Monday, April 20, 2009

Global Stocks Rally May Falter, State Street Says

Dow futures are indicating a 137 point decline, the S&P 500 16.90. Since the March 9 closing lows major indexes are up 24-30%. Seems generous enough, time to pull back and evaluate.
From Bloomberg:
A rally in global stocks is likely to falter as a prolonged recession dents corporate earnings, according to State Street Global Advisors Inc.

The MSCI AC World Index has surged 27 percent since its March 9 low after lenders from JPMorgan Chase & Co. to Bank of America Corp. said they made money at the start of 2009 and the U.S. government unveiled plans to buy as much as $1 trillion in toxic assets from financial firms. The Standard & Poor’s 500 Index advance in the past six weeks is the steepest since 1938.

“We’re likely to see a pullback in stock markets as earnings disappoint,” said George Hoguet, global investment strategist at Boston-based State Street Global Advisors, which oversees $1.4 trillion. “We are undergoing a severe shock and the global economy will take several quarters to get back to trend growth.”

Profits at S&P 500 companies dropped for six straight quarters through December and are forecast to decline until September. The world economy will contract 1.7 percent this year, the World Bank said last month, while the International Monetary Fund said April 16 the “severe” global recession has “worrisome parallels” to the Great Depression.

“It’s hard for global equities to sustain a rally absent stabilization in the U.S.,” Hoguet, who is also a senior portfolio manager at State Street Global, said in an April 18 interview in Shanghai.

‘Sucker’s Rally’

Mark Jolley, strategist at MainFirst Securities Hong Kong Ltd., and economist Nouriel Roubini share the view that equities are set for a correction.

“Six weeks of consistent gains is typically a healthy medium-term signal for any equity market but is also typically indicative of a market overdue for some consolidation,” Jolley wrote in a report published today....MORE

On March 10 (the day of the pop that started this rally) we said:
...I'll go with Faber on the timeline, at least three, maybe six weeks before we see a change in direction, i.e. more than a one day move.
Three days later in "Markets: Where Do We Go From Here?":
...Using the low I.Q. approach* to investment analysis, refined by yours truly, while we will have some down days in the next two weeks, the trend will be up.
Then come the first quarter earnings reports and the crystal ball gets a bit cloudier.

One of two paths will emerge.
a) Earnings are bad enough to shock investors into a type of photo-realism:
where you see detail (granularity, in the biz) that may not actually be real but is scary nontheless. Or

b) Earnings surprise on the upside, a mild euphoria emerges and stocks move higher, unfettered by economic realities until we reach a collective Wile E. Coyote moment, we've gone off the cliff, forward momentum has decreased to zero and gravity is a nanosecond from taking over (I know that's not how trajectories work, it's a cartoon):...

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