Overbought would be an understatement

As we all know we are currently in a Global recession. Unemployment is increasing at a staggering rate throughout the world at a staggering pace, this rate is only made worse as companies look to cut their operating costs to keep their shareholders happy. It seems in this day and age if a company is seen to be sacking, reducing staff costs and spending less with its suppliers then the shareholders who are generally pension funds, big banks and those private investors still in jobs are happy. What they don't seem to realise is this cost cutting is having a knock on effect to an already bad situation in the economy. With less people in work, fewer people are spending and those in work are certainly cutting back on their consumption due to the fear factor that it could be them up next to the chopping board. So this in turn has a multiplier effect which knocks onto the whole economy - shareholders may feel slightly more flush because in the short term a company has been seen to cut costs so its share price might rise but in the long term without its customers spending money on its general business this business and all businesses will suffer further. Effectively leading the so called "V" shaped recovery into at best a "W" shaped recovery but at worse a huge depression which was last seen in the 1920's.

The Federal Reserve, the Bank of England and all the other major world banks might think they have the tools to deal with the problems through Monetary Policy but the reality is as businesses cut back on their spending and begin to produce a lot less combined with the effect of governments devaluing every major currency huge inflationary pressure will be seen to be on the cards and with no end to the unemployment in sight worst case 1920's scenario's could be very likely. This in turn will be mirrored in share prices - causing a huge slump in share prices - probably breaching the March 2009 lows and heading lower.




Well that's my rant for the day - however - I thought I would draw your attention to an interesting note from Deutsche Bank yesterday:

Earnings
Make no mistake, this has been a very strong start to the US reporting season relative to EPS expectations seen as we entered reporting season. However we should put things in perspective. Q2 YoY growth was expected to be -11.3% on Jan 1st, -31.7% on April 1st and -35.5% on July 1st. With 184 companies having now reported the blended YoY growth rate stands at -31.0%, back to where expectations were when the quarter started in April and well below where expectations were at the start of the year. It would be interesting to know what the market reaction would have been on January 1st had people known the full extent of Q2's poor YoY earnings growth. YTD the S&P 500 is now up 8.42% with Stoxx600 +10.74%. Clearly the equity market is rightly looking at 2010 and the recovery, but it does seem that it is prepared to sweep a very bad 2009 under the carpet and naturally assume markets return to near normality in 2010. The table overleaf shows aggregated Q2 earnings so far in both the US and Europe.