Sucker's Rally Approaching an End

Apr. 13, 2009 5:26 AM ETDIA, SPY, QQQ, GAF, GULF196 Comments
Peter Cooper profile picture
Peter Cooper

Whatever the technical reason for the 25 percent rise in the S&P over the past five weeks, or a more modest eight percent bounce in GCC regional stock prices, the absurdness of this sucker’s rally ought to be obvious to all.

Unemployment is still rising, house prices are still falling, and the fundamentals of bank balance sheets are still deteriorating with total bad debts unknown except that we know they must be getting worse.

Global trade fell off a cliff in the first quarter of the year. Even Mercedes car sales to the oil rich of the GCC fell 23 per cent. The collapse of the world’s second largest economy, Japan, has been unprecedented.

Bad news coming

Nor do you have to look hard to see what the bad news to come might be: US banks will have to reveal all in government stress tests to be published at the end of this month; the bankruptcy of Chrysler and General Motors (GM) loom, two companies of vast importance to Main Street USA with a million jobs in jeopardy and huge borrowings to be written off by the banks.

The stock market pattern in 2008-9 has so far been a mirror image of the crash of 1929-30 with a halving of prices from the autumn followed by a 25 per cent rally from March lows. In April 1930 stocks moved sideways and then they crashed another 50 per cent into the summer.

What possible reason is there for optimism to believe that history will not repeat itself? Government stimulus packages have more than likely been too small and too late to prevent another down leg in stocks, and will take time to revive the real economy, if indeed they can do so.

They might just stop the worst possible scenario but are they going to prevent the plunge downwards? Governments have not managed it so far.

Consumers and unemployment

At the commonsense level you have to ask why should an economy show signs of recovery as it lays off hundreds of thousands of people: the unemployed are not big consumers, and it frightens the hell out of people left in work who stop spending and save.

Consumer demand is the most important fundamental in modern economies and the confidence of consumers is being blown to pieces. It will take more than weasel words from US bankers and ‘green shoots’ in the waffle of President Obama to put things right.

Eventually global stock markets will reach a bottom but they are not close to having visited it just yet. Wall Street and its friends are playing investors as suckers but they are in danger of overdoing it. For once these guys are impoverished where will the next bunch of fools come from?

Goldman Sachs' (GS) results this week might well mark the top of the rally, beyond that the only way is down.

This article was written by

Peter Cooper profile picture
Peter Cooper was formerly a partner in, forming his company just after the dot-com crash in 2000 and selling it as a part of a private equity deal just before the subprime crisis in 2007. His book 'Opportunity Dubai: Making a Fortune in the Middle East' was a best seller. He was also an early investor in Dubai property. He was a European Commission administrative trainee, and formerly founding editor of both the ArabianMoney newsletter and Gulf Business magazine. He lives in Dubai and Budapest. ‘Escape to Budapest: Moving to Europe’s Coolest Capital’ was published in 2021.

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