Broad Oak: your emotional support animal

Tuesday, January 12, 2010

More warning signs

Update: see "Jesse" on speculation about recent curious purchases of US Treasury bonds.

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"Mish" looks at two countries experiencing trouble - Argentina and Venezuela - and point out that European banks are exposed to risk in that area.

"George Washington" thinks the recent rise in the stockmarket has been because of activity by "hedgies, pension funds, banks and other institutional investors", including possibly even clandestine intervention by the government itself (I've seen this allegation before). However, in the US 80% of stocks are owned by individuals, not these corporate entities, so the suspicion is that the rally has been engineered to encourage the private investor to return to the market.

It doesn't seem to be working - much of the money withdrawn from stocks has gone into bonds (I think the unfortunate private investor may lose again if - as I fear - interest rates rise and bond values plummet).

I also suspect that if the individual re-entered the market because of what appears to be leveraged (boosted with borrowed money) speculation by the institutions, the latter would then cash-in and leave the individual holding the baby. This pattern is known as a "sucker rally".

But if the private investor is not "suckered" back into the market, then institutions will race to get out again (suckering each other, faute de mieux) and we could see a sharp fall in stocks. This, I assume would confirm the private investor's worst suspicions and lead him/her to pull even more out of the market.

Some, including myself, have suggested that the real bottom (at some point, goodness knows when) in the stockmarket may be somewhere around 4,000 on the Dow and 2,000 on the FTSE (adjusted for inflation, if that takes off). It may never happen, but Google "Dow 4000" and see some quite respectable commentators bandying around that idea.

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