Sometimes Winning is Not Losing

By Jerry Slusiewicz | October 06, 2008 | 5:43 PM | 0 Comments

No other way to describe it. It was another ugly day, that followed an ugly week last week. Not just in the U.S. but globally. The losses would look bad enough if they were for a year, let alone a week.  At the lows today the S&P 500 was off 16.7% in five and a half trading days.

The S&P suffered its worst, single day percent drop last Monday since the crash of 1987. Specifically, it plummeted 8.8%.  At today's lows we almost tied that point drop from last week.  Typically big drops are not followed by more big drops.  Risk is coming out of these markets fast.

Last week the stock market posted its worst week since July 2002, near the bottom of our last bear market.  The Dow lost the most points in a single session - 777 of them, in the 112-year history of the index. The NASDAQ and the S&P 500 both, percentage-wise, had an even bigger decline.  

Today's losses pushed all the major market indices to multiyear lows. The NASDAQ and Dow closed at their lowest levels since October of 2004.  The S&P 500 closed today at levels not seen since December 2003.

The prevailing liquidity crisis has cast a wide swath of fear and distress into the markets.  It's not just a crisis of credit; it has expanded into a crisis of confidence. Today we witness big investors such as hedge funds with seriously bleeding portfolios.  Captains of commerce and industry such as Goldman Sachs (NYSE: GS) and General Electric (NYSE: GE), having to pay 10% preferred dividends to attract investment dollars and the local car dealer whose customers can't borrow the dough to buy a car.  These are signs of a credit crisis spilling over from Wall Street to Main Street.  If larger institutions cannot raise capital on competitive terms (GE is an AAA-rated company), what do you think it costs a firm with a B rating? Many firms which used the credit market to access capital now are simply shut out.

The real problem is as follows: Virtually our entire credit system has based on a false premise by a high number of people. They spent more than they earned, they borrowed more than they saved, and they wrongly believed that fantasy could go on like that forever.  In the corporate environment 40 times leverage became common practice.  This is not just a US issue. This is a worldwide crisis.

Recessions are by definition deflationary events. Given that we have had two bubbles burst (housing and credit), the potential for deflationary pressure has increased. Add into the mix the deleveraging process, and you have a recipe for our current market environment.  Some of the recent economic headlines include:  The Unemployment Report for September showed a total of 159,000 jobs vanishing.  This was the ninth month in a row of job loss rather than job gains.  So far this year a formidable 750,000 jobs have disappeared.

Consumer spending looks like it will be negative for the third quarter.  This hasn't been negative since the 1990-1991 recession, and the consumer makes up more than two-thirds of GDP.  The S&P/Case-Shiller home price index dropped 0.9% in July for a 16.3% year-over-year decline. Since the 2006 peak, prices are now down 19.5 nationally. Some regions are hit even harder, like here in Southern California.

The manufacturing ISM dropped sharply to 43.5; any number less than 50 shows contraction in manufacturing. This is the largest one-month move since 1984. On the inflation front, "prices paid" also dropped by a huge amount, from 77.0 to 53.5 - the biggest drop ever, with history dating back to 1948.  Auto sales plummeted to approximately 12.4 million units at an annual rate in September. That's the lowest level in 16 years.

Where and when we find a bottom is yet to be determined.  Today we had a nice bounce off the lows.  Capitulation could be close.  The volume rose as the indices rallied.  Stocks are cheap and fear is rampant.  This week is a very light week for potential market-moving economic reports. Perhaps tomorrow's release of the minutes of the Fed's last FOMC meeting may shed some light as to what the Fed is thinking.  I expect the Fed to come in with a 50 basis point interest rate cut, on or before, their Oct. 29 FOMC meeting.  I think they will attempt to make a coordinated effort with the European Central Banks.  They are desperately trying to inflate our way out of this depressing environment.

We are also at the beginning of the 3rd quarter earnings reporting period, which should be very interesting and revealing of how widespread the problems are in this troubled economy. Do not let panic or fear grip you, there will be opportunity from the current downturn.  It may be soon, or it may be some distance away. There will be a bottom to all of this and a potential for profit. This too shall pass.  If you have been in cash for this downturn you can have a clear head as to when to make your entry points.  If you have been suffering with a deteriorating portfolio, it is time to plan what you will do differently next time (like employ stop losses), and vow to not let this happen to your portfolio again!