Chris Lau - Seeking Alpha

Friday, May 22, 2009

Bear Market Rally

Below are notes taken from John Mauldin's Newsletter. My comments are included.

About Bank Earnings Q1 (April 2009):

Of course US banks made good money in Q1. The environment created for them is the equivalent of the US government reducing the cost of goods to zero for its embattled car manufacturers and then going on to buy - courtesy of the US tax payer - a couple of million cars that nobody really needs. Even Detroit would make money given those conditions!
Mauldin notes that all of this "free" (tax-paid) government money is being trapped in the banking sector. This means that the "multiplier" will not be at work and that inflation is not as likely as many think. Look out for downward pressure on gold.

Bear Market Rally:

It will take longer than 18 months to unwind the excesses of the past 25 years
15 largest banks which between them have shrunk their balance sheets by about $3,600 billion so far in this crisis, will shed another $2,000 billion in 2009. If you do not share my pessimism, please take a quick look at chart 3 below. The US financial sector debt load (as a % of GDP) is now 117%. In the early days of the great bull market in 1982, the same number was 22%. Households are not much better off with total household debt now at 96% of GDP vs. 47% in 1982.

It will become clear soon that the March - May rally was a necessary one because too many companies were trading at far too low a valuation. Many companies have capitalized their balance sheets by selling shares or debt. Shareholders who bought these issues will feel the pain as the market trades closer to economic fundamentals (down). I am most cautious in the financial, commercial real estate, and the automotive sector. I believe that GM bond holders will be wiped out. The company will likely go bankrupt but the market has already priced this in.
On Mortgage loans:

Delinquencies related to Alt-A and adjustable rate mortgages have taken off, and prime and jumbo loans are only now starting to suffer.

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