Blogs & Comment

Big Rally or Big Bear?

Im told there were five rallies of 20% or more during the worst bear market in history from late 1929 to mid-1933. Will the rally of the past six weeks similarly give way? Or is it going to be like the Big Rally in the summer months of 1933, when the stock market incredibly soared by more than 100%?
One argument against having the Big Rally in 2009 is that its still too early. During the Great Depression, it came 4 years after the peak of the previous bull market. We are only about two years past the peak of the last bull market. Then again, policymakers this time around reacted with massive stimulus sooner than was the case in the 1930s, so perhaps the Big Rally could get here sooner.
Ultimately, it will be up to the economy. It was early glimmerings of a recovery in the U.S. economy that ignited and fueled the rally; the tone of economic data over the next few months should be what keeps it going or not, I wrote in an earlier post, Is this rally for real?
So lets generate another installment in the mash-up that was started in the above post and continued in a second post, Rally Gone Overboard?This time the focus is more on the real economy than financial markets (as it was in the previous post). Again, the flow of data and commentary has a large strand of skepticism. But some of it does shine a light.
Highlights from thedata/comments flow
Optimism may be fashionable, but there are plenty of reasons to fear it is premature. The upbeat thesis focuses on firms and their inventories .The danger, however, is that too much emphasis on the [inventory] cycle misses the underlying characteristics of this downturn. This is mainly a balance-sheet recession precipitated by a financial crisis. And it is a downturn that it is unusually synchronized around the globe. Economist magazine.
The recession is very likely to end sooner than people think [ECRI’s weekly leading indicator of economic growth, which has a good record of predicting business cycle turns, just hit a six-month high] Lakshman Achuthan, managing director at the Economic Cycle Research Institute, (ECRI).
A Reuters/University of Michigan measure of U.S. consumer moods jumped more than four points to 61.9 in April, the highest reading since September.
In March, the year-to-year decline in U.S. industrial output of 12.7% was the result of reduced U.S. demand, inventory cutbacks and recessions abroad it was the largest since the factory sector’s wind-down following World War II, Haver Analytics.
deleveraging by highly leveraged firms, such as hedge funds, will lead them to sell illiquid assets in illiquid markets [and] some emerging-market economies, despite massive IMF support, will experience a severe financial crisis with contagious effects on other economies, Nouriel Roubini, Professor of economics at the Stern School of Business.
The CBOE Market Volatility Index was 36 on April 16, edging down from the 40 level of recent weeks and noticeable lower than the peak of 80 in October 2008. But before the bear market, the VIX was hovering near 10.
The $787 billion stimulus program is flawed because too much spending comes after 2009, and because it devotes too much of the money to tax cuts, Nobel prize economist Joseph Sitglitz.
there are some encouraging signs that support cautious optimism. I do not expect a strong recovery but I do expect the economic contraction we’re now experiencing to give way to slow and tentative growth as early as the third quarter. Dennis Lockhart, president of the Atlanta Federal Reserve
Over just the last three months, business inventories have fallen at a 15.2% annual rate, a record for the series which dates back to 1980 Lower business sales [and prices] continue to propel the inventory correction they are down at a 16.2% annual rate over the last three months The inventory cutbacks overall, however, have done little to reduce the I/S ratio for total business It remained in February near its highest level since 2001, Haver Analytics.
Taken together, both (housing and jobs) releases will put a damper on the nascent optimism we’ve seen in the markets in the past couple of weeks, Matthew Strauss, senior currency strategist at RBC Capital Markets.
Consumers spent less [in March], sending sales skidding 1.1 per cent from February This week’s Chapter 11 filing by General Growth Properties, the second-largest mall owner in the U.S., [could be] a bad omen for what ails the U.S. economy If consumer spending stalls at current low levels, brace yourself for more retail and mall bankruptcies, in the U.S. and elsewhere. Barrie McKenna in the Globe and Mail.
The fundamentals in terms of corporate profits, house prices and bank lending have not yet bottomed; valuations are not yet at fire-sale levels — the cyclically adjusted price-earnings ratio is 14.5 compared with previous bear-market lows in single digits. Teun Draaisma, Morgan Stanley strategist