Monday, February 9, 2009

Is the bounce contagious?

So many things collapsed in price from last September through the end of the year, only to bounce this year: shipping costs, most commodity prices, corporate debt prices, and emerging market stocks and bonds. It's enough to make you think that it isn't just a coincidence; that global economies hit an airpocket last September but have since begun to recover. Equity markets haven't bounced yet, but virtually all equity markets around the world have stabilized over the past several months, and many are up from their lows.

It's therefore quite tempting to wonder whether the recent and ongoing bounce in commodity prices, shipping costs, and corporate bond prices will be replicated in the equity markets. I think it will. I think the improvement in shipping costs, commodity prices and credit spreads reflects an improvement in the underlying economic fundamentals. The U.S. and global economies are not in free-fall, they are in the early stages of recovering from what was a sudden and massive loss of confidence in the global banking system that paralyzed commerce.

Whatever solutions Geithner gives us tomorrow, and whatever the fate of the faux-stimulus bill in Congress this week, if equity markets improve, it will not be solely due to the helping hand of government, it will be due also to the market's ability to recover from its own excesses.


Jeff said...

What is your take on the below analysis?

The big issue this week is 1) how much of the "stew" of TALF, TARP, stimulus, aggregator bank actually becomes real, and 2) how many traders will end up believing that this creates some kind of bottom in the economy, so it's safer to buy stocks, or at least stop shorting them?

Short-term (the next few days) most agree it is tough to short aggressively ahead of the TARP/stimulus/aggregator bank juggernaut.

Bulls—or at least those that are not outright bears—think all these plans are part of the process that will be building a bottom, sooner rather than later, and that is why the idea of spending money is generally supported.

On top of that, credit spreads continue to improve - so fear of a systemic collapse has declined.

Bear say the big post-stimulus hangover will be a doozy. Bears are convinced that once this stimulus juggernaut is out of the way, we will be facing a long period—mid February into the third quarter—where most of what can be done, has been done.

We will be staring at awful numbers (first quarter will be very bad) and bears say they will play their trump card:

1) They will argue that second half earnings are way too high (particularly for financials and consumer discretionary) and will have to come down;

2) Traders will realize the market is no longer cheap and the market will drop to--and surpass--the November lows (some bears are at 600-650 on the S&P; the November low was 741, we are currently at 867).

I'm particularly interested in your view of the Bears point of view.

Scott Grannis said...

Jeff: right now it looks to me like the market was fully prepared for the stimulus bill to pass, and the market was terrified that it would be as bad as it has turned out to be. If I'm right, that reduces downside risk substantially, leaving the bears very frustrated.