Sunday, October 11, 2009 EST

The Economist Magazine presented an interesting article on the bear case for the market. Some of the most insightful information came from the current state of commercial and consumer lending. It is no secret that consumer spending is a big driver of the stock market. Part of the spending comes from loans to consumers and those loans are just not taking place.

The except below is from the article The End is Nigh (again)

The bears argue that although governments may have stabilized the banking system, they have not been able to restart private-sector lending. In America bank lending has been falling rapidly over the past three months while in the euro zone broad-money growth has slipped to just 2.5% year-on-year (see the left panel of chart 2). In recent months consumers in Britain and America, two of the most heavily leveraged economies, have been repaying debt.

Conventional analysts tend to argue that on the basis of profit forecasts for 2010, stock-markets are reasonably valued. But bears doubt that profits will rebound so dramatically. They tend to prefer longer-term measures. Andrew Smithers of Smithers & Co, a consultancy, produced a timely book in 2000 arguing that Wall Street was in bubble territory. On his two favorite measures, the q ratio (which compares share prices with the replacement cost of net assets) and the cyclically adjusted price/earnings ratio (which averages profits over ten years), the American market is still overvalued, by 41% and 37% respectively. As chart 3 shows, Wall Street got back to an average valuation by the March lows, but never looked particularly cheap by historical standards.