Mind the Market: Whatever happened to Common Sense ?

I am beginning to think that the lack common sense is what got all us into this Mega Mess. The problem is that common sense is still missing and I wonder why?

The markets are rallying and it’s good but shouldn’t we do a reality check before we get too carried away? I mean the expectations are so LOW that any number above the bottomless floor is sending the markets into rallies. We all want rallies but sustainable rallies please that are supported by solid fundamentals and not driven by speculative play. Folks are talking about recovery against the backdrop of some pretty bad numbers. Yes we are now seeing some mixed numbers (some positives) come out from the 1st quarter but the real economy is still hurting.

To get some perspective let’s just look at the numbers out today from the UK today ( May 01, 2009 ).

According to the Government figures out today ( May 01, 09 ) nearly 5,000 companies in England and Wales went into liquidation in the first three months of 2009 and a record number of people succumbed to insolvency.

The Insolvency Service says that company liquidations rose 56 percent on a year ago to 4,941.

Personal insolvencies rose 19 percent on a year ago to 29,774, the highest since records began in 1960.

The unemployment is now probably close to 8% in the UK. Not to mention the declining house prices

Now let look at US. The unemployment in places like Detroit is over 14%. Average unemployment in the US is close to or above 10% already in at least 4 states. Consumer delinquencies are at historic high levels in the US. And what about EU well the Unemployment in Spain is already around 17% and the growth prospect is pretty BAD.

People on the street are still hurting. But some might argue that the consumer confidence numbers out suggest otherwise well  I wonder if the consumer confidence numbers are the type of real silver lining we should be looking for or a company loosing a little bit less money then expected. I surely think it is unwise for anyone to speculate about the earning prospect of any company in this current environment. Yes some companies will make money no doubt so if their stock goes up there is a justification for that but I don’t see the justification for a massive rally.

Let’s let look at the Banks. Some of them have made money in the 1st quarter of 09 but the devil is in the detail. They are not making money on their Loan book but on trading securities, assets, commodities etc. Are they suggesting that their trading business will keep on generating enough money to cover for all their potential losses on the loan book? I am not buying that argument at all.  They did pass the stress test but it was expected are we suggesting that the government was going to come out say Folks we are screwed our banks have failed. Well I am not suggesting that they have massaged the results of the stress test but what I would say is that the economic criteria set for stress test by the regulators and the government simply can’t incorporate all the uncertainties going forward. Yes the banks had a good strategy that made them money in the first 3-4 months of 09.  And the reason for that is simple the DYSFUNCTIONAL market allowed them to make a huge spread on trading securities but this can’t be a long term strategy. You don’t need leverage these days to book a healthy profit because there are so much of bargains out there but as I said this won’t last for very long.

Yes we are seeing the credit market starting to show some positive movements but by no means it’s back to where it should be to support a speedy or sustainable recovery.

Folks are busy picking the bottom. I wonder why? Shouldn’t we just take a step back and use our common sense. Well the reality is simple. The markets will recover but not today or tomorrow. I just hope that we just don’t run out of Gas before we approach the recovery line. We should prepare ourselves for the road ahead. We are going to face huge tax rises, high interest rate and less government spending as the governments around the world try to fix their balance sheet. So I am quite confident that we are not going back to the growth rate of 05 ,06 or 07 anytime soon. So why all this Euphoria? Yes I want to be happy too but let’s keep it real please. As I said that the expectations are so low that anything above expectation is sending the markets into huge rallies. I never bought the argument about market being efficient and Always Forward Looking.

What I am suggesting is that guys our future is at stake here so let’s not screw it up. We are already paying for the mistakes made by some of our friends. Guys working for a profit making arm of an investment firm lost their jobs because the other guys at the same firm forgot to apply common sense and screwed up. We make a mistake that’s not the point but we shouldn’t keep repeating it. We have already borrowed heavily from our future generation, so let’s apply some common sense.