Ten reasons to be optimistic about the market

By Murray Leith
Globe Investor Magazine Online, Oct. 17, 2008

Murray Leith, CFA, is the director of research at Vancouver-based wealth management company Odlum Brown Ltd. This research note was sent to the firm's clients.

The right attitude: In a few short weeks (which felt very long), there has been a dramatic, worldwide shift in attitudes regarding the need to fix the global banking system. Voters now expect governments to do whatever it takes to mend the finacial system and get the economy back on its feet. It would be a mistake to underestimate what can be accomplished now that the world has the will to win.

A coordinated approach: We now have a globally coordinated "shock and awe" campaign aimed at restoring confidence in the banking system.

Action plans aimed at the root of the problem: The United States, United Kingdom, European and other governments are injecting massive amounts of capital directly into the banking system, which is the best means of reducing excess leverage and diminishing the odds of further bank failures.

Encouraging trends: Credit spreads are improving and moving in the right direction.

More improvement is on the way: While the improvement in credit spreads has thus far been modest, patience is warranted. The heavy artillery was only recently revealed and much of it has not yet been launched into action. We expect significant improvements in credit spreads as the massive policy initiatives are implemented.

Lots of reserve ammunition: Governments and central banks have lots of other weaponry at their disposal to fight the banking crisis. The authorities are displaying every intention to use all necessary means to stabilize the banking system.

Relief on the commodity front: Oil prices are half their peak levels and most other commodity prices are down dramatically as well. Lower commodity prices will act like a major tax cut on consumers and businesses and give the economy a much-needed boost.

Further monetary policy relief on the horizon: With commodity prices dropping, inflation fears are fading fast. With the notable exception of the U.S. Federal Reserve, most of the world's central banks have just begun to ease monetary policy and cut interest rates. Much more interest rate relief is around the bend, which will help stimulate lending and spending.

Fiscal policy action likely: Increased government spending and reduced taxes will give the economy a further boost. While talk of balanced government budgets has been popular with voters in recent years, we believe that increased government spending and tax cuts will become trendy. The Democrats are already talking about another fiscal stimulus package. Budgets deficits are a necessary evil to help stabilize the overall economy while the private sector gets its house in order.

Stocks are very attractively priced: It is quite likely that 2008 will go down in the history books as the stock market buying opportunity of a lifetime. Although the outlook is uncertain, many stocks seem to be discounting a certainty that economic conditions will go from bad to horrendous. While there is little doubt in our mind that the world economy will experience an economic recession, shares of high quality companies will rise to the surface once investors realize that there will also be an economic recovery. Great companies are selling at fire sale prices because mutual funds and hedge funds are dumping stocks to meet redemption orders. As is often the case, the quality companies are being sold alongside the poor since that is where the liquidity lies. Once the selling abates, high quality stocks will rise above the rest. Don't foreget that the stock market is a leading indicator and stocks will rally well before the economy hits bottom.