22 May 2010

What is Going on in the Stock Market ?

The market crashed in 2008. Or did it. Influential models used in investing reference share value to earnings re-invested into the company over time. But for a long time, there have not really been earnings on any reasonable definition of them.

The tech bubble was based on future revenue being booked on a vast scale as present revenue. This pushed share values sky high, as the models themselves said they should be. But the revenue was not real, this was nothing to re-invest and grow the companies and share prices had to fall to reflect this.

The same thing happened from 01-07 in the recovery from the tech bubble.  There was revenue, but it came from spending by consumers from debt, from credit cards, and mortgages. Thus overall, in the economy there was no real asset growth and the market finally revalued itself in 08 to reflect this. There is nothing wrong with the market. So what is it doing now. The same kind of thing.

From 08 till now, the Fed has kept interest rates artificially low. This means major investors can borrow dollars very cheaply indeed and invest this into equities. There have been no significant earnings to justify the surge upwards from 8000 - 11000. What has been driving it up, is all this cheap money.

But a few months ago, the Fed said this was coming to an end, with a hint about raising interest rates, and the cracks started to show. This began in the Forex market where all things are shown first, but they are not as obvious as in equities. In further articles I will discuss this :) What is happening now is a major re-valuation of assets in equities.

There was nothing really surprising about the 900 point fall, it needed no fat finger. But this does not mean assets will be re-valued down to a Dow of 8000 or less. Governments are already finding ways to reflate. But...the models I use suggest there is a real recovery and a real recovery will not reflate but restore asset values. But asset values right now are inflated and depend only on new ways to disguise this with debt.  

The question is then, will it be possible for this recovery to take over from the effect of withdrawal of stimulus of various kinds in time. There are certain technical events which indicate it may indeed be...and indeed the volatility you are seeing is exactly this process, a new computation already developing within the market on asset growth versus debt

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