Why stocks can shake off mortgage meltdown (Part 1)

The following article is for people who are afraid that recent financial events are the onset of a Bear Market.

Turmoil in the credit markets is sparking a global sell off, but are investors overreacting?
By Grace Wong, CNNMoney.com staff writer

The threat of a broad credit crunch has jittery investors rushing for the exits, but those concerns may be overdone.

Problems in the risky debt and subprime mortgage sector have sparked wild swings in the market recently - these days few bat an eye at 100 point-plus drops and gains on the Dow Jones industrial average.

Investors have been rattled by a wave of credit woes that has hit leveraged buyouts and the mortgage sector. The worry is that a tightening of credit will have a broader impact on consumers and the economy.

Don't freak out about the Dow
There are reasons for concern. American Home Mortgage (Charts) said Tuesday lenders had cut off its access to credit and that it may have to sell off its assets. The collapse of companies like American Home and other mortgage lenders could make home loans more expensive for borrowers.

And after two years of rapid-fire deal making, the buyout boom is facing a lull. As a debt crunch starts to squeeze private equity firms, the boost take-private deals have provided for stocks could start to crumble.

Uncertainty about how wide credit problems will spread is likely to persist, which means investors are in for more sharp swings in the market. (Watch how you can protect your portfolio -- 6:07.) But there are a number of reasons why stocks aren't likely to fall off a cliff, analysts say.

(1) Stock valuations are reasonable For one, stocks aren't too pricey and sell offs are likely to bring in buyers looking for a bargain.

"A lot of stocks are looking reasonably cheap," said Peter Dixon, strategist at Commerzbank in London. "On the basis of valuations, you've got to continue to favor equities," he said.

In the U.S., the S&P 500 index is valued at about 15 times 2008 earnings, which makes stocks attractive investments, according to Stephen Leeb, president of New York-based Leeb Capital Management.

(2) Deals not doomed Private equity buyouts have helped support the stock rally in the U.S. and Europe as investors have bet that nearly any public company could be taken over.

The outlook for these deals is looking murky as buyout firms face hurdles securing financing, but a slowdown in leveraged buyouts isn't going to have a substantial impact on stocks.

"The exit of private equity is not going to be what caps this market. There are lots of corporate buyers out there willing to step up to the plate and fill the gaps left by private equity," Leeb said.

Continue Part 2 here...