Beware an April rally! (page 2 of 2)

Obviously a slowdown in loan growth to the real estate sector would have negative implications for the housing market and the homebuilders whose stocks have risen by almost ten-times since 2000. Moreover, weakness in both financial and retailing shares suggests an imminent slowdown in US consumption.

Housing driving consumption

Why? Over the last twelve months, about 25% of consumption growth in the US was driven by households, which drew down their home equity lines of credit by an unprecedented US$ 110 billion. Please note that, according to Merrill Lynch, the 37% increase in revolving home-equity loans over the last twelve months has exceeded growth in wage-based income by a factor of six.

So, if the housing market begins to weaken as a result of financial companies diminished ability to extend loans an important pillar of consumption growth - increasing revolving home equity loans - will be absent and weight on the consumer ability to keep up his lavish spending habits.

I have to admit that I am somewhat surprised that the stocks of homebuilding companies have so far failed to decisively break down. This especially in view of the weakness in financial stocks and retailers!

Buffett mainly in cash

But then again, if the NASDAQ could reach 5000 in year 2000 nothing should surprise us. For the bulls no price has ever been too high. But for value oriented investors such as Warren Buffett there appears to be little value in the asset markets. Berkshire Hathaway's, cash as a percentage of book value now exceeds stock holdings.

Needless to add that it appears that Warren Buffett - not exactly a beginner at the money shufflers' game - does not share the optimism about the US economy and the stock market the 'bullish lady' expressed on CNBC.

I have pointed out in previous comments that a strong dollar (tighter money) is bad for asset markets. This seems to have been confirmed by recent market action. Each time the dollar strengthens stock and commodity markets stumble. This is particularly true of emerging markets.

While fundamentally most emerging economies are far sounder than the US emerging economies' stock markets are vulnerable in an environment of tighter money and a rising US dollar. After their out-performance since 2001, I would expect a more challenging environment for the next six months or so.

April tends to be a month of seasonal strength. This coupled with the very near term oversold condition of stock markets around the world and the likelihood that oil prices could decline somewhat following Goldman Sachs' call for $ 105 oil should support stock prices and lead to some rebound in stock markets in the period directly ahead.

I do not recommend playing this short term rally from the long side but using this strength to reduce positions and to initiate some short sales.