Signs of Optimism?

Hedge fund manager, John Paulson purchased over $165mn shares of Bank of America Corp to become the banking giant’s fourth largest shareholder. Paulson was among the select few, who predicted the sub-prime debacle, so his allocation into financials may be interpreted as a nice vote of confidence from an unexpected source.

On the other hand, the US Federal Reserve made a few bold moves to promote its case for recovery as well. Bernanke announced his intent to cease the program of buying up to $300 bn of Treasuries in October, as a major economic lifeline may have served its purpose well. Additionally, banks have scaled back borrowing from Fed’s emergency short-term lending facility – a sign that the frozen credit markets have thawed considerably.

Finally, the Car Allowance Rebate System, popularly known as ‘Cash for Clunkers’ was expanded – allowing car buyers to receive vouchers for future purchases as automakers report dwindling inventories.

In 2Q earnings reports, retailers take centre stage as it still offers cautious projections, even though Wal-Mart and Kohl’s Corp beat expectations.

Despite favourable reviews by the Fed, major equity indexes gave up slightly during the week with the Standard and Poor’s and Nasdaq still flirting with 1,000 and 2,000 respectively. The economic data of the week offered mixed signals as retail sales surprisingly declined in July despite the popularity of the ‘clunker’ program, though continuous claims for unemployment benefits fell to the lowest level since April.

The anticipated re-birth of the consumer may be on hold for now as the Reuters/University of Michigan sentiment index fell again and individuals continue to worry about the state of the job market.