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Summary

Right, wrong, or indifferent, Wall Street sent stock prices rising sharply on the idea that there is definite light at the end of the subprime tunnel that the Street has been enduring for what it believed was an eternity.

In actuality, all that really happened was that Lehman Brothers was successful in its latest preferred stock offering, an offering that added to its capital despite Lehman’s swearing on a stack of bibles that the move was only to show that it could, not that it needed to.

Lehman Brothers saw its share price end the day up $6.70, or 17.80 percent, to close at $44.34 after the investment bank said it raised $4 billion of capital in an offering of convertible preferred shares.

Also pushing stock prices higher was the latest economic news that showed a contracting manufacturing sector but one that was contracting at a slightly slower pace than Wall Street had been estimating. Suddenly Wall Street took the position that the economy was climbing out of the recessionary hole it had dug for itself.

Early in the session, the Institute for Supply Management said its index of national factory activity edged up in March, but remained below the level that separates growth from contraction. Notice, however, that no one said the economy was not contracting; just not quite at the pace Wall Street had previously predicted. Somehow I fail to see how you get “happily ever after,” from a story of that ilk.

A $19 billion write-down by Swiss bank UBS AG reinforced the view that the banks were aggressively scrubbing their books clean of soured investments tied to the slumping housing and mortgage market. Bank stocks ran up in price with large gains by JPMorgan Chase, Bank of America and Citigroup, helping to drive both the Dow Jones industrial average and the S&P 500 up more than 3 percent.

JPMorgan's stock, which contributed the most to the advance of both the Dow and the S&P 500, ended the day up $4.05, or 9.43 percent, to close at $47.00.

The shares of Bank of America ended the day up $2.95, or 7.78 percent, to close at $40.86 and Citigroup ended the day up $2.42, or 11.30 percent, to close at $23.84. The S&P financial index rose 7.5 percent.

Technology stocks also had a strong day. The NASDAQ chalked up a gain of 3 percent, due in part to Microsoft, whose shares ended the day up $1.14, or 4.02 percent, to close at $29.52, after the company said it would not raise its offer for Yahoo and was confident in its bid.

Nonetheless, stocks posted their best gains since March 18, the day that the Federal Reserve's policy makers last cut interest rates. Tuesday's rally also marked a strong start for the first day of the second quarter.

Offering more relief to investors was UBS, which said it wrote down an additional $19 billion on U.S. real estate and related assets and unveiled a massive increase in capital. Its ADRs rose $4.21, or 14.62 percent, to close at to $33.01.

$19 Billion Write-Down, No Problem

Wall Street has become so inured to losses and write-downs in the billions of dollars that today such news is taken with a grain of salt.

Tuesday's rally could serve as a veritable case study in this nascent reversal of investor psychology. After all, the day's two big catalysts driving the Dow higher were a $4 billion stock offering from Lehman Brothers and a $19 billion bad debt write-down by UBS. At an earlier time either of those events would have sparked panic in the markets.

Instead investors chose to see it as one bedraggled investment bank getting a much needed market endorsement and a Swiss bank scrubbing its balance sheet clean. However, if you think that this is the beginning or rather a reemergence of a bull market, I am afraid you will be sorely disappointed.

Strains still exist in the U.S. credit and banking markets. What UBS was write-down $19 billion in illiquid real estate assets said it raised $4 billion of capital in a deal designed to stop questions about the Wall Street investment bank's stability. Its stock surged $, or 18 percent, to close at $.

Even though write-downs and major capital-raising actions from financial institutions have become common fare, that doesn't mean every you should at ease. In fact, in the bond market, many are still bracing for the credit crisis to continue. Junk bond and corporate-debt investors still demand huge premiums for the securities they are holding. The spreads on Merrill Lynch's investment-grade index still trade at around the widest level since Merrill began tracking the data.

Spreads on junk bonds, or corporate debt rated below "Baa3" by Moody's Investors Service and "triple-B-minus" by Standard & Poor's are at 821 basis points over comparable Treasuries, levels not seen since December 2002, according to Merrill.

But all told, this is not to say that a bottom isn't in the making. Typically, a huge failure of an institution such as Bear Stearns has led to extreme policy responses by the Federal Reserve and government regulators. That has helped restore the confidence of investors, but that doesn't mean they should be off to the races.

The Fed has provided a backstop for banks and financial firms by opening its discount window, but generating profits will considerably more difficult. That's because bank earnings remain under pressure with the credit crisis pushing up funding costs and squeezing profit margins.

Higher Commodity Prices – Don’t Blame Speculators

Tired of watching commodity prices, such as oil and food, shoot through the ceiling as your pocketbook and budget are demolished in the process? Do not look to lay the entire fault at the feet of Wall Street. While it is true to some extent that rising food prices around the world are the result of investors looking for better returns than were possible from stocks and bonds. However, is that not what investors do, look for the highest returns, wherever those returns

Global investment funds saw the potential for profits in commodities outstripping those from the stock market, and from 2002 started diving into oil, followed by metals and then grains. This move was fueled by falling interest rates in major economies, which makes fixed-income investments less attractive, and a weak dollar, which tends to drive up the price of dollar-denominated investments such as most grains.

The end result was that investors with little or no connection to the grain market, often labeled as speculators, took corn, soybean and wheat prices to a whole new altitude. In March, corn futures hit a record $5.88 a bushel and soybeans $15.86. Wheat peaked at $13.49 a bushel in February.

Stung by high transportation costs from record oil prices, food makers have passed some of the high crop prices to consumers, leading to protests in many countries. Some nations have even withheld grain exports to guarantee domestic supply.

Investors say high prices are supported by fundamental supply-and-demand factors like a higher-protein diet in emerging economies like China, demand for biofuels made from corn, soybeans and palm oil, and drought in some important grain exporting nations. But investors bear at least some of the blame, economists say.

As recession talk swirls in the United States, some say the outlook for stocks and bonds may not be as bright as for commodities. A long position is a bet that prices will go up, while a short position is a bet that prices will fall.

Traders said the weight of long investors has crowded the space between producers and consumers in grain markets, which are much too small to handle the influx.

Total trading volume for a day in CBOT corn, soybeans and wheat is less than 1 percent of the $3 trillion traded each day on the global foreign exchange market.

And the combined value of the U.S. corn, soybean and wheat crop for last year was just $92.51 billion. By comparison, outstanding U.S. Treasury bonds total about $4.6 trillion and the market capitalization of U.S. stock markets is about $16 trillion.

Investors also say the farm sector is partly to blame for failing to invest enough in production over the past five years. With the U.S. credit squeeze getting worse by the day, securing borrowings has become harder for farmers in the world's biggest grain exporter.

Also, grain elevators, companies that buy from farmers and remarket to processors, are seeing losses because they have committed to provide grains to processors at much lower prices than today's.

Unfavorable weather that has played havoc with crops is another problem. A severe drought in major wheat exporter Australia lit a fire under the wheat market.

Adding to the mix is the race to make biofuels. The United States has a mandate to produce 9 billion gallons of ethanol, made from corn, this year and 10 billion gallons in 2009.

Given the varied factors at play, blaming hedge funds and other speculators for current commodity prices may not be fair.

"The fact that these grains markets are moving higher is a bonus to these funds but they would be equally content if these markets were in a downward spiral as they could make money shorting them," said Gavin McGuire, an analyst at Iowa Grain, a Chicago firm specializing in trading U.S. grains futures.

When the fast money crowd sees a market that is in an upward spiral, they want to jump in with both fee until the bubble bursts, at which time there is an abundance of scapegoats.

Manufacturing and Construction Data Fall

The manufacturing sector and the construction sector both turned in weaker numbers on Tuesday, once gain pointing to the conclusion that the economy is in a recession.

The Institute for Supply Management reported that manufacturing contracted for a second consecutive month in March as manufacturers grappled with weakening order books and rising prices for raw materials. The institute's manufacturing index came in with a reading of 48.6 last month, a bit stronger than the 48.3 reading for February, which was the weakest in five years. Readings below 50 indicate contraction, while those above 50 show growth.