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Europe and America pump the money, Stock market rallies, main Indices still -20% -40% oversold. – It’s Halloween! (upate 1)

Posted by Adrian on October 30, 2008

The US federal Reserve are swapping currencies to pump US dollars into countries such as Brazil, Argentina, South Korea, Australia and New Zealand. This would indicate two things, all those countries are going be straining with large account deficits, which has yet to narrow and now will not narrow with a current global slump, the other point would be the commodity based countries will be hit hard on a US slowdown and US dollar funding is under pressure. Note the recent currency sell offs with the countries mentioned.

The money pumping (fiscal stimulus) is reeving up from Japan to German to dump money onto the consumers. As we know from the US experiment with a fiscal stimulus, the consumer is under huge pressure, so fiscal stimulus (which are token) will either put into savings (causing a greater downturn), or pay down debt. It is actually quite pointless, a politically driven tool (economic intervention) that has, as mentioned numerous times on this blog, causes more volatility in the market.

But economically the governments of the world are driving blind, throwing money around everywhere (mind you except for infrastructure development!), the commodity producing countries are still grappling with high inflation and I would still dispute whether core prices have actually declined in the US and Europe (namely food).

Also with business trying to deleverage and shrink to cope in difficult economic environments. The discounting on prices may not be so prevalent; if the business is highly leveraged. Staff will go before prices are dropped on products. What is dangerous in regards to the amount of business debt out there , so again rather than a business model dropping prices and trying to maintain competitiveness. They may maintain prices (or increase). The invertible outcome is the business will just cease to exist. This could become a widespread phenomenon, as credit markets are still tight and business leverage is still high – it could end just going straight to ‘bust.’

So with the IMF central banks and governments, who allowed all this to unfold, attend all these forums and meetings and I quote from the Telegraph, “A world system must be envisaged that is more coherent because it is simpler and more efficient because it is more coordinated,”.

I guess these guys have to justify their existence, but they do nothing. The worst politically and economically error in history was allowing money to be flooded into the economies which then unleashed massive credit growth in all the world economies. This is the error. Consumer excess fulled for political gain and self interested parties in pointless economic positions; such as the central banks and so called regulatory bodies.

The global recession hasn’t even entered the sharp ‘downward’ trend yet. We are just as the cusp, the US will ‘officially’ go into recession soon (although their slowdown has been going on for just under a year).

So stock markets maintain rallies despite the awful US economic numbers – yet all indices still remain very oversold, from Timesonline:

“The main drag on growth came with consumer spending, which slumped in the third quarter at an annual equivalent rate of 3.1 per cent. This marked the first drop in US consumer spending since the end of 1991 and the biggest since the second quarter of 1980.

Economic activity was also sapped as businesses cut back on their investment spending, which fell at a 1 per cent annual rate, after rising by an annual 2.5 per cent in the second quarter. It was the first drop in business investment since the end of 2006.”

But it is Halloween, so in light of Halloween (if you care) are terms used in the market too describe the ‘the dark’, ‘scary’ and ‘the dead’.

I use the term ‘zombie’ a lot, not just because I like zombie movies (which I do). But zombie’s in business and the market fits appropriately (especially now), hence the term ‘zombie business’.

Below is the term and it’s definition, from Investopiedia:

In the supernatural world, a zombie is a reanimated corpse infused with the magical energy of voodoo.
Zombies in the investing world aren’t that different from their supernatural cousins. They are companies that are insolvent or on the brink of insolvency, but are still operating as if nothing’s wrong. Although zombies are in or close to Chapter 11 – which allows a business to continue to operate while restructuring its debt – a zombie company is perceived as not having a chance. Therefore, much like the supernatural zombie, the corporate zombie doesn’t know that it’s already dead. As an investor, you should avoid zombie companies like you would avoid the living dead.

In light on AIG’s ‘cooked’ accounts

Voodoo Accounting
Voodoo is a religion practiced chiefly in Caribbean countries and some African countries. In most Western countries, the term “voodoo” connotes black magic and unexplained phenomenon.

Hence the term voodoo accounting: it occurs when a company uses some highly suspicious accounting methods to disguise what’s really going on with the business. These methods can be as simple as spooky math (when numbers don’t add up) or as complex as cooking the books through cookie jar accounting or the big bath. Voodoo accounting can also raise zombies of its own. The corporate zombies mentioned above are exactly the type of companies that would use some voodoo accounting to cover up their major financial woes.

Graveyard Markets

A graveyard market, on the other hand, pops up right where you’d expect it to – at the end of a prolonged bear market, when investors have just finished weathering a financial storm. They aren’t exactly moving and shaking like they used to. At the same time, any new investors are tentatively eyeing a market that just beat up the big players. Thus, there is no action either from those already on the inside or from potential new investors on the outside. The parallel between this type of the market and a graveyard is obvious: the dead (longtime investors) can’t get out, and the living (new investors) aren’t rushing to get in.



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