Mohan:
Corporate profits are largely a function of the interest rate and individual disposable income. Lower interest rates reduce a company's cost of capital, and make more disposable cash available to consumers. A reduction in US budget defecit unleashed the pressure on US Treasuries, reducing the interest rate and making an explosion in the US stock market and many other global markets since 1992. Now, we are in a deflationary environment! Techs are suffering partly because of their lower debt:equity ratios. Utilities are going up partly because of their high debt:equity ratios.
True, an appreciation in the stock prices also adds to the consumer purchase power. But, most of the investment is tied to retirement mutual funds. If for some strange reason (sun-spot), stock prices fall dramatically, this would lead to a serious problem. But, the financial payment system is so stable that a panic is unlikely to take root. One has to worry about fundamental shifts in the P/E-EPS-interest rate equilibrium which appears to be holding now.
At some point in time (a week ago) I was worried that Japan was bound to sell US Treas and did not know of her pact with Fed. I was thinking of their large-scale dumping of US Treas as a sun-spot phenomenon to lift up the interest rate temporarily. But, this pact is a very wise idea, another milestone in maintaining stability in the global payment system -- a need to help keep the markets in line with fundamentals.
Again, I do not see the markets rising or falling dramatically, but that any movement will be gradual. I also do not think that the markets are out of line with fundamentals now. However, a lot of companies perhaps are and will fall due to competition while others will lead the way up.
Sankar |
