It’s All About the Confidence

Now that the Fed has made available a lot more money for financial institutions to tap if they want to, perhaps we can get on with the business of affecting stock market sentiment. Make no mistake; there’s all kinds of money floating around the world, which was already made available much earlier in order to combat the credit crunch taking place among institutional investors.

It isn’t a money issue out there; it’s a confidence issue. Like I wrote previously, when you get great companies reporting outstanding financial growth and their stock prices are dropping significantly, there’s a fundamental confidence issue to be dealt with.

Of course, the entire subprime credit collapse (commensurate with housing prices that were due for a correction) is responsible for the situation we’re in now and the subsequent correction in equity prices. And, it’s very likely that it will be the housing market that will get us out of this quagmire. This will take time, but it has to be done.

As a full-time investment analyst, my view before all this started was that the economy was slowing, but that corporations were generating very respectable numbers, because so many have been running very lean operations. The economy this year may not actually achieve the technical definition of a recession.

In many areas, the real estate market is overbuilt. But this didn’t happen everywhere. Virtually all housing prices, however, accelerated too quickly and too far. With the correction in the housing market the main catalyst for the confidence issue in the stock market, the Fed is on the right track. Even though the central bank’s actions are inflationary in the long run, they are serving their purpose in the short run.

All we have to do now is determine how we can use the lack of confidence in the equity market to our best advantage.