The Key Market Issues

We have talked with many investors to complement our daily monitoring of media treatment of markets.  It is pretty obvious that we have a significant downtrend, based upon a fear that things will get much worse.  Each piece of news about problems gets a lot of attention.  Any company that does not give a rosy view of prospects — and few are willing to claim this visibility — gets an immediate hit to its stock price no matter what current data show.

Here are what we see as the key issues:

  • Economic Growth Prospects.  Please note that this is not a simple question of whether the economy is already in recession, something that no one can yet know.  This is not a binary situation, despite the media attitude.  An economy that is operating below the growth trend potential hurts many companies and many people.  It affects earnings, but it is not binary.
  • The Impact of Lower Growth.  How much will economic growth slow, and how much lower might it be?
  • The Earnings Effect.  How much does slower growth affect earnings prospects?  Is guidance valuable?  Are bottoms-up analysts or top-down strategists getting a better read on this?
  • How much of slower earnings growth is priced into the market? Current sentiment is to treat each new piece of news as fresh information.  Our view is that many earnings estimates and stock multiples already reflect a very negative result.
  • Interpretation of data.  So many seem determined to make two mistakes.  First, they ignore any economic reports that do not fit a pre-conceived outlook.  Second, the punditry — as opposed to most economists — finds something wrong with real data — the best available.
  • The Role of Government.  Market participants are unhappy and impatient with government reaction to perceived problems.  This includes Fed policy, housing policy, mortgage availability, and the prospects for the bond insurance companies.  Very few Wall Street experts have any real understanding of how government approaches problems.  Few have such experts on staff, and the "political experts" they have  focus on the election.  Many of those with great media influence are merely reporting the Wall Street reaction to what government is doing.  This does not reflect any real understanding of how problems are addressed.
  • Intractable problems.  Which problems are unlikely to be solved, and what might be the effect?

The last of these points is a current focus, to which we shall return in the next few days.  We want to talk about various government initiatives, explaining why solutions are less obvious than the problems.

This approach to the problem is important for investors, mostly because so few know anything about it.  Readers who wish to understand this process should first take a look at our little problem about the Three Business Decisions.

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  • StockTrader February 10, 2008  

    Jeff, You wrote: “Very few Wall Street experts have any real understanding of how government approaches problems.” Can you suggest a book that explains, in a way that would be useful to an investor, how government approaches economic problems? Thank you. – ST

  • Jeff Miller February 14, 2008  

    StockTrader –
    Your question is excellent, and difficult to answer with a single book. It is more a question of understanding the entire process. For me, it was many years of study. I am trying to pass along the key concepts in the current series.
    Your question helped to stimulate my most recent article.
    Thanks for a good question.