- The markets are extremely oversold, but it can't muster a rally. Why not? The Fed is doing everything it can; it will undoubtedly soon start taking direction positions in financial companies, and may even guarantee loans between banks.
While many are expecting a rally, and some are in fact buying modestly right now, there are other problems.
1) Financials have been hurt by concerns about wider losses (credit card, commercial real estate), and capital raising issues.
Look what happened to BofA[nd Morgan Stanley after they announced capital raises; look what is happening to Wells Fargoand Prudential and Protective Life now that many believe they will have to raise capital.
2) But there's a bigger problem: there is no "E" in the P/E. In English, there is no Earnings in the Price/Earnings Ratio.
Look at the estimates now: S&P 500 price is 975; many estimates of earnings for the S&P 500 for 2009 are around $75 for the index.
Do the math: 975/$75 = 13 x earnings. Now, this is modestly cheap. The historic average is 15 x earnings, so 13 x is a little cheap, but not much.
Here's the problem: that $75 estimate is baloney. No one has a CLUE what earnings will be. All we know is they keep dropping.
So the Street is re-jiggering the numbers. Instead of $75 earnings, let's assume, say, $60 earnings. In order to get to a level where the S&P is cheap (13 x earnings), we have to go to 800 on the S&P: 800/$60 = 13.3 x earnings. 800 on the S&P??? Gads, it's at 975 or so now, that's a drop of...another 175 points....1,700 points on the Dow! Sobs and wails.
See why the Street is in despair? With no visibility on earnings, we can't play the game.
That's why the banks have to start lending, in order to get a clear indication of what it costs to borrow money. Getting a grip on a company's lending costs are key.
Source: http://www.cnbc.com/id/27103775
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