Markets Rally, Roubini Not Impressed

Written By Brian Hicks

Posted October 14, 2008

 

 

eeyore

 

To quote a famous song writer, it’s either sadness or euphoria these days when it comes to the markets.

Up big…down big….up big…down big…down big…down big…up big…

That’s volatile rhythm that the exchanges have been tapping out since everybody suddenly realized that wasn’t a good idea to loan money to people that could never pay it back.

Of course, last Friday was when the markets hit rock bottom falling 45% from peak to trough….. Oh the humanity.

But ever since that gloomy morning, the market has rallied as the smell of market capitulation now suddenly fills the air.

In fact, yesterday move higher turned out to be an all-timer as the Dow, the Nasdaq and the S&P 500 all gained over 11% on the session proving that green is good.

Even still, the doomsayers are still sticking to their guns—perhaps rightly so. But then again there is an Eeyore in every crowd.

One of them is Nouriel Roubini who— to his credit— has been spot on throughout the entire crisis.

Not surprisingly, he’s still bearish.

From Bloomberg by Eric Martin and Rhonda Schaffler entitled: Roubini Sees Worst Recession in 40 years, Rally’s End

Nouriel Roubini, the professor who predicted the financial crisis in 2006, said the U.S. will suffer its worst recession in 40 years, causing the rally in the stock market to “sputter.”

“There are significant downside risks still to the market and the economy,” Roubini, 50, a New York University professor of economics, said in an interview with Bloomberg Television. “We’re going to be surprised by the severity of the recession and the severity of the financial losses.”

The economist said the recession will last 18 to 24 months, driving unemployment to 9 percent, and already depressed home prices will fall another 15 percent. The U.S. government will need to double its purchase of bank stakes and force lenders to eliminate dividends to save them from bankruptcy, Roubini added. Treasury Secretary Henry Paulson said today he plans to use $250 billion of taxpayer funds to purchase equity in thousands of financial firms to halt a credit freeze that threatened to drive companies into bankruptcy and eliminate jobs.

“This will be the first round of recapitalization of the banks,” Roubini said. “The government has to decide to intervene much more directly in the provision of credit and the management of these companies.”

U.S. stocks rallied the most in seven decades yesterday on the government plan to buy stakes in banks and a Federal Reserve- led push to flood the global financial system with dollars. The Standard & Poor’s 500 Index rose 12 percent. It gained as much as 4.1 percent and fell up to 3.1 percent today.

“The stock market is going to stop rallying soon enough when they see the economy is really tanking,” Roubini added.”

So will the current rally last?

Well I’m not sure, but here is a prediction.

I think the current rally stalls eventually at around the 10350 mark on the Dow. From there I think we get one more re-test 8450.

After that though the real rally begins.

So that’s my story and I’m sticking to it. It ain’t easy being green…

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