Senior Correspondent
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THANKS to Wall Street - where it seems to be business as usual again for the large investment banks which have not had to suffer much despite their earlier recklessness - greed has replaced fear in equity markets everywhere. 'Green shoots', which were beginning to brown over the past three-four weeks, have now been spotted once again, from US housing to local property.
Although we are still sceptical about the strength of the recovery - especially since all the hype surrounding growth seems to have failed to take into account the fact that it's coming off a low base - the amount of liquidity sloshing around the system and the suddenness of the turn has not only been surprising, it's also convinced hordes to jump on the bandwagon. In a nutshell, liquidity and momentum should drive the major indices higher in the early part of the week, especially since most of the trading these days is accomplished via high-speed programme trading that seeks to capitalise on these very same key variables. Of course, contrarians might argue that large volume swells usually herald a stampede of novice players in which case it's time to bail out - and there would be some truth to this - but for now, we'll focus our energies on the approach taken over the past months, which is to present both sides of the investment coin and to leave readers to decide for themselves how best to invest their money.
The bull case is by now well-known - thanks to the vast stimulus applied by the US Treasury and Federal Reserve to the US economy and the efforts of its officers, politicians and bankers in talking things up, the pace of the worsening seems to have eased. Again, whether 'less bad' should be taken to mean 'good' or even 'excellent' as market behaviour is implying, is open to debate; for now though, all that matters is the answer appears to be 'yes'.
This has led most houses to continue calling an 'overweight' on stocks. As the rally stretches on and in order to try and keep things fresh, you can be sure that brokers will continue finding new justifications to get clients to buy. So far because earnings are still hazy, most houses have employed deviation from 10-year price/book as the main 'buy' rationale, leaving aside the issue of whether using a 10-year average is reasonable if the numbers in the first place were artificially inflated by now-defunct US investment banks who peddled fraudulent financial instruments.
Merrill Lynch last Friday, in its Asian Macro Navigator, added to the bull case by saying that there is a sharp bounce in the shipment-inventory ratios in emerging Asia, which lead it to be optimistic on Asia's export outlook for the second half of 2009. It also said that the experience of the 1997 financial crisis is that post-crisis recoveries always surprise on the upside. US investment advisers Rhodes Capital offer a less positive view of Wall Street when it said in its July report that a 'double-dip' is still probable, as is a test of the new lows. The argument in this case was that the preconditions for a bull market that were present from 1938 onwards are not present now, which is another way of saying that Wall Street needs to fully capitulate in order for a proper base to be built and this has yet to happen.
On Monday, the US Commerce Department will report its June new home sales report. According to research outfit Ideaglobal, 'new home sales were weak for all of 2008 and are expected to be so for much of 2009'. However, because prices are still sliding, Ideaglobal expects a 3.8 per cent month-on-month increase to around 355,000 in June.
'The new home sales report should continue reflecting weak buying conditions, which stand to be held down by falling home prices and deterioration in employment measures. Although prices have eased and rates have moderated significantly, we do not see any real catalyst in the housing sector to stimulate a sustainable increase in demand for new homes' said Ideaglobal.
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