Our Market Assessment

What Moves the Market?

This is a question that provokes continuous debate. At Yellowstone Partners, we believe that the core determinate of market movements is ultimately corporate earnings.

That said, for some time now, the market has departed from a reliance on corporate earnings to determine valuations, and has looked to federal interest rates, economic news, and government stimulus programs to make assumptions about the valuation of company stock. As the market has made this deviation, we have adjusted our course to take these factors into account, but we haven’t abandoned the foundation of company fundamentals.

While each of these factors is a factor in corporate earnings, none of them can replace the earnings themselves. By focusing on the long-term determinate of market movements, we believe that we can realize significant value as investors return to the underpinnings of hundreds of years of analysis.

Indicators of Stabilization?

Throughout this recent economic recession, much has been said about a “credit crunch,” an unwillingness of banks to lend to one another because of concern over the value of toxic subprime mortgage assets. The way we measure the level of confidence between banks, and thus the willingness to lend and eliminate the frozen credit market, is by comparing the rate that banks charge one another to lend on a short term basis, to what the government charges to lend. The spread between these two rates is referred to as the TED Spread.

 

 

Historically, the trend has been a spread of .50 to 1.00. As you can see in the chart above, distrust reached its peak in October of 2008, when Lehman Brothers failed, and the spread leapt to over 4.00.  In recent weeks as companies have reported earnings and the market has begun to rally, we’ve seen significant “thawing” in the credit market, and the spread has eased to .57.  This has positive implications for the financial sector and for the economy overall. 

Translating Opinions and Media

Whenever you hear an opinion by any of the various sources of expertise on the markets, remember that everyone has an axe to grind or something to sell. Since the stock market is an enormous auction, each and every player has his or her own interests at heart. In addition, media outlets exist to sell advertising. They have to maximize viewership which translates most often to maximizing drama in reporting.

There is certainly quality advice to be found in the massive quantities of investment advice that flood the internet and the news media, but the caution is to remember that it is likely worth exactly what you paid for it, which is most often, nothing.

The differing opinions on the market at any given point are a testament to how the market functions… and thus the opportunity for return for investors who are savvy enough to capture opportunities at the right time and at the right price.