Equities – A new recovery shape has been invented – the W shape recovery.

Nikkei 225 (8.743)  Topix (835)  Dax (4.542)  FTSE 100 (3.989) Dow Jones (7.920)  S&P 500 (835) Nasdaq Comp (1.626)  

The current uptrend in global equity markets is so persistent that I am very close to revise my view on this asset class. So far, I have for a very long time (since early 2007 or longer) argued to stay away from stocks. If the current upside momentum continues for just another week or two I will adjust my view to be 25% long of the total expected allocation to equities.

The downturn will reassume, the question is just when. With all the stimulus packages a W shape recovery is about to be created – what is a W shape recovery? Personally I have never heard about it before, but I think it is a simple way to explain what will happen.

The left downwards line in the W is the crash the world has explored since late 2007. The far right upwards line in the W is of course the healthy and real upswing that will return one day – hopefully. In between we have the difficult stuff. The first line up in the W might be where we are now. If it’s steep, the second downturn will be very steep and the low in the second part of the W will be lower than in the first part. Official stimulus packages are made for borrowed money meaning the governments move future consumption (public and private) to current consumption. Too enthusiastic public spending (stimulus package is the new official buzz word) will lead to a prolonged up- and downturn in the middle of the W shape recovery. Higher public spending now leads to higher probability of a lower bottom in the second part of the W (debt repayment or some governments simply might run out of money…..).

There is a chance that the second bottom in the W will be higher than after the first down line. This argues for going long as mentioned in the start. Right now there is a global consensus about better times next year. After a negative GDP growth of 5-10% this year is +1% next nothing to cheer about, but investors do, and I need to respect this. Some argue that the negative growth rates are less steep, which is correct but we still haven’t got any feeling about where the bottom is. One thing I take as positive is a few good signs from the housing markets in US and UK. In the areas with very large price reductions some buyers are emerging, but it also indicates for rest of the world how low housing prices needs to go before a two way market is working again.

Realisticly seen is the current positive consensus more based on expectations than anything else. All the PMI’s and ISM’s plus other expectation surveys have turned around late but reality looks really nasty. Credit is tight but we can live with that, industrial production has dropped but partly due to destocking. Other negative impulses are a true threat, corporate investments (particular in the industry) are dropping like a stone this year and unemployment is on the rise. Fed’s Fischer says that US unemployment will be above 10% next year and weekly working hours are on a multi year low. Same picture in Europe, but there is risk of an explosion in continental Europe. The number of employees who have been saved from getting fired by lowering their working hours to a de facto part time job is massive. I see a big risk of these jobs disappearing, but it is hard to say if it will be by end of Q2 or Q4.

The hope is caring the current uptrend because investors still live in the V thinking. I expect the hope to be strong enough to represent 1/3 chance that the second bottom in the W is higher than the first one. This is against 2/3 risk of a lower second bottom in the W. 1/3 chance for a higher future bottom might be enough to argue for entering the stock market with 25% again. For a long time bear it’s not so easy, but within the next 1 or 2 weeks I should make my mind up, well aware that it is a W shape recovery……..

Targets: Nikkei 225 6.683  Topix 697  DAX 3.075  FTSE 100 3.456  Dow Jones 6185  S&P 500 656 Nasdaq Comp 1191

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