Global equities – The bulls are still in the lead – but for how long ?

The uptrend in global equity markets is still intact and some factors will be supportive in September. The very important gold digger mood among private investors, who believe in the V-shape recovery means a lot for the uptrend. This combined with plenty of funds to invest and professional money managers being behind going long stocks all in all creates a natural demand.

I am also behind the curve, as the frequent reader knows, I didn’t believe in the V-shape recovery, and still don’t. The consequence is, that I am forced to recommend to enter the market when it goes up despite I am uncomfortable with the levels.

Other market participants are in the same situation, so if signs of a turnaround in the equity markets become evident, then a massive crowing out will result in steep sell offs. It’s not sure it will happen, but the risks for such a situation are rising in my view, but the market will find comfort during September.

Industrial production and US housing supports

The positive tones are also founded in real numbers I admit.

One of the reasons why we saw the steep drops in GDP was because corporations took their stock of produced goods much lower. Most likely was it below what is needed to supply the new lower consumer demand. The logic consequence is that production of goods will go up a new normalised level the coming months.

In June there was a small improvement to “only” a drop of 17% in the industrial production within the Euro Zone on a year-on-year basis. The “improvement” was seen as a real improvement but the year-on-year development needs to move against zero, otherwise the production is in an ongoing negative spiral. It feels positive but it is also a technical rebound.

What truly has turned around for a period is the US housing market. The most significant turn is in existing home sales. It belongs to the story that inventories are still high at 9,4 months of demand, but off the high at 11 months supply. Prices paid have increased a little but just a few percentage points. As I wrote earlier in August is the housing market important in my view. No doubt that the good impulse from the housing markets will continue for some months. A closer look will disclose that a growing number of house owners in US are defaulting, but it is not in focus right now. I note it, and keep the information on my risk monitor, but on the side right now.

Elections in Japan and Germany won’t help

Two large economies elect a new parliament within a month. Very interestingly, also the two countries with the biggest structural reform need. This global crisis should be the catapult for totally new politics one should think, but reality is more to continue as always. Concerning Japan I recommend to read the Hot Topic covering the new Japanese government and politics.

In Germany a coalition between the Conservatives and the Liberals is the likely outcome with Ms. Merkel in the lead again. I am almost tempted to say that nothing will happen the next 4 years, and even Germany has also a large deficit to fight with as an additional problem.

It’s hard to see that the elections will give any new impulse to the equity markets.

Unemployment is a monster

The German election most likely blocks for further large reduction of jobs, but the rumours are that it happens after the election. I think the speculations are closer to reality than many can imagine.

It is in line with the ongoing global growing unemployment. I recognise that the first July labour market data from different countries have been slightly better than expected, though I judge it as a summer blip. Not only is unemployment still rising but wages are under pressure and the working hours for the people in job are lower. Unemployment is a monster problem with no improvement in sight combined with the same taxpayers that suddenly have to service a much higher public debt. It results in a fundamental pressure on the consumer purchasing power and the debt might lead to higher taxes.

How to play the equity market ?

With the view I have is investing a true challenge. I do not expect any impulse from corporate investments either, as the corporate sector has a production overcapacity.

The global companies manage the product adjustment fastest and most efficient. That was also the reason why I recommended global stocks as the first entry together with Chinese stocks.

S&P 500 managed to close just above 1.030 triggering the second entry round in global blue chip stocks. Together with the first entry at 925 it gives an average of 977,50. The stop loss level is 900 and next entry point is 1.110. On my list of global blue chip stocks I have a couple of oil companies as well. These I consider to remove as the high oil price is not justified by real demand.

Nikkei broke 10.500 last week which was the entry with the first 1/3 of expected total investment in Japan. The stop loss is 9.000 and next entry point is 11.700.

As you can imagine am I not at all comfortable with the entries, but respect the higher markets we currently have – but for how long ?

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