My 2 cents on the markets: Sure, the violent moves in the short term are the results collective sentiments and trading activities, nothing more. It's easy to call them over reactions. However, whenever market swings get this violent with no apparent catalyst or obvious reason ("fear of the US is entering a recession" is not a catalyst), it usually means something very fundamental is unfolding, and great wisdom is embedded in the mass psychologies (consciously for pros, subconsiously for joes).
Many would argue that markets are fundamentally sound, valuations are low based on the low interest rate environment, recession or not, since a few quarters of no growth or decline in earnings matters very little in a long term economic valuation model. They've also been arguing for over a decade that capital gains/retained earnings are far superior than earnings distribution/dividends, because of tax efficiency. Corporate executives gladly played along.
Is it really all good? As boomers retire, they go from accumulators to liquidators of equities. Many think they have saved and invested in a portfolio of decent size, until they actually have to live off the cash flows generated by it. It is throwing off about 1.8% yield(S&P500 dividend) only, and going lower (financials were the back bones of dividend yields, but are dramatically cutting them now). An equity portfolio of $1.5 million give them roughly the same income as someone below the national poverty line. Almost all boomers must systematically sell their holdings to fund their livelihoods post retirement.
A few questions to ask:
If an investment is of great value, shouldn't the return on investment alone justify its merit?
What would you call an investment, if the end game is count on someone paying a higher price than you did?
In the foreseeable future, the market participants will be made up by an increasing number of sellers and a decreasing number of buyers, What would this do to the markets? (think Japan)
The greatest leverage bet, yen carried trade is unwinding as we speak. Marginally higher returns from the cream of the "crap", supposedly safe and high grade CDOs, SIVs have gone bust. The Fed will cut rates further (maybe an inter-meeting cut on Tue./Wed.), while Japanese inflation and more importantly, inflation expectations are at multi year high. What is a carried trader to do, other than to unwind? Who else will come in and fill the $trillion dollar shoes of driving equities and other asset markets' values higher?
If the earnings are real, I agree that 15-16 P/E is cheap, if they are real, S&P 500 should have no problem paying 5-6% dividend yield if and when that is indeed what the majority of retiring shareholders wanted. I think the earnings are as real as what was once reported by the likes of Citi, Wamu, Countryfried and New Century.
