sábado, 19 de abril de 2008

Is The Rally For Real This Time?

Is The Rally For Real This Time?

Another day of record-setting losses for an iconic American financial firm… another triple-digit gain for stocks!

Today it was Citigroup’s turn to fess up to more “collateral damage” related to the ongoing subprime credit crunch… and it was a doozy. Citi posted a $5 billion first-quarter loss, and kicked in another $16 billion of write-offs and increased loan loss reserves. Ouch!

Still, as has been the case this week, investors chose to look-through the bad news. The financial sector losses being reported with first-quarter results this week have largely been anticipated and “priced in” to current market values.

As a result, Citigroup shares actually rallied 4.5% today – following in the footsteps of Merrill Lynch, and J.P. Morgan – both of which also reported dismal results, but saw their stocks rally.


It’s pretty clear that the point of maximum pessimism in this market has already passed – at least for now. While the credit crunch is far from over, investors are getting used to it now. Big credit losses no longer have the same “shock” value. Until the next unanticipated crisis comes along (which could be anytime), stocks have room to rally.

In fact, the S&P 500 declined for 5 months in a row from November through the end of March. Such a consecutive losing streak is rare. In fact, it’s only happened 7 times in the past 40 years. After the previous 6 occasions, the S&P 500 averaged a gain of 18% over the following 12 months. So we could see a similar robust rally now.

There are plenty of things to worry about in the future however. That’s because Wall Street still has great expectations for a speedy recovery in corporate profits this year, which ain’t likely to happen.

But hey, spring is in the air after an extended winter of discontent in the stock market. So who can begrudge investors a bit of a rally now? After all, it’s been a long time coming.

So sit back and enjoy. If the magnitude of this rally comes even close to mirroring the size of the decline since November – then it should be a very profitable experience for investors.

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