I saw quite a bit of talk this weekend about how the FNM & FRE bailout was going to signal the end of the bear. Let's step back for a minute and consider this shall we.
First off let me remind you what bear markets do, especially secular bear markets. They take valuations back to ridiculously cheap levels. They do not take values back to the average. That's not how human behavior works. The current trailing P/E ratio for the S&P is about 20. Granted prices have come down a lot so theoretically P/E ratios should be falling right? Well the problem is that earnings are coming down even faster.
Unemployment is still rising. housing prices are still falling. Pray tell how are earnings going to rise if more and more people are out of work? If those same people can't rely on asset appreciation then how is consumption going to be maintained? In a recessionary economy how are earnings going to grow? If earnings aren't growing or heaven forbid contracting (which they are) what is the incentive to bid up stocks?
In the end all the chart patterns, COT reports, trend lines, price of oil, etc. etc. are meaningless. If earnings are contracting stocks are going to be moving down. It really is that simple.
At the moment wall street is projecting next years earnings at $100. The problem is that this years earnings look to come in around $63. One has to wonder how in a global economic recession earnings are going to grow by 50% next year. I suspect the market is going to be sorely disappointed. I have to wonder how likely a disappointed market will be to bid up stock prices.
So let's see, did the bail out of the GSE's do anything to change the economic outlook? Did it in anyway change the employment picture? Will it somehow prevent upside down home owners from walking away from their homes. Will it in any way increase demand for still overpriced real estate? Does it somehow shrink the national deficit? Does it stem the tide of rising credit card and auto delinquencies and defaults? I have to think the answer to every one of those questions is no.
So what exactly did happen this weekend. It seems to me that the powers that be just stuck another finger in another hole in a severly leaking dike. I have to wonder how many more holes are ready to spring up and how soon before the leaks get too big to be plugged.
Realistically does anyone think that this bailout has fixed the underlying problems that have sent the markets into bear mode?