U, V, W or L

Hi,

Its time to take a break from stocks and re-learn the alphabets.

Have you guessed it?

We are looking at the types of recovery possible for the US economy and the World Economy.

1. V Shaped Recovery
In this type of recovery, there is a rapid deterioration in the economy and before you know it there is a sharp recovery as well. V-Shaped recoveries are less painful and are are the mild recessions last for about 1 year. We are way past this stage to say that there would be a V-Shaped Recovery this time.

2. U Shaped Recovery
In this type, things go downhill then flatten for a bit. For maybe 6 months or so there is no further deterioration in the fundamentals of the economy and then a recovery starts taking place. This type of recovery includes a dull phase of maybe 5-6 months where nothing much happens in the economy, but we do start recovering. We may be in a U shaped Recovery mode. The next 3-4 months may make it clear.

3. L shaped Recovery
This type of Recovery is a variation of the U-Shaped recovery, only that things get prolonged. Thing stop deteriorating but do not get better either for a long time to come. This may take up to a year when things are pretty dull. I would say we have more chance of a L shaped recovery.

4. W shaped Recovery
This is the most dreaded form of recovery. As the letter suggests, there is a sharp fall, then a recovery which flatters to deceive. Things fall down again and then we are again on the upward part. This is basically 2 recessions almost back. The second recession may or may not be as bad as the first one but it devastates sentiment.
People lose hope in this type of recession. The second recession may be smaller in magnitude but leaves everyone shattered. (George Bush's middle name is also W, which should give you an idea of the havoc it can wreck ;-) )

So, U, L or W, take your pick. Next 3-4 months will make things clear. I would say 25% changes of U shaped, 35% chances of L-shaped and 40% chances of W shaped recovery.

The implications for the world equity markets:

1. U shaped - the worst is over. We have hit whatever lows we had to hit. (Dow should be at 10000 by Jan 2010)
2.L shaped - the worst is nearly over. Slow consolidation for the next year or so. (Dow should be at 8000 by Jan 2010)
3. W shaped - You aint seen nothing. This was just a trailer. Picture abhi Baki hain. (Dow should be at 5000-6000 by Jan 2010)

The toxic assets are coming out slowly. In the US, 32 banks have failed so far. That's more than what failed in entire 2008.

Chrysler has filed for bankruptcy, GM is next in the queue. Obama has made it clear. GM is almost sure to file in for bankruptcy.

The US economy is showing some signs of stabilizing. The rate of deterioration is not as bad as it was earlier. Next 3-4 months will give us clear indications whether Spring is here or the onset of Autumn for the markets has come.

In the immediate future, the results are out of the way in the US. The next key thing is the Stress Test results. I think they should not be too bad.

The Dow looks to be stabilizing for the months of May and June. The Quarterly results in July will set the tone.

For Global markets, next 2 months should be serene.

Above. I have tried to outline the probable scenarios which could play out and the implications for the global markets.

Thanks,
Nishit