Friday, October 17, 2008

Welcome to the New Reality

After a month of wild gyrations and hefty losses, US markets (and, to some extent, world markets) seem to have finally found some level ground, or, as the case may be, some ground that seems to not be shifting radically from moment to moment.

Dow 8,852.22 -127.04; NASDAQ 1,711.29 -6.42; S&P 500 940.55 -5.88; NYSE Composite 5,948.80 -22.10

Even though the major indices ended Friday with across-the-board losses, thanks to the outsize gains on Monday, the Dow, S&P NASDAQ and NYSE Composite all had their first positive week in the last five, with gains between 2 and 4%.

These new ranges may be closer to reality for most of the stocks making up the various indices, especially in terms of dividend yield and price-to-earnings ratios. Of course, there are still high-fliers nestled in overvalue-land and a large number of companies whose earnings outstrip their share prices (bargains), but for the most part, the indices seem to have settled into a range, albeit a lower one, that is reflective of fair value.

Looking forward, the prognostications of a severe recession may actually not come to bear. Corporate earnings have thus far held up fairly well, the banking virus has not spread far beyond the financial sector, and there have been some pleasing side effects, notably lower prices for food and fuels, and that deflationary trend should continue well into next year.

While lower prices are an outstanding benefit for consumers, lower prices for finished goods are generally not seen as a harbinger of great things to come for corporations.

However, this time it may be different. Since the one bubble barely mentioned is the one which existed in base, or raw, materials, commonly known as commodities, those entities like sides of beef, bushels of corn, barrels of oil and tons of coal, it makes perfect sense that finished goods will be less costly to produce, meaning companies will be able to make significant savings at the bottom of the manufacturing regimen.

How these lower costs are passed through the rest of the economy remains to be seen, but, given sound management at the manufacturing level, an actual boost to corporate profits. In dynamic markets, such as the global one in which most listed companies now reside, cost and price adjustments need to be applied rapidly in order to maintain competitive edge.

In the market conditions of the recent past, companies had the luxury of maintaining high profit margins, as long as cash and credit were flowing, but now must be aware of lessened demand, and the need for price adjustment. In general, with lower (though not by much) margins, market share will take precedence over getting every last dime from cost-conscious consumers.

The widespread pain of the credit crisis, blared across TV screens, radio waves and computer screens, has not had any noticeable effect on consumers. With overall more money in their pockets due to reduced petrol prices, some may even consider saving some. Who knows? The next administration and congress might even see fit to lower taxes, modify banking and credit card interest regulations and keep their own books balanced. The end result would be more money in circulation and a much less stressed-out consumer.

I know that may appear a rosy scenario as compared to what been passing for news lately, but I urge you to take a look not only at your portfolio of investments, but the lives of others, many of whom either had no nest-egg in stocks, or a small one, or are young enough not to be distressed by something so common (they happen just about every ten years) as a stock market crash.

One only has to look at a long term chart of the Dow Jones Industrials to see that even at this level, stocks may be marginally overpriced and due for further adjustment. While I can't really make a case for further losses, one simply cannot rule out the possibility, as emotions often have more to do with markets and equity valuation than fundamentals. Besides, I called the bottom at 9450 on the Dow. Well, I was only off by about 1000 points, but who's counting? At least I saw the fallout coming at least a year ahead of most.

On the day, winners and losers finished in a virtual dead-heat, with 3180 advancers and 3161 decliners. New lows again led new highs, 344-49. That persistent metric, which has had new lows ahead of new highs every day except for a handful of days (5 or 6) since October 31 of last year, should slowly begin to show signs of moderation as stock pickers become more selective and a slow recovery develops.

Volume was just a bit on the high side, as expected, today being options expiration, which also explains some of the volatility.

NYSE Volume 1,740,610,000
NASDAQ Volume 2,761,572,000

Commodities continued their death spiral, though oil bucked the trend, gaining 1.87, to $72.13, a number with which most people can be happy. Gold fell another $16.80, to $787.70. Silver dropped another 30 cents, to $9.34 an ounce.

There are reports of an individual bombing a law office and the Goldman family attempting to obtain O.J. Simpson's Hall of Fame ring as part of a civil suit settlement. You see? The is some good news after all.

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