Posted by Shyam Moondra
The stock market suffered its biggest loss for the month of June since 1930. From the record high set last October, the DJIA is now down over 20%. The question is where do we go from here. Oil and other commodities continue their upward price spiral forcing many companies to increase the prices of their products and services. That means inflation will continue to lead the headlines in the coming months. That also means the next move by the FRB on the interest rate front is most likely to be upward. The consumers, hard-pressed by astronomically high oil and food prices and rising unemployment rate, are pulling back on their spending. The financial sector is besieged by non-ending mortgage securities related losses and the need to raise huge amounts of new capital, which will cause dilution in the coming years thereby lowering their per-share earnings. The credit crisis is also keeping the housing sector meltdown alive and well. Increasing energy and material costs and declining consumer demand are likely to make corporate earnings for the 2Q08 fall short of expectation. All these negative headlines in the coming weeks will be enough to sink the market even further.
The sad part is that FRB has run out of ammunition and President Bush and Congress don't have much in their arsenal either that could change the course of economy in the short-term. However, the best opportunity for a turn around now rests on a new administration that could take some initial steps to lay the foundation for a big turn around in the second-half of 2009.
- Increase income taxes for the very rich and close corporate tax loopholes (e.g., off-shore tax sheltering) and use that money to lower taxes for the middle-class and low-income people that will fuel consumer spending.
- Implement the plan recently passed by Congress to stop the wave of foreclosures that's causing continued slide in housing prices. The sooner we stop this downward spiral, the sooner we will get the housing sector moving again.
- Invest heavily in the infrastructure projects and public transportation systems around the country to revitalize the construction sector and help reduce demand for the imported oil.
- Initiate a more effective energy policy that combines heavy emphasis on alternative fuel sources and conservation.
- Strengthen regulations of banking industry (including investment banks) to avoid any future credit crisis.
- Strengthen regulations of energy and other commodity markets, especially those that are currently not monitored because of the so-called "Enron" loophole . This should help reduce manipulative futures trades by investors that have no commercial interests in energy and other commodities (e.g,, investment banks, hedge funds, and pension funds).
- Investment banks, hedge funds, and other big players have turned the stock markets into casinos. We need to ban short-selling by these institutions (or at the minimum, restore the "up-tick" rule for short-selling) and also limit trading in derivatives. The markets have become way too easy to manipulate; we need to restore the role of fundamentals in investing.
- We need to show our resolve in protecting dollar. Strong dollar will bring down oil prices that will immensely help in improving the psychology of the stock market.
