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Stock Market Rally, A Magic Pudding?

Stock-Markets / Stocks Bear Market Jul 18, 2009 - 07:09 AM GMT

By: Brian_Bloom

Stock-Markets

Best Financial Markets Analysis ArticleTwelve month trailing earnings (GAAP adjusted) now yield a P/E ratio on the Standard & Poor Industrial Index of 137.08X (Source: DecisionPoint.com )

Presumably, those who are piling into the market now are expecting earnings across the board to bottom out and rise strongly from here.


But world demand for oil does not reflect the expectation of a major economic bounce. In particular, demand for oil from OECD countries is expected to fall further in 2010

Quote: “World oil demand is expected to turn positive in 2010. After two consecutive years of negative growth, global demand next year is projected to show a moderate increase of 0.5 mb/d. Non-OECD countries are seen making up the bulk of the increase, growing by 0.8 mb/d. China is projected to increase by 0.3 mb/d, up from only minor growth this year. The OECD region is forecast to see a continued contraction of 0.3 mb/d, following a decline of 1.8 mb/d this year. The US consumption is
expected to rebound by 0.2 mb/d after a sharp decline of 0.7 mb/d this year.
The pace of the global economic recovery continues to be the main risk for the outlook for next year. For the current year, the world oil demand growth forecast remains unchanged at -1.6 mb/d.”

Quote: “World economic growth in 2010 is forecast at 2.3%, representing a recovery from the 1.4% contraction expected in 2009. In the OECD, growth is expected to remain anemic at 0.7%, below the pace seen after previous recessions, reflecting the depth and complexity of the current downturn. With a 1.2% growth forecast,
the US will outperform Japan (+0.9%) and the Euro-zone (-0.4%), with the latter seen to remain mired in recession well into 2010. Risks remain predominantly on the downside, despite the recent improved sentiment in forward-looking financial and commodity markets. In the US, stretched households will require time to readjust their balance sheets, amidst rising unemployment and sharply diminished wealth, implying modest growth
in consumer spending. Japan and Germany are seeking to rebalance their economies away from an overdependence on export-led growth. Continued Euro-zone banking sector problems may limit credit next year.

Source: http://www.opec.org/home/Monthly%20Oil%20Market%20Reports/2009/pdf/MR072009.pdf

Author comments:

  1. If the US equity market is rising in the face of the above dismal expectation then either the forecast is wrong or the rise is technically driven.
  2. Yesterday I heard a radio advertisement (repeated several times) that mortgages equivalent to 97% of the value of your house are now available.
  3. This unchanged mindset on the part of mortgage lenders, coupled with the fact that the Investment Bank profits have rebounded strongly, seems to indicate that “financial engineering” is still top of mind as the driver of the next economic bounce
  4. And the issue of debt remains unaddressed. US public debt has risen by over $2 trillion in the past 12 months: (Source: http://www.treasurydirect.gov/NP/NPGateway )
    • US Public debt at July 17th 2008: 9,517,951,282,749
    • US Public debt at July 16th 2009: 11,598,417,943,168.

    Conclusion

    As long as financially oriented professionals are able to influence public policy, the focus of “solutions” will remain financially oriented. It appears that the entire system will need to break before a change in orientation towards wealth generation will be possible.

    The core questions now are:

    Will the system break?
    If not, why not?
    If yes, when?

    Author’s Note

    I have voted with my feet because I do not believe in “Magic Puddings”. My expectation is that the system will break and that the timing will be before December 2012 – which is one reason my wife and I are now living in a town with a population of 1300. It is two hours up the coast from Sydney and this still gives us access to the “Big Smoke”, when/if we want it.

    Having said this, I am convinced that there are solutions and that a new system will emerge – one that is not predicated on wallpapering over the cracks in the walls of society, but rather on shoring up the foundations of society; perhaps even laying new foundations.

    In my view, those who want to survive and prosper in the years ahead should focus on the foundations. At bedrock, the foundations on which human civilization has been built are “energy”, and “rules of ethical behaviour”. We have allowed this foundation to crumble and I believe what we are witnessing in the world today (economic, social and environmental breakdown) are the consequences.

    We need to turn the page. We need to move “Beyond Neanderthal”

    Brian Bloom

    www.beyondneanderthal.com

    Beyond Neanderthal is a novel with a light hearted and entertaining fictional storyline; and with carefully researched, fact based themes. In Chapter 1 (written over a year ago) the current financial turmoil is anticipated. The rest of the 430 page novel focuses on the probable causes of this turmoil and what we might do to dig ourselves out of the quagmire we now find ourselves in. The core issue is “energy”, and the story leads the reader step-by-step on one possible path which might point a way forward.  Gold plays a pivotal role in our future – not as a currency, but as a commodity with unique physical characteristics that can be harnessed to humanity's benefit. Until the current market collapse, there would have been many who questioned the validity of the arguments in Beyond Neanderthal. Now the evidence is too stark to ignore.  This is a book that needs to be read by large numbers of people to make a difference. It can be ordered over the internet via www.beyondneanderthal.com

    Copyright © 2009 Brian Bloom - All Rights Reserved

    Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

    Brian Bloom Archive

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