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Wall Street turns bearish despite Q4 growth surprise

with 2 comments

As goes January so goes the rest of the year. This old Wall Street adage may well apply to 2010 if yesterday’s news on Q4 GDP growth is any guide.

Stocks closed down on the day, and more than four per cent down on the month, despite Q4 GDP figures which might be interpreted as a decisive end to the 18-month long recession.

Double-dip recession coming

Instead the word on the street is that this is the middle of a W-shaped recession, commonly known as a double-dipper. For once economists had something intelligent to say.

Taken apart the GDP growth was not nearly so impressive with most of it coming from government stimulus, and something like 1.2 per cent from the consumer segment. You also have to consider the comparative Q4 of 2008 and how bad that felt at the time, and consider whether this represents much of a bounce for private business whose recent profit growth only came from firing people.

The real economy of lengthening unemployment lines and a depressed housing market threatens to compound downwards with more foreclosures, bankruptcies and then a second banking crisis. We already know that the mortgage resets of 2010 and 2011 are going to leave millions of home owners in an impossible position.

So to interpret the Q4 hike in GDP as a mixture of inventory rebuilding and stimulus programs is a fair assumption. That it failed to rally stock markets is perhaps a sign that reality is beginning to catch up with the market again.

Stocks have over-shot the mark on recovery hopes and now need to find a new level closer to economic reality. If that reality dims further, as ArabianMoney suspects, then the unwinding of stock prices will be all the greater.

Exit panic

The trouble for the market is surely that when everybody realizes the investment party is up the tendency is for everybody to try to leave at the same time. That causes a panic and an over-shoot in the opposite direction.

How long will this take to happen? If January is the cue then a rapid sell-off over two or three months ought to follow. For if record Q4 growth was not enough to impress the street it is hard to see what else would do the trick.

Meanwhile, we have bank credit tightening in India following on from China last week. The foot is on the brake pedal in the runaway emerging markets, and the stock correction here could make Wall Street look like a walk in the park.

UAE bourses are already pretty bombed out – perhaps a forward indicator for the others – and the downside for these markets must be relatively limited.

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Written by Peter Cooper

January 30, 2010 at 8:58 am

2 Responses

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  1. The US is really pissed off China this week with the arms sales to Taiwan. China is venting it’s anger all over the media in Asia this weekend about the arms sales (I’m in Hong-Kong now). China as we all know is the biggest buyer of US debt (Treasuries). Wait till the next treasury auction comes in February. When China does not buy or buys very little I expect a huge market correction (or crash) due to this. China said they will respond and I am quite sure that they will respond. My guess is that Wall Street will take a hit in return. Should be a good Bear month starting next week.

    Bull has been on a roll for 10-11 months now and this Bear is really hungry now.

    Andy

    January 31, 2010 at 8:35 pm

  2. The reason is: NET it’s no growth but contraction: How GDP betrays the Economy and, probably from the second quarter forward, it’s likely to get A LOT worse: Of Mortgage Brokers, ARMs, Attrition and Marathons

    crisismaven

    January 30, 2010 at 6:46 pm


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