Stock markets headed higher prompted by global coordinated actions

Posted by Shyam Moondra

The stock markets were oversold around the world primarily because of fear and uncertainty. However, coordinated actions by the governments of major economies are beginning to have a positive impact on investor sentiment. This kind of coordination is unprecedented and is a direct result of interdependencies of world economies caused by increasing global trade.

Although the 3Q08 earnings reports of many companies were much better than expected, they generally gave a cautious guidance for the 4Q08 based on the negative impact of the global credit squeeze. However, aggressive infusion of liquidity by the governments around the world and lowered interest rates seem to have worked and the credit markets appear to be inching towards normalcy.

The housing market in the U.S. has been in a downward spiral, but the latest reports of an unexpected increase in new home sales and increase in mortgage applications seem to suggest that the housing sector may have hit a bottom. Recent rapid decline in home prices and lower mortgage interest rates are finally bringing new home buyers to the market. More and more existing homeowners are also flocking to the refinance market.

The stock market started its decline after DJ index hit a peak of over 14,000 at a time when the average PE ratio was around 17, significantly less than 30 when the 2001-2002 bear market began. With a dramatic stock market decline of almost 45% since the beginning of 2008, the average PE ratio has come down to a level not seen since the early 1970's. The current extremely low valuations of many companies make the overall market so attractive that an explosive up move of almost 1000 points on DJ, like the one we had yesterday, doesn't seem that surprising.

Many analysts blame Alan Greenspan, the former FED Chairman, for keeping the interest rates too low for too long that fueled the housing bubble. I don't think it was the low interest rate that led to the housing excesses; the main culprit was the lack of regulations that led to risky lending practices and to the unregulated mortgaged-based derivative securities. Had we been more diligent in recognizing the risky nature of unregulated practices, we might have seen continued prosperity for many more years to come.

The recent polls indicate a land-slide victory for Sen. Barack Obama, who will become the next president of the United States. His priorities on reducing taxes for the middle class, creating new jobs in the construction industry through a massive infrastructure improvement program, pursuing an aggressive energy policy that will not only stop the flow of money to OPEC countries but also create high-paying jobs here in the U.S., and significantly reducing health-care cots could spark the next bull market which could last for many years.

Stock Market plunge made worse by computerized trading by hedge funds

Posted by Shyam Moondra

Undoubtedly, risky mortgage-backed securities led to credit crunch, which, in turn, is causing global economic slowdown. The stock markets have lost value by as much as 80% in some parts of the world. The panic selling is getting aggravated by computerized trading by hedge funds and other financial institutions. When the Dow-Jones average moves up and down by several hundred points several times a day, this shows that big players' unregulated trading practices are only making nervous markets even more volatile.

The stock markets were formed to help corporations raise capital for expansion. The stock prices moved up or down based on the company fundamentals. However, since banks and hedge funds started computerized frantic buying and selling, including short selling, the stocks move up or down not based on fundamentals but speculation, turning stock markets into gambling casinos. These computerized high-speed trading practices have harmed our financial markets and require investigation by the Congress to decide if limits be placed on the trading practices of big organized players that have created their own modern version of financial mafia.

Secretary Paulson, SEC Chairman Cox, and FED Chairman Bernanke all have done a terrible job in managing the economic affairs of the country. They discounted the risks associated with mortgage-based derivative securities, they failed to properly monitor the capitalization of highly leveraged banks, and they consistently failed to understand the dire consequences of what was going on in the financial markets. What they have done since then is a patch-work of spur-of-the-moment remedies, without fully understanding the scope of the problem. President Bush has failed to provide leadership and the Congress failed in its oversight responsibilities. I think electing Sen. Obama as the next president is now imperative to bring a transformative change to our regulatory regime and provide leadership in calming down the nerves of the investors. It's also the right time to give filibuster-proof majority to the Democrats in the Senate to speed-up the implementation of the Obama plans and strategies. I believe bringing in new people at SEC, Treasury and FED will help stabilize the markets.

The Congress needs to start deliberating on the role of organized computerized trading by hedge funds and banks and implementing regulations to stop market manipulation and abuse by these big players. We need to bring back the markets that move based on fundamentals. We also need to ban or at a minimum limit short-selling (e.g., no more than, say, 2% of outstanding shares can be shorted at any given point in time) and options trading.

McCain's extreme comments against Obama are harmful to our democratic process

Posted by Shyam Moondra

Lately, Sen. John McCain and his running-mate, Gov. Sarah Palin, have been using extreme tactics against Sen. Barack Obama that are totally out of line and are very damaging to our democratic process.

Bill Ayers, who is now a university professor, committed terrorist acts to show his opposition to the Vietnam war at a time when Obama was just eight years old. A few years ago, Obama and Ayers had brief association because they both served as board members in connection with community projects in Chicago area. Ayers is not an Obama advisor nor he is in any way involved in Obama's presidential campaign. Given these facts, this is a huge stretch to use this brief association between the two men as a basis to imply that Obama may be a "terrorist." This is a smear tactic, plain and simple.

McCain and Palin have also implied that Obama may be a "corrupt" Chicago politician or he is "dangerous" or he has "character" problems. These are all flimsy charges without any proof to support any of these charges. McCain's surrogates have called Obama "unpatriotic" and they have used Obama's middle name "Hussein" to imply that he may be a Muslim even though they know that he is in fact a Christian.

During the first debate, McCain was visibly angry and disrespectful towards Obama that didn't win McCain any points in the eyes of many voters. During the second debate, McCain referred to Obama, his colleague in the Senate, as "That one," which was totally uncalled for.

McCain has been utterly ineffective in articulating his vision for the pressing problems of economy, jobs, health care, and education that the American people have been dying to hear about. McCain has impulsively offered flawed solutions or said something and then changed or retracted his solutions or comments. That makes him look indecisive and confused.

McCain's erratic leadership and his extremism have in fact hurt him because a majority of Americans believe in fair play and they are not happy at the political terrorism being practiced by McCain and Palin. McCain has run a dishonest and dishonorable campaign, second only to Richard Nixon.

McCain should be careful not to enrage his hard-core racist supporters to the point that one of them may contemplate to assassinate Obama or if McCain loses, Obama may have a hard time to govern. Just because you can't win, it doesn't mean that you unfairly torpedo your opponent's chances to govern and do the good work for the country. Country comes first, which means keeping the political discourse civil and fair.

Most polls indicate that Obama may be headed to a landslide victory, so McCain and Palin should tone-down their extreme rhetoric and be mindful that if Obama wins he should have an environment where all the people could work together to solve tough problems we face as a nation.

FED should buy stocks to stabilize the markets

Posted by Shyam Moondra

It's amazing to see how people have become used to the DJIA declining 500+ points a day. The ramifications are far reaching; the crash of financial and housing markets will inevitably lead to declining living standards and increasing poverty around the world. While people enjoyed the fruits of globalization when things were going great, now they must share the pain when the sky is literally falling down.

The question is what can we do now? The government has many other tools at its disposal that it can use to build up the investor and consumer confidence. One thing the federal government could do is to buy the stocks in the open market which will surely move the market up and improve the investor sentiment. At the current fire-sale stock prices, the tax-payers will eventually reap huge profits in a year or two when the stock markets reflect the true value of the corporations. Those profits could then be used by the new president to invest in education, health care, and infrastructure improvements.

Here is a list of what the government should do:

1. FED and Treasury Department should buy stocks of major blue-chip high quality stocks in the open market at the current outrageously low prices.
2. Extend FDIC insurance to all deposits regardless of the amount.
3. Close-down weaker banks immediately, so that banks can start freely lending money among themselves.
4. FRB should immediately lower funds rate by another 0.5%.
5. FRB should extend credit to corporations and small businesses to avoid layoffs.
6. Implement $700 bi bailout without any delay.
7. Treasury Department should also buy foreclosed houses on sale and sell later when the housing market recovers, as was done during the last depression.
8. President Bush should coordinate actions with EU, Japan, and China, and convince oil-rich countries to use their sovereign funds to invest in American companies.

Sen. Biden performed superbly in his debate with Gov. Palin

Posted by Shyam Moondra

Sen. Biden did a superb job in articulating why the next administration needs to focus on the middle-class, need to move away from disastrous Bush-McCain policies on Iraq, regulation, tax cuts for the rich, and confrontational foreign policy. He brought out his common touch when he talked about his middle-class upbringing. I was afraid he will say something stupid, as Sen. McCain hoped for, but he didn't. Biden offered a lot more substance than Gov. Palin did - she just provided some talking points. Biden was very gracious and treated Palin with respect which provided a sharp contrast to how McCain treated Sen. Obama during their first presidential debate - McCain came across as angry and disrespectful which made him look unpresidential.

Biden, with complete command of the issues, is clearly ready to be president but I didn't feel the same way about Palin, who came across as shallow in her understanding of the complex issues and she offered simplistic common-sense views rather than well thought out solutions.

McCain has run one of the worst campaigns in the history: telling lies, being not forthcoming, having no vision for the future (there is more to the problems than just pork-barrel projects!), and offering no solutions to a wide range of problems. McCain has proven to be erratic and impulsive (lacks calmness and steady hands in the face of crisis - almost as if he doesn't know what to do, as demonstrated in his suspending campaign and saying that he will not debate and then flip-flopping), a man who could very easily make a bad decision. Also, McCain made an unwise choice in Palin who is clearly not qualified and not ready to be the vice president, heart-beat away from the presidency.