Chris Lau - Seeking Alpha

Monday, December 22, 2008

When Things get Complicated, Keep it Simple
I have stated numerous times in past entries that the stock market rules have changed, thanks to the Federal Reserve actions. That is not to say that these actions (in the form of bailouts for example) should not be carried out, but they do change the playing field. Stock market valuation analysis cannot be applied with absolute certainty, because forecasting such things as growth rates, margins, and revenue will be inaccurate. Take, for example, GM. Traditional fundamental analysis would result in recommending a giant sell call (in neon lights). With the government stepping in, the stock is not trading at its market worth of zero.

Remember another market rule: don't bet against the Fed. When the new administration in the U.S. is lead by Obama on January 20th, he will be spending at least US $700B. This will give the market a boost, but who's paying for all of this? Have the previous bailout bills been paid yet?

How does one keep things simple? Look at fewer indicators to get a gauge on the economy. Two things. Housing and borrowing costs. It is best not to look at just one housing market figures, but a variety of them, since one measure does not tell the whole story. I would closely monitor foreclosure rates, the Case-Shiller index, and new home sales figures.

On borrowing costs:
"But the undeniable reality remains. According to Merrill Lynch’s High Yield Master Index, the spread between high-yield bonds and comparable Treasuries has increased from roughly 600 basis-points to 2,072 bps since June according to Bespoke. This means that companies in the high yield bond category still face interest rates north of 22% to borrow – not a situation conducive to healthy balance sheets, especially in a deteriorating economy."