Wednesday, March 19, 2008

Markets breathe for now

Markets breathed a sigh of relief (cheered even) jana, as Lehman Brother and Goldman Sachs, two of the top 5 investment banks in the world revealed that yes things were bad (Q1 profits down 57% and 53% respectively), but not as but as Bear Stearns. Because of its previous life as a number 1 fixed income broker, Lehman Brothers was feared to be going the Bearway, but its share price recovered after its announcement. Still, it 
makes you wonder why there were fears unless it was having problems settling positions. 

The problem is that this is now no longer a stock markets issue. Many banks are no longer willingly lending
 to each without adding a premium. This then translates to each bank having less funds to lend to the 
joe public. In turn means that interest rate cuts will not have the intended effect which is to lower the 
cost of borrowing for mortgage borrowers and credit card holders, the key drivers of the economy in the West.
Its a paradox that the financial ministers of the big economies need to figure out. Not to mention commodities-related inflation.


Ssembonge said...

The problem is that markets don't move in a straight line. In between, there are rallies/dips. Financials were oversold and have just 'corrected'.

The 50 lb gorilla in the room is inflation and consumer spending holds the key to recovery.

What we saw on Monday and Tuesday was not the begining of a bull market. Consumers are still in the red.

MainaT said...

Ssem, there is no prospect of a bull market until Q1 2009. As I said last year, every investment bank will have downloaded its toxic waste by either Q1 (now)/Q2 2008. The residue will be if the housing market deteriorates further.

However, if another bank fails, things will be thick for longer.

Hence the post.