The Market Doesn't Care if We are in a Recession. Should You?
Wednesday, April 9, 2008 | Teeka TiwariRating:
Editor's Note: The third weekly conversation with Teeka is complete and ready for download. Listen now to hear ...
- Teeka's take on the "blame game" for today's credit crisis
- His current outlook for gold and silver
- Two innovative ETFs offering new ways to play the market
Click Here to Listen >>
- What Teeka's doing in the Big Apple all this week
If the stock market doesn’t care if we are in a recession, should you?
I ask this question because over the last two weeks, we have received some horrible economic news and yet the market has pushed higher.
What does this mean?
Do the fundamentals even matter anymore?
The week before last, UBS announced a whopping $19 billion in real estate write downs. To add insult to injury, they then said that they would tap the equity markets for $15 billion! Even more galling were last Friday’s unemployment numbers. We saw unemployment spike to 5.1% from 4.8% and continued claims climb to 2.93 million.
On top of all that, just yesterday Washington Mutual announced a reduction in its dividend to a penny a share, and that TPG (Texas Pacific Group) will be sinking $7 billion into the company through a common and preferred stock offering at $8.75.
In the past, this kind of "recessionesque" news would have sent the market plummeting.
So did everybody just get dumb about the economic news?
What’s happening is that that Wall Street is beginning to look past the bad news, and is starting to look ahead to the good news. However, we may not see any actual good news for several months. In fact, we may see a worsening of employment and business conditions, but we could still see the market rally.
The thing to remember is that the stock market is a forward looking, discounting mechanism. The market does not reflect current business conditions, but rather it seeks to reflect future business conditions (typically 12-18 months out).
The market is telling us that it expects US business conditions to improve. Already we are beginning to see liquidity creep back into the credit markets, and the banks are well on the way to rebuilding their balance sheets. For now it’s a good bet that we will have quite a nice intermediate rally. Initial resistance lies at 12,800 on the DOW and when we clear it (and I believe we will) we could see a very nice trading move higher.
I think it’s difficult to make a call beyond the intermediate term because, once the banks get on a firmer footing, the Fed's attention is going to turn back to inflation. For those of you that don’t know, inflation is the mortal enemy of long term equity bull markets.
I don’t care what how the inflation numbers are massaged, we are experiencing dramatic inflation across the board with no end in sight. But let’s not get ahead of ourselves. For now the market wants to go up and it wants to ignore inflation. I’d suggest we not argue and enjoy the ride higher but keep a wary eye out for shifts in market sentiment.
The rest of the world hasn’t experienced their credit melt down yet. But rest assured, to a greater or lesser degree, they will be feeling the pain here shortly. Our UK readers will be able to share with you how their housing market is just beginning to feel the pinch. As such, new buying should probably be US focused rather than offshore focused. The US dollar has been getting stronger and, at least for the short to intermediate term, US stocks look set to outperform foreign stocks.
(Please let us know what you think about Teeka Tiwari's article.)
Rate his article here »
Rate his article here »
“Let the Game Come to You.”
Teeka Tiwari
Chief Investment Officer
Point & Profit
