Wednesday, March 04, 2009

Markets never move in a straight line forever

As most of the world was expecting, the markets perked up finally today. It was a fairly weird trading pattern as the futures were up about 147 pre-market and the market finished up 149 pts, so if you weren't long on Tuesday night it was hard to take advantage of the bounce.

Asian markets are continuing to rally on the news that China will provide more stimulus.

"Premier Wen Jiabao said China will “significantly increase” investment in 2009 as it struggles to meet an 8 percent economic growth target to protect jobs.

“We face unprecedented difficulties and challenges,” Wen told delegates to China’s parliament in Beijing today. The nation needs to “reverse the economic slide as soon as possible,” he said, without announcing an increase to the government’s 4 trillion yuan ($585 billion) stimulus package. "

I'll just note a couple of points:

* I actually think China needs the opposite of stimulus. As I noted a couple of days ago, up to 20% of commercial space in China is unoccupied. Building more roads to nowhere is not the answer to China's woes.

* China can't spend its way to health. China's economy is built on consumer products and global demand for consumer products is falling off a cliff.

* I often take issue with the rosy picture painted by the US government's economic data sets but I think it's safe to say a government that consistently censors their citizens access to information on the Internet might be prone to "massaging" the data. Any upticks in data from China must be taken with a tablespoon full of salt.

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The Federal Reserve's Beige Book is one of the best pieces of research put out by the Federal government. Today's Beige Book was lost in a see of rally news, but note the honest tone of the release -

"Ten of the twelve reports indicated weaker conditions or declines in economic activity; the exceptions were Philadelphia and Chicago, which reported that their regional economies "remained weak." The deterioration was broad based, with only a few sectors such as basic food production and pharmaceuticals appearing to be exceptions."

Consider that again - 10 of 12 districts report business activity weakened from the end of 2008, while 2 districts indicated things remained weak.

"Markets for residential real estate remained largely stagnant, with only minimal and scattered signs of stabilization emerging in some areas, while demand for commercial real estate weakened significantly. Reports from banks and other financial institutions indicated further drops in business loan demand."

This is one of the key facets of the recession that many are missing. The common refrain from politicians is that we need to increase credit availability to jump start the economy. The fact is that, in my opinion, there is credit available to good credit risks, but demand for loans by good credit risks is low and I do not think any stimulus plan can forcefully recreate loan demand.

Cheers.

2 comments:

Scott Atkinson said...

Why do days like yesterday feel unimportant, while down days feel critical?

The Artful Blogger said...

It's a good question. I think the answer is two-fold: Trends and situational rallies.

1) Trends - the trend has been down since September so every little bounce had the feel of a dead cat bounce. If you fall 5 straight days and bounce for a day or two it's hard to feel better about the markets.

2) Situational rallies - much like watching A-rod hit a useless homerun in the bottom of the ninth when the team is up by 12, if the market rallies on low volume in front of an important number like Friday's job number it feels like there is less conviction to the rally.

The expectations have been lowered so much for Friday's job number that as long as we don't lose 1 million jobs we could get a little relief rally.

*Disclosure - I'm a little long for a trade. I'll probably be short if we go up another 3-5%.