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Looking for the Silver Lining

By Bryan Perry

The lifting of lending caps on Fannie Mae and Freddie Mac was the latest government pseudo-bailout package that investors cheered, but only for about an hour. And the amount of damage done to the credit markets just doesn't vanish because of more effort to ease restrictions.

The surprisingly positive forward revenue and earnings guidance offered by big-cap technology companies like IBM (IBM), Hewlett-Packard (HPQ), Research In Motion (RIMM), Apple (AAPL), Microsoft (MSFT) and Applied Materials (AMAT) really bucks the prevailing negative backdrop for cyclical companies -- but I'm not sure it will change investor sentiment about how deep the current recession could go.

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Global capital budget growth is still pretty strong, despite what's happening in the United States, and because of the dichotomy of the scenarios, the market is in a quandary about what direction to take.

Hope may spring eternal that the monetary stimulus, rate cuts and government incentives will kick in sooner, rather than later, but it doesn't appear that the market thinks so for now.

Inflation is a problem for everyone, going forward. Energy bills, filling up the family auto's gasoline tank, climbing grocery bills, college tuition, medical coverage, travel and most every other household expense is fast on the rise. And with lending standards tightening up, the possibility of refinancing their way out of trouble is now out of reach for millions of Americans.

The Fed has lowered rates, but that doesn't necessarily mean mortgage rates will come down. Residential mortgage rates have spiked back up to levels approaching those seen in November 2007 -- and that's after the Fed cut the Fed Funds rate by more than 2%. Short of a sterling credit rating and the ability to plunk down a bit more cash to compensate for the decline in loan-to-value assessments, the desire to refinance might remain only that: a desire. This borrowing reality is nothing more than a byproduct of a credit market that is still shaky.

The only silver lining to this not-so-pretty picture is the many forces currently at work trying to relieve the stress on lending institutions, to make it possible, eventually, for the banking system to return to normal. The subprime meltdown has caused a domino effect that's being felt around the world, although the most pain has been happening here at home -- and it will, undoubtedly, take some time to complete the repairs.

Right now the jury is still out about how much of the slowdown is priced into the market, but given the recent price action in the financial sector, there are the first inklings of hope. However, there still remains considerable downside risk for the market.

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