Longneck’s UCC’s (Useful Chit-Chats) : My Thoughts on the Recent Subprime Crisis

The recent subprime financial crisis : what really happened, what’s happening, and my thoughts as to what will happen — these will be discussed and linked as thoroughly as possible by yours truly in simple layman’s terms in this special edition of my UCC’s.

I have this thought that has dangled in my mind for ohhh so long, but I decided to come out with it just recently, because I want to confirm my own personal theory as to the US unemployment data indeed making a u-turn to recovery.

We know for a fact that stock markets usually move way way in advance ahead of any crisis or recovery. Just keep this in mind as you read along.

Last early November 2008, Barrack Obama was declared winner of the US presidential elections. US stock markets have been actually rallying before the announcement. I remember that fateful day, as from that day on, the DOW crashed from 9,700 all the way to March ’09 lows of 6,500. This phenomena became a classic  ” sell on the good news ! ”

We won’t be looking at the highs of the markets which was 14,000+, but we will just focus on the events which unfolded before our eyes, when Obama was officially declared winner.

Nov ’08 ~ March ’09 : DOW crash from 9,700 to 6,500
–> this DRASTIC move south was caused by extreme ‘FEAR’ which led to irrational redemption of mutual funds/UITFs, flock and flight to safety mainly US treasuries causing US $ to appreciate dramatically, selling of commodities like gold and oil. All this happened on a close to ZERO US  interest rate regime.

March’09 to PRESENT : DOW recovered in V-fashion even breaching DOW 10k.
–> Did we really have a V-shaped recovery ?
==========> stocks – YES !
==========> US jobs market, housing, etc – NO !
The recent recovery is being attributed as a ‘LIQUIDITY driven recovery’. As interest rates are so low, the drastic sell-off leading up to March’09 did a RESET of a lot of fundies. Awashed with CASH, investors shied away from the US $ this time, and headed to other major currencies (carry trades) and to commodities like oil and gold, and of course the stock market. Liquidity, liquidity, liquidity…

NOW :
—–> with US unemployment data making a surprise move last night to the positive note and tone, equities actually shot higher at first, but this time US $ gained, and GOLD crashed back down… this on speculation that with unemployment <esp being a lagging indicator> improving quite significantly, FED might just start to increase rates, and hence will siphon out liquidity OFF the stock market, OFF commodities, and OFF other major currencies and back now into the US $ ….

Looking ahead :
—-> I strongly feel the unemployment numbers last night is indeed showing us something : that things will begin to improve from here, and we are indeed on the right path to recovery out of this subprime mess. Yes, yes I know it is just one month’s data, BUT clearly unemployment had peaked, and following this recent trend, we have nowhere to go but to improve.
—-> So what now? I believe that though we are indeed moving in the right direction, the light at the end of this tunnel which we now know as “SUBPRIME” is still a few miles off. We will get there eventually, and we will all see daylight, but there are still a few months still of darkness.
—-> FED will increase rates not tomorrow and not next month, but in my view sometime in the late 2nd quarter. Until then, we should still see the stock market rally. But when the rates increase, that will also be the time when REAL robust recovery will take place, US $ will appreciate and this will go hand in hand with the equity boom. This time it will not be a LIQUIDITY-driven recovery, but a RECOVERY-driven recovery.

In summary, the dive from 9700 to 6500 for the DOW was driven by FEAR and IRRATIONAL redeeming and selling. The recovery from 6500 to NOW is driven by liquidity.

From NOW to a not so distant future, FED will indeed be increasing rates thus siphoning out that ‘liquidity’, but real recovery should be strong enough to push and carry  the markets higher, though not as fast and furious as the recent stock market BULL RUN.

Crunching the numbers, I feel if there will still be a correction from here, 9700 for the DOW (level before the crash, refer above…) would hold FORT. For this particular cycle, this level for me will be the worst. As to where we are really headed, the recovery is in reality just starting, with 9700 acting as my trough, I dare not guess where this journey will take the all of us who believed.

Well, are you ? Are you a believer ??? Well, I know I am …

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