When someone shares with you something of value, you have an obligation to share it with others.
Monday, 12 January 2009
As Always, an Overvalued Wall Street is the Main Problem
Last week’s column strongly advised investors to be sceptical about the year-end rally and to sell into strength at every opportunity, or risk getting caught in yet another bear trap.
As Always, an Overvalued Wall Street is the Main Problem
By R SIVANITHY 12 January 2009
Last week’s column strongly advised investors to be sceptical about the year-end rally and to sell into strength at every opportunity, or risk getting caught in yet another bear trap.
As it turned out, after a Monday rise, the Straits Times Index dropped for four consecutive sessions and now stands just 2.6 per cent up for the year.
It’s difficult to see any need for a drastic change in last week’s advice for the five days ahead. Our guess is that instead of looking at upside targets, as some observers were doing last week, we should assess where the downside support lies.
There will, of course, be the odd short-covering bounce now and again and the inevitable claims of a ‘Chinese New Year rally’ - as if it were a given that stocks must rise before the Lunar New Year - but, by and large, it’s highly unlikely that the market has bottomed yet.
The problem, as it has been throughout 2008 - and will continue to be so in 2009 - is an over-optimistic and over-valued Wall Street that continues to pin hopes of its salvation on government handouts.
Even after all the turmoil of the past 12 months, the US market’s major indices only sank to an 11-year low in November. Major banks, insurance companies and automakers have gone bankrupt, unemployment is rising and deflationary forces are being unleashed in the worst crisis since 1930, but stocks are only down to their lowest in a decade. How realistic is this?
Since that November low, the US benchmarks rose 18 per cent until last week’s sell-off, supposedly propelled by hopes that the incoming Democractic administration would be able to money-print its way out of trouble - the sums being bandied about are now reaching close to a staggering US$1 trillion.
More realistically though, we believe the push was probably driven by large program trades looking to exploit the low volume, a general absence of many participants - and the naive belief in the ‘January effect’ among many investors.
To a large extent, it worked. There was a sudden rush of interest among gullible retail investors who quickly jumped on the bandwagon - not because the outlook for the bandwagon had improved in any way, but purely because the bandwagon was moving. The added weight of the investing public did manage to generate some momentum, but it has to be said that this has now abruptly ended.
On Friday, Bloomberg news agency attributed Wall Street’s plunge to an awful employment report that was the worst since 1945. Yet the stock market did not tank as much as might have been expected which, in our view, amounts to only delaying the inevitable. Bloomberg’s Friday market report quoted Mavin Barth, chief investment strategist at Tennenbaum Capital Partners, as saying ‘the stock market hasn’t fully priced in how bad this is going to be ... you’re not going to see the rapid earnings growth that we had seen’.
Bloomberg’s analytics give the S&P 500 as currently trading at an estimated earnings per share of US$74, up from 2007’s US$56. You’d have to wonder that simply from a valuation and growth standpoint, where is such a large jump to come from?
As for the local market, it will continue to track Hong Kong insofar as the latter’s movements embody expectations of how Wall Street might perform later each day.
The recent surge in liquidity presents a headache for the bulls, because it means that there are scores of ‘stale bulls’ caught at last week’s top - and will have to exit soon or face large contra losses. As prices slide lower, the pressure to exit will increase and it’s then likely that bounces will be capped.
Looking further ahead, most experts reckon that if US lawmakers approve the Democrats’ rescue package quickly, there could be a second-half recovery. Our only response to this is that all forecasts should come with a probability estimate of the likelihood of success. As it stands now, a second-half recovery is possible. But it doesn’t look very probable - at least until Wall Street fully recognises the mess that the country is in.
1 comment:
As Always, an Overvalued Wall Street is the Main Problem
By R SIVANITHY
12 January 2009
Last week’s column strongly advised investors to be sceptical about the year-end rally and to sell into strength at every opportunity, or risk getting caught in yet another bear trap.
As it turned out, after a Monday rise, the Straits Times Index dropped for four consecutive sessions and now stands just 2.6 per cent up for the year.
It’s difficult to see any need for a drastic change in last week’s advice for the five days ahead. Our guess is that instead of looking at upside targets, as some observers were doing last week, we should assess where the downside support lies.
There will, of course, be the odd short-covering bounce now and again and the inevitable claims of a ‘Chinese New Year rally’ - as if it were a given that stocks must rise before the Lunar New Year - but, by and large, it’s highly unlikely that the market has bottomed yet.
The problem, as it has been throughout 2008 - and will continue to be so in 2009 - is an over-optimistic and over-valued Wall Street that continues to pin hopes of its salvation on government handouts.
Even after all the turmoil of the past 12 months, the US market’s major indices only sank to an 11-year low in November. Major banks, insurance companies and automakers have gone bankrupt, unemployment is rising and deflationary forces are being unleashed in the worst crisis since 1930, but stocks are only down to their lowest in a decade. How realistic is this?
Since that November low, the US benchmarks rose 18 per cent until last week’s sell-off, supposedly propelled by hopes that the incoming Democractic administration would be able to money-print its way out of trouble - the sums being bandied about are now reaching close to a staggering US$1 trillion.
More realistically though, we believe the push was probably driven by large program trades looking to exploit the low volume, a general absence of many participants - and the naive belief in the ‘January effect’ among many investors.
To a large extent, it worked. There was a sudden rush of interest among gullible retail investors who quickly jumped on the bandwagon - not because the outlook for the bandwagon had improved in any way, but purely because the bandwagon was moving. The added weight of the investing public did manage to generate some momentum, but it has to be said that this has now abruptly ended.
On Friday, Bloomberg news agency attributed Wall Street’s plunge to an awful employment report that was the worst since 1945. Yet the stock market did not tank as much as might have been expected which, in our view, amounts to only delaying the inevitable. Bloomberg’s Friday market report quoted Mavin Barth, chief investment strategist at Tennenbaum Capital Partners, as saying ‘the stock market hasn’t fully priced in how bad this is going to be ... you’re not going to see the rapid earnings growth that we had seen’.
Bloomberg’s analytics give the S&P 500 as currently trading at an estimated earnings per share of US$74, up from 2007’s US$56. You’d have to wonder that simply from a valuation and growth standpoint, where is such a large jump to come from?
As for the local market, it will continue to track Hong Kong insofar as the latter’s movements embody expectations of how Wall Street might perform later each day.
The recent surge in liquidity presents a headache for the bulls, because it means that there are scores of ‘stale bulls’ caught at last week’s top - and will have to exit soon or face large contra losses. As prices slide lower, the pressure to exit will increase and it’s then likely that bounces will be capped.
Looking further ahead, most experts reckon that if US lawmakers approve the Democrats’ rescue package quickly, there could be a second-half recovery. Our only response to this is that all forecasts should come with a probability estimate of the likelihood of success. As it stands now, a second-half recovery is possible. But it doesn’t look very probable - at least until Wall Street fully recognises the mess that the country is in.
Post a Comment