The Fed Cuts the Rate to 1%; Stock Market Yawns
Oct 29, 2008
Posted by Jody Eisenman | Filed under crisis
The Federal Open Market Committee today cut the fed funds rate by 50 basis points to 1 per cent today. As we discussed earlier, there seems to be very little correlation in trading from one day to the next. Here is part of the statement from the FOMC:
“The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures. Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for U.S. exports. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit.”
If you focus on the last sentence, you will see that the Fed actually thinks the credit situation will get worse going forward! This is not exactly awe inspiring for the financial markets going forward.
In other news, the NY Post is reporting that New York is starting to feel the pain:
NY Post: New York Gov. David Paterson said Tuesday that the recession, overspending by the state and Wall Street’s meltdown will result in a record $47 billion deficit over the next four years.
He says the current budget’s shortfall is $1.5 billion and the next fiscal year beginning April 1 will include a $12.5 billion deficit. A month ago, the current deficit was estimated at $1.2 billion.
“New York is at the epicenter of an extraordinary financial crisis on Wall Street,” Paterson said in releasing the state’s mid-year financial reports during a New York City news conference. “We will have no choice but to take bold and aggressive action to reduce state spending.”
Finally, here is an article from the NY Times regarding the across the board layoffs throughout corporate America: Link
So where does this all end? How low can we go? While no one can be really sure, I believe that the going forward earnings on the S&P 500 could be around $60. If you put a price earnings multiple of 12 on that, you come up with a target of 720. However, in a severe recession, this multiple could easily be at 10, or even less. Just to put things in prospective, General Motors was the largest company in the US during the 1930’s. The stock actually got as low as five times earnings (with a dividend yield of 11%). Although I’m not saying we will get there, a P/E multiple of 10 on S&P earnings of 60 would give you a level of 600. The index closed at 930 today.
