Tuesday, 26 January 2010

Stock-market crash?

John Mangun
Outside the Box
Business Mirror
http://www.businessmirror.com.ph/home/opinion/21337-stock-market-crash.html

The New York stock market posted its worst performance last week since March 2009. Because all the economic policies of the Obama administration have been total and complete failures, the only thing that the die-hard cult followers of Obama could look to as any measure of success was the nearly year-long rise in the stock market.

People who actually understand how stock markets function have been saying that there was no justification for this year’s long rally and, at best, that the rise in prices was a bull rally in a bear market.

The Dow Jones has gone up for only two reasons, neither related to any business or economic fundamentals. First is that you can borrow money in the US for almost zero-interest rates. With that situation it makes sense to speculate in the stock market, thereby pushing prices higher. Second, foreigners also have been able to borrow dollars for substantially nothing, so here again, a speculative investment in New York stocks makes sense. But the party is over and reality is finally beginning to kick in.

The reason for last week’s decline in US stock prices is supposedly because Obama is going after the evil, greedy banks by forcing them out of the brokerage business and back into loaning money. He is appealing to the US masa who have no understanding of what the game is all about. But the smart money does understand.

US banks have not been making any money loaning funds, their traditional business, because they have not been doing any lending. That is one reason the economy there is sick and dying. There are a few people in the US administration who understand this. Forcing the banks to loan money is not a bad idea. But it is not going to happen.

The bad investments that the US banks are carrying in their books are being valued as if they were worth something. In truth, the US banking system is broke, bankrupt and completely insolvent.

Investors know that the only way for the Obama administration to get the banks to lend is to get them out of the speculative-investment business. But in order to do that, they must clean up their balance sheets by showing the true value of the worthless investments. If they do that though, they go out of business because they will be insolvent. A real rock and a hard spot.

The banks are like movie zombies. The only way to cure them is to kill them. The banks are worthless to the economy the way they are but to make them functional is to, in effect, close them down and put them out of business. There are no successful options at this point. Why? It’s because all the bailout money was used to keep these banks afloat for them to continue their speculative-investment business, not to loan money.

Therefore, the reality of a failed banking system is hitting the stock market since it is only the financial companies that have fueled the rally. Real businesses that make something or sell something are in terrible shape and their stock prices deserve to be 50 percent lower.

For example, in the US, Wal-Mart stores are the economy and a perfect economic indicator. From the Associated Press: “Wal-Mart Stores Inc. said Sunday it is cutting about 11,200 jobs at its Sam’s Club warehouse division. The terminations represent about 10 percent of the warehouse club operator’s 110,000 staffers across its 600 stores.”

The other problem is that the US has to fund its own debt. It is sort of like borrowing money from your wife and then giving it back to her to pay household expenses. In 2009, the US borrowed some $1 trillion. China bought $62 billion or about 5 percent. Only 40 percent of all borrowings came from foreigners in 2009. The rest was borrowed from US lenders. By comparison, as recently as 2007, foreigners were actually buying 100 percent of all US government debt. The US is going to have to figure out that borrowing money from yourself just does not work.

Maybe yesterday (US markets closed as of this writing), today, tomorrow, next week, there is going to be a severe decline or even a crash in the US stock market. It is inevitable and to be expected. What does that mean to our local market?

There is going to come a time very soon when the emerging stock markets like the Philippines disconnect from the US and European markets. Saying that to a local stock broker is almost blasphemy. Most local brokers could not go to work in the morning without first looking to see what the Dow Jones did the night before. Local brokers are like drug addicts when it comes to the US Dow Jones.

But disconnect from the US is what is going to happen. Our local market needed to fall to 2,950 on the Philippine Stock Exchange index. It may fall further to the 2,800 level. Nothing could be sweeter. We must reduce stock prices first before the move to over 4,000 can begin.

In the meantime, the dead-dollar scenario will continue to be realized. Gold is going to $1,500. The economic situation in the US will become increasingly desperate. There is absolutely no other scenario to the current picture.

On a personal note: If you would like to subscribe to our Weekly Stock Market Update, send me an e-mail. I will furnish you with a recent sample issue along with subscription details.



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