An insightful analysis of the current stock market environment

Discussion in 'Stocks' started by Cutten, Oct 22, 2008.

  1. Cutten


    I thought this gave a lucid analysis of the investment case for stocks (long-term) right now. Personally I'm a trader more than investor, but I agree with most of what Hussman writes here.
  2. aresky


    Governments follow Nobel Prize winner
    ••Paul Krugman, winner of the 2008 Nobel Prize in Economics, gave his
    view: If a small group of financial institutions is in danger of seeing
    their capital requirements falling below the statutory minimum, they
    will be forced to sell assets in order to improve their leverage.
    ••This will cause the price of this asset to fall considerably, especially if
    the asset in question has become circumspect in the investor
    community. As a result, other financial institutions which value this
    asset mark-to-market on their balance sheet will be in danger of not
    being able to meet their capital requirements as well.
    ••These institutions will also need to sell assets. If this process continues for long enough (as it did), financial institutions will eventually be
    forced to dump assets whose underlying fundamentals were perfectly
    sound at the start of the crisis.
    ••Thus, the indiscriminate asset fire sale is caused by a lack of capital.
    This suggests that a direct injection of fresh capital by governments
    is crucial to tackle the problem.
    ••Hence, it is not surprising that Mr. Krugman acclaimed the initiatives
    unveiled by the European governments.
    Major economies cannot escape a recession
    ••Essentially, the public sector is now filling the gap left by deficient
    private sector interbank, debt and equity funding. This should
    significantly reduce the risk of a financial sector meltdown and the
    associated collapse of the real economy seen in the 1930’s.
    ••The degree of government commitment is now so large that one
    can safely assume that governments will increase their funds should
    the need to do so arise;
    ••As far as the impact of all this on the real economy is concerned,
    the damage has already been done: the major economies (US, UK,
    Eurozone, Japan) cannot escape a recession.
    ••In this environment it seems reasonable to expect that the coordinated
    rate cuts of October 8 will be followed by further cuts by
    the monetary authorities worldwide.

    We have a neutral stance on equities versus bonds
    ••Early October we closed the underweight in equities to adopt a
    neutral stance.
    ••Fears over systemic failure of the global banking system put equity,
    credit & money markets in an unprecedented downfall. Extreme risk
    aversion, deleveraging and forced selling spurred the fall.
    ••The industrialised world slides into a recession, while emerging
    economies are slowing down substantially. We believe joint policy
    interventions will be able to exclude a depressionary outcome.
    ••At current valuations, equity markets are discounting earnings
    declines of more than 40%. That is in line with a severe recession,
    which we do not expect.

    Valuations increasingly attractive
    Equities witnessed a sharp correction. As such, v •• aluations already take
    a severe global earnings decline of more than 40% into account.
    ••The market is showing signs of extreme investors’ pessimism (high
    bear/bull ratio, extremely high volatility). These indicators point to
    an increased probability of a bear market rally, especially with
    substantial support from policy makers as is the case now.
    ••We believe that markets will stay very volatile but we should be close
    to the bottom. Furthermore, lower inflation expectations will be a
    big positive for equity valuations generally.
    ••Given the stage of the cycle, a sustained recovery of equity markets
    is not yet expected. That will happen a few months before earnings
    bottom, which we expect mid to late 2009 at the earliest.
    ••We do not follow the herd in selling equities from this point onwards. In
    the meantime we focus on large companies and sectors with good cash
    flows and strong balance sheets and shun cyclically exposed companies.

    Oct 21 2008 Monthly Investment Newsletter October-November 2008
  3. ===========================
    Could be one of the many bottoms in a bear market;
    most of his reasons soud rather logical,
    except that most bear markets last much longer . SPY & QQQ havent even cut 50% off the highs, or tested the 10 year lows.

    However mr Buffets stocks tend to do much better than the market averages;
    so he may be right anyway, on his stocks.:D But that also means many stocks will be more bearish than averages.

    Long term upward bias in stocks, so thats in his favor also ;
    but that's not true in a bear market , which is what we are in.[Defined by 20% correction or below 200 dma for months, & with
    MCD, beating earnings, sells off by 4%...................................:cool:
  4. aresky