Monday, March 30, 2009

Is the party over?

The markets are down about 3.5% today following a modest decline on Friday. I think it is important to keep this move in perspective. On the one hand we are still up 16% from the lows we reached on March 9th which is a respectable move. Another way to look at it is that where we are today is where we were a few hours after Tim Geithner announced the government’s plan to remove “legacy” assets from bank balance sheets.

Even during the course of the main rally there was a lot of disagreement as to how real it was. Some thought it signalled a bottoming or others that it was a sucker rally that would soon reverse itself and retest the lows.

Personally I think it is too early to answer this question. Todays move was big but not outrageous in the context of what has been going on. It’s important to remember that what got the big rally going was a few comments from Vikram Pandit about how things were looking up at Citibank followed by similar comments from the CEOs of other banks. Since then we have also gotten some economic data which was bad but no worse than people had expected. We also got the Geithner plan fully fleshed out. The markets ran ahead on this but we never got close to the level that we got to in the euphoria in the run up to the inauguration.

Generally my view is the following. The markets are counting on bad economic data and maybe even bad earning data for the first quarter so the data would have to be really shockingly bad for the markets to trade down on data and earnings. Additionally the markets tend to look toward the future and while there is uncertainty about the effectiveness of the various government programs the markets know they will take time to work. I don’t think we’ll move too much on economic data until the second or third quarter when we start to get hard numbers about whether the stimulus package and banking support programs are having an effect.

Having said that the markets are willing to give the economy time to recover I think there are certain things that will move the markets because it is not possible for them to anticipate them. Those things are US government actions and international events.

Today was an example of US government action. The Treasury Secretary said over the weekend that some banks would need massive assistance, and the markets took that as a bad sign even though he said the aid would be forthcoming. The government also took some aggressive moves against the auto-industry removing the CEO of GM and basically setting strict deadlines for the resolution of the auto-industry problems. This aggressive stance spooked the markets a little but was probably necessary in order to get the various stakeholders, to concentrate on a solution.

The other thing that can’t be ruled out are problems internationally. There are very serious problems in Europe both on its periphery and within the Eurozone itself. A major default by a Eurozone country or a serious political problem in the Ukraine that draws in Russia would be very bad for markets which are generally already nervous. Add to this the very interesting dialog between the US and China about what the form of the international monetary system should look take and you have a combustible mix for the G20 meeting this week.

So I can’t really say whether the market will hold this rally or not, I can tell you that the high intraday volatility is here to stay.

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