Chicken or Egg?

It is often said the equity or stock market leads the real recovery or recession in the economy. Equities, which have plummeted for a good part of 2008, seem to be on a rebound after the recent rally on Wall Street and in Asia. The latest stimulus package by China also came in at an opportune time, giving a second wind to bargain-hunting investors. In fact, it was even suggested over the weekend that the S&P may be heading for a six-day rally. That might be some truth in that earlier statement that the efficient market has priced in the recovery and, behold, we shall see the glorious days unveiled before our very own eyes soon.

I was also tempted to dip into equities now amid all the heightened hopes. But if I were to ignore the noise, step back and analyse, we are probably only half-way through the trough. There isn't any economic data or business statistics released so far that suggest that we are in recovery mode.

The latest:

• General Motors has been downgraded to a price-target of ZERO. For an industry that drives (pun unintended) U.S. eleventh most populous city (Detroit) and with survival dependent on a bail-out, it doesn't exactly speak of optimism in the economy.
• Fannie Mae and AIG - two financial giants rescued by the U.S. government recently has reported record losses again. For the latter, the terms of the initial rescue has to be amended so that the company has more resuscitation time. It is important to realise the grave consequences of a bankruptcy by the insurer. The Fed has allowed 19 regional banks to fail, permitted Bear Stearns and Lehman Brothers to fail (though the former was technically bought over by JPMorgan) but held on to AIG. It implies that any fall-out would bring about a financial tsunami. If the beleaguered insurer goes, I think I WILL go too.
• Economic data has now consistently surprised on the downside. Market-makers have been pricing in the downturn, bad results but it turned out that the actual results - unemployment, house prices, more layoffs, actual bankruptcy - have been truly, scary outstanding. Closer to home (Singapore), even the esteemed DBS is retrenching while the authorities are probably having cold sweat after the latest from the developer of their pet project.

Even though my JC testimony speaks of a "non-conformist", I do agree with the much-touted view that we have not seen the worst. Bargains are there for the picking and it is ABSOLUTE NONSENSE to discuss previous highs when picking current stocks. Nikkei hits its all-time high about twenty years ago. Even in recent boom and bull periods, it has barely traded above half of that peak. And you would have been a fool if you agreed that Bear Stearns was going for a steal at $10 in March-08 when, a little under a year ago, it was going for $133.

You might not be able to take the mauling.