Tonight's Business News

Comments

[Mike H]

Nice cartoon Steve. :-) Pretty accurate right now. I feel this is as good a place as any to ask this. Are you at all worried with all the sub-prime buzz? Could the economy be hurt enough to destroy the chances for a balanced budget before the 2008 election? I'd like to hear your take on the whole thing.

PS- I got my first Social Security statement yesterday. Not enough credit to earn anything yet, but I'm still glad I work for the state and don't have to pay in at the moment.

[Bob]

Buy low, sell high.

Good time to buy, says I.

[woodchuck64]

Yes, by all means buy, if you're not the least bit afraid of a credit crunch and what that will do to an economy addicted to cheap credit.

[Zephyr]

"Be fearful when others are greedy, and greedy when others are fearful" -- Warren Buffet

[Steve]

Mike H:
The market panic this week is, in my opinion, emotional, and not justified by the fundamentals. That said, panics (emotions) have a track record of trumping fundamentals, and causing a lot of pain for those who place logic ahead of emotion. For people like me, in other words.

Corporate profits are booming, real incomes are growing, unemployment is low, and the world economy is booming. I agree with Bob and Zephyr: good time to buy. Caution: I have been wrong before, and will probably be wrong again -- every now and then, anyway.

[Bob]

I've been a student of the financial markets for about 10 years. They ALWAYS overreact.

I haven't looked at the component stocks of the DJIA in this latest correction. The reason is that I don't pay much attention to the Dow. However, I'd bet that it is financial stocks that are dragging it down.

Steve is right. This is a highly emotional game driven primarily by fear and greed.

[woodchuck64]

Steve says: "Corporate profits are booming, real incomes are growing, unemployment is low, and the world economy is booming. I agree with Bob and Zephyr: good time to buy."

All of these may be true, but ignore the obvious fact that there is a credit contraction or precursor to a credit contraction in progress. As I understand it, a credit contraction is a normal, necessary, inevitable part of the business cycle and in this case has been triggered mainly by falling home prices and ARM resets (ultimately the fault lies with creative and exotic credit instruments used in the first place). If history is any indication, home prices will continue to fall. The majority of ARM resets are coming due in a few months. Thus, the credit problem will only be getting worse.

What happens when cheap credit is no longer available to American consumers and business owners? Less spending, less growth.

Ignoring the economic impact of a credit contraction seems seriously shortsighted.

[Bob]

EA,

There may very well be a credit contraction. However, when markets overreact that is almost always a buying opportunity.

Who gets hurt in this?

Lenders who allowed 100% funding or zero equity.

Highly leveraged companies with weak balance sheets that will find it harder or more expensive to finance operation.

Owners of high risk financial instruments.

Now, that hardly looks like the entire economy to me. And, in terms of getting hurt, well, banks and/or funds that securitized risky mortgages, on the edge companies and high flying investors certainly knew what they were getting into.

We've been through this before...the 1987 decline, Asian Flu, Long Term Capital and the dotcom bubble. In every instance, if you would have bought at the dips, you came out ahead.

Also, every time, even with a short period of economic blues, the economy comes back. Be thankful this isn't the seventies or the early eighties.

[JorgXMcKie]

All I know is that the bears have successfully predicted about 7 out of the last 2 recessions.

[woodchuck64]

Bob,

What seems to be different this time is the extent of risky finance as a consequence of easy credit. Six years worth has led most obviously to a massive housing bubble, but there's got to be a lot more shaky stuff out there waiting to collapse. It's human nature to do risky things with free money, especially if year after year it pays off.

A correction seems inevitable.

I agree we'll see high-flyer's hurt, but I predict the surprise will be how many were flying high.