Economy Watch: Looking Back and Looking Ahead

Today marks some important changes both in market fundamentals and in psychology. On such occasions we interrupt our regular writing agenda for more specific market commentary. This is an occasion where readers unfamiliar with our recent work should take some time to follow the links.

In recent days we have tried to provide some perspective on the market turmoil and what to watch for. Some of these ideas are starting to play out, but there is more to come.

A Review

Here is a brief review of the last few days:

We reviewed a number of popular myths and provided a brief assessment. We then showed how some shallow thinking was leading many to be excessively negative.

We made timely shifts from bearish to neutral to bullish via our TCA-ETF system. Investors in the program had a gain of 9.7% today. Being in the right sectors means a lot. Our current holdings seem to capture the rapidly revised thinking of market strategists.

We wrote about possible catalysts, including this suggestion:

Housing initiatives. The Treasury is hinting at a new plan to reduce mortgage rates. The Fed has already acted. We expect the market to be skeptical of both, so it may take some real evidence to change opinions.

In addition to the Fed statement today, there was other important news, setting up the rally. The Obama Administration seems to be embracing a major plan to cut mortgage interest rates to 4.5% for everyone. We have the full story on our sister site, ElectionStocks.com. This story is very big in many ways and for many sectors.

Being Modest

We are very cautious with a period of success. There are so many who think they know so much. In fact, investors should look not to a single market call, but to long-term history. We tried to illustrate this with our football analogy. In our own methods, we try to emphasize the long run.

Looking Ahead

Today's trading could represent a change in market psychology. There are plenty of fund managers who are either caught short or under-invested. The negative sentiment has been palpable. The news of scandals and the market declines have tested the resolve of many long-term investors. We expect some managers and investors alike to shift gears.

There are more catalysts to come. We continue to collect ideas on this front. More to come, with several interesting ideas. Briefly put, those making negative forecasts on the economy, on corporate earnings, and on stocks have a doubtful platform. They are not just fighting the Fed. They are also fighting the Treasury and the incoming Obama Administration.

Investors do not understand government policy, and have expected immediate reaction from the many programs. They have been dazed by acronyms and have lost focus as a result.

There is a firm determination to avoid a major recession. The market will look ahead, beyond the recession that is now a year old. This may already be starting.

Conclusion

We have ridiculed strategists calling for a five-percent gain in the next year. This is silly, when intra-day moves are frequently greater. The only reason to invest in stocks is an expectation for a major rebound. Few are willing to talk about valuation, when the consensus mentality disparages earnings prospects. We note some courage on this front from Morningstar, where they see the Dow as 30% undervalued. (Hat tip to Abnormal Returns, helping everyone see what otherwise might be missed. None of us can check everything!)

We shall comment further on valuation issues, with a focus on expected and trailing earnings.

Comments

[Maya_:]

What you say is very sensible. Anyone with an ounce of sense can see undervaluation if a long term view is taken. Unfortunately, the market is not presently rational and the depths to which it can descend are not evident.

The market is a bit like a flight - when it takes off the ascent is rapid. Then there is a period of stability - people have a nap, a drink and some grub - baring minor turbulence all is well. Then there is a rapid descent. When people get on the flight and off it, order prevails. So really, it is dis-embarkation we are after.

I think we are near dis-embarkation BUT the feds action yesterday worried me. The first indicator of approaching dis-embarkation is no rapid gear shifting by the pilot. Since the pilot has not approached the runway yet, we may be in for a further decline. If the fed had done nothing more than indicate an accomodative stance for a long period, I would have been much happier. As it stands, it looks like we may have a while to go. Yet, I remain a buyer as in my view much of descent is done for now; its just the bumpy landing and the ride to the terminal to go.

2008 Dec 17 08:09 AM

[prudentinve...:]

It is undervalued only to those who started in the market after 1995. By historic P/E and Yield metrics, there are indeed a few pockets of undervalued stocks, but large number of grossly overvalued ones.

2008 Dec 17 08:27 PM

[MHalyard:]

I am increasingly concerned that current bullish investors and the media seem to believe that Obama has a magic touch: that every dollar, or even every other dollar, that will be spent to "stimulate" the economy will be spent wisely. We harp on about infrastructure spending as though it will usher in a new age of prosperity, and hopes are not just stratospheric, they are fervently stratospheric.

I humbly point out some truths: when our well-meaning government throws money at various companies and organizations, how will the government conduct oversight to ensure that those dollars are spent meaningfully? We know there will be waste, but are we just inflating a new bubble of investment, this time a bubble that EVERY taxpayer will feel in his/her pocketbook? Also, most of the job losses are in financial industries or high tech; are unemployed people who made $100,000 plus going to line up for jobs in road construction that pay $20 per hour, or are they going to wait a while (maybe until their unemployment benefits and Medicaid benefits run out?)
I don't know the answers, but I know that the media hasn't even begun to ask the right questions. I see too much potential for good old fashioned greed to destroy the benefit of Obama's stimulus plan, however well-crafted.

2008 Dec 17 10:40 PM

[Carl Martin:]

I think the reasoning (?) of the first two sentences of the author's conclusion are pretty silly. Apparently he thinks that if the market goes up and down a lot in intra-day moves now, this will somehow result in large gains in the next year. Next year might well result in large gains - just not for that reason - if that could even possibly qualify as a reason, for anyone. Because of this little oversight, I think the entire article should be questioned. There are plenty of other good articles both in support of and against his views, that offer sound reasoning all the way through.

2008 Dec 18 06:30 AM

[Jeff Miller:]

Carl - You are not interpreting the point the way I intended, so let me make another try. I am certainly not suggesting that high volatility is a predictor of high stock prices.

There are some big-time firms who are recommending stocks and at the same time projecting a 2009 gain of 5 - 8 percent. In some prior articles, I said that this was crazy. The potential gain has to be compared to the volatility. Who would invest to make 5%, when that amount can be lost in a single trading session?

Anyone thinking about investing, should do so only if expecting major gains, like those suggested by Morningstar.

Thanks for helping me to clarify this.

Jeff

2008 Dec 18 04:22 PM

[ShareTipsIn...:]

HI,
After Mumbai attack sentiments were really negative in the stock market. Still BSE managed to touch 10K mark which is a great achievement and it shows the confidence of investors which they have in Indian economy.

Long way to go

Regards
SHARETIPSINFO TEAM


e or there inner self is waking up??

What you have to say about it??, Looks like some political move is there!!

Now stock market will be affected by all political moves, though sentiments are not good but on technical charts market is quite bullish for very short term, still sentiments will effect Nifty movement. So all are advised to trade in small quantity and with strict stoploss till the picture is clear.


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ShareTipsInfo.com Team

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2008 Dec 19 08:05 AM