Reply #20: The East, no the West, is (in the) red

[Ghost Dog]

MARKET RAP By R M Cutler

MONTREAL - Two weeks ago, three different patterns could be detected among the principal equity indexes on the main Asian stock market exchanges, but the week now ending has been one with one major pattern with a few nonconformists.

The pattern, if last Friday's trading is included, is characterized by a weak upward trend of between zero and 2% through Tuesday's close, followed by a strong spike upwards at the Wednesday open and even-tempered movement further upwards throughout the day, with a continuing mild but constant uptrend on Thursday but concluding with an almost total lack of movement this Friday - at least so far.

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What was the reason for the spike at the Wednesday open? As one might suspect, New York is the origin. Market sentiment interpreted the Swiss bank UBS's writedown of US$19 billion, connected with the unfolding subprime debacle, as a sign of the beginning of the end rather than as a glimpse of the iceberg beyond the tip.

Despite the fact that the bank announced it would countervail its first-quarter net loss of over $12 billion by seeking $15 billion in new capital, likely requiring a new share issue and thus in fact the dilution of the value of existing shares, UBS shares rose 12% that day in Zurich. Let the reader judge whether this is a marker of self-delusive irrationality.

Asian financials, which earlier this year had led the New York markets down when they cracked under the combined fear of subprime exposure and the prospect of a US recession, thereupon nevertheless led their own markets higher and those markets responded. Yet it is noteworthy that the early-Wednesday upward spike accounted for well over half the week's gains in Singapore, Japan and Australia, and nearly two-thirds in South Korea.

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If the collective wisdom in New York had one good explanation for the irrational behavior at the Wednesday open, it had two irrational explanations for the good behavior that followed. One was credulous acceptance of Federal Reserve chairman Ben Bernanke's defense, before a Congressional committee, of the decision to help JP Morgan Chase buy Bear Stearns, as "not a bailout" (which is strictly true but really beside the point).

The other was the manic phase of a manic-depressive week awaiting the release, on Friday morning New York time an hour before markets open, of the nonfarm payrolls and unemployment rate figures for March. Less significant but related statistics from different sources released during the week were subjected to intensive interpretation, but the best that could be said of them was that they could not in the end be taken as portents of things to come on Friday morning and (inconsistently with the foregoing, of course) at least did not validate the worst fears.

The important new figures, which will be published roughly six hours after the present column is published and may well be available as you read these words, have the potential to incite a new daylong mini-panic but, as unfavorable as they may be, they are unlikely to provide an argument that will close discussion on the question of a US recession.

Perhaps it would be a step forward if they were bad enough to force debate into the open, over whether the US recession will be long and deep or short and shallow. That would allow the ventilation of studies of industrial demand suggesting that the recent run-up in commodity prices, for puncturing which Bernanke was briefly hailed before they largely recovered relatively quickly (the precious metals being a temporary exception for technical reasons), was not due mainly to speculation.

The price increases recently forced on China by its raw and semifinished materials suppliers could then be introduced to complete the circle integrating into the debate Asian extractive industry, and also consumer and capital goods production. That way, we would all get a better idea of where Asian equity markets stand in the mix, not to mention prospects for inflation in countries importing those goods. The telling sign, as always, will come when such issues reach the popular press.

/... http://www.atimes.com/atimes/Global_Economy/JD05Dj03.html