Where are we in the global crisis? Are we recovering yet? Why are stock prices rushing upwards when the real economy still looked unsettled? I have tried to convey some answers in my posts before. Let's look at some more related factors:
a) economic statistics - no doubt the stats that have been coming out are still bad, but we have to remember that economic stats are dated, things that are dated means we all should know already, they do not tell us something we don't already know, we went through it, we read about how many companies have been downsizing, we read about plunging commodity price and the Baltic Dry Index, we hear about the number of foreclosed homes ... hence the main aim when looking at economic stats now is to look for signs of recovery, then we have to distinguish between year on year, quarter on quarter and month on month data, year on year is the hardest to calibrate - we already know that things will be very bad on a yoy basis, thus we look at comparative yoy figure for the past few months, yoy figures are important in that it takes out seasonal effects - its the same month as last year, month on month is deceptive because of seasonal effects e.g. figures for February (Chinese New Year effect / holidays / front loading) when compared to March will have the seasonal effect, which is why it is safer to look at quarter on quarter as it would indicate a more genuine trend change ... considering where we are in the recession cycle, everyone should be looking at the rate of decline, or rather the changes to the rate of decline to get at hints of recovery
b) bad news discounted - just how much of the bad news has been discounted, we can only guess, but when you take into consideration the spike in risk aversion over the last 7 months (which can be measured), it is reasonable to assume that prices have more than discounted the bad news because a depletion of confidence and a spike in risk aversion will lead to oversold markets, and thats where we are coming back from, an oversold position
c) bear market rally - in the beginning I would call it a bear market rally, but since February I think its a cyclical market rally, many who call this a bear market rally are those who totally missed out profiting from the rally, the more it rallies, the louder will those who did not buy will shout that it is a bear market rally ... you will also notice that those fundamentals driven experts have gone a lot quieter in recent weeks as the markets continued to climb because they have been wrong and wrong week in week out, hence the only people still shouting are technical analysts, or rather those chartists who also failed to spot the rising trend are now calling for a massive correction ... nobody wants to be wrong and at the same time not being able to make some money when others have traded profitably, beware of the underlying reasons why some people are saying certain things
d) what could go wrong - markets will seize up again if there are major unknowns appearing again, such as if a few big banks were to collapse, or that some of them would require another bailout in the hundreds of billions again, that is not likely after the "stress test" that did not please many people, to me its a very good move by Geithner because it opens up the books and sores for all to see, only with another round of panic will the bond markets seize up, and when they do, the risk aversion will return, looking at what has transpired, that risk has be lowered significantly
So, yes, foreclosures will be bad, unemployment may still rise ( I expect them to peak by end of June/July 2009), pockets of Europe will still be very bad, but the focus has shifted to investors looking for signs of recovery, and every time economic stats DOES NOT say that, markets will just drift lower, but not correct massively, as the amount of liquidity and the need to have an exposure in order not to miss out, will counterbalance the markets in the weeks and months ahead.
p/s photo: Jessie Chiang
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