Latest News Raises Chance of a "W" Shape Economic Recovery...

Most Analysts are of the view the economic recovery will be fast, in the form of a "V" shape recovery. However, the latest news seems to indicate that "W" shape is possible.




Dennis Ng,


Share prices have moved too far ahead of economic reality

After hitting its best levels of the year on Wednesday ahead of the Federal Open Market Committee’s (FOMC) communiqué, the S&P 500 Index ran into heavy weather on the realization that the Fed could start scaling back on emergency support of the economy. US equities dropped further later in the week on renewed concerns about the state of the troubled housing market and weaker-than-expected durable goods orders.


In addition to global stock markets declining, risky assets such as commodities, oil, gold and other precious metals all sold off as pundits worried about the winding down of quantitative easing puncturing the “liquidity rally”. Government and corporate bonds, as well as the Japanese yen, emerged as winners.


As stated often before, share prices have moved too far ahead of economic reality. This calls for a cautious approach in anticipation of the market working off its overbought condition and fundamentals reasserting themselves. I will bide my time while the fundamentals play catch-up, especially as we could be seeing one of those occasional all-change signals in the short-term trends of a number of markets.


David Fuller (Fullermoney), making a successful recovery from heart surgery, said: “… it does look as if Wall Street and other stock markets under its influence have temporarily run out of upside momentum following a good run recently. Supply in the form of secondary offerings has increased. This coincides with understandable October jitters as investors recall last year’s meltdown.


“At this stage of the bull market cycle, a consolidation would have the benefit of preventing overheating. When a larger reaction eventually unfolds it is likely to be a providential buying opportunity rather that a repeat of last year’s harrowing decline - provided monetary conditions remain favorable.”


The S&P is at a level that should be reached in the third year of recovery from a recession, David Rosenberg, chief economist of Gluskin Sheff & Associates, told Bloomberg (via MoneyNews).  “The fair multiple for earnings should be 12 or 13,” he said. “We’ve blown right through that.” (The S&P 500 is trading at a level equal to almost 20 times reported earnings from continuing operations, according to weekly data compiled by Bloomberg.)

MoneyNews: Whitney - end of government aid a big test
“Bank analyst Meredith Whitney remains bearish on the economy, particularly when it comes to jobs.


“‘There’s not a lot of new job creation going on on Main Street, and the liquidity to the consumer and to small business is still contracting,’ she said on CNBC.


“‘It’s very difficult to get the engine moving without a lot of government support within that. So when you slowly wean government support, that’s going to be the test that I think everyone’s going to be watching starting in October.’

“She questioned where new jobs will come from.


“‘Once companies become more productive do they go back and say I want to become less productive? … You have to have a revolutionary application to hire people,’ Whitney says.


“‘Surely if this country becomes massively protectionist we’ll build up manufacturing capabilities. Is that necessarily a good thing? No.’


“Half of the work force toils in small businesses, she notes. But, ‘there’s not a lot of free capital for small business innovation, small business period’.


“As for the banks, ‘they’re now doing everything they can to keep loans on the books and not write them down,’ she notes. ‘They’re extending and pretending with loans.’”


Bloomberg: Housing crash to resume on 7 million foreclosures

“The crash in US home prices will probably resume because about 7 million properties that are likely to be seized by lenders have yet to hit the market, Amherst Securities Group analysts said.


“The ‘huge shadow inventory’, reflecting mortgages already being foreclosed upon or now delinquent and likely to be, compares with 1.27 million in 2005, the analysts led by Laurie Goodman wrote today in a report. Assuming no other homes are on the market, it would take 1.35 years to sell the properties based on the current pace of existing-home sales, they said.

“Helping to stoke speculation the housing slump has ended, an S&P/Case-Shiller Index for 20 US metropolitan areas showed the first month-over-month increases in values since 2006 in May and June, reducing the drop from the peak to 31%. Echoing other mortgage-bond analysts including those at Barclays Capital, Amherst cautioned that a change in the mix of foreclosure and traditional sales over different parts of the year lifted prices in the period, as the distressed share shrank.


“‘The favorable seasonals will disappear over the coming months, and the reality of a 7 million-unit housing overhang is likely to set in,’ they said.


“The amount of pending foreclosed-home supply has been boosted by more borrowers going into default, fewer being able to catch up once they do, and longer time periods to seize properties because of issues such as loan-modification efforts and changes to state laws, the New York-based analysts wrote.”

Source: Jody Shenn, Bloomberg, September 23, 2009.