Today was supposed to be a good day. IBM preannounced earnings after the close of trading yesterday, and the market reacted quite positively in afterhours trading. The broader market reacted similarly, starting the day with a quick jump of almost 200 points. IBM opened almost $5 higher than yesterday's close. Tech stocks surged, and the NASDAQ followed suit. But it didn't last long. Within an hour the market went negative. Most of the day we hovered on the downside about 100 points. However, General Motors was listed on CreditWatch Negative by Standard & Poors this afternoon, which sparked intensified selling, and we ended the day off 679 points.
What's the problem? Why is this happening? The problem isn't really related to the stocks in question. These are good companies! The issue comes down to confidence. Right now, there is no confidence that anyone can sort this all out in the near future. Because of that, investors are hoarding cash. To raise cash, they are selling assets.
Solid companies now are now sporting dividend yields of 3% to 4% per year, whereas those same companies were yielding 2.5% a month ago. This is an indication of how much the market is seeking safety. The fact that a solid company is paying a solid dividend just does not matter at this point. Price/earnings ratios are falling toward or into single digit territory - this is a place we have not been for years in terms of stock valuation.
What will bring us out of this? That's the question on everyone's mind. We need something that will restore confidence. We need a sign that the world has not come to an end. As earnings come out over the next few weeks, we may see investors relax. That is, of course, assuming that some bellwether companies make statements assuring investors that their futures aren't bleak. But more than that, we need something to occur to restart the credit pump. As it stands, there is virtually no credit to be had. Without credit, the economy is at a virtual standstill, but at present, banks are not willing to lend because of the issues we've discussed in earlier blog entries.
Can anything the government is doing help? Yes, but it's an issue of not whether the patient is going to get better, but rather how long he will be sick. I saw a quote this morning along the lines of "we all started rejoicing when the ambulance showed up, until we realized we had a reason to call an ambulance in the first place." Without the intervention that the government has taken, we would be in an even worse place at this point.
If you have any questions, please e-mail me at nsnodgrass@evanstonadvisors.com.
