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STOCK MARKETS MOVE PAST DOOM AND GLOOM IN ANTICIPATION....................
By Shah Gilani
In the face of gloom-and-doom predictions, rapidly rising
unemployment, and an imploding economy, the market’s strong rally
clearly anticipates a recovery in late 2009.
Is this just a bunch of bull?
While everyone seems focused on the economy hemmoraging red ink from
the gash in the real-estate market, the broken bones of consumer demand
and the unconscious state of banking and credit markets, only the stock
market, and yours truly, seems to realize that the patient is being
No, I haven’t lost my senses; I’ve simply regained a sense of
optimism. I never drank the poisoned Kool-Aid of markets past and am on
record calling in February 2008 for investors to not only “sell
everything,” but to “short everything, buy short-dated Treasuries and
hold cash, not cash equivalents.” And just because I was right then
doesn’t mean that I’m right now; however, like back then, the traffic
lights are flashing.
This time, however, they’re green, and not bright red.
There’s no doubt in my mind that the economy has farther to fall.
Unemployment will hit double digits. Yesterday, the Labor Department announced that 5.6 million Americans are out of work,
and that doesn’t count those who’ve given up looking for work. On top
of that it was reported that based on fourth-quarter numbers, gross
domestic product (GDP) actually shrank at an annualized rate of 6.3%.
So, what are rallying markets telling us?
First of all, the U.S. Treasury Department may not actually have to
spend the approximately $13 trillion in rescue programs teed-up to
drive the economy. If investor perception that the U.S. Federal Reserve
and Treasury plans might actually work, whatever the details end up
being, then traders and risk takers will lead the investing crowd by
getting in early before the herd follows suit.
That is exactly what we’re seeing now.
Second, by some estimates, there is more than $9 trillion of cash
sitting on the sidelines. I haven’t heard a single market commentator –
or so-called expert – illuminate the new market reality, which is that
there are far fewer shares available to buyers than anyone realizes.
Since the Tech Wreck of 2000, we haven’t seen any significant
issuance of corporate equity. Since late 2007, for instance, the
initial public offering (IPO) pipeline flow has been virtually at a
What hasn’t been at a standstill since 2002 are leveraged buyouts. Low interest rates drove the leveraged buyout
(LBO) business, which now goes by the more genteel name of private
equity. Giant and once-thriving private equity shops such as KKR & Co. LLP, TPG Capital, Cerberus Capital Management LP, The Blackstone Group LP (BX), The Carlyle Group LP, Bain & Co. Inc.,
and a host of other multi-billion-dollar buying machines took hundreds
of public companies private by purchasing their outstanding stock with
What will happen to most of these debt-laden “private” companies is
another story, but the word “bankruptcy” will be featured prominently
in the epitaph-like final chapter of most of their stories. The point,
however, is that there are fewer companies and fewer shares for equity
buyers to purchase. Add into the equation a share-drop in share prices
to levels not seen in decades, and “Presto:” When institutional money
and eventually retail buying comes back into the market, those
trillions of dollars will be chasing fewer shares at low, low prices.
It doesn’t take a Wall Street rocket scientist to figure out that
robust demand for cheap assets will fuel a rapid run-up in prices.
As the perception that this dead-cat bounce or bear-market rally has
real legs takes hold, more committed buyers will come out of the
woodwork, not wanting to miss the opportunity to average down or pick
up top-notch household names at bargain-basement prices. [For additional insights on the recent run-up in U.S. stock prices, please click here to check out a news-analysis story that appears elsewhere in today’s issue of Money Morning.]
Increasingly positive market breadth and momentum technicals aside,
what’s fueling my optimism is that we’re finally seeing a real effort
to constitute meaningful regulatory reforms. Recent statements from
President Barack Obama and Treasury Secretary Timothy F. Geithner echo
my clarion calls for regulation of derivatives, market-moving hedge
funds and run-amok private equity firms. This week, Geithner said he
was pushing “not modest repairs at the margin, but new rules of the
In addition to reigning in freewheeling leveraged wrecking machines, I see unequivocal echoes of my calls for a systemic regulator to monitor all players with the potential to single-handedly corrupt the markets,
tightened and more universal accounting standards and a systemic
watchdog to monitor threats to markets and the general economic health
of the country.
Equally encouraging are statements that signal interest in adopting the “Spanish model” of requiring banks to set aside more capital in good times to cushion their equity
and support regulatory reserve and capital ratios in bad times. Also,
in a wink and a nod to stemming the moral-hazard implication of
charging all banks the same Federal Deposit Insurance Corp. (FDIC)
deposit insurance premiums, smaller and better run banks may not have
to pony up premiums on an equal basis with insanely large and egregious
and incompetently run money center universal banks.
The upcoming G20 meeting on April 2
will spotlight whether America will take charge in orchestrating a
better international regulatory order by demonstrating its commitment
to meaningful wholesale changes in it own feeble domestic regulatory
apparatus. Clearly, President Obama had Treasury Secretary Geithner
float several trial balloons this week, and clearly in the face of
terrible economic data, the markets found a reason for increasing
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It’s just not possible to say enough about what effects appropriate,
protective, and dynamic regulations can do for investor confidence in
banks, markets and the safety of committed investment capital.
Unfortunately, as far as the economy, unemployment, embattled
homeowners, businesses and devastated investors are concerned, the pain
may not be over. On the other hand, if the tide of investor perception
flows towards the potential for a safer investing climate and roots
itself in anticipation of a stampeding bull run, all boats may rise
with the tide a lot sooner than the gloom-and-doomers would have us
I’m looking to the future.
[Editor's Note: Money Morning
Contributing Editor Shah Gilani is a retired hedge fund manager and an
internationally recognized expert on the credit and financial crises
that continue to sweep the globe. More than 2 million readers have
perused his analyses of deregulation, problems with the debt-rating
process, and the bailout and stimulus plans put forth by the Bush and
Obama administrations. Indeed, Gilani recently unveiled a banking-system repair plan
that he says would fix the U.S. financial system - and at a much lower
cost than the government bailout plan now being proposed.
Gilani is also the editor of The Trigger Event Strategist,
which identifies profit plays that continue to be created by
"aftershocks" from the financial crisis. Uncertainty will continue to
be the watchword for at least the first part of the New Year. Little
wonder, as the global financial crisis continues to whipsaw the U.S.
financial markets in a manner that hasn't been seen since the Great
Depression. It's almost enough to make you surrender and give up the
investment game forever.
But what if you knew - ahead of time - what marketplace changes to
expect? Then you'd be in the driver's seat right? You'd know what to
anticipate, could craft a profit strategy to follow, and could then
just sit back, watching and waiting and finally profiting from the very
marketplace events you anticipated.
That's just what Gilani, a nationally known expert on the U.S. credit crisis, attempts to do with the Trigger Event Strategist. He has
predicted five key "aftershocks" of the financial crisis that he says
will create substantial profit opportunities for investors who know
just what to look for, and how to play the. In the Trigger Event Strategist,
Gilani uses these "trigger events" as gateways to massive profits. To
find out all about these five financial-crisis aftershocks, and about
the profit strategy they feed into, check out our latest offer.]