Posted At : May 22, 2009 9:56 AM
The markets are finally pulling back (a bit), due to the possibility the U.S. may lose its AAA rating. I never thought I would hear such talk. However, we are still not letting go severely even though the bad news continues to pour in. This is almost always a good sign, as the markets go up 6-9 months in advance of a bottom. Although the immediate trend is due for a pullback, the general short term trend is still up, showing investors believe the worst is behind us. As is usually the case, stocks climb the proverbial wall of worry. That’s when it goes up…even though there is no good reason and no sane person would suggest such. The market is telling us that the economic rebound will be stronger than most people think, and that is a very fair assumption. With inventories at incredibly low levels and gazillions of dollars coming into the economy, it should be strong. Damn strong. I’m not saying the long term issues that I have been addressing are cured. No way. But that’s a discussion for tomorrow. It’s hard to believe it was just 2 months ago when the Dow hit 6500 and all seemed lost. (Remember that asteroid hurtling towards earth?) What a difference the sunshine makes.
One very good thing is that the US credits markets are returning to a semblance of normalcy, Bank of America raised $13.5 billion in an equity offering, and it appears that the 19 largest US banks, which were the focus of the Treasury’s stress tests, are able to come to market with relative ease. Many of these 19 have already raised substantial amounts of both equity and unsecured debt. Even more important is that 3 month LIBOR continues to drop, falling -4 basis points to 0.71% at today’s (5/20) London fixing. The fact that borrowing rates are declining and the aggressive deleveraging of bank balance sheets is winding down, there is optimism that the stage is being set for a recovery. The strength and timing of the recovery is still open to question, but presumably the worst of the economic news is behind us – at least for the US.
Regards – Keith Springer