Friday, June 4, 2010

Why global stocks are poised to rebound ..........

Taken from ET, today's Editorial......4th June 2010....

Too many people are crying too much wolf over the current troubles in the worlds financial markets; we are poised for a period of sustained growth globally and long-term investors have everything to gain, says Sunil Kewalramani
IT HAS taken 23 years and a world market meltdown, but Oliver Stone's Wall Street: Money Never Sleeps, sequel to his 1987 hit film, has returned exactly at the time US Congress has introduced the Restoring American Financial Stability Act of 2010.
Ironically, the music in the film's trailer is the familiar opening of the Rolling Stones' Sympathy for the Devil. Please allow me to introduce myself. I'm a man of wealth and taste, croons Mick Jagger. The fictional embodiment of financial excess is played by Michael Douglas, who was given a hero's welcome at the Cannes Film Festival.
Even as actors in the Greek drama were seeking catharsis after their prevarication, the European leaders, calling to mind ex-US Treasury Secretary Hank Paulson's bazookanomics,' agreed to a hefty rescue package to replace the water pistols at Greek riots with bazookas to shock and awe markets out of their predictions of doom. 750 billion is sufficient to buy the entire debt of Greece twice and still have enough left over to buy the debt of Portugal.

While the Greek tragedy was being played to the gallery, Portugal and Spain sold 10-year bonds at 4.05% and 4.52% respectively, in an oversubscribed auction. Now that Germany (safety net) is on board, the PIGS (Portugal, Ireland, Greece and Spain) may not even need to tap into the funds.
Greek crisis has enabled Germany to achieve a de facto 20% devaluation against the US dollar. It has made the BMW, Mercedes-Benz and Volkswagen cars cheaper in Beijing and Mumbai than they were six months ago. It has given a great fillip to manufacturing in Northern Europe.
The TED Spread a m easure of bank confidence to lend has widened to 40 basis points from 28.4 basis points. The spread, which compares three-month dollar Libor and the overnight indexed swap rate, had surged to 364 basis points after the collapse of Lehman in September 2008.
Brazil today is an economic growth rock star. Eight years ago, Brazil faced 25% interest rates, massive government spending, currency devaluation and risk of default. Brazil's debt was $335 billion almost as large as Greece's entire GDP today!
President Lula ramped up a difficult austerity programme almost 4% of GDP. Brazil received $30 billion in aid from the IMF, which investors feared was insufficient. Brazil is no longer synonymous with hyperinflation, but with growth, opportunity, Olympics. The myth of the lazy Greeks: According to Organisation for Economic Co-operation and Development (OECD), Greek people work for much longer hours than Germans. Consequently, it might be just a myth that hard-working Germans had to bail out lazy Greeks.
Between 1989 and 1994, Greece, which accounted for the same share of the world's economic output as today, had interest payments, as a fraction of GDP, more than twice what they are now.
Investors fret Germany's ban on naked short sales of European credit-default swaps. However, the outstanding credit default swaps on 10 European countries (including PIGS) are less than $108 billion. The entire CDS market is estimated to be around $11,000 billion. Besides, most CDS activity does not take place in Europe but in New York.
PEOPLE are selling the euro, as if there is no tomorrow, and I believe there is a tomorrow for the euro. The austerity measures being adopted in Europe, in a sense of urgency, are much larger than the US (which also has a high deficit/GDP ratio) adopted in the heat of the sub-prime crisis.
Besides, the anti-euro trade is getting overcrowded. Euro speculator longs as a percentage of positions are essentially at all-time lows and hedger longs are as a percentage of positions at all-time highs.
Europe is China's biggest export market hence, fears of China selling its $630 billion eurozone holdings will not cut the mustard. Despite fears of China dumping US treasuries while the dollar was getting hammered, its holdings of US debt have increased $1 billion this year to date.
Chinese government isn't blind to the threat of rampant inflation outpacing the economy and has taken steps to rein in stimulus. Chinese monetary policy has taken the middle road inflation-limiting but not growth-choking.
As long as monetary policy remains measured, there's no reason China's economy can't grow as it did during the last bull market. After all, reserve requirements, interest rates, and currency all rose then too.
There is apprehension that Dr Copper is diagnosing a double-dip. Copper prices bottomed at $1.34 per pound in December 2008 and even after recent declines are up 132% from that bottom. Falling oil prices leads to more purchasing power in the hands of consumers as we head into the peak summer driving season in the US. It is a deflationary trend that should help keep Fed rates low.
Market recoveries aren't smooth (see accompanying chart) and gyrations along the course can easily spur emotion. Watching stock markets move is a great spectator sport, but not a great participant sport unless you're a market pro. Amateurs get whipsawed when they obsess over the market, minute to minute.

The PMI manufacturing indices for 23 international economies shows that only two (Greece and Hungary) are experiencing contraction. China's manufacturing data is nearly always lower in May over April.
Emerging markets today are as large as Europe. Semiconductor sales in the Asia/Pacific region were up 72% yearover-year in March, aiding US exports.
Since 2006, Japan has seen five prime ministers: Koizumi (2001-2006), Abe (2006-2007), Fukuda (2007-2008), Aso (2008-2009), and now Hatoyama (2009-10) early exit of a PM will not come as a bolt out of the blue.

There is an adage on Wall Street Sell in May and Go Away. Many investors wished they had. Global stock markets are poised to rebound in the near term. Perhaps, the new adage should be Sell in May . and come back in June'.

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