April 04, 2009

Are we there yet?

Weekly Snapshot
• Dow ends week above 8,000 - best 4 week performance since 1933
• NASDAQ Composite and NASDAQ 100 in positive territory for 2009
• U.S. unemployment rate rose to 8.5% in March - the highest rate since late 1983
• U.S. employers eliminated 663,000 jobs in March
• U.S. accounting officials are expected to ease mark-to-market rules
• G20 summit: leaders pledged $1.1 trillion in loans and guarantees to struggling countries
• The ECB lowered rates by a smaller-than-expected 25 basis points to a new historic low of 1.25%
• Rick Wagoner was ousted as GM’s chief executive
• The World Bank issued a new forecast for the global economy: -1.7% in 2009
• OPEC president predict oil prices to reach $75 per barrel in 2009

Are we there yet?
In spite of an onslaught of gloomy economic data and a deteriorating job market (US unemployment rate hit 8.5% in March), equities seem to be off of their worst sessions. In fact, some stock indices have posted remarkable gains in recent weeks. The Hang Seng Index is up 36% from its 52 week low and the NASDAQ composite Index posted a stunning 28% gain since March 9th - not a bad return for a 4 week time frame. Is there light at the end of the tunnel? The general US market as mirrored by the S&P 500 is up 24.5% since the eerie low of 666.79 within the current bear market. Technically, it is yet too early to call out a bottom formation since the intermediate trendline is still downward sloping and must be broken to move higher. Until we see a clear reversal of this trend, the charts suggest a bear market rally that needs additional momentum to break the bearish trendline and form a true reversal. A break above 850 on the S&P500 and a subsequent re-attempt of the previous double top around 877 should give impetus to such a trend reversal.

But until then, the charts suggest a bear market rally within the general down trend. Technical factors aside, there are a number of problems still looming and the massive declines in stock and asset prices have not yet fully translated into the real economy. Unemployment being a lagging indicator typically trails the stock market about 6-9 months. Let's assume the market hit the low in early March then we would be looking at a possible peak for unemployment towards the end of 2009 - very dire prospects for a job market with an unemployment rate already at 8.5%. Higher unemployment also has a destructive effect on financial markets giving companies an uphill struggle ahead for an economy such as the US which is primarily consumer driven.

However, given the speed of the rise in unemployment, we could also consider a potentially positive scenario. It appears to me that this time around, more companies have taken more drastic cost cutting measure faster than ever before. While this is bad news for the unemployed, it means companies can operate on better margins sooner and a return to higher profitability should happen faster as well. A recovery of the equity markets is therefore plausible but the recovery may be a jobless one. Are we there yet? Not quite, but there is some light at the end of the tunnel.

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