The problems with the economy and the credit markets are far more deeply rooted and intractable than what is reflected in current market prices
Many informed participants have a decent awareness of the former, but seem to be in denial regarding the latter.
Beyond this current assessment, media reports indicate a further coming wave of real estate defaults beyond the subprime mess. The financial markets, already struggling with the current impact of the bursting of the real estate bubble will encounter extreme difficulty accomodating further deterioration. In certain quarters this is known as cardiac arrest
When the stock market begins to more accurately reflect these realities, you do not want to be long!
Proof on the ground supporting this view can be found by examining the FOMCs own rationale supporting their rate reduction action taken on December 16, 2008
Market action in the new year have served to confirm this assessment as evidence of further deterioration in the banking, auto, housing, and consumer sectors have emerged. At this writing, January 15, 2009, the Dow Jones Industrial Averages has traded below 8000. The Federal Reserve has indicated a requirement for substantial additional funds, perhaps on the order of another $1 trillion, to bolster the banking system
Please note that as of February 10, 2009 the S&P 500 is on track for it's worst quarterly report on record. The Q4 reports are approximtaely 77% completed. The current reports show a LOSS of $7.56 per share on an "as reported basis" which include writeoffs and other accounting items. More disturbing is that Operating Earnings are at $6.58 per share. Assuming earnings STABILIZE in the coming quarters at $6.58 per share that would result in annual earnings of $26.32.
Applying a reasonable PE ratio of 15 would result in a target price of 394 for the S&P 500. Please note that these numbers are current and will most likely end WORSE upon the completion of reporting in approximately 2 weeks. As you can see - SIGNIFICANT DOWNSIDE may lie ahead. The market will ultimately reflect the horrible earnings picture. CAUTION STILL!