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Winds of change are blowing
If you follow the market daily, you would have noticed a change of sentiment in the past few weeks. Up until recently, markets went up at every bit of good news and bad news was quickly discounted. In the last few weeks, the reverse is happening as good news get discounted and markets fall hard on the slightest bit of “bad” news. I was quite shocked to see a 200 point drop in the Dow when I woke up this morning. We certainly have not seen drops of this magnitude in a long time. The reason given for this was Obama’s announcement for new stricter rules for the banks. The Global Financial Crisis was caused by the banks taking on too much risk so the correct thing to do is to reform the financial system to try to prevent it from happening again. I see the new rules as a step in the right direction but the market chose to see it as “bad” news and sold off hard, ignoring good news like great earnings results from companies like Goldman Sachs and IBM. Normally during earnings season, earnings are the main market movers but this year they have been totally sidelined. A few days ago, Intel’s great earnings was discounted with markets preferring to focus on the “bad” news of the Chinese government call to their banks to curb lending. Again, I don’t see that as bad news. The banks had an unprecedented increase in bank loans in 2009 as part of the stimulus measures and surely it cannot be expected to continue forever, and it is time for lending to go back to a more “normal” pace. It almost feels like the market participants are behaving like drug addicts who are suffering withdrawal symptoms when the drugs they have come to depend on are taken away from them.
Another change I have observed was the change of attitude to bailouts. In the past two years, whenever there was a problem, someone will step in to bail the party in trouble out, even when they were undeserving. Obama has been most generous with various bailout programs for everyone from troubled banks to the homeowner facing foreclosure last year. Recently, he has started to take a tough stand against the banks. Last week he proposed a tax on the 50 largest financial institutions to recoup the money spent on rescuing these companies during the crisis. Yesterday, he proposed stricter rules for the banks. Perhaps this is a response to boost flagging support for his administration which was made abundantly clear when the Democrats lost the Massachusetts seat to the Republicans. In other parts of the world, after three bailouts, Japan Airlines was finally allowed to go bankrupt. Abu Dhabi also cut their bailout commitments to Dubai from $10 to $5 billion. The sentiment seems to be shifting towards taking a tough stand and letting those who were reckless face the consequences of their actions. If this sentiment continues, Greece will probably not be bailed out by the European Union and things could get really interesting if Greece cannot solve their financial problems on their own.
Finally, enthusiasm for free global trade seems to be waning. International trade relations seem to be getting more strained. The latest evidence of this was the Chinese cyber attacks on Google (and other US companies) and Google’s threat to pull out from China. This is on top of other ongoing trade disputes over steel products, tires, movies, etc. I seem to see an increasing number of “Buy Australian” on TV. With a shrinking consumer pie, I guess everyone has to fight harder to get a slice of it.
Just as sentiment suddenly changed from bearish to bullish in March 2009, it looks like we may be getting a reversal of that in January 2010. According to this BusinessDay survey, 40% of those investors surveyed plan to increase their exposure to equities and one third of them plan to increase their leverage this year. After today’s ugly action, I wish them good luck.
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