Liam Denning, who writes for the Heard on the Street column at the Wall Street Journal, sounds like he’s writing about dancing when he says that there is new talk of “inflections, turns and bottoms.” In fact, he’s talking about the bullish argument that “it can’t get any worse” so the market is bound to keep rallying.
Unfortunately, Denning writes, the arguments for stocks–especially financial stocks–is hardly confincing. Here are the main points raised for financials:
- Upbeat comments from Vikram Pandit about Citigroup, followed by similar remarks from Bank of America’s Ken Lewis and JP Morgan Chase’s Jamie Dimon.
- Suspension of mark to market might be in the works.
- The semi-official “No Failure” policy coming out of Washington, and continued resistance to nationalization, which takes away the possibility of stocks going to zero.
Denning moves from this to the darker side of things. You know this song already. The credit contraction continues despite zero interest rates. Consumers are pulling back, hurting exporters. Financials…well, no one trusts that the heads of Bank of America and Citi have a better take on the financial health of their institutions than the wife of a professional wreslter.
Meanwhile, a structural shift appears underway which will reapportion the economic pie away from shareholders towards government and labour. Corporate profits as a percentage of U.S. gross domestic product peaked at 12.7% in 2006. That share had fallen to 10.5% by the third quarter of 2008, still above the postwar average of 9.5% and a low of 6.4% in 1982. Unlike the past couple of decades, the political theme du jour is regulation and redistribution.
Even if investors think it can’t get any worse, the underpinnings of a sustained, healthy rally are not in place yet.