Investor sentiment has risen to more bullish levels with the recent recovery in the US stock market. Is this the long-awaited recovery?
The world economy can be approximated by the US and the Chinese economy. Both seem to be recovering but there are worrisome hints that reality is worse than appearances.
In the US, banks have done well with their recent earnings reports but there are two under-reported factors to take into account. The first is the impact of all the federal bailout money and the second is the recent decision to suspend the "mark-to-market" rules for valuing bank assets (loans). US banks still face crippling losses and lower stock valuations in future, because they are carrying huge housing liabilities that are not reflected in their reporting. Want an example? Only half of bank-repossessed real estate is on the market; the rest is being held back so as not to further damage property values. This should tell us that prices are still not low enough to clear the market, and that bank losses are more probable than bank profits in the future.
Here is a link to my source for the above gloomy opinion. There is more bad news in the full story.
In China there are reports of economic recovery but, interestingly, total power consumption has dropped by 5.2% in the same period that economic activity was reported to be up by 6.1%. Exports are also down sharply. Headline economic figures might just be easier to fudge than power consumption figures, especially if governments have just had a big G20 meeting to discuss the state of public confidence in the world economy and resolved to try to get people spending again. The Baltic Dry Index certainly looks feeble these days after showing signs of a promising recovery, so actual trade volumes seem to be retreating again. Further details are available on the April 17 posting on the following link.
Conclusion? Be willing to sell into short term strength in the stock market, and be prepared for a sharp market correction once the superficial warm feeling passes.