What is going on with the market?

It seems that the worse things look on Wall Street, the more people start to pay attention and show their disbelief at the way the financial systems actually work. Do companies actually borrow funds in order to keep operations flowing? Are bad financial decisions actually bundled, bought and sold without regulation of any kind? You mean the SEC doesn’t regulate the quazi-markets in which banks play with funny money loans in much the same way as the people in the ghetto shoot craps at the wall of a stop-n-rob convenience store?

True.. True.. True..

So what is wrong with the markets? What is wrong with my stocks?

Most stocks carry a P/E multiple. That means that the price you pay for a stock is generally at a higher (at times much higher) multiple of the actual profit the company generates annually. For example:

Microsoft’s P/E is 12, meaning for each share you buy at $23 you are actually paying 12x the amount of their annual profit. Apple is at 18x, General Electric at 9x, and Google at 22x.

Why are you compensating a company several times their income potential? Isn’t that just insane? Yes. It is. You do it because these companies are not valued just on their income, profits, dividends and general financial health, but the hopes and dreams of the investing public that these companies will continue to grow and with growth improve your portfolio and over the long term be worth far more than you paid for them initially.

Ah, the American dream. Full of hope, promise and expectations.

Alan Greenspan coined the term “irrational exuberance” as the .com boom was just getting started, to explain how investors become irrationally excited about the prospect for stocks and investments to do better as the fundamentals of the economy (low unemployment, low interest rates, low inflation, low energy costs) concern your average investor less and less.

Stock markets, and investments, are emotional reflections of our faith in the health of our country and businesses that make up it’s economy. We buy stocks because we believe the country, and all its citizens (particularly corporate citizens) will be better off in the future than they are today..

As you can tell by the numbers, the legacy of the Bush Administration and the prospects for the next one, are signaling that most people believe the worse times are ahead of us, not behind us.

All the more reason to learn about the economics, free markets, globalization and run a business that answers to the customer demands and needs.