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The Importance of Stock Market Valuation and Earnings

News_Letter / Stock Market Valuations Apr 12, 2008 - 10:25 AM GMT

By: Nadeem_Walayat

News_Letter The stock markets have managed to survive further turmoil in the credit markets by managing to rally from the March lows on the back of further central bank lending and interest rate cuts. However, looking forward to corporate earnings during the rest of 2008 in the face of a US recession and slowing economies across the western world. It is very difficult to support the over optimistic earnings growth forecasts that range for many markets of 10% for 2008 and 15% for 2009.


The Market Oracle Newsletter
April 12th , 2008            Issue #11 Vol. 2

The Importance of Stock Market Valuation and Earnings


Dear Subscriber,

The stock markets have managed to survive further turmoil in the credit markets by managing to rally from the March lows on the back of further central bank lending and interest rate cuts. However, looking forward to corporate earnings during the rest of 2008 in the face of a US recession and slowing economies across the western world. It is very difficult to support the over optimistic earnings growth forecasts that range for many markets of 10% for 2008 and 15% for 2009.

Therefore this implies that the stock markets are not pricing in a recession, which means either we do not have a US recession or stocks are about to start a new leg lower as we enter the new quarter's earnings season.

My view is that it is unlikely that corporate earnings will see any improvement until well into 2009, therefore that does suggest weak stock markets for the rest of this year. There is a high probability of most global stock markets testing and breaking to new lows for 2008, in many cases falling by at least 15% from current levels, that would take the Dow Jones to below 11,000 and the UK FTSE to below 5000.

The sectors most likely to be hit the hardest will again be the housing and financial sectors, as the G7 Finance Ministers on Friday urged the world banks to come clean with their total losses over the next 3 months as part of a strategy of drawing a line under the credit crisis.

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  • Report #4: Learn How to Integrate Historical Price Extremes, Failed New Highs and Lows and Other Technical Indicators into Your Elliott Wave Forecasts
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Your analyst,

 

Nadeem Walayat,
Editor of The Market Oracle

In This Issue
  1. Is it a Bull, Bear or Cowardly Lion Stock Market?
  2. Falling US Dollar and Trouble with the Trade Deficit
  3. Bottom for the Banking and Financial Stocks?
  4. Did Greenspan Have to Cut the Fed Funds Interest Rate as Much?
  5. Lessons from Japan: Prepare for 0% US Interest Rates
  6. Stock Markets to be Hit by Sharp Fall in Corporate Earnings
  7. Contracting US Economy to Hit Corporate Earnings
  8. Investment Perspective- What to do in a Tough Investment Climate?
  9. Is Our Financial System Out Of Control?
  10. Credit Crisis Reflections and Mark to Market Myths
1. Is it a Bull, Bear or Cowardly Lion Stock Market?

By: John_Mauldin

  • Market Cycle Math
  • Where Are We Today?
  • Analyze and Strategize

Are we in a bull, a bear, or a cowardly lion market? As we will see, the answer can make a huge difference in your investment portfolio. This week I am at my Strategic Investment conference in La Jolla. About four times a year I take a break from writing the letter and bring in a guest writer. This week Thoughts from the Frontline will have the very distinguished analyst and author Vitaliy Katsenelson.

Read Article

2. Falling US Dollar and Trouble with the Trade Deficit

By: Andy_Sutton

Ever since the falling dollar really hit the radar screen of the mainstream media, one predictable, knee-jerk response was that this would be a miracle elixir for our ailing export economy. Further, they asserted, the weak dollar would cure the trade deficit. This is a prime example of what happens when textbook logic is used in place of reality. I dedicated the second edition of Economic Myth Busters back in September 2007 to the absurd notion that the weak dollar was good for the American economy. In the 6 months since the article some notable trends have developed.

Read Article

3. Bottom for the Banking and Financial Stocks?

By: Hans_Wagner

Investors who regularly beat the market are always careful not to jump into a sector to early. In the last few weeks there has been unprecedented action in the financial markets as several banks have received infusions of capital to help them cover their significant credit losses. Last month the Fed lowered the Fed Funds and Discount rate, increasing the slope of the yield curve which should help banks. They also opened its lending window to investment banks giving them a new, stable source of funding. Then the regulators allowed Fannie Mae and Freddie Mac to boost their investments in U.S. mortgages by $200 billion, trying to give the mortgage market a boost.

Read Article

4. Did Greenspan Have to Cut the Fed Funds Interest Rate as Much?

By: Paul_L_Kasriel

In today's Financial Times , Greenspan is generously given yet another chance to defend his legacy. Greenspan's argument that it was not his doing that set off the U.S. housing bubble reminds me of my two perfect children. When they appeared to err, it was never their fault. Greenspan's main defense lies on the fact that long-term interest rates were falling in the early 2000s due to global factors beyond his control. To start with, let's give him this one. But even if the decline in long rates were beyond his control, did he have to cut the fed funds rate - an interest rate he did control - as much as he did and hold it at the low level as long as he did (see Chart 1)?

Read Article

5. Lessons from Japan: Prepare for 0% US Interest Rates

By: Jim_Willie_CB

The prospect of a US Fed 0% rate becoming a reality has been on my mind since August when the subprime made news hit. In my view, the entire mortgage bond structure would suffer massive losses in a successive of waves, beginning with subprimes, extending to primes, and concluding with commercials. How could housing distress not spread to nearby shopping malls, office complexes, and urban centers? First, USTreasurys would draw huge sums of money, reducing bond yields across the entire set of maturities.

Read Article

6. Stock Markets to be Hit by Sharp Fall in Corporate Earnings

By: John_Mauldin

For the last few months in my regular letter I have been pounding the table that corporate earnings are going to decline this year, which is always a negative atmosphere for stocks. Since today is the beginning of the earnings season for the first quarter, I thought it would be helpful to look at this piece from our old friend James Montier, head of equity research at Societe Generale based in London. It seems that analysts are behind the curve when it comes to predicting future earnings.

Read Article

7. Contracting US Economy to Hit Corporate Earnings

By: Prieur_du_Plessis

A sense of relative calm descended upon financial markets over the past week. Although fears about the outlook for the US economy persisted, a perception crept into markets that much of the bad news related to the credit crisis was now out in the open, with the result that the equity bulls had reason to feel rather pleased with their performance by the close of the week.

Read Article

8. Investment Perspective- What to do in a Tough Investment Climate?

By: Brian_Bloom

When the going gets tough, the tough get going. From an investment perspective, times are getting tougher; so what do we do?

Well, “step 1” is to straighten out our thinking so that we can face the future with clear heads.  There are times when an investor's orientation should be to increase his/her wealth; and there are times when that orientation is more appropriately focussed on preserving what you have. In this analyst's view, we are now facing a time when stock market investor orientation should be defensive.

Read Article

9. Is Our Financial System Out Of Control?

By: Anthony_Cherniawski

The financial crisis that started in 2007 had its genesis in the deregulation of the financial markets. This began in the mid-90s when Travelers Insurance Company bought Citibank, forming Citigroup, thumbing its nose at the Glass-Steagall Act , which separated Commercial banks from owning other financial institutions. This led to its repeal by the Gramm-Leach-Bliley Act that implied that Citigroup would not be held accountable for flaunting the law.

Read Article

10. Credit Crisis Reflections and Mark to Market Myths

By: Ty_Andros

The tumultuous 1st quarter is now behind us and what a quarter it was. VOLATILITY IS OPPORTUNITY and wonderful fireworks of volatility exploded across all asset classes providing bucket loads of OPPORTUNITIES for prepared investors. Your investment portfolios should be considerably higher in value, for rarely do we see moves of this magnitude across all sectors almost without interruption. This phase is now coming to an end and, as we all know, markets are NOT one-way affairs and the inevitable intermediate term corrections now appear to be beginning to unfold.

Read Article

 

For more indepth analysis on the financial markets make sure to visit the Market Oracle on a regular basis.

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