Financial happy talk failed to pass the smell test .
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Fed's hope-and-a-prayer forecast no basis for a new bull market
By Gary Lamphier, The Edmonton JournalMarch 17, 2009 7:39 AM
It was great fun while it lasted, and a relief from the endless gloom of recent months.
But last week's lively bounce in global stock markets will almost surely go down as just another head fake -- a tenuous bear market rally doomed to fizzle out from the start.
Yes, that's easy to say in retrospect. But I've been planning to write the epitaph for this rally all weekend.
Well before major U.S. indexes ran out of steam and began heading south again Monday afternoon, it was clear to most thoughtful observers that the suddenly upbeat rhetoric from market players and commentators was spectacularly at odds with any sober-minded assessment of economic reality.
It just didn't pass the smell test.
To put it bluntly, the global economy still sucks, and it's likely to remain in the ditch for the rest of this year, notwithstanding Federal Reserve Chairman Ben Bernanke's hope-and-a-prayer pronouncement that the recession might (fingers crossed) end in 2009. That's not exactly a firm basis for a new bull market.
The U.S. and European banking systems are still in deep doo doo, trillions of dollars of toxic assets remain on their books, commercial credit is still tight, the factory sector is on its knees, the U.S. housing market is nowhere near a bottom, commercial real estate in the U.S. is a disaster waiting to happen, jobless rates are heading due north, and the Mount Everest of debt that's piling up south of the border will eventually have to be repaid.
And even after the economy starts to recover in 2010 or 2011, someone, somewhere will have to explain just who is going to replace the debt-hobbled, increasingly savings-focused U.S. consumer as the key driver of global demand. This is not a small question; consumer spending accounts for about 70 per cent of U.S. GDP, or about $10 trillion US a year.
Despite these and other glaring obstacles, major U.S. indexes rebounded gamely from 12-year lows last week, with the S&P 500 Index tacking on 10.7 per cent and the Dow Jones Industrial Average gaining about nine per cent. In Toronto, the S&P/TSX Composite Index jumped 9.4 per cent. The talking heads cheered. It was high fives all around.
The trigger? Bank stocks. They soared, after troubled U.S. giant Citibank conveniently leaked news of an operating profit -- a profit! -- for the first two months of 2009. Two other major U.S. banks followed suit. It was a thin reed upon which to base a sustainable rally, however, and the smart money knew it.
Ergo, after racking up triple-digit gains early Monday, major U.S. indexes again slammed into reverse. By the close, the S&P 500 was off about three points, to 753.89, the Dow was down seven points, to 7,216.97, and the Nasdaq Composite Index shed 27 points to 1,404.02. The resource-rich Toronto market managed to buck the downtrend, gaining 83 points to 8,386.71, although it shed about half its gains in the final hour of trading.
"A relief rally cannot continue until investors have greater faith that the problems in the economy have been worked out," William Dwyer, senior investment officer at U.S.-based MTB Investment Advisers, told Bloomberg News, in an admirable display of good sense.
Not surprisingly, U.S. bank stocks led the slide Monday, reversing last week's uptick. The S&P 500 Financials Index fell 1.9 per cent, the biggest loser among the S&P's 10 industry groups. It was up nearly six per cent earlier in the day, after soaring 34 per cent last week, the sharpest one-week gain on record.
"There is some fear that maybe the rally isn't for real and investors want to make sure that it doesn't roll over and break to new lows," Bruce
McCain, chief investment strategist at Cleveland's Key Private Bank, told Bloomberg.
Barron's columnist Alan Abelson, whose aptitude for skewering Wall Street's cheerleaders and exposing their blatant hypocrisies is nothing less than journalistic poetry, was, shall we say, far less charitable in his weekly column. In particular, he took aim at Vikram Pandit, CEO of Citigroup, whose leaked "internal memo" prompted last week's dubious rally.
"Besides breathing new life into equities virtually everywhere they're traded, the leak can lay claim to being miraculous on another score. For truly amazing is the fact that its contents would incite anyone with even the most cursory knowledge of finance to buy stocks," Abelson wrote.
"Essentially, Mr. Pandit's memo relayed the less-than-startling revelation that if you disregard, as any polite person is obligated to, the $301 billion of toxic assets sitting atop its balance sheet, like a grinning monster waiting to pounce, and the something like $45 billion our munificent government out of the goodness of its heart has poured into Citi's rather strained coffers, plus a few other pesky details, it's making a profit!"
Right. And if I wasn't a slow-footed, overweight 54-year-old with no shot and an aversion to body checking, I'd make a fantastic NHL defenceman.
So where to from here? I expect lower lows on major U.S. indexes before stock markets finally hit bottom. So does Morgan Stanley equity strategist Jason Todd. He figures the S&P 500 could drop down to the 560 level before it begins a sustained advance. But the turn could be a sharp one. He sees the index back up to 825 by year's end.
Toronto, with its heavy weighting of energy, base metals and gold stocks, as well as a far healthier banking sector, should fare better. But until the U.S. economy finds a bottom, the TSX will be fighting an uphill battle.
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