World Bank Scorches the Green Shoots

Dismal.

Dire.

Danger.

These are the sorts of words peppered throughout the World Bank's latest missive on the state of the world economy. That pretty much conveys the tone of the 167-page report, titled "Global Development Finance: Charting a Global Recovery."

Some of the low-lights of the report:

  • Global GDP seen contracting by 2.9% in 2009.
  • International trade experiencing the sharpest drop since World War II.
  • Subdued recovery in 2010, with 2% global growth expected.
  • "[I]ncreasingly grave economic prospects" in low-income countries if capital flows don't improve.

I think today's report brings into clear focus a very important distinction between economic stabilization and economic recovery. Ben Bernanke's "green shoots" metaphor conflated the two, in my view.

The global economy is not collapsing, but it's not snapping back to business as usual, either. We've got zombie banks like Bank of America (NYSE: BAC  ) that are hardly suited to lead the way in lending growth. I see busted balance sheets across the board, from underwater homeowners to touch-and-go governments. It's this backdrop that led me to challenge the crowd of back-half-of-'09 boosters two months ago, in my call to kiss the rally goodbye.

Commodities in the crosshairs
After months of chatter about green shoots, this report is akin to a brush fire, singeing investors of all stripes. Energy and basic materials-linked stocks are easily faring the worst, however:

Company

Principal business

Intraday Decline

Precision Drilling Trust (NYSE: PDS  )

Onshore drilling

(16%)

Allegheny Technologies (NYSE: ATI  )

Specialty metals

(12%)

Freeport-McMoRan (NYSE: FCX  )

Copper and gold mining

(11%)

LDK Solar (NYSE: LDK  )

Solar wafers

(11%)

Frontline (NYSE: FRO  )

Oil transport

(7%)

Mosaic (NYSE: MOS  )

Fertilizer

(9%)

We looked at oil's flimsy fundamentals earlier this month. Aside from the gold miners, this area has been one of the most overbought sectors in the stock market. It's actually encouraging to see oil and the related stocks tank today. I was getting concerned that prices had become detached from the realities of supply and demand.

Speaking of which, the same day I urged caution about riding the energy bull, China announced that it was suspending its strategic crude stockpiling program. This leaves actual demand in the driver's seat, which makes the case for $70-plus oil harder to make. The World Bank is projecting $55.50 per barrel on average for 2009, for what it's worth.

Bottom line, the stock market has gotten ahead of itself, as has the oil market. That's not to say there aren't great investment opportunities today, but they're not to be found in an index fund. If that puts me in the Mark Cuban camp of the buy-and-hold debate, then so be it.

Precision Drilling Trust is a Global Gains recommendation. Scour the globe for world-beater stocks with a free 30-day trial of the premium service.

Fool contributor Toby Shute doesn't have a position in any company mentioned. He recently ranked 54th out of more than 135,000 Motley Fool CAPS participants. Check out his CAPS profile or follow his articles using Twitter or RSS. The Motley Fool has a disclosure policy.


Read/Post Comments (9) | Recommend This Article (59)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 22, 2009, at 5:46 PM, CAPTAINWACK wrote:

    Thank you World Bank...finally somebody has stopped sugar coating this financial mess and has the backbone to tell it how it really is. The world is buried in debt and the financial markets are in the dumps and will stay that way for years.

  • Report this Comment On June 22, 2009, at 6:15 PM, caltex1nomad wrote:

    Thanks......It's created another Buying Opportunity.

  • Report this Comment On June 22, 2009, at 6:48 PM, FoolishJayhawk wrote:

    Anyone have any statistics on just how accurate the mighty World Bank's previous forecasts have been? My guess is that the standard error on their predictions is big, very big. Indeed the search for gems amidst the rubble continues successfully.

  • Report this Comment On June 22, 2009, at 7:43 PM, vmh104 wrote:

    here here

  • Report this Comment On June 22, 2009, at 9:05 PM, drericrasmussen wrote:

    Yes, the World Bank's forecasting error is huge. I used to work in US Treasury and we would laugh at the "forecasts" of the World Bank, the IMF, and the OECD. Multi-country compilations (and negotiations) that take forever to finish and then must be vetted like crazy typically are worse at the turning points of the buiness cycle. Ignore this one.

  • Report this Comment On June 22, 2009, at 10:04 PM, tasteslikechickn wrote:

    Sentiment has been turning sour for the last couple of weeks. Cooler heads were talking about how overbought the market was and how the fundamentals could not support these prices. But the market continued higher as any good news bouyed investors.

    This report, errored or not, is yet another nail in the coffin of this bear market rally. The deleveraging process will take time. We will have more chances to pickup solid stocks at great prices.

  • Report this Comment On June 22, 2009, at 10:29 PM, Loser2Master wrote:

    World bank report was based on Q-1 or Q-2 ? How often they are upto the mark ? I see Dow @ 12K by end of this year. The next rally will take SP to 1050 easily. BUY BUY BUY when the media says sell.

  • Report this Comment On June 22, 2009, at 11:28 PM, DownEscalator wrote:

    Loser2Master - The media was saying "Buy" all through April and May and into June. People on MF are still saying "Buy" and the news is peppered with news items about how the recession is ending even though the fundamentals are still atrocious. Isn't it time to SELL and sit back for 3-4 weeks as the sentiment cools?

  • Report this Comment On June 23, 2009, at 11:46 AM, jesse2159 wrote:

    The IMF isn't the best source of predictions, but it isn't Tarrot Cards either. If you cull out the stupid predictions, you will find that the basic findings are correct. It wan't a secret. The world economy is drowning in debt that will take considerably longer to clear from the books than originally thought. It will take many,many years to recover from this mess. There are many weeds among the green shoots. This report simply noted that because you see some green, it isn't necessarily money.

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