Sell this May and go away until after Ramadan
Posted on 15 May 2010 with 3 comments from readers
Stocks sold off again last week, and when a near $1 trillion euro-bailout fails to lift market sentiment this is surely the end of the line for the great stock market rally since March last year.
ArabianMoney newsletter subscribers who bought the short ETF portfolio in the May edition are already major winners, and there should be much higher gains for them over the next couple of months. This website has been premature in calling an end to the rally but that does not mean that the best profits cannot still be had from shorting a collapsing market.
Bear case
The Lex column in the Financial Times summed up the triple bear case for equities. First, any real recovery means higher interest rates that will kill stocks. Second, bond vigilantes will cause a debt crisis as in Europe now, interest rates go up and stocks down. Third, a Japanese-style depression crushes equities.
Come on then bulls, where is your argument? Rising US profits? Unsustainable. European trade is not relevant to the US? Well, perhaps but a strong dollar certainly hits the fragile recovery, and the US also has massive government debts like Europe which are going to be an issue going forward.
The US banks still have huge bad debts on their books and house prices will fall as interest rates rise causing more bad debts. The Obama bailout just put back the day of reckoning.
No the stage is set for a massive stock market reversal. Never has the old adage ’sell in May and go away’ looked more relevant.
Even the Chinese Premier Wen Jiabo told the China-Arab Cooperation Forum last week that the European crisis is ‘deepening’ and the foundations of the global economic recovery are not ’solid’. He added: ‘We should recognize this as a result of a once-in-a-century financial crisis, the world political and economic landscape is undergoing major adjustments and transformation’.
Chinese trade with the UAE has tripled in recent years and was worth $25 billion in 2009. However, the Chinese stock market has slumped since peaking last summer, and the economy is widely perceived to be overheating with a property boom rather like in the UAE 18 months ago.
Chinese equities fall
Perhaps China is leading with its equity sell-off and this will be its next export to the world. Quite apart from the interest rate linked perspective of the FT, ArabianMoney is more concerned about fundamentals such as demand from Europe in a age of austerity.
For the $1 billion euro-bailout this week was fundamentally different to the US stimulus package last year because it is accompanied by public spending cutbacks and fiscal austerity, and is quite the opposite of a stimulus. It is an austerity package that will reduce domestic demand and not stimulate a recovery.
In the UK the new government’s instant spending cuts and five per cent pay cut comes from the same economic school. As Sony pointed out in Tokyo last week how can television sales grow in this environment? The contagion is considerable, and it certainly was for Sony shares when this viewpoint was articulated.
The sell-off now maybe very quick and deep as the 1,000-point collapse in the Dow Jones the previous Thursday demonstrated. Many investors in this rally have positioned themselves for a quick sell because of being caught out before, and this will compound a fall to the downside.
3 Comments posted by readers:
I haven’t been to Europe for the last 18 months , but it seems that situation there is pretty grim as you mentioned. In the UK for example, a recent study showed that 70% of UK citziens want to migrate because of both economic and political conditions. Honestly, I don’t know how valid this study is. I’ve seen it on Al Jazeera Channel yesterday, but if the numbers are correct, then it would a surprise for me. 70% is indeed shocking!
Hi Mo,
i’m frenchman, who is married with an indonesian. I also don’t know about these numbers but, what i foresee, is bad pensions for the people like me who are only 40 now, huge government debts, no economic recovery, to tell it in one word, NO REAL FUTURE in France. If you add a bad immigration politic which causes problems to us as a couple, we are studying the possibility to emigrate to Indonesia.
We didn’t decide yet (it’s a big decision to take, and we have to build a new business project before) but we actually think of it.
Ed Note: Just do it! Don’t look back!
None of this money has hit the markets yet from the bailout package. I am pretty sure we will see some sort of rally once this money starts hitting the markets. When the money from the US bailout packge for $750 billion dollars hit the market in the US the DOW rallied for a good 14 months straight. I don’t see why this package would not help Europe. The package was supposed to be big enough to bail out 3 countries.
Bailouts aside I think the US and Europe are still not doing well. Many people in the US are not better off now than they were a year ago and I think the same goes for Europeans in Europe as well but when this money hits the markets stocks always rally regardless of reality.
The EURO recently took a beating because they did not have enough money to fight off speculators but I bet this will change after they get the cash from this bailout package. Until this money gets released the EURO will coninue to drop but I for sure expect a bounce or dead cat bounce if that is what you wish to call it once cash from the bailout package hits the markets.
Ed Note: The euro-bailout is part of an austerity package so no stimulus, very different from the USA (which stock market rally aside does not appear to have worked well anyhow).