3 billion in 549 deals in the first quarter – a 61% decline from the first quarter last year – hitting a low that dates back to before the dot-com bubble.

Investment activity was down 47% from the $5.7 billion invested in 866 deals in the fourth quarter last year, according to research by the non-profit National Venture Capital Association (NVCA) and PricewaterhouseCoopers LLP.

"Given the economic turmoil that began in the third quarter of 2008 and continued on into 2009, it's not unexpected that the (venture capitalists) would pause to assess the impact on their portfolio companies before again looking forward to their next investment," Tracy Lefteroff, global managing partner of the venture capital practice at PricewaterhouseCoopers, said in a news release.

Declines plagued nearly every sector – both in the total amount invested and the number of deals.

Software companies received the highest level of funding, with $614 million invested in 138 deals. But that was still a 42% drop in dollars invested and a 34% drop in total deals compared with the fourth quarter of 2008.

Clean-technology (alternative energy, pollution and recycling, power supplies and conversion) was the hardest hit sector, as investment fell 84% to $154 million in 33 deals from a record high of $971 million in 67 deals in the fourth quarter last year.

The financial services sector was the only one that saw an increase in dollars and deals – taking in $108 million from 17 deals, increases of 26% and 21%, respectively.

In addition to having considerably less money to invest, venture capital investors were also weary of investing in new companies and technologies that couldn't promise a short-term return.

Instead, they spent their money on companies and sectors they already own, John Taylor, vice president of research at National Venture Capital Association, told Bloomberg.

"We are in a very difficult, stressed time," Taylor said. "Everyone is trying to figure out what is going on."

The investment drought in clean-tech could bottleneck the sector, as ready-for-market technologies can't get out of the lab.

"We are continuing to see a lot of innovation coming out of universities and government labs, but the big challenge looming is how any of these will be scaled and who will pay for them to see the light of commercial day," Noubar Afeyan, chief executive of Flagship Ventures, told The New York Times.

Mark Heesen, president of the NVCA, wasn't entirely pessimistic over the figures. Venture firms with the ability to invest are pulling the trigger on capital-starved entrepreneurs with "game-changing" technologies, he said.

"While this drop in investment is significant, we are not forecasting levels to continue to fall further," Heesen said. "We would expect a mild and steady increase in investment throughout the rest of the year, particularly if the exit pipeline is allowed to clear."

Two recent deals gave hope to the static initial public offering (IPO) market.

Shares of language instruction software titan Rosetta Stone Inc. (RST) rose about 40% on its first day of trading, netting the company $112.5 million. And online college Bridgepoint Education, Inc. (BPI) rose 7% on its opening day of trading, reeling in $141.75 million from its initial stock sale.

Both companies' shares continued making gains for the rest of the week after their IPOs.

[Editor's Note: When it comes to liquidity, capital, banking or global economics, there's literally no one better than Money Morning Contributing Editor Martin Hutchinson - a former investment banker with more than a 25 years experience. Hutchinson has proven himself to be a market maven and he is currently offering investors an opportunity to make $4,201 in cash in just 12 days. You can also subscribe to Martin's new investment service, The Permanent Wealth Investor, by clicking here.]

News and Related Story Links:

• National Venture Capital Association:
  VC Investments Q1 2009

• Bloomberg:
  Venture Capital Investments Plunge 61% Amid Frozen IPO Market

• The New York Times:
  Venture Capital Investment Sinks

Over the 25-plus years he spent as an investment banker Martin Hutchinson's wealth-creating investment strategy has never once wavered or changed.

Of course the same can't be said of the financial landscape, or the conditions surrounding the everyday investor.  But while those changes have been dramatic, and in some cases jarring, they have not necessarily been changes for the worse.

In fact, in Hutchinson's case the changes have actually been for the better.

Last September, for the first time in more than 40 years, the dividend yields on Standard & Poor's 500 Index eclipsed those of bonds.

From this "positive yield gap" emerge companies with dividend yields that are historically high, secure, and appreciate in value the longer you hold them. Hutchinson dubs these companies "Alpha Bulldogs," and they could be the greatest permanent wealth opportunity in 51 years.

"Permanent Wealth" isn't buy-an-island money. It's not a one-time, $1 million jackpot. 

Rather, it's steady income – month after month, year after year – that will pay your bills, put food on the table and accelerate your retirement. It's enough money to pay for everything your paychecks are overstretching to cover, freeing you to enjoy your lifestyle from now and through retirement.

"If you're looking for income, you need regular, reliable income over the long haul. That's what Alpha Bulldogs give you," Hutchinson said. "And they are ideally suited to making money in tough global economies, like now."

You see, "Alpha Bulldogs" can pay three to six times more than the average S&P 500 dividend. They beat T-Bills, CDs and other cash instruments by eight to 14 times.

This opportunity – how to spot them and begin building permanent wealth – is the central focus of Money Morning's free web summit, "The Shocking New Yield Gap… And What It Means to Your Wealth."

This free, 20-minute summit will be held Tuesday (April 21) at 4 p.m. EDT (U.S. East Coast time).

Among the topics Hutchinson will discuss: 

• How the new yield gap is creating the best permanent wealth opportunity since 1958.
• The unique investments that pay you to be in the market.
• And two Alpha Bulldog investments that can create significant income right away.

Hutchinson is a Cambridge-and Harvard-educated investment banker with over 25 years experience working on Wall Street, Fleet Street, and markets all over the world. He is a leading expert on the international currency markets. And as U.S. Treasury advisor to Croatia, he helped that country launch its own T-bill program, its first government bond issue, and start a forward currency market.

He was recently nominated for Business Journalist of the Year. And last week, Slate magazine honored him for correctly calling the Bear Market bottom.

Now, he's dedicating his career to showing you how to generate cash that lasts from Alpha Bulldogs.

In Tuesday's free Web summit, Hutchinson will detail specific Alpha Bulldog recommendations that investors can look at in the weeks and months to come.

To find out more, please click here.

To skip that step and actually register for the event, please click here.

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India’s information technology industry is one of the largest operations in the world – employing millions of engineers, technicians and customer service specialists who serve the world’s second-largest population.

The industry has enabled socio-economic development, enhanced economic growth and productivity, reduced poverty, and improved standards of living across the board. It’s even helped develop nuclear power in India.

And the company standing at the top of India’s IT mountain is not Infosys Technologies Ltd (INFY) or Tata Consultancy Services. And it’s certainly not Satyam Computer Services (ADR: SAY). 

It’s Armonk, N.Y.-based International Business Machines Corp. (IBM).

“They’ve beaten their competition relatively handily,” Kaufman Bros.’s Karl Keirstead told Bloomberg, who pointed to IBM’s brand name and experience as draws for potential clients. “There’s a cachet in using IBM.”

IBM’s model is the anti-model. Whichever country the company is working in, it has a game plan exclusively catered to it. It encompasses not only the determination of the customer needs, but also the provision of every aspect of the required technology solutions – including recurring maintenance, updating and even financing.

And financing is crucial these days. IBM’s long history in the world’s markets has given the company a recognition and credibility abroad, helping to mitigate competitive threats from unproven newcomers.

Its presence in India will yield dividends as India’s economy emerges from the global financial crisis.

IBM leaders have shrewdly increased the company’s investments in the fastest growth areas of the world, increasing its unparalleled geographic diversification as it keeps emphasizing its higher-value businesses – especially software, highly profitable middleware and services.

At the beginning of 2009, 71% of IBM’s nearly 400,000 employees are working overseas – a 65% increase from two years prior.

In fact, IBM incorporates the words “global” or “world” in nearly every sentence of the business strategy outlined in its annual earnings report of 2008.

“The Internet has enabled communication and collaboration across the world and brought with it a new computing model premised on continuous global connection. In that landscape, companies can distribute work and technology anywhere in the world,” the report said.

It continues: “At the same time, the current economic crisis increases the pressure on both businesses and governments around the world to adapt…. Given these opportunities and economic challenges, IBM is working with its clients to develop new business designs and technical architectures that allow their businesses the flexibility required to compete in this new landscape.”

IBM Boosts Profits with Business Overhaul

In addition to global diversification, IBM has also successfully employed a versatile and aggressive business model. Between 2000 and 2008, IBM acquired more than 100 companies and poured more than $50 billion into research and development.

In 2000, the distribution of IBM’s business model was: Hardware (24%), software (25%), financing (10%) and services (40%). 

But by the end of last year, the model had evolved to: Hardware (9%), software (40%), financing (9%) and services (42%).

The result was a 130% increase in annual earnings per share (EPS) on more than 22% annual revenue growth in that span.

For 2008 – by far one of the worst years for companies around the world – IBM posted an 18.4% increase in net income and 23.9% increase in earnings per share.

And IBM blew away analysts’ estimates with a fourth-quarter net income of  $4.4 billion, or $3.38 a share – a 12% increase from 2007. Analysts had expected IBM to earn only $3.03 per share.

What’s more is that the first quarter of 2009 is shaping up to be much better.

IBM said it expects a $9.20 EPS in fiscal 2009, up from the $8.93 it posted in 2008. It’s also forecasting an EPS in the range of $10 and $11 in 2010.

But more than anything else right now, investors want to first see the company’s first-quarter results, due Monday.

IBM’s Eventful First Quarter

IBM’s biggest news came in March, when the company made a $6.5 billion, or about $10 per share, bid for Sun Mircosystems Inc. (JAVA). IBM subsequently lowered its offer to $9 per share and talks fell apart. 

According to a recent report by CNBC, Sun has attempted to restart negotiations, but IBM is wary of the government scrutiny that may result. A combined IBM-Sun business would dominate the server market with a near 50% share – something that could set anti-trust alarm bells ringing.

However, if IBM did move ahead with the Sun acquisition, the company would not only build on its hardware business and take control in the server market, it would further expand its software portfolio, which is the company’s most profitable business.

Regardless of whether or not it reaches a deal with Sun IBM has plenty of business to build on.

Big Blue is teaming up with tech giants to build 28-nanometer (nm) chips, a little more than a generation ahead of 45nm technologies used by industry leaders Intel Corp. (INTC) and Advanced Micro Devices (AMD), CNET reported.

It also recently inked a seven-year, $372 million deal to manage IT infrastructure of Canada’s National Financial Group (NA). That came three days after IBM announced a similar deal with of one India’s largest banks, Kurmanchal Nagar Sahakari Bank, which is planning to double the number of its branches in the next two years. 

Finally, last week, IBM won an eight-year, $873 million contract with the state of Georgia to provide mainframes, servers, printers, service desk, end-user computing and disaster recovery.

Elliott Gue, editor of Personal Finance newsletter, wrote that IBM’s IT services are a steady revenue stream, and are a product of its long-established relationships with the world’s biggest companies.

And now – with spending tightening around the world – is the time they especially turn to IBM. 

“Many of IBM's key software and service offerings are designed to cut costs for companies and improve the efficiency of their IT infrastructure,” Gue wrote. “And during downturns, companies are always looking for ways to cut costs.”

Analysts polled by Thomson Reuters forecast first-quarter earnings of $1.65 a share on revenue of $22.6 billion. IBM earned $1.65 a share on revenue of $24.5 billion a year earlier.

News and Related Story Links:

• Bloomberg:
  IBM Targets India to Beat Rivals at Their Own Game

• IBM:
  2008 IBM Annual Report

• Money Morning:
  Buy, Sell or Hold: IBM Has Found a Formula for Growth – Even During a Recession

• Bloomberg:
  Sun Said to Be Willing to Talk If IBM Eases on Terms

• The Wall Street Journal:
  IBM to Cut U.S. Jobs, Expand in India

• CNET:
  IBM, Samsung, others team up on next-gen chips

• Reuters:
  IBM wins C$450 mln contract with National Bank

JPMorgan Chase & Co (JPM) beat first-quarter estimates, and its Chief Executive said it has the money to repay the $25 billion the bank borrowed from the U.S. government.

After dividends, the second-largest U.S. bank reported net income of $1.52 billion, or 40 cents a share, on $25 billion in revenue.

Investors have been cautiously cheering the performance of the financial sector, whose enormous losses led the stock market into decline. JPMorgan’s quarterly earnings report – like that of Goldman Sachs Group Inc. (GS) and rosy estimates from Bank of America Corp. (BAC) – serves as another psychological prop to jaded investors. 

Perhaps the biggest surprise was JPMorgan CEO Jamie Dimon’s claim that the Wall Street bank has the resources to pay back the $25 billion it borrowed from the U.S. Treasury’s Troubled Asset Relief Program (TARP). Earlier this week, Goldman Sachs sold $5 billion in shares to repay half of what it borrowed from TARP.

 "We could pay it back tomorrow," Dimon said on a conference call, adding that the bank is waiting for guidance from the government.

JPMorgan’s investment banking business was a large driver of profits, bringing in a record $8.3 billion in revenue, including $4.9 billion from fixed-income trading alone. The investment-banking arm brought in $3 billion during the same period last year.

“It is almost certain we will see no improvement in those numbers for the next three quarters, probably through the middle of next year,” Gavin Graham, director of investments at Bank of Montreal Asset Management in Toronto, said in a Bloomberg TV interview.

News and Related Story Links:

• Reuters:
  JPMorgan profit beats forecast

• Bloomberg:
  JPMorgan Profit Beats Estimates on Fixed-Income Revenue Surge

• Money Morning:
  U.S. Banks: Why Only the Simplest Will Succeed

Fiat SpA (OTC: FIATY) Chief Executive Officer Sergio Marchionne said his company would walk away from merger talks with Chrysler LLC unless American and Canadian unions agree to take substantial pay cuts, The Toronto Globe and Mail reported.

Marchionne said he's aiming for Chrysler's U.S. and Canada labor costs to match those of plants in Japan and Germany. Otherwise, he is prepared to scrap the deal, a move that would likely send Chrysler into bankruptcy court.

"Absolutely we are prepared to walk. There is no doubt in my mind," he in an interview. "We cannot commit to this organization unless we see light at the end of the tunnel."

Marchionne gave 50-50 odds that a merger will be formed, and spoke strongly about the reality Chrysler faces if its unions – the Canadian Auto Workers (CAW) and United Auto Workers (UAW) – don't "change the framework of the discussion."

"We are not anti-organized labor. No one wants to remove the UAW or the CAW from the table. But it will happen if a bankruptcy process drags on," he said, adding that the negotiations with the CAW are especially lacking progress. 

Privately owned Chrysler has been survived only by taking on $4 billion in emergency government loans, and the Obama administration has given the car company until the end of April to produce a viable business model. If Chrysler succeeds, the administration will provide another $6 billion loan.

"What we're asking for is difficult," President Obama said. "It will require hard choices by companies. It will require unions and workers who have already made extraordinarily painful concessions to do more. It'll require creditors to recognize that they can't hold out for the prospect of endless government bailouts."

The first stipulation for Chrysler is that the company alters its partnership with Fiat, which agreed in January to take a 35% stake in Chrysler.

Under new terms, Fiat would take a 20% stake in Chrysler with the White House's backing. And as Chrysler reaches certain milestones, Fiat would gradually increase its ownership to 49% in 5% increments. The Fiat stake would only rise above 49% after Chrysler repaid all money owed to the U.S. Treasury.

Chrysler is currently 80% owned by Cerberus Capital Management LP and 20% owned by Daimler AG of Germany, owner of Mercedes-Benz.

Chrysler creditors are also planning to make a counteroffer to the U.S. Treasury this week – possibly asking for equity in a firm combining Chrysler and Fiat S.p.A. (ADR: FIATY), The Wall Street Journal reported.

The lenders, which include JPMorgan Chase & Co. (JPM), Citigroup Inc. (C), Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS), were in talks with the government to reduce Chrysler's debt by swapping some of it out for equity, new debt or a lesser amount in cash.

News and Related Story Links:

• Toronto Globe and Mail:
  Fiat to Chrysler: Cut costs or we walk

• Money Morning:
  Obama Rejects Automakers' Reorganization Plans; Elevates Potential for Bankruptcy

• The Wall Street Journal:
  Chrysler Creditors Plan Counteroffer

Retail sales and inflation took a step backward in March, as dour consumer demand hurt the former and suppressed energy prices stalled the latter.

Total retail sales for March clocked in at $344.4 billion, a decrease of 1.1% from February and a 9.4% dive from March 2008. Overall, first quarter retail sales sank 8.8% compared to the same period a year ago, the U.S. Commerce Department said in a report.

The stats reverse the back-to-back monthly gains that kicked off 2009. Those gains surprised the market not only because they followed dismal holiday shopping numbers in November and December, but also because unemployment continued to get worse.

"The surprisingly sharp drop in retail spending shows how uncertain consumers are about the recovery," Joel Naroff, president of Naroff Economic Advisers, wrote in a note to clients. "Consumer spending had been growing much more strongly in the first quarter than any of us could have expected, so a one-month cutback should not have been a surprise."

Among the hardest hit sectors, gasoline station sales were down 34.1% from March 2008, and motor vehicle and parts dealers' sales were down 23.5% from last year. Food and beverage stores held strong with only a 0.1% decline. Healthcare spending posted the best figures with a 2.2% annual gain.

"This was not a pretty report as demand for just about everything fell," Naroff said. "There were large reductions in demand for furniture, electronics and appliances, building materials, sporting goods and clothing."

Sinking demand for energy products played a large hand in keeping producer prices in check. The U.S. Department of Labor said that the Producer Price Index (PPI) for finished goods, a measure of inflation, fell 1.2% in March after inching forward 0.1% in February.

Prices for energy products fell 5.5% after rising 1.3% in February. Food prices fell 0.7% after falling 1.6% the month prior. Excluding food and energy, the PPI was a flat for the month.

While not a positive, flat inflation isn't much of a threat when compared to the host of other economic issues the Obama Administration is addressing. In fact, the U.S. Federal Reserve said it expected inflation to be "subdued" in a March 18 statement.

But inflationary concerns will be on the horizon, when government measures to reboot the economy kick in – flooding the market with liquidity that can't be absorbed by record low interest rates.

News and Related Story Links:

• U.S. Department of Commerce:
  Advance Monthly Sales for Retail Trade and Food Services – March 2009

• U.S. Department of Labor:
  Producer Price Index News Release

• Money Morning:
  Two Ways to Protect Yourself When the Inflation Alarms Return

The U.S. Department of Treasury is directing General Motors Corp. (GM) lay the groundwork for a bankruptcy filing by the automaker's June 1 deadline to restructure or have the plug pulled on more federal emergency loans, The New York Times reported.

Last week, GM and members of President Obama's task force meet in person and talked on conference calls, sources told the Times. Talks are expected to continue this week, but the Treasury's goal is a speedy "surgical" bankruptcy for GM.

One of the plans the Treasury is considering would involve creating a new company that would buy GM's better assets immediately after the bankruptcy filing. Bad assets would be left in the old company and liquidated in the coming years, the Times reported.

One potential outcome would be a "good GM" enters bankruptcy protection and leaves it in as little as two weeks using $5 billion to $7 billion in government financing.

Two weeks ago, the Obama administration gave GM another financial lifeline, but under the condition that Chief Executive Rick Wagoner resign from his post. Even as GM's ship continued to sink, Wagoner repeatedly said that long-term price tag for bankruptcy filing is higher than more bailout money.

Though Wagoner's replacement, Fritz Henderson, doesn't want GM is file for bankruptcy, his language has continually genuflected to believing filing for bankruptcy is inevitable. 

"We think GM's new CEO, Fritz Henderson, is simply not as opposed to a filing as his predecessor," JPMorgan Chase & Co. (JPM) analyst Himanshu Patel said in a note for clients on Monday, Reuters reported. "Henderson has always had a more sobering assessment of the sustainability of GM's liabilities."

So far, the government has given GM $13.4 billion in emergency loans. It has until June 1 to turn its business model around, and that involves putting out two major fires: convincing bondholders to exchange about $28 billion in debt into GM equity; and convincing the United Automobile Workers' to make more concessions – the latter being more difficult without bondholders making a sacrifice.

Today's report sent GM shares down more than 17% at one point.

In 1970, GM had nearly 60% of the U.S. automobile market, and imports' share was below 10%. Today GM's market share is little more than 20%, and imports and domestically produced automobiles of foreign brands dominate the market.

Privately held Chrysler LLC is also in the government's crosshairs. Chrysler has until the end of April complete a merger with Italy's Fiat SpA. (OTC ADR: FIATY), which agreed to take a 35% stake in Chrysler in January. 

If Chrysler succeeds, the administration will provide another $6 billion loan, on top of the $4 billion it received in December.

"What we're asking for is difficult," President Obama said yesterday. "It will require hard choices by companies. It will require unions and workers who have already made extraordinarily painful concessions to do more. It'll require creditors to recognize that they can't hold out for the prospect of endless government bailouts."

News and Related Story Links:

• The New York Times:
  'Surgical' Bankruptcy Possible for G.M.

• Money Morning:
  CEOs of GM, Peugeot Lose Their Jobs as a Result of Auto Industry's Great "Global Glut"

• Money Morning:
  The Slow Death of General Motors

• Reuters:
  GM shares slump as bankruptcy fear grows