Spinning the G20

April 4, 2009 — Mitul Kotecha

There seems to been a lot of spin put on the amounts of money pledged in the wake of the G20 summit in London. A lof the money appears to have already been committed and the actual amount of new discretionary fiscal spending is a lot less than the $5 trillion in fiscal spending that was announced.

Even the $1.1 trillion that was all over the headlines in terms of the “additional programme of support” looks overblown. Immediate contributions will only amount to $250 bn and much of this has already been pledged prior to the summit. The timing of the rest is unclear. The $250 bn in SDR‘s will simply be created from thin air, rather like printing money and most of the the $250bn in trade finance will come from the private sector.

Concerns about the actual amount of new money from the G20 meeting may lead to reassessment of the initial euphoria in markets seen last week.

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Pricing in recovery

April 1, 2009 — Mitul Kotecha

As was pointed out to me in one of the comments following my last article there are some signs that the market has become increasingly resistant to bad news. Indeed, it is encouraging that a host of weak economic data, more bad news on the banking sector front, bickering by leaders ahead of the G20 meeting, and the likely bankruptcy of a couple of US automakers has not prompted a more negative reaction.

Is the market tired of selling? It’s highly possible. Having faced an onslaught of bad news over recent months perhaps market players are simply exhausted. Adding weight to this is the fact that any pullback in equities has been relatively small compared to the gains over recent weeks whilst technical indicators are suggesting a more positive picture emerging.

I am not convinced. I will grudgingly admit that the market looks in better shape than it has done for months but this is far from a sustainable rally. Retail investors have yet to get in on this rally and like past equity crashes such as that following the Nasdaq bull burst, it took a long time for many investors to get back into the market having been burned so badly on the way down.

As I write this the US ISM manufacturing and pending home sales data have been released and both have come in on the positive side of expectations. The caveat is that the ISM is still in contractionary territory, consistent with falling GDP. Even if the data coming out now is less negative economic stabilisation is unlikely to take place until at least the end of the year. Based on past trends equity markets begin pricing in recovery around 6 months ahead of actual economic recovery, suggesting that we may only be a few months away from a more sustained turnaround in equity markets.

My only concern with this theory is that this is unlike any previous recession and so the equity market signal may be false. The current US recession has already lasted around 16 months, which is already a few months longer than the average for past recessions. It will need banks to be healthy before the economic outlook improves. If banks continue to remain in bad shape then past history will be a poor guide to the current path of the US economy.

Posted in bank rescue, Economics, equity markets, Financial crisis, US. Tags: , . 1 Comment »

Tough week ahead

March 30, 2009 — Mitul Kotecha

It looked as though it all went wrong today as the bad news just kept on coming. Following reports on Friday that JP Morgan and BoA had a more difficult month in March following a stronger start to the year, reports that UBS would be shedding thousands of staff and would announce billions more in writedowns as well as news of the takeover of a Spanish regional bank by the Bank of Spain hit market sentiment hard. Topping all of this were comments by the US administration that some banks would need more capital in addition to that already provided. The administration also said that bankruptcy may be the best option GM and Chrysler.

This sets up a difficult week ahead, with risk aversion set to rise further and the news unlikely to get any better. Economic news is likely to add to the market’s gloom as US releases such as the ISM manufacturing survey for March and the jobs report will likely reveal further deterioration. Expectations for another hefty drop in payrolls in March could see a total of over 5 million jobs lost so far in the current cycle with many more to go.

The news in Europe will not be much better and as today’s Eurozone sentiment indicators have shown the outlook for the economy remains gloomy. The ECB is likely to cut interest rates but will refrain from embarking on the quantitative easing policies followed by other central banks such as the Fed or BoE. As risk aversion rises the USD is set to continue to strengthen against most currencies this week.

Posted in bank rescue, central banks, Currencies, Economics, equity markets, Europe, Financial crisis, UK, US, US administration. Tags: , , . 6 Comments »

Is the bad news priced in?

March 28, 2009 — Mitul Kotecha

I have been harping on about the fact that the market rally is losing its legs, that the market is too optimistic about the bank rescue plans, that there is a lot pain ahead on the economic front. This has been a view that is generally not a consensus one.

There is a good article in the FT today about the divergence between the equity market reaction to the US administration’s plans and the fixed income market reaction. The article sums up quite well the thoughts I have been having and why I believe the rally does not have legs. The article describes how “broken finance” has become since the onset of the crisis and how the US Treasury is relying on leverage and securitsation when this was exactly what got banks into the mess in the first place. The difference in the price that banks are willing to sell toxic assets (realising losses at the same time) and the price private investors are willing to pay could be a major stumbling block to the plan working. In addition, another question revolves around the type of toxic assets banks will be willing to offload with the worst quality likely to be sold off first.

If the the process results in better disclosure of such debt then it may finally reveal that some institutions are technically insolvent. If so, will the administration do the right thing and temporary nationalise “zombies” or even allow them to go bust? My view is that in the end a quick end to the pain, with a lethal injection may be better than the slow tortourous debt that is happening now.

I was asked on CNBC this week why I believe the rally won’t last and I said that there was a lot of bad news still out there. The presenter replied that is this not priced in to markets? I replied that perhaps some of the bad news is priced in, but there is still a lot more to come. I would add to this, does this pricing in of bad news also justify the magnitude of the rally seen over recent weeks. I don’t think so.

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Running out of steam

March 25, 2009 — Mitul Kotecha

The euphoria in markets over recent days appears to be fading but only after a fairly solid rally in equities amounting to around 20% in some stock indices from their lows. Financials have led the gains over recent weeks helped more recently by a warm reception to US Treasury Secretary Geithner’s plans to fix banks.

Although I am doubtful about the staying power of the recent improvement in market sentiment I have to admit that there are clearly positive steps in action in the US both from the Fed and the US Treasury.  In fact the US authorites have gone all out to get things turned round.  This appears to have put a floor under risk appetite for now. 

Ok there are still a lot of questions to be asked such as how quickly the Geithner’s bank plan will work or whether banks will be unwilling to offload toxic debt at a significant loss or whether the deal is a raw one for US tax payers who seem to be bearing most of the downside and not too much upside if things go well.  All of that aside something is better than nothing even with its faults.

As for equity markets this still smells like a bear market rally or put another way a dead cat bounce.   I could be wrong and will be happily eat my words but I can’t see how the rally can be justified given the struggle ahead for both banks and the economy.   At best, what to expect is a period of high volatility before a real recovery arrives. 

Posted in equity markets, Financial crisis, US, US administration. Tags: , , , , . Leave a Comment »
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