Is stock market bottoming out?

Posted by Shyam Moondra

There were several instances when it looked like the stock market had bottomed out but then came more bad news and the market headed lower again. However, the behavior of the market in recent days suggests that DJ may have already hit the bottom at 7,773 on October 10, 2008.

It seems that the market is being hit repetitively by the same old bad news, leaving the valuation at a level as if we are headed to the 1930's era depression. The recession has come fast and furious but it's unlikely that it will last long for the following reasons:

1. In a concerted effort, the governments of major economic powers have been reducing interest rates to the levels not seen for decades, pumping liquidity into the markets at an unprecedented rate, and increasing expenditures via stimulus packages that will eventually revitalize the global economies.
2. The credit crisis is easing, as is evident from the inter-bank Libor rate that has come down to the levels not seen since 2005.
3. The latest housing data suggests that the housing market may be stabilizing. Recent positive actions by several major lenders will reduce the number of home foreclosures, which will help revitalize the housing market.
4. In general, the corporate balance sheets are very strong with unprecedented levels of cash. This explains why corporate bankruptcies are far fewer than seen during the past recessions.
5. The corporations were quick to adjust their inventories when the credit crisis first became evident. The current extremely low inventory level suggests that the industrial production may be ready to bounce, which will boost the employment.
6. The current stock valuations seem ridiculously low when compared with the valuations at the bottom of the past severe recessions.
7. The collapse of the prices of oil and other commodities is a welcome news for the consumers. The lower commodity prices will dampen inflationary expectations that will free the FED to reduce interest rates even more. Low inflation and low interest rates are generally good for the equity markets.
8. The incoming Obama administration is poised to cut taxes for the middle-class and small businesses, aid the ailing auto industry, and invest in alternative fuel research and development and infrastructure projects. These initiatives will boost employment and consumer confidence.

The current stock market is being driven more by fear rather than the economic reality. In this kind of market, as Warren Buffet said, investors need to be greedy.

Is Dow Jones Industrial Average headed to 10,000?

Posted by Shyam Moondra

The stock markets around the world are going through turmoil. The markets in China, India, and elsewhere are down 30-40 percent from their respective records set last year. Inflation is heating up everywhere, thanks to the high oil and commodity prices. Many countries in Europe and Asia have been increasing interest rates to fight inflation. These actions, combined with consumer's reduced capacity to spend, will slow down the global economy. Many of these countries are also experiencing reduced demand for their products and services from the U.S. because of the weakening economy here.

The U.S. has its own special set of problems. The credit crisis, which the government officials declared was under control not long ago, seems to be in the forefront again. After the government bailout of Fannie Mae and Freddie Mac, the investors are now fixated at who is next. It has become a guessing game for the economy watchers about which bank will go under. It has been said that around 150 banks, mostly regional banks, could file for bankruptcy. It’s like Savings & Loan fiasco all over again. These credit problems will have negative impact on the economy. Because of sustained high oil and commodity prices, inflation is creeping through the economic system and we will see awful inflation numbers over the next few months. Just today, it was reported that the PPI increased in June by 1.8 percent, the largest increase in 27 years. Those kinds of headlines will persist for a while. The housing industry was hit hard because of the mortgage mess and now it looks like the auto industry is on the ropes. The consumer-driven U.S. economy is sliding down because consumers are busy trying to cope with the high gasoline, heating oil, natural gas, and food prices. They cut-down their discretionary spending and leisure travel, putting airlines and Las Vegas and Atlantic City casinos in dire situation.

The only segment of the U.S. economy that was doing well was the exports business helped by weak dollar, but even that's slowing down because of the shrinking economic growth around the world.

Unfortunately, the large federal budget deficit precludes any dramatic stimulus effort by the Bush administration. The FRB has already reduced interest rates as much as they could. So there is nothing any one can do right now to turn things around. We may very well be headed for a prolonged recession, like the one we had during 1970-1975. The tougher times are still ahead in terms of high inflation, high unemployment, meager or negative economic growth, and continuing bank failures – all of these will eventually affect the corporate profits. While the U.S. stock market has declined over 20% from the peak of 2007, the extent of the economic problems around the world suggests that the worst may not be over. A stream of bad news about inflation, unemployment, and corporate profits over the next few months is likely to sink the DJIA to 10,000.