Message of the Markets

Make no mistake. We are currently in a bear market for stocks. While the US Markets were closed as we celebrate the Martin Luther King holiday, indicies abroad sold off Monday and indicate a potentially brutal day at the corner of Wall and Broad Tuesday. While stimulus plans being thrown around seem to the average observer as good, the fact is this type of plan is a band-aid at best. We need macro changes, starting with lowering the corporate tax rate and extending the Bush tax cuts. Contrary to belief, reducing the tax burdens on corporations allow them to expand in areas from research and development to the hiring of additional employees while increasing output. Where is Art Laffer when you need him?

The FED needs a .50 basis point cut like yesterday and should assert themselves to be anticipating the problems and not reacting to them.

Lets look at the sub prime crisis, which has exposed many companies lack of forecasting ability. Extremely low interest rates in the aftermath of the events of September, 11, 2001 (remember those) precipitated a historic rise in the average value of existing homes. Values were far above the historical moving average, and this is where risk increases. Values essentially doubled in half a decade and all the homebuilders lined up to get their share, ignoring or lightly weighing the above mentioned risks. The party ended and several had lampshades on their head when the lights came on. We are now digesting the excesses, or have a hangover if you will. This takes time. Regression to the mean, which would be an average appreciation of about 6% a year, suggests that home prices could retract over 50% from here and the gains would still be substantially above the normal appreciation. The same would be investors who quit their jobs to trade stocks in 2000 are the same would be investors in trouble now having pretended to be realtor and appraiser.

Want a time frame for the hangover? Perhaps the chart below offers a clue!