As recently as last Monday, the S&P 500 Index stood at 1,350, up a modest 1.4% for the month of March. The S&P Index may not have the world-class stature of its cousin, the Dow Jones Industrial Average (DJIA), as a barometer to gauge the stock market. Nevertheless, at any point in time, the S&P represents between 70% and 75% of the market value of all U.S. stocks.

By Thursday, the S&P 500 Index turned negative for the month. The Index was already down from where the quarter started (at 1,468), and with only two more trading days left before the month of March becomes history, Q-1 of 2008 is likely to finish down almost 9%, the first two-consecutive quarter declines since the 9/11 attacks.

The NASDAQ Composite and DJIA mirrored changes in the S&P 500 Index. The tech-laden NASDAQ dropped another 15 points on Thursday to close at 2,281, down almost 14% in Q-1 while the DJIA shed almost 100 points closing Thursday at 12,302, a decline of 7.3% for the quarter.  Links to these historical stats can be found below: 

Historical stats for NASDAQ: click here.

Historical stats for DJIA: click here.

The immediate catalyst for these declines was the announcement that the economy, as measured by the Gross Domestic Product (GDP), grew at a meager 0.6% in the fourth quarter of 2007. To place this into perspective, that’s a decline from 4.9% economic growth in Q-3 of 2007, or a drop of more than $500 billion in economic activity from the prior quarter.

http://finance.yahoo.com/q/hp?s=%5EGSPC&a=00&b=3&c=1950&d=02&e=28&f=2008&g=d

NASDAQ has the potential to stage a rally amongst tech-dominant stocks almost independently. The Dow is a blue chip indicator, with each of the 30 components a juggernaut in its own right. Two statistical facts make diminished value in the S&P Index ominous (i) it is a market value-weighted index; and (ii) it represents almost 75% of the value of all U.S. stocks.

Market averages, however, do not capture all the drama that unfolded in the week that just ended. A process of deleveraging is currently under way. Deleveraging is the term given to debt reduction, either by write-off, foreclosure or repayment. It is the opposite of gearing-up, i.e. borrowing.

Robert Buckland of the global strategy team at Citigroup (C: $22) wrote clients that, “steady growth, low inflation and rock-bottom interest rates encouraged financial participants around the world to gear up…” with the consequence that easy money is history. The Citigroup report calls this the “Great Unwind.” 

You can read the article about the Citigroup report at InvestorPlaceblogs by clicking here.  

Perhaps the best financial ratio to demonstrate this development, and how it has impacted the U.S.’s financial services sector, is the debt-to-equity ratio…normally 20-to-1 (debt = 20 times equity for most financial institutions).

Below, the top five investment banks are listed, ranked in descending order by the amount of market value lost since the start of the year, which totaled $64 billion. That’s more than the GDP of most countries.

The bar chart to the right of this table illustrates the depth of the price decline of these stocks. The chart below places into perspective how far afield from the standard 20-to-1 financial leverage ratio the U.S.’s major investment banks have gone.

Note that Bear Stearns (BSC: $11), the first casualty of the subprime loan crisis, reached a leverage threshold of debt equal to 32 times equity. Morgan Stanley (MS: $46), the second-largest investment bank in terms of market value, actually has an even higher leverage ratio: almost 33 times. However, Morgan Stanley has an equity base that is 2 ½ times larger than Bear Stearns, making it less vulnerable to mount a run on its independence. 

Lehman (LEH: $39) emerged in the online rumor mills, chat rooms and other electronic communities as the next banking casualty within minutes of announcing a reduced target price for Google (GOOG: $444) based on reports of zero growth in paid-clicks in February. This came on the heels of negative numbers for January and December. Here’s the link.

It is not all doom-and-gloom, however. Highlighting the stock market’s ability to differentiate, VISA (V: $63), which went public on March 19th, goes down in history as the third-best IPO this year. Here’s a link to Visa’s opening day at NYSE: http://www.nyse.com/images/about/VisaOpeningBell.JPG  

In another development, a Texas judge ruled that the five commercial banks, which agreed to finance the $19.5 billion buyout of San Antonio-based Clear Channel (CCU: $30) 18 months ago, were legally bound to honor their commitments to the transaction.

The five commercial banks are Citigroup, Morgan Stanley, Credit Suisse, Royal Bank of Scotland and Deutsche Bank (DB: $113).  Two private equity firms/private investment banks, Bain Capital and Thomas H. Lee Partners, had agreed to pay $39.20 a share for Clear Channel. Clear Channel had fallen to less than $26 a share before the judge’s ruling, climbing back 15% in stock price afterward.
                                               
Here comes the sun…as the Beatles once sang…and as showcased in a recent piece in NavellierGrowth. First Solar (FSLR: $227) was founded in 1999. It is THE low-cost producer of thin-film solar electric power modules, producing them at two-thirds the cost of its competitors. Earnings have increased 10-fold…

 “…and shows no sign of stopping. As a bonus, the company does most of its business in Germany and Spain, and stands to benefit from the falling dollar. Suntech Power Holdings (STP) is another one of my powerful Blue Chip Growth stocks that is in the solar industry. Its products are used in individual homes as well as for larger utility usage for wholesale generation of solar power. Although based here in the United States, Suntech does the bulk of its business in China right now and has recently expanded into Italy as well as Spain. Growth has been stupendous! Revenues are growing at better than 100% annually, and so are earnings. Analysts are raising their estimates, and right now the consensus is that earnings will double again next year and grow at an eye-popping 44% average for the next 5 years after that.”

Here’s the link to that article.

Both First Solar and Suntech are large market cap companies, with market values of $18 billion and $6 billion, respectively. A smaller market cap company also in this commercial space, and China-based as is Suntech, is Solarfun (SOLF: $13). With a market value of $750 million, it is still considered a small-cap company. A market value of $1 billion is the line of demarcation between small-cap and mid-cap.  SOLF has also attracted the attention of the investment banks…here’s a quote from the news:

Sector Snap: Solar Companies Surge
Thursday March 27, 2:08 pm ET

Chinese Solar Company Solarfun Leads Sector Higher at Midday After Posting Strong 4Q Results
NEW YORK (AP) -- Shares of solar companies bucked the broader market to surge higher on Thursday as investors reacted to upbeat news for the sector. Shares of Chinese solar power provider Solarfun Power Holdings Co. Ltd. soared after the company said Thursday its fourth-quarter profit soared to 66.4 million yuan ($9.1 million) from 29.5 million yuan in the year-ago quarter, beating Wall Street estimates.

Goldman Sachs analyst Cheryl Tang called the results “solid” in a Thursday client note as shares of Solarfun advanced $1.99, or 17.4 percent, to $13.45.

http://biz.yahoo.com/ap/080327/solar_power_sector_snap.html?.v=1

The difference between a commercial bank and an investment bank is that a commercial bank earns money on loans 24/7 whereas an investment bank earns fees on transactions—if it is not doing a deal, the investment banker is “unemployed.”  Of course, implicit in this definition is that these deals have to be wholesome and profitable, otherwise, unemployment is still possible.

In fact, unemployment in the investment banking sector made the news last week, 34,000 layoffs, surpassing the 31,000 layoff in the aftermath of the dot com bust in 2001. One has to marvel, however, at the speed with which this employment realignment took place. In the dot com bust, these layoffs took place over an entire year. The subprime crisis brought about this headcount adjustment in a matter of weeks.

One final point on the Bear Stearns/JPMorgan transaction. We need to weigh-in on this topic, since the majority of the financial news media has focused on JP Morgan’s bargain basement offer for Bear Stearns, and overlooks what really happened over the past 10 days, when JPM bid $2/share to take over BSC.

What JPMorgan did on March 17th was to establish a floor, certainly for Bear Stearns but probably for market sentiment overall. This bold move by JPM will be regarded as historic in the years ahead. As one of the premier financial institutions in the world, contrary to appearing greedy, though there was probably some of that, JPM’s price to purchase Bear sought to get ahead of a falling knife.

We point out that Bear Stearns never got to that $2/share price. It did fall to a low of $2.84/share on March 17th, but closed that day at $5…and it’s been all upside since then, from an admittedly much higher price level.

Before signing off, consider this potpourri:

• In the event you are considering using your 401(k) to raise capital, please check out this video at Dolans.com, The Pros and Cons of 401(k) Loans.
• Confirm the rest of 2008 has pitfalls, Tobin Smith has some ideas looking out to 2009—here’s the link.
• And then, finally, this human interest story from our archives:

Profiles in Corporate Americana

Howard Cosell is arguably the person most responsible for segueing modern sports broadcasting into entertainment. His hosting Monday Night Football on ABC is legendary. Born in 1918, and a lawyer by education, he was admitted to the New York State Bar in 1941, then served in the U.S. Army as a Major in Transportation.

His early clients were athletes (including Willie Mays) and for 3 years in the 1950s, he broadcast Little League games for WABC in New York, for free. In the 1960s, he moved into television, and together with Mohammed Ali, put American Sports on the international map. What made him so rare was that he easily shared the spotlight with his interview guests.

Take Gordy Howe, for example, the legendary goalie for the Detroit Red Wings. In a 1968 interview, Mr. Cosell asked, “Gordy, you’ve had over 500 stitches on your head in your career. You refuse to wear a mask, yet, you do wear a protective cup. Tell our viewers why is this?”

After pondering an answer for a minute or so, Gordy says “Mr. Cosell, the way I see it, I could always get someone to do my thinking.”

Until next week—adios amigos!

If you missed last week’s Week in Review, you can read it here: Three-and-a-Half Somersaults with a Tuck.