Despite the pessimism in the NYT article, there is hope on two levels. First, BARRON'S, one of the most widely read investment journals, in its latest edition criticizes Greenspan for his FAILURE to control the stock market bubble by raising margin requirements (the only other major tool besides interest rates that the Federal Reserve can use). Instead of raising margin rates from 50% to, say, 70% during the 1999-2000 period, Greenspan did nothing except start raising interest rates. That took the steam out of the expansion, eventually bringing on a recession. It was sort of like using an axe to cut paper, when a scissors would do a better job.
Second, the drop in major market indexes is aggravated by technical analysis, which is really little more than a type of trend analysis. Here's how it works. When you get a sudden drop in the averages, the tecnical analysts looking at their charts decide that perhaps a support point has been broken and immediately predict further damage. Since so many investment firms and individuals rely on technical analysis (it's a lot easier to do on a computer screen than fundamental analysis), investors react to the TA predictions and sell. The market goes down. Another support point gives way, the TA boys see further damage, people sell, the market goes down more, and so forth. In short, the TA predictions become a self fulfilling prophecy. Fortunately, at least a few more people, led by the likes of Warren Buffett, are once again putting more reliance on fundamentals. And while many stocks sell at somewhat higher than average price-earnings ratios, many others are quite reasonable. Coupled with a moderately growing economy, this means that the prospects for at least some stocks are good, based on their fundamentals.
It's time for investors to place a lot more emphasis on the fundamentals. It's also time for regulators to start doing the work that existing laws provide for, but existing budgets often do not. This part of the puzzle will be clearer by this coming November.
Art Bechhoefer |
