This rally is only a blip!!!

Since the Easter weekend the financial press and the pump monkeys on CNBC have been calling the bottom of the markets and an end to the credit crisis - their reason is that the banks are passed their worst all the bad news is reflected and the actions of the Fed will now stimulate the economy which will rebound in the second half of 2008. This cannot happen for the following reasons: 1) The USA will now enter a protracted phase of slow growth similar the path followed by the Japanese economy since 1987 - The Nikkei Index is still 75% below it's peak and interest rate have been at zero for decades, one thing in their favour was that they had extremely high rates of personal saving at the time - The American consumer is virtually bankrupt. The lower bank rates will not allow the consumer to take on more debt and continue to spend the country out of recession, the banks will not be in a position to lend at any rate, they will have to become more risk averse in the practices. 2) You cannot have a system where profits are privatised and losses are made good by the public - the bail out of Bear Stearn's has cost each citizen of America $300!!. House prices still have a long way to fall to revert to the mean, this will increase the default rate which will bring down the value of the toxic bonds that the banks and now the Federal Reserve own further exacerbating losses on Wall Street. This equates to higher PE's on the averages, which in spite of the bottom pickers claiming the market is cheap makes it extremely expensive. Meridith Whitney who has been spot on on calling the banks earnings has just lowered her earnings for the entire banking sector to a loss of 28 cents from a profit of 75 cents - You cant have a P without an E. 3) US consumer confidence is the lowest it has been since March 2003 and expectations are the worst since the oil crises of 1974 - Hardly an environment for shares to rally. 4) Commodity prices have probably peaked as the big hedge funds will need to unravel their speculative positions as margin call increase for all their positions - No more 32x leverage by the banks and trading houses. Some of my targets on the downside have been reached - my next post will be an update and predictions for the second quarter Watch this space