Equity prices slide

If investors can bear to see through Friday, fixed income markets will be asked to swallow a $118 billion slug of fresh government supply next week. And so it’s just as well the stock markets around the world are collapsing in advance, lifting the dollar at the same time. That’s sending investors conveniently into the safe haven of bonds and driving yields lower, saving the U.S. government a pretty penny on servicing its interest payments. 

It would surprise us less to see equity prices drift lower, but we have to admit that we are surprised with the raft of news currently deemed negative, which is coming together to pile drive the S&P 500 index down at its fastest pace since November. The index, which had delivered the instant karma of 3.6% gains to investors within the first three weeks of the year is now down on the year.

But is all of the news necessarily poison to investors? We think not and this morning sent out a fresh way of playing this for our Jurojin Weekly readers. Let’s examine some of the factors.

China – growth surged to 10.7% in the fourth quarter of 2009 and beat the pants off the government’s official 8% target. But the rejoicing is cut short because the central bank says some of its banks failed regulatory measures, which means they have to stop lending. In addition it’s still allowing short term money rates to rise in its money markets indicating it is manipulating rates higher.

The truth is that we’ve seen a near identical shock last year in China and the “growth off” argument was persistently resurrected throughout 2009 to justify what turned out to be aberrations to the rise in commodity prices. The bottom line is that we don’t expect China to destroy its own economic growth rate anytime soon. We think something, somewhere along the line is being lost in translation.

Earnings at American companies are hardly missing the mark and are not the catalyst for an accelerated smack down. But what of the heavyweight financials in the aftermath of President Obama’s decision this week to attempt to further regulate and rein in the risks these bankers can take with other peoples’ money? Is this tantamount to kicking the crutches away from the cripple so soon after helping him stand up?

While we can’t be precise in arguing that this will only erode x% of banking earnings, where “x” is a small number, it is unlikely that “x” is a huge number or at least not in recent quarters. Banks will have to find another avenue for growing earnings and that’s assuming that the President’s proposal passes safely through Congress.

Emerging markets are collapsing – well once again, we’re not sure that investors have any reason not to join the selling. It’s hard to stand steady when those around you are running around like headless chickens, and the rally in the dollar to monthly or longer highs in some cases is another factor likely to unsettle investors in this climate.

Yet all said and done, none of this feels like the onset of a bear market and while we can’t claim to know where the bottom is just yet, we reckon that just as it turned out in 2009, Chinese steps to manicure its lawn won’t turn out to be a huge threat to the emerging bull markets around the world. That doesn’t preclude a further 5% downdraft just to shake investors’ conviction up front though.

John Bull
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