Three reasons to be bearish

1) The credit crunch between banks has spread to the general economy. An article from Business Week revealed that some banks in the U.S. are unwilling to lend their client new money unless the clients put an equal sum into a certificate of deposit. In other words, the bank doesn’t want to lend even one penny. Without bank financing, most got no choices but to either contract their business or simply close them down. That means more jobs will be lost in the coming two quarters. Subsequently, consumers will tighten their wallet, which means the U.S. GDP will contract. Recession will be on the horizon. And equity valuation will be adjusted downward under a recessionary environment. Though credit condition in the Asian region may not be as bad as in the U.S., a recessionary U.S. will nonetheless have an impact as the region’s export is highly dependent on the U.S.

2) The forced selling of asset may go on for some time. It is very clear that the cost of equity raised by financials kept surging. That could be reflected by the deal closed by Warren Buffett & Goldman Sachs and Warren Buffett & General Electric. GE has struck a $3 billion preferred deal with Warren Buffett at 10% coupon with warrants attached. As for Goldman, Buffett will buy $5 billion of perpetual preferred stock, which also pays out a fat 10% dividend. Berkshire also gets the right to buy in the next five years another $5 billion in Goldman common stock at $115 a share. In other words, even the smartest Goldman needs to pay 10% if one desperately needs new money. That means if anyone needs additional financing but unable to pay 10% per annum, asset sale is the only way to go. In other word, de-leveraging will continue.

3) The situation in Europe is dire. Although European governments spanning from Iceland to Germany are taking steps to shore up their banks like issuing blanket deposit and liability guarantees or even in a dramatic way recapitalize the banks, working the bailout on their own is still a risky move. Based on the numbers provided by JP Morgan, US banking system liabilities are around 200% of U.S. government debt. In Ireland, Belgium, Spain and United Kingdom, they are 600% to 1000%. And in Switzerland, banking sector liabilities are over 3000% of Swiss government debt. A bank run may warrant a pan-European government action. But with Germany staying on the sideline not participating in the France’s proposed massive bailout by the European Union, the blanket deposit guarantees may be the EU’s Achilles’ heel if they are being tested.