Global Equities: The Next Downleg Begins   

• Despite all of the Obama Administration's policy actions and there have been many involving trillions of dollars of expenditures the DJIA, S&P 500 and global equity markets are entering the next downleg of the secular bull market.
• We believe that the financial crisis has entered Phase 3, i.e., from “near meltdown” conditions to a phase where regulators actually begin to tackle the balance sheet problems. In Japan's case, however, the stock market continued to fall until the banking sector problems were perceived as being largely addressed.
• In addition, the economic news in virtually every economy around the world continues to show a steep contraction that underscores the depth of the current economic crisis. This is weighing on stock prices of sectors (consumer staples, health care and domestic-demand related) that had heretofore prevented benchmark stock indices from breaking down further.
• Japan's economic news continues to be bleaker than its OECD peers, with the depth of the contraction representing nothing less than economic shock and awe. However, the Nikkei 225 is proving to be relatively resilient, supported by, (1) a weakeningyen, (2) the imminent passage of a FY09 budget and related stimulus packages, and (3) serious talk by the Japanese government about using as much as JPY20 trillion (8% of current market capitalization) to buy up Japanese stocks.
• Consequently, the Nikkei 225 has yet to break down below 2008 lows despite continued large foreign investor and broker prop trading net selling.  Buying by domestic institutions (mainly pension funds), in addition to smaller but helpful net buying by investment trusts and corporations buying back stock as well as increasing strategic holdings in other companies, is absorbing most of this selling pressure.
• The weak yen is helping to support stock prices of Japanese auto, rubber and electronic producers, while traders are looking for conceptual trades in economic stimulus beneficiaries among domestic construction, electric power and telecommunications companies. This may prevent the Nikkei from falling as much as the US indices in the next downleg.

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