Where is the market going from here?

The market has risen more than 50% from its March low, and recent market indicators seem to imply improving economy, but with some mixed signals. So is it a good time to go into the markets, for those who have not taken the courage to do so earlier and have missed the cash boat?

Let us take a look at what has happen since last year.

The main cause of this crisis is mortgage default, mainly in the US, and with this, causes many related subprime products to collapse. As a result, banks could not collect back their mortgage loans, and are stuck with lots of foreclosed empty houses. Losses on subprime products also accelerated the depletion of their cash. People starts withdrawing their investment with the banks, and the collapse of Lehman results in more default loans to most major banks.

While bank’s loan are insured, their insurers, like AIG, collapse under the influx of loan defaults. As a result, banks which can usually do loan from other banks, could not do so anymore as banks tighten their credit to ensure their liquidity to cover their losses.

Thus government has to intervene to do “free” loan to these banks, so that they can tide over the cash drain. And fortunately, this has indeed help to stabilize the banks, and prevent more from falling on their knees.

Market falls steeply, and the main fear is more banks will collapse, however what many people has forgotten is, this has pull down the entire market – consumer spending has declined steeply, job are lost, companies in other industry have collapsed, including retailers, and thus this has result in a different kind of loan defaults, like credit card and corporate loans.

Stocks start to rise from its March low, when it becomes clearer that the banks will no longer collapse, under the government support, and it starts to increase further when 2nd quarter results of most companies beat analysts’ expectations. Analyst Expectations? who are these analysts? Are they fortune tellers? Yes they are, and they are normal human beings like everyone of us, and the key thing is, they have the same objective as everyone of us, they want to make money out of the stock market, as their performance is not based on how accurate you write the report, but how much returns you have brought back for the company. Take a deeper look into the actual results and balance sheet of these companies and do a year-on-year comparison, you will see how badly hit these companies are. In normal circumstances, the stocks of these companies will be sold off steeply, instead of rising just because they beat expectations.

One thing to remember is, most government has pumped money into stimulate the economy, somewhere around the 1st quarter, and the most straightforward way to do this, like China, is to increase storage of commodities, make more loans to more companies. Companies also start to replenish their inventory after stopping for 3-6 months.

Who is going to buy the products made by these companies? Who is going to buy the houses built by the developers? One answer: End consumer, and one thing that many people has forgotten is US consumer spending accounts for two-third of its GDP, and US will still be the leading economy at least for the next 20 years.What do the banks do with those foreclosed houses that they are holding on?

Let us take a look at the latest indicators: US jobless rate at 9.7% – a 26 year high, and an increase from 9.4% from the last month, and people cheers that the number of job losses are less than expected. Consumer savings are increasing, and latest consumer confidence has dropped as well. These are dark figures in terms of consumer spending.

One can only fix an issue when the source is fixed. The source of the entire crisis is housing loans. What is happening now is the banks are trying their best to work with people to prevent more foreclosure and help them to continue with their loans, to the extent when interest rates are lowered or loan periods are extended. They are doing this as it makes no sense for them to force closure, as what are they going to do with the stocks of foreclosed empty houses?

Let’s look at the housing data. One thing to cheer though, is that housing indicators are improving in the US, but a dark spot is that the percentage of mortgage defaults are still increasing. This is another indicator of poor consumer spending power.

The economy is stabilizing, and is not as bad as before, and is definitely deteriorating at a slower pace – note that is not growing. My point is, though unemployment rate is a lagging indicator, but this rate at a 26 year high is no joke, and without consumer sucking up all those stock-up inventory, the economy will not move and will not grow.

The market warrants an increase from its March lows, but definitely not an increase of 50-80%. Few good indicators of market bubble are the volatility of the stock markets recently, especially China, the pulling back of loans in China as advised by the government to avoid bubble, and the high volume trading of cheap and poor quality stocks – in the US: Citibank, AIG, Freddie, Fannie and BOA, in Singapore: penny stocks which has poor historical results in the top 10 active list and this has been happening for some time. Another indicator is the never-seen in tandem rise of bonds, gold and equity, one of this has to break off its relationship, and my take is equity.

The 3rd quarter results are especially important on determining the market directions from here, but meanwhile, i do not see anything boosting a further increase from here. My take is a fall of at least 10-15% from here, especially during the Sep/Oct period.

As a long term investor, do buy on this dip, as my feel is this is going to be the last few dips, and the market is going to rise slowly from here. My last note: I am also a fortune teller, like all those analysts. Thus you may not want to take my word too seriously and do make this a leisure read.