I Want to Believe....in Green Shoots

The quiet optimism I had talked about of late as it spoke to recovery seems to have been overtaken by rampant stupidity.

However I must admit that I read a piece recently from Albert Edwards of Soc Gen, whose faith may have been slightly shaken as he wondered aloud whether he had in fact missed the start of the new bull market rally.

I suspect not, because one can have very strong bull runs in bear markets and looking at the large percentage gains in the rally over the last 6 weeks, I suspect that we need to remember that those gains are hardly linear i.e. based on where one was to track from let's assume last years highs, then we are still down size from there.

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The other component that would have me wary is simply the economic backdrop. With on average 500,000 jobs being lost in the US each month and plant and retail closings you have a multiplier effect that may have some way to run.

There might be signs that housing is trying to find some equilibrium, but I am reminded of a great line that I read recently to describe our economic travails and it was that "we are no longer falling off a cliff; but rapidly bouncing down a steep hill"

I sit back appalled that I have missed such an impressive rally in equities; but suspect it's quite unsustainable and would agree whole heartedly with the likes of John Mauldin, Albert Edwards, Ambrose Pritchard Evans, that this is a suckers rally for the very reasons supra.

The metrics are pretty impressive looking back over the last 5-6 weeks Equity up anything 30-50%; Credit spreads compressed in the last month IG12 in about 140 points; Curve steepened; Yields higher - 10Y UST hit their resistance area in the 3.32 - 3.35% area last Thursday and will likely hold a 3.00-3.35% for now: Funding Spread vis-à-vis - Libor-OIS now at +71 (versus last years high of +364); 3mth Libor at its lowest level for quite some time trading under 1.00% (well off last Oct 5.77% high).

Investor risk appetite is definitely returning based on not only equities but on the desire for corporate issuance at a price.

So why the scepticism on my part?

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Simply put it doesn't add up just yet and furthermore the damage that has been done is structural in nature.

The Banks have all come through the Stress Tests with flying colours, or at least the majority and the others can raise the required capital with ease now that investor appetite for risk has returned; but Treasury carried out these tests and the initial results had many of the banks up in arms including Wells Fargo from all accounts on the initial outcome and recommendations by Treasury to the extent that there was substantial push back by the banks. While the tests might not have been be undertaken with a tickle stick as some have suggested was the case of Barclays with the FSA; it also suggests that the initial rigour was relaxed at the end of the day.

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I continue to call for embracing the current economic reality. That is not pessimism that's simply making an assessment of the current facts and circumstance without sugar coating. The observation at this point is the likely divide that we will end up with, as you have the very strong dominant players such as JPM, Goldman, CS and MS and the rest of the crowd.