Tuesday, July 28, 2009

Nationalizing credit

The second quarter was great for equities and the third is shaping up to be even better. Optimism is back in fashion in a big way and commentators are moving past the 'green shoots' stage to talk about a rebound in house prices and a sharp 'V' shaped recovery. There are even those who are talking about 3% GDP growth in the US in the fourth quarter. On this side of the pond the newspapers are beginning to call and end to the recession and forecasting positive GDP growth by year end. What a turnaround from only a few months ago.

As a bull turned bear I feel as though I'm the one at the party drinking soda while everyone else is on the hard stuff. I recognize that markets move on more than fundamentals. This market has done well on a flow-of-funds basis and a growing belief that we shall see a strong upside recovery in H2. But to support current levels on the FTSE and Dow earnings need to rise beyond any short term boost that comes from restocking. With unemployment rising and deleveraging continuing this is going to be difficult.

What if instead of being a 'V' shaped turnaround this is a no-recovery recovery ? Why if things are going so well has the BoE issued a further £50 billion of Quantative Easing - taking almost all the analyst community by surprise?Stocks are surging and hitting stratospheric and possibly unsupportable valuations relative to earnings . I find it telling that in the US between April and June insider selling ran at a rate 22x greater than insider buying. Ryanairs chairman reporting his Q2 numbers says that he sees no improvement in any Euroland economy and that this winter will be particularly hard. Willie Walsh at British Airways is saying the same thing.

Another worry I have is consumption. US private consumption ran at a $10 trillion rate (16% of global output) in 2008 with EU levels at $9 trillion and Asian consumption at around $5 trillion.With American and European savings rates increasing sharply there is a real chance that we will see a significant reduction in global GDP in 2010. Japanese manufacturing fell 37% from peak to trough and looks as though it will settle down 20% or so from the peak - admittedly a pretty healthy upswing from the lows. In the short term the comparisons can look pretty good but what happens to profits once companies have cut costs by laying off workers?

I still can't get it out of my head that this is a bear market rally, that my trader friends are making hay while the sun shines, and that more trouble lies ahead.

No comments:

Post a Comment