Saturday, May 9, 2009

GM Results, Stress Test results and Great Expectations

This was an eventful week in the US. This week probably sowed the seeds of a bear market rally in the US for at least till the end of June.There are several factors for this.

The Stress Test results were out. It portrayed a hunky dory picture for the US banks. Obama is doing well to play up the sentiment. The banks need help but not too much. We are on our way to recovery. Throwing money at Banks has helped. There is always a free lunch out there. We just have to print US dollars and the only cost to pay is the cost of printing those notes. That's Obama's message for the world.

The Stress Test results will buy time till the next wave of failures. I don't see that happening very soon. The Banks managed to show good results by accounting jugglery. Wells Fargo for instance, saw NPAs jump by 40 pc but Reserves to accommodate the same were increased only by 5 pc. This especially at a time when the NPAs are increasing.
If the value of the banks debt decreased from 100 cents to 60 cents and banks took a gain of 40 cents on their books.

The Investors are not really bothered by all this. It time to herald a new dawn and keep buying the shares of banks. The only fly in the ointment is that banks make money from their customers. The Customers are the US citizens who have lost their jobs. GM just made a loss of 6 billion dollars last quarter. Even Toyota made an annual loss. These jobs are going to disappear and they are not going to come back. Who will pay the loans of these people. Who will hold the bucket for these losses which will come later on. Remember the US unemployment is now 8.9 pc highest in 25 years. Bankruptcy now looks inevitable for GM. You cannot keep losing billions of dollars every quarter.

The 1 part of the problem of credit availability has been solved but the second part of demand creation remains. Till jobs are created there will be no demand creation.

For now, it is time to party. Recession is ending and get in before the Dow moves to 10000 seems to be the feeling.

The real problems will start a few months down the line. The next results in July and August September onwards. Things can get nasty if institutions start failing. The whole so called solution till now is print more dollars. This will work only till the dollar remains attractive. The 10 year T bill is already upto 3 pc which is bad news as everything from Mortgages to credit card debt is linked to the T-Bill rates.

As and when Inflation rears its head, the central banks will have to start raising interest rates. The main problem the US faces is the lack of jobs for its citizens. That has to be fixed. Obama's tax plans to curb of shoring will back fire in a big way. If the companies dont move jobs to low cost areas they become unviable and leading to more bankruptcies.

Obama is like a typical idealist. he positions himself like a Robinhood, the defender of the common man. All that has come about now is lofty promises.

In India, the elections hold the key. Looks like UPA + Left support and a Pranab Mukherjee or Shiela Dikshit as a probable PM. I would buy on dips if the market dips post results while a government is being formed.

Last time all Opinion polls were wrong and who knows this time. NDA might just squeak in. Prakash Karat has now started talking of supporting Congress led government.

I would buy because the global problems have taken a pause for now, monsoons look to be on time.

Its a traders market not an investors market. Till we get clarity on the long term, buy low and sell high.


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