Last week Obama unveiled his spending plan, which turned out to be (surprise!) full of pork. This week he made it worse, rolling out a budget that increases taxes significantly, and reduces the value of deductions for mortgage interest and charitable contributions (which effectively raises taxes even more). There has yet to be a pronouncement from his administration that has had a positive impact on the markets.
The market continues to search for something to spark a turnaround, but Washington is not providing it. This morning it was announced that the government investment in Citigroup would be converted into common stock. Citigroup stock is down 37% on that news. That's 37% for the day. Other financial services companies were also battered by the news, with Bank of America falling about 25% today, and AIG, which within the last 12 months traded as high as $52, selling for about 43 cents a share. GE slashed its dividend to 10 cents a share from 34 cents. This was somewhat expected, and market reaction to the news has been relatively uneventful (the stock was already trading down prior to the announcement).
The biggest drag on the market today was the revision of the GDP numbers for the fourth quarter of 2008. While a downward revision was expected, the number came in much worse than predicted. The decline in GDP was the worst since the beginning of 1982.
Given all the above, why on earth would anyone want to buy stocks? The reality is that because of all the above, now is one of the best times I've ever seen to buy stocks. Stocks are cheap. Might they get cheaper? Sure. But that does not negate the fact that they are cheap now. Granted, not every company is worth owning. I wouldn't want to buy any financial services company right now. Is there money to be made in financial services stocks? I'm sure there is, but the risk in those stocks is incredibly high. The payoff may be astronomical, but I'd much rather invest in something with significantly less risk and a more predictable outcome.
Companies are still making money. People are still buying burgers, putting gas in their cars, drinking soda, taking prescriptions, using personal care products (toothpaste, soap, deodorant, etc.), and unless you raise your own vegetables, mill your own flour, and butcher your own meat, you're probably still going to the grocery store. There is a level of economic activity that is required just to meet the needs of daily life. That level of economic activity results in additional economic activity. All of that economic activity has a value, and I believe its value is higher than that being assigned by current stock market valuations.
