Overreacting to the market

Published by the Arizona Daily Star, Letters to the Editor, 10/15/2008:

Historically the cost of company shares in our stock markets has averaged about 15 times the annual earnings of a company. However, over the last 25 years the average cost of common stock was 30 percent higher than this norm, more than 21 times earnings.

This week’s plunge has little to do with economic weakness and much to do with a needed adjustment to a market inflated by artificially cheap credit begun by the foray into lending by the Feds in the form of government-sponsored agencies. This allowed families, companies and investors alike to overextend themselves, acquiring outside their actual ability to pay and at prices disconnected from the true value of companies, products and services purchased.

This inflation is now erasing itself, expeditiously, as the credit party comes to an abrupt, screeching halt. Issues of liquidity, job creation, tax policy, energy consumption and others are real problems in our economy, but stock markets, at best, are a reflection five places removed from this reality and our media and politicians would do right by consumers to focus on things that matter instead of feeding the sensationalism of Wall Street panic journalism.

Taylor Davidson, Licensed Broker

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