Dow to fall to 4,000, FTSE 2,000
Posted on 04 April 2009 with no comments from readers
Now that the G20 summit is over all the good news is priced into global stock markets. The rally is therefore almost over, although markets mights drift sideways for a while.
Then markets will really take a tumble with the Dow bottoming out at 4,000 later this year and the FTSE dropping to 2,000. Gulf stocks will trend lower but have fallen so far that there is not so much further that they can fall now.
G20 hope
You could see the Dow Jones tick higher as President Obama delivered his wind up remarks to the press in London last week. The G20 was indeed a climactic conference – with a great deal of hope and spin – but markets will now deliver an assessment on whether anything of substance was achieved.
Aside from a useful $250 billion commitment to the IMF it was largely hot air, and the trumpeted $1.1 billion in total bailouts simply a restatement of initiatives already launched to ’save’ the global economy.
However, the world economy is not going to be saved from a huge slump this year. Singapore has announced it expects a 10 per cent crash in GDP, the predictions are for a seven per cent fall in Germany and nine per cent crash in Japan – the world’s second and third largest economies.
This follows a contraction of global trade on a scale not seen since the Great Depression of the 1930s. To expect a quick bounce back to ‘business as usual’ is simply and quite self evidently unrealistic.
It is impossible for major economies to recover that fast. Stocks have rallied on false hopes. Credit markets tell a different story and are still locked.
Businessmen seldom trust politicians and their economic forecasts, and they should beware of the G20 leaders. Those offering quick and easy solutions to serious problems are usually quack doctors.
Banking problems
That is the other problem. These bailouts are sticking plasters to cover up the initial disaster and keep the patient alive. The far more difficult job of sorting out the global financial industry has yet to start in earnest.
This has to be done, and stock markets will have little patience. The shorts will go back on. The downward pressure on financial sector equity will resume. The good banks will have to be saved and the bad slaughtered.
Sadly the multi-trillion dollar bailouts will make this a longer and more expensive process than it needs to be, and cause a great inflation. Stock markets are not going to like any of this at all. Gold and silver will be the only places to hide.
no Comments posted by readers:
Peter, the wise, as ever. One quadrillion of derivatives and impaired financial assets (according to the Bank of International Settlements) ensures that we face a Great Unwinding. Gold, silver, land (agriculture and oil). There is the refuge for honest people with their eyes wide open, and ears shut to the sophistry of paid political puppets, serving the banksters who funded their political campaigns. Reinstate the Glass Steagall Act in the U.S. if there is any truth behind G20 posturing.
Best wishes to you and yours. C.
Wall Street Journal today…and it does not even mention the crisis brewing at GM and Chrysler…
This rally’s scaffolding includes wishful thinking, too. It was launched by word that some big banks were profitable in January and February. Two months do not a quarter make, and banks indicated conditions got tougher in March.
Stocks got another hand from the Financial Accounting Standards Board, which relaxed mark-to-market accounting rules just in time to boost first-quarter bank results. But the move risks obscuring these banks’ true worth, something that should make investors think twice.
This rally was also perpetuated by talk of a revival of the uptick rule mandating that short-sellers can’t short a stock unless its price is rising. But years of research have produced little evidence to support the idea that the rule helps avoid sharp swoons, and last year’s experiment in banishing shorts did not stop a market collapse.
The most credible drivers of this rally are hints of an economic bottom. But even these tell of a bottoming at a very low level, not necessarily a quick recovery. Weekly jobless claims are still rising. The Baltic Dry index of global shipping costs, has fallen for the past 18 days and is off nearly 35% from its high of the year. Investment-grade corporate bond yields are still not much off their highs, a sign credit is still tight.
For all its vigor, the Dow is still down 9% for the year and 43% from its record high.
While this bounce might not mirror November’s, it still has the hallmarks of a bear-market rally.
From MoneyWeek today:
Well, as James Montier from Societe Generale points out, “it isn’t the bubble stocks which tend to lead us out of the fugue state. Thus the prominence of emerging markets, mining and financials in the recent rally makes me wary.” Lex puts it a little more brutally: “it is the trash that has done best.” Stocks such as AIG, Citigroup, indebted retailer Debenhams and builder Taylor Wimpey are among the biggest risers of all. “This is not investment; it is speculation.”
This, says Lex, is exactly what happens in a bear market rally – investors get suddenly excited because the news isn’t quite as bad as it has been. The spurt of optimism sees them start piling back into cruddy stocks simply because they look a lot cheaper than they did at their peaks. But all it takes is some more miserable news to knock them back off their stride.
Don’t buy yet
And more bad news “is likely when reporting season begins anew.” As Stephanie Giroux of US broker TD Ameritrade points out to Bloomberg, America’s problems will take a lot longer than a couple of quarters to fix. Consumer spending accounts for about 70% of the US economy, and this will “stagnate for years as Americans pay debts and businesses cut jobs.” As she puts it, “you’ve taken a big engine of growth out of the system for a while… The consumer has really driven growth in the economy, and the stock market is a proxy for that growth.”
When it comes to markets, where the US goes, Britain (and most of the rest of the world) can be expected to follow. And with our own economy heavily dependent on equally indebted consumers, it seems likely that there’ll be plenty of disappointments from British companies too. Suffice to say, I wouldn’t be piling into the market as yet.
By Telegraph staff
Last Updated: 8:13AM BST 07 Apr 2009
“It’s a bear-market rally because we have not yet turned the economy around,” Mr Soros said in an interview with Bloomberg Television. “This is not a financial crisis like all the other financial crises that we have experienced in our lifetime.”
Stock markets around the world have gained in recent weeks on hopes renewed efforts to fix the banking crisis and a stabilisation in economic data signal the sharp deterioration since the collapse of Lehman Brothers may have eased.
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In the US, the Standard & Poor’s 500 has climbed 24pc since March 9; in the UK the FTSE is up 13pc and in Japan the Nikkei 225 has soared 25pc.
The bounce in equity markets was given an extra fillip last week after the leaders of the G20 countries agreed to a six-point plan designed to ensure the global recession does not turn into a depression. Critics however argued that the plan did not go far enough.
Mr Soros praised the efforts of President Barack Obama’s administration but said more needs to be done to tackle the crisis in US banks.
“He’s done very well in every area, except in dealing with the recapitalization of the banks and the restructuring of the mortgage market,” Mr Soros told Bloomberg.
From the excellent Rick’s Picks:
The first number notes that in January 2008, when the S&Ps were in the early stages of what was to become a devastating collapse, domestic equity mutual funds were worth about $6.5 trillion.
Lo, a little more than a year later, in February 2009, we see that the value of these funds had fallen by about 48%, to $3.4 trillion.
But guess what: Over that time, net redemptions totaled only 2%, or about $100 billion! What that means, explicitly, is that mutual fund investors have stuck with this bear market throughout the decline.
Wholesale Dumping Ahead
So, do we infer that guys like Kudlow, Suze Orman and CNBC’s talking heads actually believe this bear market will somehow be different from all others before it, with no exhaustion selling to carve out a durable low?
We do not merely doubt this, we view such an outcome as very nearly impossible. This bear market will end, like every other bear market in history, with a wholesale dumping of stocks at prices that will make current values seem exorbitant in comparison.