Since 9th March 2009 when the recent stock market low was formed, the FTSE rose 20%, the S&P 500 25% and the German DAX and French CAC 20% and 19% respectively. These rallies were triggered by a sharp swing in sentiment, short covering and a series of less-bad data when compared to the recent past. That string of data and improved sentiment was helped by, and partly caused by, G-Plan – not the 1950s freakish and very modern furniture but Tim Geithner’s plan for private/public partnerships to buy US banks’ legacy (toxic) assets. Finally, the G-20 summit that Gordon Brown labelled “The day the world fought back against the recession”, gave the market further impetus.
The bear market rally (that’s all we think it is, not a return to bull market conditions) reached a technical resistance level on Thursday 2nd April, exactly where this rally might well reverse; a 50% retracement, the important downtrend and to the 30-week moving average. If this bear market is to proceed, this should be as far as the rally should go.
Is the recent series of less bad-data the first swallow of spring or just a confusing, temporary abatement of the earlier awful data? Is it likely that a global financial crisis, triggered by the greatest amount of leverage that ever happened in the history of the world, could lead to anything less than a recession of historic proportions and stock markets’ bottom out now? We don’t think so!
As Tim Price said in the Insight column in the FT on 8th April 2009, “While it would be lovely to see the Geithner Plan succeed, the idea of resolving a financial crisis brought about by easy credit and overmuch leverage with easy credit and overmuch leverage seems naïve, not to say bizarre. But then the US seems allergic to the logical and possibly inevitable alternative, namely the nationalisation of much of the domestic banking system.”
So the situation is that for a number of different reasons, investors have recently been willing to embrace greater risk, encouraged by a plethora of insubstantial evidence that the financial crisis is over. The charts of the developed world’s stock markets do not suggest a new bull market is underway. Indices have, so far, done no more than rally from an oversold position to where we would expect the next downturn to commence.
The reporting season for the first quarter 2009 started with Alcoa Inc on Tuesday evening announcing its second consecutive quarterly loss. For the stock market to continue its recovery it will need to hear, not only less-bad profit news but also a more optimistic outlook for quarters two and three. For this rally to be sustainable and morph into a genuine long-term bull market, much will depend upon how this reporting season goes.
Bloomberg said that in March thirty five companies defaulted which is the highest number in a single month since The Great Depression. It also said that the rate at which speculative grade corporate borrowers worldwide failed to meet their obligations rose to 7% from 4.2% at the end of last year.
Rights issues will become the new major phenomenon, especially following HSBC’s recent successful giant £12.5 billion issue – the biggest in history, hardly a prescription to nurture a sick equity market into good health.
In March, 35% of US consumers surveyed expected to reduce their debt levels over the next six months, one third have already done so. One third also said that any money freed-up by lower credit costs will be diverted into savings. To illustrate how dramatically things have changed; from 2000 to 2007 US consumer debt doubled to $3.8 trillion. Last year everything changed; the total amount of consumer debt outstanding reduced for the first time since World War II, we truly are living in interesting times.
This bear market and economic crisis have been driven by the banking collapse and much has been recently said about strong reversals in banks’ share prices. It is therefore important to see these for what they are. Below are charts of the UK & US banking sectors. In each case, relative to the massive declines, the recent rallies are very modest and in line with the regular bounces that have occurred all the way down since mid-2007.
During this recent rally, Andrew Smithers, the economist who wrote Valuing Wall Street, said that the S&P 500 was about 20% above fair value, adding that historically major bear markets, and this is certainly a major bear market, ended about 45% below fair value – just work it out.
Some of the emerging markets might be horses of quite a different colour and several, including Brazil, India, China and Hong Kong, have delivered important buy signals, so triggering a decision at fullCircle to invest 7.5% of portfolios in a fund invested in the Chinese stock market.
• This article was written by Full Circle Asset Management, and was published in the threesixty Newsletter on 9 April 2009