torsdag 16 april 2009

Revisiting the bottom call

With a month and a half elapsed since my equity price bottom call, the stock market has gained about 28 % from its bear market cycle low.

I do not expect a big consolidatory correction of prices, and any such event would likely, at the most, take down equity prices as measured in the value of the S&P 500 10 % from present levels. Therefore, individuals should continue to aggressively poisition their financial allocation for strong gains in assets positively correlated with risk appetite appreciation.

Examining the economic data published since the last post, we can observe all the indicators we would expect to see in the early stages of a trough in the economy developing:

Builder confidence increasing strongly, industrial production collapsing and capacity utilization plummeting, port activity rising sharply and Store Sales increasing 0.9 % Y/Y, as reported by Redbook.

You must be wondering if the incorporation of the dismal industrial production figures was a typo. Nope, it was not. A characteristic some other indicators also share; a very low level of capacity utilization indicates that the recession has run its course, that enough demand has evaporated, and that enough pent-up demand has been built to end the down cycle.

As Donald Trump said on CNBC yesterday, the "...biggest obstacle is loans. Banks won't lend." Well, in a fiat money system, there will not be such an obstacle for very long, given policy makers, such as Ben S. Bernanke, that are inclined to do anything to extend credit and print money.

In the long run, the policies adopted today will prove damaging. However, for the short and medium term, they will work, and they will end the recession. Sooner rather than later.

"It's all about timing." -- Hugh Hendry

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