Equities – Another bull go, backed by the US tax payer – PPIP it’s called this time….

Nikkei 225 (8.216)  Topix (792)  Dax (4.719)  FTSE 100 (3.974) Dow Jones (7.555)  S&P 500 (792) Nasdaq Comp (1.509)  

It almost feels like history, but I need to touch base on the surprise announcement from Fed last week about buying T-bonds. If you had asked me even 1 minute before the announcement, I wouldn’t have believed it to happen. Mr. Bernanke is truly living the “helicopter speech” (if you need a copy I can provide it).

The bond market intervention from Fed only helped US equities for a few trading hours, so why spend time on the plan? The plan is of serious magnitude and has 3 short to long term implications. The 10 year T-bond rates dropped 50 basis points within minutes. This should be a very strong impulse to buy stocks but this basically faded out very fast. A good sign that the bull sentiment was about to end for this time.

Long term, the intervention plan is serious interesting for the stock market. Fed says, that they want to stabilise the housing market. I trust them, and they know that the US economy won’t find foothold before private households feels confident about the future and their own wealth situation. I fully agree with the observation and it’s a clear signal about how worried Fed is, which the equity investor should take as a warning signal.

The hidden agenda is really important. Fed simply wants to create inflation to help the highly indebted private households. Deflation is bad for assets (a true risk right now), what some call natural inflation around 2% we like but higher inflation is unpleasant for assets – this should worry equity investors. The old Fed Chief Mr. Greenspan was correctly criticised for “the big experiment”, but this time the game is highly toxic……

Talking about toxic, then the new bull hit in the market is called PPIP (Public Private Investment Program) presented by US Treasury Secretary Timothy. A burden will disappear from US banks, that’s correct, but they also need to take the loss if the toxic assets haven’t been valued at the sales price. Private investors are intended to join PPIP, but investors should only join if it’s a good deal – if it’s a good deal for investors, why should the banks sell the assets? The US Government will try to sponsor both sides so the deal is acceptable for banks and private investors participating. The bulk of toxic assets is mortgage bonds, basically debt issued by the normal tax payer. As mentioned above must the deal somehow be sponsored by the US Government, backed by US tax payers. So the US tax payers sponsor financial market participants to trade their own debt – did somebody mention the ponzi scheme……it’s toxic.

I fully accept that the market use all positive signals to buy stocks, and that leading indices are trading above important support levels now. DAX stayed above 4000 on Friday, Monday Nikkei just went straight up through 8000 and Dow Jones will stay fine above 7000. This alone will create short term support. In addition we have the financial year end coming in Japan, where it seems, that there have been a serious interest in buying stocks higher from official or semi official names.

An even stronger force is the mutual interest among investors and market participants in higher equity prices. It sounds strange, but should not be underestimated. Many would prefer to live with higher P/E ratios just as long the stock markets trades upwards as well. The hope must of course be that corporate profits turn around from the current downward trend. This I consider a lot.

I might be about to make a serious mistake by not acknowledge the current bull market, but I just see the underlying fundamentals as continuing lower.

Global unemployment continues to rise, and maybe even accelerates. This might go on for another 12 months or so. Parallel the global downturn in the private housing market is spreading and accelerating (including China but with Switzerland as the only exception). Despite the many stimulus programmes it’s a natural reaction if consumers simply scale down, and continue to reduce spending.

BASF AG, the world’s biggest chemical producer, has halted construction at two facilities in China. The company simply is in line with all other companies reducing Capex. The significant reduction in company investments adds to the lower global demand, and it will take time to speed up again.

About BASF AG, the following comment came from their Chairman Mr. Jürgen Hambrecht saying that, “demand for chemicals will not rebound this year. It may recover next year, or at the end of next year.” I note the comment because chemicals are used everywhere around the globe. He might be too pessimistic but it could also be that the view turns out to be optimistic, as we haven’t seen the bottom yet.

The price action during the last 2 weeks shows that the market is closer to a level where investors are comfortable to be long, but for the above reasons I stay with the view that it is too early to enter the market.

Good arguments for going long equities are more than welcome, as I consider the current market a lot.

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

Bookmark It