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Sucker's rally! Retail investors beware...
6 May 2009 (more...)
Chart source: Bloomberg
What’s going on? The world is apparently in the deepest of all recessions, yes the mother of all recessions, but the equity market is moving UP at break neck speed. Yes after the G20 meeting in March, apparently before the world collapses and we will go back being cavemen, global equity markets have rallied, hard.
Let’s look at Malaysian equity market, KLCI specifically (chart above). KLCI peaked at 1,516 on 11 January 2008. Since then it has been in a free fall all the way until the collapse of Lehman Brothers in September 2008, it was at 829 on 29 October 2008 (yes, thanks Paulson! You let Lehman went under and after that decided to save even the unknown US regional banks. Seriously, US tax payers you should be thankful to him, your kids will be paying trillions of dollars worth of taxes thanks to this guy). After 5 choppy months, KLCI went back to where it was after Lehman collapsed, it was at 838 on 12 March 2009.
From then onwards suddenly KLCI (and the rest of equity market worldwide) shifted gear. Up up and away! Yes all the way up to 1,024 today, 6 May 2009. Almost 200 points up, or close to 25% in 7 weeks. No consolidation, nothing, the market just went up and up and up. Did something happen? Ok, Malaysia have a new leader, maybe funds from the stimulus package are ramping up their books? Foreigners? Well not really. Local unit trusts with June year end doing something to polish things up? Well, possibly, can’t rule this one out. To be honest I have’t got a clue...
Personally, I’m still pessimistic even after this big rally. Last month my fellow professionals in the market were saying it could be a bear market rally, a false hope. Now, some are saying this could be the beginning of a bull rally. I’m not too convinced. Let’s have a look, US and Europe are in serious recession, millions have been made redundant, millions more will follow. Agreed, the rate of people being fired have been reduced, of course you don’t expect to see people being sacked continuously, well someone has to run the company no? Those millions who are out of job will initially live on their savings, after sometime savings will run dry and they will cut their expenditure, significantly. Translation, lag effect, expect to see third and fourth quarter corporate result to be serious disaster.
But US banks have shown good first quarter results. If you still want to believe them after all this, good luck! No seriously, some big banks reported serious profit in first quarter. Let’s see, market rallied from mid March, those same banks still have those toxic loans on their books. Yes mark-to-market accounting, you book those toxic loans at end of March price, which was substantially higher than December level. Voila! Billions of additional profit coming from nowhere. And yes, they still have the same toxic loans on their books as previously. And those companies that you lend, those toxic loans, are they improving? Unfortunately the answer is no, many have filed for bankruptcy or went into restructuring. And yes, more bad news to follow, those unemployed will stop spending, my revenue is going to fall further. How am I going to service my debt. Yes that same toxic loans that is on the banks’ book, well the one reported billions of profit recently.
There is trouble ahead... I agree! This is the mother of all recessions, and the bear rally is the mother of all bear rallies! The bounced is far higher than normal, do not be fooled with the strong rally of late.
Unfortunately I cannot tell the future, I could be completely wrong. But for those of you retail investors out there, who work hard to make a living, work hard to save, just be careful. Do not throw away your hard earned savings. Stop when you are at the top! With the current (false) rally, the market will suck you dry when the tide turns.
So my fellow investors, be careful, it’s a sucker’s rally, after all it is your hard earned savings you are investing...
Comments
KLCI
So what's next? How do I make money from here?
Re: KLCI
Short the market if you can, ie sell now & take profit. Wait for consolidation and maybe you want to go in again on weakness. Patience is the key, Rome wasn't built on a day. Control your greed, sell when people are buying, do not chase the sucker's rally. Good luck!
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