Thursday, November 27, 2008

two sides of the coin

One of the reasons why stocks change hands a million times over everyday is because no matter how great or dire the economic/corporate earnings outlook is, there is always two sides to the story. Optimists and pessimists will always disagree, and each side can usually make a compelling case to either leverage yourself to the hilt and buy stocks with all your resources, or to sell everything stash most of your cash underneath your mattress and use the rest to build a bomb shelter. I think most would agree that it feels like we are on a very bad footing right now economically, but yet stocks are still finding bids, and the sun continues to rise every morning. Here are some reasons to be optimistic or pessimistic about the near-mid term economic/corporate earnings outlook:


  • Consumers and businesses are buckling down for a number of reasons which include economic uncertainty, rising unemployment, recessions, falling home prices, and trouble obtaining credit.
  • The U.S. government is building a massive debt load, and recent actions that they've taken shake the very foundations of capitalism and promise more risk aversion, and government regulation, of industries and markets in the future.
  • The former 'BIG 3' automakers are in trouble, putting millions of more jobs at risk.
  • The growth within emerging markets like China and India is slowing and recent terrorist acts add to the fear and uncertainty in these markets.
  • Deflation is now taking over from inflation as a worry because the price of goods are declining quickly.


  • Fuel and other commodities are much more affordable than they were just months ago. This allows consumers and businesses to cut costs and leave room for consumption and investment.
  • The S&P 500 index has fallen over 40% since the start of 2008. Shares of many companies can be bought for significantly less now versus in 2007. Severe declines in forward earnings have been priced into many stocks making them less risky investments.
  • Interest rates around the world are coming down making credit and mortgages cheaper for many.
  • Emerging markets like China and India are still growing at very high rates and demographic, and lifestyle trends indicate that they will require the rest of the world's goods and services in a big way for years to come.
  • In a Darwinian type of way, plenty of the inefficiencies, mismanagement, redundancy, greed, and waste is being washed from the system. Most of the issues which have been dealt with and are being dealt with right now will come out the other side cleaner, leaner, and more stable. (ie Big 3, Financial sector, credit markets, consumer debt)

Feel free to comment on which camp you are in and why.

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Sami said...

I like your post.

The issue in investing , and always will be, is risk/ reward ratio. With 50+% decline in market levels the risk/ reward ratio moves to longs in a big way to earn decent return. at higher prices and valuation the inverse happen although the economic picture is healthier.

Singapore Recession said...


They always said that stock market is a zero sum game ... someone must be making tons of money and someone must be losing.

But who is making tons of money in this recession?

Dividend Growth Investor said...

I like the argument that it's different this time so the 200 year uptrend in stocks doesn't mean anything to those bears.

Sarlock said...

Over a long term, stocks are a zero-sum game, but the losses during this recent drop will only be recovered once/if the stock market returns to its original valuation: for every winner there are many, many losers.
Good time to buy right now, but we may have to wait 2 or 3 years before we see any solid and stable moves upward. Until then, shop for the best bargains in the bargain stock aisle.

MG (moneygardener) said...

Great comments!