Tuesday, January 22, 2008

Global Stockmarket's Wile E. Coyote Moment

As most of you have probably already heard, global stock markets have plummeted in recent days-and recent weeks. Why? Well, it seems global stock markets are finally waking up to the fact that the U.S. economy is in a recession and that this will hit profits of companies operating in America hard. This probably happened already the fourth quarter of last year, and I and a few others, like Jim Rogers, Peter Schiff and Nouriel Roubini, have long pointed this out, but stock investors have long deluded themselves that it isn't true. Now they're finally getting it-and now they're panicking and selling even stocks that are likely to be largely unaffected by this crisis. This creates bargain opportunities, although I wouldn't recommend buying yet. Since the crisis is likely to get even deeper, the general sell off will continue in the medium term -although some new sucker rally may come soon in the short term if, as seems likely, the Fed panics and cuts really big, deluding investors into believing it will solve the problem- , which means these undervalued stocks will get even more undervalued.

Anyway, the fact that the stock market this time reacted to the recession so late really reminds me of the Wile E. Coyote cartoon character. Wile E. Coyote in his futile hunt for the Roadrunner sometimes ran off a cliff and kept running even though there was no ground below him. Then, when being in mid-air, he looked down, and only then did he start to fall. The U.S. stock market valuations have long had no fundamental ground to stand on-but only now do investors realize it and only now is it starting to fall.


Anonymous Anonymous said...

Share your view, however, one should be a bit more specific as different sectors will be hit different depending on thier correlation with the economy. I would certainly see a further weak development for both Real Estate and Banks sectors, however there are other industries which will provide a least better resustance in the fall (and later on gain), e.g. energy and food (increasing prices alway's lead to some more profits for the companies).

Regarding the FED, I also belive that another cut is likley during Q1, this will further weaken the USD. However when it comes to stock market valuation, as the risk free rate decreases the cost of capital also does and this will at some point in time lead to making stocks an interesting investment again.

I say that one of the main reasons why stocks have fallen so sharply is because the market risk premium has increased dramaticly during the last months (this is the coyote mentality). And when volatility decreases so will the risk premium. As we are currently in an "un-normal state" things will go back to normal. I however do not see this until after Q2. Crashes like this needs time to heal, like when someone dies.

Swede interested in Economics

4:32 PM  

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