Are We There Yet?
ByLike children on a car journey asking if they are almost “there,” investors are asking, are we at the bottom, are we at the bottom of the bear market?
It might be wishful thinking to expect the good times have arrived again. Currently, investors are trying to outsmart the market by getting into the market before the recession ends. The conventional wisdom is that the stock market bottoms six to nine months before the economy. Given that the market often makes huge gains bouncing off the bottom – the “smart thing” to do is to get into the market before everyone else. The big question stands: are investors being smart, or are they being overly optimistic and wishing for a recovery.
If we step back a few months to the beginning of March, investors were wondering if the financial system would fail and the world was coming to an end. The market became very much oversold. Things changed fast and the market rocketed upwards. Two things happened. First, some of the reports coming out of the financial system seemed to be turning around from being very dire to showing signs of hope. Investors started to come to the realization that the Obama administration would not let the financial system collapse. Second, there were some “green shoots” of economic data that were warmly welcomed after so many months of negative data. The media loves to coin terms. It seemed that every bull in the market was talking about green shoots and the end of the recession. It led me to ask the question, “is everyone was now a farmer.“
Are things really as positive as everyone is assuming? Not really. With some positive numbers from the financial system all of a sudden everyone is assuming that the crisis is over. There is no question that the situation has gotten better: the credit freeze has thawed (at the LIBOR level) and the big banks appear less prone to going bankrupt. Scratch below the surface of the bank results and the numbers are not as good as they appear. Overall, they are really not making money at their core business lending. Their ratios have been bolstered by cash from the government and a large part of their profits have been generated from their trading desks. There is one additional problem looming on the horizon for the banks – credit card debt. So far this debt has been manageable, but a lot of consumers have been leveraging their existence with credit cards. This trend is unsustainable. If the economy continues to slide, watch for this situation to get worse and banks to start increasing their loan loss provisions (LLP).
If we examine the overall economic data, it is not good. Although we had a couple of positive numbers that surprised to the upside, such as retail, in major economic downturns, there are always transitory positive results. Investors are often anxious and want to declare the recession over. The first few signs of positive relief investors rush back into the market, expecting a sustainable positive uptrend. Overall the numbers coming in are still bad: Japan’s exports were down 39% in April, U.S. house prices down 19% (and still going down), U.S. unemployment at 8.9%, Japan Real GDP YoY – 9.7%, UK GDP – 4.1%, U.S. GDP -2.5% etc.
One or two cars do not make a parade. Do not be fooled.
