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.
