Green Shoots?

Green shoots are springing everywhere and the stock market has managed to claw its way higher since early March. I am not too sure if this green shoots can just as easily turn into wilting weeks again this summer?

Over the past 9 weeks, the market rally, as correctly predicted as early as January 2009, is leaving many investors frustrated and bewildered. I see this just another bear market bounce and I wonder what on earth investors are thinking even though some recent data has improved but it is still too early to be optimistic as the cold and hard facts present themselves.

10 of America’s largest banks are coming up short and must raise at least US$75bn in capital they desperately need to survive. Mind you that this number is derived after the government did everything possible it could to lower the bar to allow more banks to step over the stress test hurdle. So far, more than 500 US banks have already received nearly US$200bn in government hand-outs.

The back-to-back GDP declines of -6% annually for 1Q2009 and 4Q2008 are not only the worst in decades, but they are also worse than the worst-case scenario used in government stress tests, which forecasts a -3.3% annual GDP decline this year.

The decline in US home prices still alarming, down nearly a third from their peak in 2006 and even worse, a record 5.4 mn Americans are delinquent on their mortgage loans or already in foreclosure. One in five homeowners is already under water. 20 mn Americans nationwide now owe more on their mortgage loans than their homes are worth, which doesn’t inspire much confidence, I believe.

So, anyone who still thinks the worst is over and the recent green shoots will lead to sustainable recovery soon, may want to think again. Don’t let Wall Street pundits brain wash you that they are reacting to the much anticipated ‘V-shaped’ recovery patterns.

I firmly think that the current rally is consistent with the historical pattern of the long-term secular bear markets of the past and it is what I anticipate for this one as well.

Market is now trading at normalized P/E of 15.6x – certainly not cheap and at the end of previous secular bear markets in the 1940s, 1970s and early1980s, the normalized P/E ratio frequently fell below 10 and sometimes even lower.

So, don’t ignore the lessons of the past!