Having had a big bowl of Credit Crunch this morning, I am ready to share a connection between the credit crisis and the stock market. The current crisis has all but locked up any lending between banks, and therefore lending by banks to business and private citizens. Thus, businesses cannot get access to funds to pay for the goods and services they need to produce the goods and services they offer for sale. Until the credit market can restore its functionality, practically all economic activity will cease. For those companies that are for-profit (aka everybody in the stock market), this is really bad.
For stock market investors, this is horrible, because there can be no “visibility” for any company’s earnings. Stock prices, more or less, reflect future performance expectations of the company. The calculation of a company’s future performance requires some measure of demand for the product and the costs involved in making the product. Of course, these measurements are never 100% certain, because there are always too many variables. (Ever try to sell lemonade when you were a kid? Didn’t the weather have a particular impact on sales? And how much better have weather predictions become over time?) The market does not require certainty, but it does require some level of predictability of corporate earnings. Right now there is zero predictability. Even companies that have contracts in place for their products for the next several years do not have sufficient visibility. Why not? Because the cost of borrowing, when it can be done, has skyrocketed. We don’t know where the cost of raw materials may be headed because the commodities market is in just as much turmoil. And, we don’t know whether any contract will hold up. What if some other group of companies begins to go under, besides financials? It’s possible.
As much as I abhor government intervention in the economy, it has become absolutely necessary. We need to put a value on the mortgage assets still being held by banks and/or sweep them out of the way in order to restore confidence in the U.S. financial system. Then when corporations get access to money to fund their operations, we can turn our attention back to getting our sputtering economy going again. Until then, I would not recommend taking any long-term positions in the stock market.
In the meantime, I will try to dig up some info on safe places to park money. If anyone has ideas or suggestions, please email them to me.
Credit Crisis and the Stock Market
Posted by Gregg Killoren on September 30, 2008
Having had a big bowl of Credit Crunch this morning, I am ready to share a connection between the credit crisis and the stock market. The current crisis has all but locked up any lending between banks, and therefore lending by banks to business and private citizens. Thus, businesses cannot get access to funds to pay for the goods and services they need to produce the goods and services they offer for sale. Until the credit market can restore its functionality, practically all economic activity will cease. For those companies that are for-profit (aka everybody in the stock market), this is really bad.
For stock market investors, this is horrible, because there can be no “visibility” for any company’s earnings. Stock prices, more or less, reflect future performance expectations of the company. The calculation of a company’s future performance requires some measure of demand for the product and the costs involved in making the product. Of course, these measurements are never 100% certain, because there are always too many variables. (Ever try to sell lemonade when you were a kid? Didn’t the weather have a particular impact on sales? And how much better have weather predictions become over time?) The market does not require certainty, but it does require some level of predictability of corporate earnings. Right now there is zero predictability. Even companies that have contracts in place for their products for the next several years do not have sufficient visibility. Why not? Because the cost of borrowing, when it can be done, has skyrocketed. We don’t know where the cost of raw materials may be headed because the commodities market is in just as much turmoil. And, we don’t know whether any contract will hold up. What if some other group of companies begins to go under, besides financials? It’s possible.
As much as I abhor government intervention in the economy, it has become absolutely necessary. We need to put a value on the mortgage assets still being held by banks and/or sweep them out of the way in order to restore confidence in the U.S. financial system. Then when corporations get access to money to fund their operations, we can turn our attention back to getting our sputtering economy going again. Until then, I would not recommend taking any long-term positions in the stock market.
In the meantime, I will try to dig up some info on safe places to park money. If anyone has ideas or suggestions, please email them to me.
Cheers.
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