I have been meaning to write something on the “green shoots” and sentiment driving the recovery of world markets.

If nothing else to get my thinking straight.

Objectivity has however proven to be difficult as I am still firmly anchored in thinking that this is still a bear market rally, especially with 88% of my portfolio in cash.

I must admit that I am sometimes have really strong feelings that I have missed the boat by not buying anything at the March market lows.

But...

There is nothing I hate more than running after a share price when buying. This behaviour has cost me more than care to calculate.

My impression, when looking at the trend in most of the indicators mentioned below, is that the speed of deterioration has slowed down. It is however a different matter to say it has turned around or that it will turn positive soon.

The stock market also seems to have decoupled from the world economy with the economy still getting worse and the markets taking off.

I have used the time while waiting for the market to come down to research strong companies that require no access to the capital markets.

My shopping list is ready, waiting for the right price.

I suggest you do the same:

Below is list of the main articles I have found providing some insight on the debate.

Scan through them quickly to see if you missed any of the news items.

To start off here is a great quote fromAndy Xie former Chief Economist for Asia Pacific, Morgan Stanley. Read the whole article if you have time, it is worthwhile.

World Economy

This article “A Tale of Two Depressions” by economists Barry Eichengreen and Kevin O’Rourke shows, global industrial output is still on a similar trajectory as it was during 1930's. This analysis shows individual countries and the world graphically. The picture is not pretty.

The USA has historically had a much lower unemployment rate than Europe but has caught up with the continent. I doubt if it will remain so as the rise in unemployment in Germany has really not started yet and if there I no recovery soon it will really take off.

Economies of Europe and the UK

I doubt if investors rushing into the EUR 100bn of equity issuances in Europe so far this year are going to do well. It may help the companies survive but as in the past with aglut of new issues, investors have inevitably done poorly. Goldman Sachs calculates that the market has capacity to absorb EUR 400bn in new issuances. My question is, if there really are green shoots why are all these companies rushing to issue so much equity?

The European Central Bank’s June 2009 financial stability review, suggests Euro area banks have absorbed 60 per cent of losses estimated for 2007-2010. Saying $280bn of estimated loan losses have yet to be written off. With most of Europe’s biggest financial companies employing aggressive accounting practices that may mask their true financial condition its not going to be pretty going forward.

In Germany the only indicator going up is investor confidence.

Is it time to go bottom fishing in the Spanish holiday home market? In April the number of houses sold fell by 47.6 percent compared to a year earlier, marking the largest percentage fall in 16-straight months of decline. It may be time to start looking. The UK house builder Taylor Woodrow operating in Spain seems to think so.

This week investors attention returned to problems in southern Europe with the senior ratings of 25 Spanish banks downgraded by Moody’s.

The president of the German Chamber of Commerce and Industry (DIHK) said the German credit crunch is getting worse. A DIHK survey found that credit terms are now tougher than they were at the height of the global crisis over the winter.

Industrial production dropped 1.9% in the Euro-zone (16 countries) in April from March and declined 21.6% y-o-y. The month on month decline accelerated from February -1.4% but was less than the Jan to Feb decline of -2.6%.

At least some encouraging news on house prices stabilising in the UK. Valuators however have a negative outlook

German exports are still falling against expectations. April was 4.8 per cent lower than in March, and 28.7 per cent down against a high April 2008 number. This is thesteepest annual fall since records began in 1950. Separately, the economics ministry reported industrial production was down 1.9 per cent in April compared to March. Economists expected a small increase.

The FT thinks

The chief executive of one of Germany’s biggest bank NordLB is pessimistic about the chance of early recovery in the financial sector, believing banks will be affected for another two years by the “ugliest” part of the credit cycle.

The Eurozone unemployment rate increased to its highest in a decade increasing from 8.9 per cent in March to 9.2 per cent in April as the recession takes an increasing toll.

Lending to companies and households in the UK fell in April for the first time since records began in 1997. So much for banks lending again.

Germany's growing financial crisis is affecting that nation's banks with the state owned banks being the most hardly hit. This is an excellent in-depth article onhow, too much cheap funding ruined the state Landesbanken.

Here is some key statistical onSweden’s record Q1 GDP contraction of 6.5 per cent compared to Q1 2008. What was really mind blowing was that Q4 2008 GDP was revised down from -2.4 per cent q/q to -5.0 per cent.

The FT asks the question Is Eastern Europe on the edge again?

In this excellent article the FT's Martin Wolf explains why the recovery in the Euro-zone is likely to be slow and painful:

With Germany's bad bank plan described as an accounting trick its probably not off to a good start.

USA Economy

US industrial production figures recorded their 16th monthly drop in May. Industrial capacity utilisation dropped to a record-low of 68.3 per cent with the manufacturing figure came in at an even worse rate of 65 per cent. Prior to this recession, the low for the series which began in 1948, was 68.6 per cent set in December 1982.

Stephen Schork, energy market analyst and author of the Schork report said:

Was the surprisingly good US housing start and building permit data for May was just a bounce off record lows?

This data series is notoriously noisy and has predicted a few false starts on the way down.

The past 10 years have been close to the worst on record for % Change YoY of Real GDP. The recent decline is shown in perspective.

Ned Davis Research puts the S&P 500 at a PE of 15.5.

Unemployment overall may be a lagging indicator but the leading components of US unemployment; temporary help, hours worked and continuing claims are showing no turnaround.

The rise in the number of part workers and decreasing hours worked is unlikely to lead to increased consumer spending soon.

Barrons puts the S&P 500 2008 historical PE at 130 times. Even with bank earnings recovering it will be tough to make that up.

The number of property repossessions in the USA is and remains at record levels. Even though there has been some misreporting of repossessions and foreclosures the numbers remain high. In May repossession rose 2 per cent, month on month, as delays and moratoria on foreclosures implemented by various state laws came to an end.

US Banks are still far from healthy in spite of stress tests, repayment of government funding and capital raising. Take a look at this article in the FT depicting thehealthiest US bank. As an investor, would you touch the following bank with a cattle prod?

US exports are also not helping the recovery. Exports in April fell 21 per cent year-on-year to theirlowest level since July 2006. Even supposedly more buoyant countries are buying less. Exports to to China was down as well as to South and Central America were down about 8 per cent.

The US consumer is still over leveraged in spite of the Q1 savings rate increasing to 5.4% the highest level in 14 years. So much for an expected increase in consumer spending.

Truck and rail tonnage moved in the US was still falling in April.

In this freight volume chart also the FT show that the US economy is not yet bottoming out. The decline in volumes is actually accellerating.

In March one in nine people in the USA made use of Food Stamps.

This series of unemployment charts show the the depth of the employment situation in the USA.

The NYT said that loan quality at American banks is the worst in at least a quarter century, and the quality of loans is deteriorating at the fastest pace ever, according to the Federal Deposit Insurance Corporation.

JP Morgan Chase chief executive warned that loss rates on the credit card loans of Washington Mutual, the troubled bank it acquired last year, could climb to 24% by the year end.

Credit card loss rates have tracked the unemployment rate but that relationship has been breaking down for more troubled credit card portfolios, such as the $25.9bn in WaMu credit card loans. At the end of the first quarter, 12.63% of WaMu credit card loans were deemed uncollectable by JPMorgan. Where does that leave Citi and other large banks with large portfolios and loose credit morals?

More job losses = Greater foreclosures

Asia

It is unlikely that Chine and Japanese stimulus spending is going to help the world pull out of the economic nosedive as imports continue to plunge. Hardly a hopeful sign of boosting demand elsewhere in the world.

Furthermore already high Japanese debt levels also make it doubtful as to how long they can continue stimulating.

Asian economic health continues to decline in May. China’s official purchasing managers’ index fell from the month before. Exports from Korea dropped 28 per cent year-on-year, worse than expected and a steeper decline than April’s 19 per cent.

Regards