A four hours rally kicked in yesterday and caught some short sellers uncovered. The short squeeze following this “bailout or stimulus announcement” was shorter than ever

China's announcement of a large stimulus package targeting the business sector came on November 9th, just as we expected some important news to come out that day. But the importance was much more on how this stimulus would be assessed by people. The idea of a stimulus caused the stock market to rally a short period of time. After four hours in European stock trading, market already turned negative.

The stimulus plan is a great idea from the Chinese side. I read between the lines that Chinese government officials are getting more and more concerned about their Dollar currency holdings. After multiple sources now openly discuss the default of the US on its debt, there is no doubt that governmental officials in China will be concerned about the country’s Dollar reserves.

An economic stimulus targeting mainly infrastructure could therefore cope with two problems. It firstly allows the Chinese government to address the important infrastructural issues, which are important for future growth. Second it can make effective use of the potentially devaluating Dollar. It might be better to spend this money, now, on large projects rather than sitting on something which might lose value. Another great benefit can be seen in the fact that in deed it might help to smooth out the US construction crisis. Large construction corporations downturn might be accelerated by the huge US deficit, even though many anticipate infrastructure projects in the US as well.

Now, that was the part of the Chinese plan, but the rally did not last very long. After a couple of hours, investors were hit by bad news, again! The assessment of the AIG renewed bailout took half a day. Then another bad news: Deutsche Bank analysts recommended General Motors share at 0 = “Zero” value! (That is really remarkable)

We knew all along that GM was a speculative paper. No intelligent person in the world would hold equity in a company which is losing billions of dollars each quarter, and is still run by the same CEO.

The message of all of this is the following:

1. Last year Stimuli plans and low interest rates caused eight week rallies. Over the last 18 month the time of that kind of news affecting the markets has come down significantly.
2. That means that any stimulus and bail outs continue to fail rescuing stock markets.
3. Western economies are suffering big times, through mal-investment and betting on the wrong horse (GM is the best example)

That means, we are unfortunately set for more economic disaster to come. According to the old boy scout theme: "Be prepared".

Source >  Berninger.de | nov 11

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