U.S. stocks posted the biggest two-day rally since 1987, rising over 13%. That coming after the Obama announcement of his Treasury Secretary choice on Friday and the weekend announcement of over $300 billion for the Citi bailout, and in spite of Bloomberg’s calculation of total rescue costs over $7.4 trillion.
The two-day rise is certainly impressive, but it is not yet a trend reversal.
If you believe this is a blip and one more head feint in a larger down movement, the chart below will support that view.
If you think the last two days may be the beginning of a new bull market or a major bear market rally with legs, wait a while for a clear and sustained penetration of the general 850-900 area for the S&P 500 (roughly SPY 85-90) before risking capital.
Not only does the chart need more confirmation of a trend change, the dimensions of the problem facing the world economy and the financial markets grow larger. Markets may anticipate, but we think the horizon for better times is some ways off, and farther out than markets can currently divine.
Recent Comparators and News Snippets:
At various times in the past few days, the financial press pointed out that the total rescue package is equal to 1/2 of the US GDP; that the Fed lending last week was 1,900 times the three-year weekly average (equal to 36 full years of normal total lending); that massive additional stimulus (read borrowing) is promised by Obama and the Congress; that Europe is in recession; that the Gulf is in recession; that Japan is in recession; that China and India are slowing significantly; that Russia is struggling; that auto companies face possible failure, and so on …
The $7+ trillion bailout, according to a Bloomberg guest, is $24,000 per man, woman and child in the US. It is also a multiple of all the money we have spent cumulatively fighting in Iraq and Afghanistan.
We noted in an earlier post that the total outstanding US Treasury debt as of last June 30, according to SIFMA, was $4.7 trillion. China, Japan and UK are the largest owners of that debt, holding about 1/3 of the total between them. Can we really expect them to buy all the bonds we are going to have to float? Will the markets be as sanguine when the current insatiable demand for Treasuries turns into an oversupply? Will the Dollar continue to rise when the world has its fill of our Treasuries?
Rescue Relative Size:
Consider this table of nominal GDP for the 25 largest economies in 2007 (from a Wikipedia posting based on IMF data):
The bailout is roughly equal in amount to the total GDP of Japan + Germany, OR China + UK + France, OR Italy + Spain + Brazil + Russia.
However, we are told we also need an additional “massive” stimulus to bring the economy around. Perhaps we should think in terms of a rounded $10 trillion of total rescue dollars.
Putting all that together, we don’t see the fundamental basis for a stock market recovery just yet.
Time Frame for Market Bottom:
Obama/Summers say we need two years of economic stimulus, and APEC (Asia-Pacific Economic Co-operation) says the world economy can be turned around in 18 months.
If they are generally correct that 18 to 24 months is the time needed to mend the situation, and if markets lead the economy by 6 to 12 months, then it would be reasonable to expect a trend reversal in 6 to 18 months from now. There is no magic there, but it is a concept to consider in conjunction with the calamitous financial mess we are in.
