There is nothing more detrimental to our psychology than seeing our friends get rich. With each day that stock markets continue their impressive surge, lingering skepticism are transformed into belief and rational people are behaving once again like gamblers.
It was only months, if not weeks ago, that the same investors and businesses were perched on the precipice of financial ruin. Those who got badly burned were swearing off stocks or any form of investments. Now, the rolling good times have erased all these memories.
To be sure, the current stock market rally is surprisingly resilient compared to the typical dead cat bounce which hovers in the 20% range but we have to remember that if something doesn’t go on forever, it has to stop. Indeed, a setback in the stock market is imminent, after such a heady run-up.
For the second straight day, US stocks began on a strong note, only to have the momentum died down at the close. Despite repeated attempts, the inability of S&P 500 to break through the psychological resistance of 940 is telling.
While much uncertainty in the financial sector has been cleared up after the stress test, the bears are not convinced. In fairness, the bears are correct to believe that there could be more skeletons in the closet which require greater capital infusions.
And you don’t get anybody more authoritative than the messiah of free market speaking about banks’ capital requirement. Alan Greenspan, the former Federal Reserve chairman who is heavily castigated for his role in Wall Street’s orgy, says banks still have a ‘large’ capital requirement especially in commercial banking.
Wheez, if only Alan Greenspan had been as discerning about this financial crisis during his reign. If only the credit binge was curtailed by raising interest rates and stringent lending standards. If only he had been more forceful on curbing the extensive leverage on Wall Street. If only…
Regardless of capital requirements, I believe the likelihood of a domino effect from collapsing banks in America rocking global financial markets is remote. Not when the Federal Reserve are satisfied with the banks’ viability and stand ready, willing and able to intervene whenever doubts appear to the contrary.
On the economic front, I have to say that fundamentals have not improved significantly even as the worst of the crisis is over. The stock market, being a forward looking indicator, is hoping to reflect an economic recovery in the 4th quarter this year.
Whether this is a realistic scenario is up for debate but for now, we can only look in the rear view mirror and take note of dismal results. Japan’s economy shrank at a recod 15.2% pace, dragged down by plunging exports, thinner factory output and wary shoppers. Mexico fell 21.5% while Germany’s Q1 fell at an annualized 14.4%.
European banks which have a significant presence in Asian markets are not out of the woods yet and this is where the next trouble spot could be. It is necessary that they conduct a similar stress test in the near future to ascertain the extent of their troubles. ABN Amro is seeking further capital intervention from the Dutch government and they won’t be the last crying for help.
Unfortunately, they don’t enjoy the privilege of a Federal Reserve to create trillions of dollars out of thin air to backstop their losses. Following in the footsteps of Iceland, Kazakhstan could be headed for IMF’s intensive care unit after three financial institutions defaulted on their payments.
Britain may also lose its AAA credit rating for the first time as government finances deteriorate in the worst recession since World War II. Standard & Poor’s lowered its outlook on Britain to “negative” from “stable” and said the nation faces a one in three chance of a ratings cut as debt approaches 100 percent of gross domestic product.
As Jimmy Rogers remarked in an interview to CNBC, “Governments have not solved the essential problems that caused the crisis but instead they flooded the world with money.”
“Trying to solve the problem of too much consumption and too much debt with more consumption defies belief and will not work. I mean … you give me 5 or 6 trillion dollars, I’ll show you a very good time, there’s no question about that.”
Even Federal Reserve officials seem to agree. According to the minutes, there are possible signs of “stabilization” in the U.S. economy but they are not convinced those improvements will persist. With the global financial system still “vulnerable to further shocks,” the Fed is prepared to purchase $300 billion of Treasuries to counter “significant downside risks” to the outlook for the economy.
The bull-bear royal rumble is definitely underway but it will be weeks or months before a victor emerges to determine the primary trend of the stock market. Meanwhile, the path will not be smooth, probably three steps forward, two steps back situation.
This period allows for consolidation where investors mull over and react to the good and bad news. Since history suggests that major market collapses may need multiple tries before they can find solid footing, the bears will have opportunities to gain the upper hand again.
If you are not careful, the resurgence of the bears may wipe out recent gains quickly as seen in the rally in the last six weeks of 2008 – only to suffer deep setbacks in a matter of weeks. Thus, for investors who are sitting on profits for some long term positions, it could be wise to unload some positions and prepare for a fresh onslaught on the stock market later on.