A rally comes before a fall in a bear market, follow Soros
Posted on 18 April 2009 with no comments from readers
There is much gnashing of teeth among financial analysts this weekend who are pondering whether the sudden recent rally in stocks is sustainable, and could go higher than its already record level, or whether this is just an uptick on a long road to the bottom of a great bear market.
Commentators look first at a few over-hyped ‘green shoots’ of recovery and a little optimism in one or two financial statements. But for every green shoot there still seem to be several unpleasant new weeds in the garden.
Take the $27 billion bankruptcy last week of General Growth, the second largest US mall owner, one of the biggest bankruptcies in the history of US real estate; or calls by the bond holders of MGM Mirage like billionaire Carl Icahn for that Las Vegas casino operator to file for bankruptcy. MGM has debts of more than $13 billion, and Dubai as a major shareholder.
GM doomsday
Also pending is the possible bankruptcy of General Motors if it fails to come up with a viable recovery plan by the June 1st deadline, and similar pressure on rival Chrysler to conclude its proposed marriage to Fiat.
All is clearly not well in the real economy, and the optimism of Wall Street looks premature to say the least. If the pattern of the Great Depression is carried through stocks will tank again in June and the final bottom not be reached until mid-2011.
Trading rallies
In a bear market you can certainly make money trading the rallies. But it is also easy enough to lose money if you mistime them because the general direction of the market is down, so there is nothing to bail you out if you mess up.
Investors in a bull market often forget that the lion’s part of their gain is due to the general uptrend in which any idiot can make money. In a bear market the trend is not your friend and you are out on your own. This can make an idiot of the best investor.
Will those who choose to sit on cash and gold over the next couple of years emerge in better shape than the clever shorts and traders?
George Soros says that actually very, very few investors can make money in these markets, and perhaps that means that unless you are another Soros you should not be trying.
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From Charles Moore in The Telegraph today:
I am grateful to Larry Lindsey, former economic adviser to three Presidents, for drawing my attention to Table S.9. It states that the total “required to be borrowed from the public” (the PSBR, in British-speak) in the fiscal year 2009 is $2.562 trillion. That is 18 per cent of American GDP. Fiscal 2009 ends on September 30. Given what the federal government needs to borrow in the time that remains, the sum works out at between $6 and $10 billion per day. I make that roughly the entire British annual defence budget in one week.