Banks, Credit Markets Must Stabilize for Sustainable Rally

The U.S. markets rallied for their fourth week. We are now well up from the lows experienced in early March. Last week the S&P 500 rose 3.3% to 843 and the Nasdaq Composite advanced 5.0% to 1,622. Value stocks finally showed strength because the Financial Accounting Standards Board revised the mark-to-market rule giving bank stocks a boast. Value stocks however still lag growth stocks year-to-date. In fact, large to mid-cap growth stocks are now positive for the year.

Though the current rally has provided much needed relief, it does not mean the markets are only headed up. We have seen rallies galore since we started this ascent into hell last year. This is the fifth 10%-plus move we have seen in the past year and the previous rallies did not hold. For this rally to be sustainable the banks and the credit markets have to be functioning and stable.

The economy is still deteriorating. Last week, the official national unemployment rate reached 8.5% (an additional 660,000 jobs were lost in March). The real rate of unemployment is over 10% when you add in those that have been looking for a full time job for more than a year or those under employed (working part time but seeking full time). One out of every ten adults is unemployed and it will most probably only go get worse before it turns around.

This and other data suggest that the economy contracted in the first quarter by approximately 5%. Luckily some of the recent economic data related to housing sales, retail sales and consumer confidence is pointing to a moderation in the rate of decline. The Federal Reserve is also doing its best to pump money into the system and bolster up the banks. The economy is beginning to bottom out but the data is not pointing to a robust or steep US recovery. The economy will begin to stabilize the second half of the year but the going will be rough.

Comments

[Steve in Gr...:]

Libby is closer to being right about the general economic conditions that Cetin, but both are too optimistic.

Apr 07 01:01 PM

[mac.barron:]

Ms. Mihalka writes:

"We have seen rallies galore since we started this ascent into hell last year."

Maybe the ascent to hell is like cold comfort or a backhanded compliment.

Or not. Mr. Market seems to be getting jittery about the earnings reports that are on the way; this promises to be an exciting week, even if we end up right where we started it. Two "under the radar" bites are on the way:

People who were on unemployment for substantial chunks of 2008 may have skipped having taxes taken out because unemployment is usually a lot less than people actually need to stay afloat. Come 15 April there will be a lot of agony for those folks which will lead to more cutting back and more desperation.

A lot of people who have made up the ranks of the "hardcore" unemployed are going to run through their final week (59th?) of unemployment in Q2. We are down 5.1 MM jobs since the end of 2007 so a lot of folks are going to be really hurting.

Apr 07 06:00 PM

[The Geoffster:]

We should experience several rallies before the market hits bottom. PEs are still historically high. Rough seas ahead. Tread lightly.

Apr 07 08:14 PM

[Fighting Yoda:]

It is very far from over, lot of credit and macro data that came out today is alarming:
1. Consumer credit fell by $7.48 billion in February, or 3.5 percent at an annual rate, to $2.56 trillion - the Federal Reserve
2. US stocks overvalued- Shares in the S&P 500 trade at 1.8 times book value, according to Bloomberg data, versus 1.35 for stocks in the MSCI World.
3. IMF – Toxic asset estimates doubled to $ 4 Trillion
4. Thirty-five companies defaulted in March, the highest number in a single month since the Great Depression, according to Moody’s Investors Service.
5. Uncollectible Debt : Uncollectible credit-card debt rose to 8.82 percent in February, the most in the 20 years that Moody’s Investors Service Inc. has kept records. Moody’s cited higher unemployment and forecast so-called charge-offs will exceed 10 percent by the end of the year
6. Commodity price rebound is over – Baltic index has fallen 35% form recent highs.

Banks currently had estimated 8% unemployment and 30% fall in home prices – we are already well past it. So lots more write downs from banks.

Apr 07 10:48 PM