Some Market Perspective is in Order

On the anniversary of Black Monday which happened to 'fall' on a Friday, it's a good thing that it wasn't the 13^th. Spooky as it might sound, I read some chilling articles this weekend so I didn't bother renting a Freddy (Mac) horror movie. All this pessimism is on 1/10th the magnitude of the events from twenty years ago.

It is amazing how the pendulum swings from the Great Gatsby to the Towers of Doom on a single trading day. Not that all is well with the U.S. economy, but a little perspective is in order. The price of energy is causing a ripple effect creating a stubborn upward spiral in inflation. As asset components of the CPI decrease in value, this mitigating effect is masking the true propensity of the hardship to follow.

Subprime, Alt-A and finances in general are a tad untidy (understatement), but the banks seem to have a game plan in motion to the tune of $100 billion and expect the government to chip in one way or another. The Fed seems willing to play ball. There will be a lot of pain for thousands, perhaps tens of thousands of Americans, but millions will come out of this with a slap on the wrist - 'don't buy again something you can not afford'. Instead of a twenty year mortgage, millions will have to make do with thirty years or forty instead of thirty. First though, millions will have to refinance to fixed rates as the uncertainty of ARMs is more than the average homeowner can handle. You out there; take advantage of the next rate cut! It may be the last for a long time.

As for the general slowdown, don't write-off the entire stock market just yet. Earnings growth will definitely slow down, but there is still growth ahead. Perhaps it is time to revert to using ttm P/E as the primary gauge rather than delude ourselves with estimated forward P/E which is far less certain at this time. Based on the ttm P/E average for the Dow and the S&P 500, we are definitely not in a bubble scenario as this weekend's articles seem to imply.

The unemployment rate is relatively low in comparison with the EU. Energy conservation habits are beginning to take hold and when the primarily Democratic populated coasts start to car pool to work, we will have scored a major turnaround in our consumption patterns. The polar caps may melt beforehand. We are still addicted to oil. Naturally it is the Republican midlands that take the preemptive strike as Democrats respond to crisis just in time. I wonder how many Democrats (me included) know where to get an ethanol fix! Remind me to ask Hilary the next time we indulge ourselves with a $5 latte and a cigar. I'm still waiting to hear Hilary's energy policy…

Corporate America is sitting on the largest cash hoard in history and any potential massive sell-off by the public or overseas investors can be sucked up with buy-backs. Of course the banking sector is exempt from participating for now unless valuations get so ridiculously low that they will end up lending each other on IOUs just to take advantage of the situation. The downside is limited for stocks backed by strong fundamentals and hard assets such as the mining, railroad and manufacturing sectors. Airlines are currently afloat on hot air, stay away. As for the consumer discretionary spending sector - eh, the prospects are unsightly, unless the companies have lots of cash on hand. Using muscle to buy out distressed competitors at a bottom is always a good trick. Then again, this sector has already been marked down considerably so where we go from here depends on how you see the P/E for a slower growth economy.

Comments

[volleyballm...:]

Love your perspective on things. Thanks

2007 Oct 22 12:34 PM

[volleyballm...:]

Love your perspective on things. Thanks

2007 Oct 22 12:35 PM