The current financial crisis differs from the Great Depression in many respects. At the moment, the most significant difference is that central banks around the world are moving fast to try to stop the problem from getting worse. Stocks in Asia and Europe are rallying and futures point to a higher opening in the U.S.
Should you sell into this rally? Maybe. It depends on whether you think the world's finance ministers have solved the problem.
What are European central banks doing? The UK is injecting $64 billion into three large banks -- Royal Bank of Scotland Group Plc, HBOS Plc, and Lloyds TSB Group -- European governments agreed to guarantee new bank debt until the end of 2009, and the U.S. is coordinating with Europe to offer unlimited dollars to ease the credit crunch.
How are markets reacting? In Asia, stocks rose -- Hong Kong's Hang Seng index surged 7.5% while Sydney's S&P/ASX 200 index rose 5.6%. Things are looking up in Europe as well -- London's FTSE 100 index and Paris's CAC-40 are both up 5.4% and S&P 500 futures suggest a 6% gain in the U.S. What will the U.S. do?
No word yet. Princeton professor Paul Krugman is reporting that his colleague, Ben Bernanke, favored a program of injecting capital directly into banks but was overruled by Hank Paulson who pushed the DOA plan of reverse auctions to buy toxic waste. After Britain's success with capital injections, Treasury will try something similar -- I keep pushing for a cull and capitalize approach. Meanwhile Treasury is offering assurances that if it injects capital into Morgan Stanley (NYSE: MS), it will not wipe out a $9 billion investment from Mitsubishi UFJ Financial Group.
So should you sell into today's rally?
It depends on whether you think that the world has solved the problem and things will get better from here. If you are convinced of that, then you should back up the truck and buy stocks. If, on the other hand, you believe that there are likely to be further unexpected negative surprises along the way, today's rally could be a great opportunity to cash out -- particularly if you need the money in the next six years.
My hunch is that there are more surprises to come.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.
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Reader Comments (Page 1 of 1)
10-13-2008 @ 8:38AM
sam elissawy said...
Ido think the market rally in Asia,Europe today is not a good sign to stay at market today
let's be sure we are not in the bottom yet.
the future rally today will be anthor reminder what happen last week.
10-13-2008 @ 8:40AM
Mike Sanders said...
I think that there are more surprises on the way, however, I believe that they will be decidedly different, in one important respect... They will be positive surprises!
10-13-2008 @ 9:11AM
gregory said...
Well that's saying something without saying anything. A waste of a web post. Buy if you think prices are going up other wise sell. Do we really need someone to tell us that? More surprises to come, I never would have imagined.
How about an over-sold bounce here followed by testing of recent lows, falling through to new lows, and then a slow march back over the next 18 months to the mid to low 9000s.
Should you sell into todays rally? Unless you are a long horizon investor selling into this rally will be a smart thing. Even then the recovery will not be nice an even so pay attention to sector movement.