What do equity rallies have in common with the whizzing around in cyberspace of the latest Youtube sensation — a clip of Britain’s Got Talent contestant Susan Boyle wowing the judging panel of Simon Cowell, Amanda Holden and Piers Morgan?
Well, the unexpected appearance of the ‘feel good factor’.
Note the following commentary from Vince Farrell, CIO at Soleil Securities:
But after a report that the troubled Regions Financial will report a profit for the quarter, regional banks up-ticked in the market and the upcoming reporting season became even more interesting. Might it be possible that the banking system is not as severely damaged as first feared? My pal, Sydney Williams, passed along a YouTube phenom you have to look at. Go to YouTube and search Susan Boyle for a feel-good moment like you won’t believe. Watch the full 7-minute version. It’s worth the time. (Soleil salesmen and traders will wait till after hours, of course!)
So, just as the unemployed Susan Boyle is storming the states with her unexpectedly inspirational rendition of “I dreamed a dream”, equity markets appear to be putting in a not dissimilar inspirational performance — leading many 
market commentators to profess the recession may in fact be over and done with. Note The Gartman Letter’s Dennis Gartman’s feelings on the matter on Friday. Emphasis ours:
We have written many times over the course of the past several months that we shall be watching jobless claims with a great deal more interest than we had watched them in the past, for history has shown quite clearly that when claims “spike” down after a sustained rise and as they’ve been rising right into the midst of a recession, the recession’s end is hard upon us. It is almost unbelievable how often jobless claims “spike” downward either precisely during the month that the recession has ended, or within a month or two of that end. In the recession of 1960, claims spiked downward precisely when the recession ended. In the recess of ‘70, claims spiked down about 6 months before the recession ended. Claims spiked downward precisely at the end of the ‘72-’74 recession.
They spiked downward about 3 months prior to the end of the recession of ‘80, and spike downward 1-2 months before the end of the recession of ‘81-’82. To end the recession of ‘90-’91, jobless claims made their low only a week or two before the recession officially ended, and during the recession of ‘01, they spiked downward almost perfectly co-extensive with the recession’s end. In other words, “claims” claim the prize, as far as we are concerned when it comes to forecasting the end of recessions here in the US.
Thus, the decline last week and this week in jobless claims has our interest. Well it should, for although a decline of 70 thousand such as we’ve seen in these past two weeks can be reversed rather swiftly, and because some will argue that the data released yesterday was solely due to the cylindrical problem associated with Easter, if we see claims fall again next Thursday, we shall make the “claim” that the recession’s end is indeed hard upon us.
And here’s Morgan Stanley’s Manoj Pradhan from the bank’s global economics team on the matter:
Is the worst behind us? On our forecasts, yes! However, the Great Recession still has a way to go. Global output will probably start growing in 3Q09, with G10 output growth turning positive in 4Q. However, growth for 2009 as a whole will stay firmly in negative territory for all regions except AXJ (where China and India will continue to keep growth in positive territory). We expect AXJ’s outperformance to be sustained next year with a 6.4% increase in output, compared to 2.1% for CEEMEA, 1.1% for the G10 and 0.3% for Latam (see Exhibits 1 and 2).
In fact, the list goes on and on. Anthony Bolton of Fidelity has declared the very early stages of a new bull market. Crispin Odey, the London hedge-fund manager says pretty much the same. Even Marc Faber of the Gloom, Boom and Doom report believes US stocks probably reached a bear market low on March 6.
That’s all very well and good, but is there a chance we’re all being set up for a massive fall? After all, Susan Boyle has not won Britain’s Got Talent yet. And as talk of makeovers, Oprah appearances, recording contracts galore ensues — there is the large possibility she could end up suffering from epic overexposure having been talked up so early on. Will reality come to bite the dream she dared to dream, so to speak? The same prospect surely stalks the current market rally – a hard dose of reality already coming in the shape of the latest IMF report.
Let’s not forget that for all the “recession is over” enthusiasts, there’s still a high contingent of “don’t be fooled by the market rally” commentators. Among the loudest being George Soros, who told Bloomberg only last week:
“It’s a bear-market rally because we have not yet turned the economy around,” Soros, 78, said in an interview yesterday with Bloomberg Television, referring to the recent rebound in stock prices. “This isn’t a financial crisis like all the other financial crises that we have experienced in our lifetime.”
Former Oppenheimer bank analyst Meredith Whitney, meanwhile, also remains bearish, especially as it seems her credit card call is finally beginning to manifest itself.
RGE’s Dr. Doom Nouriel Roubini also believes the equity bear market is not quite over and that investors are becoming far too optimistic. Economist Paul Krugman, meanwhile, gives us four very good reasons as to why investors should still be cautious. Our emphasis:
1. Things are still getting worse. Industrial production just hit a 10-year low. Housing starts remain incredibly weak. Foreclosures, which dipped as mortgage companies waited for details of the Obama administration’s housing plans, are surging again. The most you can say is that there are scattered signs that things are getting worse more slowly — that the economy isn’t plunging quite as fast as it was. And I do mean scattered: the latest edition of the Beige Book, the Fed’s periodic survey of business conditions, reports that “five of the twelve Districts noted a moderation in the pace of decline.”
Whoopee.
2. Some of the good news isn’t convincing. The biggest positive news in recent days has come from banks, which have been announcing surprisingly good earnings. But some of those earnings reports look a little … funny. Wells Fargo, for example, announced its best quarterly earnings ever. But a bank’s reported earnings aren’t a hard number, like sales; for example, they depend a lot on the amount the bank sets aside to cover expected future losses on its loans. And some analysts expressed considerable doubt about Wells Fargo’s assumptions, as well as other accounting issues. Meanwhile, Goldman Sachs announced a huge jump in profits from fourth-quarter 2008 to first-quarter 2009. But as analysts quickly noticed, Goldman changed its definition of “quarter” (in response to a change in its legal status), so that — I kid you not — the month of December, which happened to be a bad one for the bank, disappeared from this comparison. I don’t want to go overboard here. Maybe the banks really have swung from deep losses to hefty profits in record time. But skepticism comes naturally in this age of Madoff. Oh, and for those expecting the Treasury Department’s “stress tests” to make everything clear: the White House spokesman, Robert Gibbs, says that “you will see in a systematic and coordinated way the transparency of determining and showing to all involved some of the results of these stress tests.” No, I don’t know what that means, either.
3. There may be other shoes yet to drop. Even in the Great Depression, things didn’t head straight down. There was, in particular, a pause in the plunge about a year and a half in — roughly where we are now. But then came a series of bank failures on both sides of the Atlantic, combined with some disastrous policy moves as countries tried to defend the dying gold standard, and the world economy fell off another cliff. Can this happen again? Well, commercial real estate is coming apart at the seams, credit card losses are surging and nobody knows yet just how bad things will get in Japan or Eastern Europe. We probably won’t repeat the disaster of 1931, but it’s far from certain that the worst is over.
4. Even when it’s over, it won’t be over. The 2001 recession officially lasted only eight months, ending in November of that year. But unemployment kept rising for another year and a half. The same thing happened after the 1990-91 recession. And there’s every reason to believe that it will happen this time too. Don’t be surprised if unemployment keeps rising right through 2010. Why? “V-shaped” recoveries, in which employment comes roaring back, take place only when there’s a lot of pent-up demand. In 1982, for example, housing was crushed by high interest rates, so when the Fed eased up, home sales surged. That’s not what’s going on this time: today, the economy is depressed, loosely speaking, because we ran up too much debt and built too many shopping malls, and nobody is in the mood for a new burst of spending.
And the point Krugman makes about banks is worth particular attention. The green shoots have, after all, largely been shaped around the better than expected earnings we’ve seen from banks. Should this really be surprising when, as Joseph Stiglitz rightly points out on Friday, government rescue efforts have mainly been designed to help Wall Street more than anyone else? Or as he said:
“All the ingredients they have so far are weak, and there are several missing ingredients,” Stiglitz said in an interview yesterday. The people who designed the plans are “either in the pocket of the banks or they’re incompetent.”
Trust us to be cynical, but there’s one sweeping generalisation that can be made about all this – the voices that are calling for a bottom/recession end are mostly coming from arenas that would benefit financially from a renewed bull market manifesting itself.
Let’s hope at least that Susan Boyle is the real thing, not a ’setup’ by clever producers as some are now claiming.
Related links:
Bank of America divides analyst opinions – FT Alphaville
Dissecting bank results - FT Alphaville
The IBs of March – FT Alphaville
The return of the IB capital call – FT Alphaville
On Wells Fargo and banks’ well-being – FT Alphaville
Citi’s early cheer put to the test – FT
Bottoms, markets and Dr Doom - FT Alphaville
Beware bottom-fishers, stocks aren’t as cheap as they look – FT Alphaville