Words from the (investment) wise for the week that was (October 6 – 12, 2008)

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Angry PC guy

I have been away from the trading desk, and the stock market’s bloodbath, during the past few days as I am on a business visit to Geneva. Just as well, but I can nevertheless associate with the frustration of the trader in the animated image (hat tip: Rob Fraim).

In order to have a bit more time to consult with the Suisse gnomes (disguised as private bankers), I am only doing a shortened version of “Words from the Wise” this week. Although I have managed to compile some very interesting excerpts from news items and quotes from market commentators, I will not be doing my customary review of the financial markets’ movements and economic statistics.

Confusion and irrational fear characterized financial markets during a remarkable week, with the CBOE Vix Index (the so-called “fear gauge”) spiking above 70 for the first time. According to data from Bespoke, the week’s US stock market crash of 18.2% ranks second as the worst Monday-to-Friday movement for the Dow Jones Industrial Average since 1900. Amid the dumping of stocks on all bourses, the US dollar, Japanese yen and precious metals were the only safe havens. (Also see related posts: Stock market performance round-up: Crash of 2008 and Stock market decline in perspective.)

The realization that the economic damage from the credit crisis was intensifying weighed on investor sentiment. Selling of equities therefore persisted despite a litany of initiatives announced by governments and central banks around the globe, aiming to boost liquidity and restore confidence in the banking system.


Source: Slate

The media headlines were cluttered with reports of various actions being taken to alleviate the financial turmoil (as dealt with comprehensively in the news section of this post). However, none was as succinctly formulated as that of the Central Bank of Jamaica (hat tip: Barry Ritholtz’s The Big Picture).


Next, a tag cloud of the text of the plethora of articles I have read during the past week. This is a way of visualizing word frequencies at a glance. As the saying goes: A picture paints a thousand words …


As far as the outlook for stocks is concerned, Paul Kedrosky (Infectious Greed) said: “I am trying very hard to look through all of this to see what things look like on the other side. And I can see faint outlines, for sure, but that other shore still seems awfully far away.”

On the other hand, Tim Bond, head of global asset allocation at Barclays Capital, was quoted in the Financial Times as saying: “We believe global equity markets are starting to offer a long-term buying opportunity that is typically only seen once in a generation. We are not calling the bottom in the bear market today, but we do suggest that the low will be seen within the next two or three weeks.”

Bond also suggested that returns from equities purchased during this interval may well be extremely higher over the next year and could – if history is any guide – turn out double-digit long-term returns over the next decade.

As a sign of these extraordinary times, mulling through my head at the moment are the lyrics of Peter Gabriel’s song “Perspectives”: “I need perspective, ‘cos I’m facing the wall. I need perspective, ‘cos I’m not that tall. I need perspective, heard the trumpet call. Don’t trust my eyes, want to know where things fall.”

Having said that, I summarized my views as follows in a post yesterday: “Nobody really knows what will happen next, although some indicators are starting to signal that a bounce may not be all that far off. But stock markets are unlikely to find a cycle low before measures are implemented to stem the decline in confidence. It may take a while yet before we see the bear’s corpse, but look out for a 90% up-day as a signal of the completion of the selling climax.”

Economic reports
here for the week’s economy in pictures, courtesy of Jake of EconomPic Data.


Time (ET)




Briefing Forecast

Market Expects


Oct 7

3:00 PM

Consumer Credit






Oct 8

10:00 AM

Pending Home Sales





Oct 8

10:35 AM

Crude Inventories






Oct 9

8:30 AM

Initial Claims






Oct 9

10:00 AM

Wholesale Inventories






Oct 10

8:30 AM

Export Prices ex-ag.






Oct 10

8:30 AM

Import Prices ex-oil





Oct 10

8:30 AM

Trade Balance





Source: Yahoo Finance, October 10, 2008.

In addition to Fed Chairman Ben Bernanke speaking at the Economic Club of New York on Wednesday, October 15, next week’s economic highlights, courtesy of Northern Trust, include the following:

1. Retail Sales (October 15): Auto sales dropped to an annual rate of 12.5 million in September from 13.7 million in August. Non-auto retail sales are expected to show noticeable weakness. Reflecting these aspects, the headline retail sales number is projected to have fallen 0.7% in September after a 0.3% drop in August. Consensus: -0.6% versus -0.3% in August, non-auto retail sales: -0.3% versus -0.7% in August.

2. Producer Price Index (October 15): The Producer Price Index for Finished Goods is predicted to have dropped by 0.4% in September reflecting lower energy prices, while the core PPI most likely moved up 0.1%. Consensus: -0.4%, core PPI +0.2%.

3. Consumer Price Index (October 16): A 0.1% increase in the CPI is our forecast for September following a 0.1% drop in August. The core CPI is expected to have moved up 0.1% after a 0.1% gain in August. Consensus: +0.1%, core CPI +0.2%.

4. Industrial Production (October 16): The 1.0% drop in the manufacturing man-hours index in September suggests a 0.8% decline in industrial production. The operating rate is projected to have dropped to 77.9 in September. Consensus: -0.8%; Capacity Utilization: 77.9 versus 78.7 in August.

5. Housing Starts (October 17): The elevated level of inventories of unsold new homes points to another monthly drop in housing starts (870,000 versus 895,000 in August). Consensus: 880,000.

6. Other reports: Inventories (October 15), NAHB Survey, Philadelphia Fed Survey (October 16), Consumer Sentiment Index (October 17).

Click here for a summary of Wachovia’s weekly economic and financial commentary.

A summary of the release dates of economic reports in the UK, Eurozone, Japan and China is provided here. It is important to keep an eye on growth trends in these economies for clues on, among others, the trend of the US dollar.

The performance chart obtained from the
Wall Street Journal Online shows how different global markets performed during the past week.


Source: Wall Street Journal Online, October 10, 2008.

Now for a few news items and some words and charts from the investment wise that will hopefully assist in guiding our investment portfolios through these troubled times. Do remember to heed Charles Kirk’s (The Kirk Report) words: “The best we can do is manage our risk, stay opportunistic, keep our emotions in control, and keep our eyes open for signs that the worst is really behind us.”

That’s the way it looks from Cape Town (or rather from next to Lac Léman in Geneva). Au revoir.


Source: Slate

CNBC: Gloom, Boom and Doom economy
Discussing the market sell-off, with Marc Faber, the Gloom, Boom & Doom Report author.


Source: CNBC, October 7, 2008.

John Authers (Financial Times): Grim anniversary for US equities
“US stocks saw their second worst week on record as markets around the world plunged in an indiscriminate sell-off.”


Source: John Authers, Financial Times, October 10, 2008.

Fox Business: Ron Paul – “Rescue Plan is not good”


Source: Fox Business (via YouTube), October 10, 2008.

BBC News: Credit crisis – world in turmoil


“As global markets fall sharply, BBC News looks at the regions of the world most affected to see what governments are doing to alleviate the financial turmoil.

“The US Federal Reserve, the European Central Bank, the Bank of England, and the central banks of Canada, Sweden and Switzerland took the unprecedented step on October 8 of co-ordinating a half-point percent cut in interest rates in an effort to ease the credit crunch.”

Click here for the full article.

Source: BBC News, October 9, 2008.

Bloomberg: G-7 commit to “all necessary steps” to stem global meltdown
“Group of Seven finance chiefs, meeting after stocks plunged and as a global recession looms, vowed to prevent the failure of vital banks while failing to unveil new initiatives for thawing credit markets.

“‘The current situation calls for urgent and exceptional action,’ the finance ministers and central bankers said in a statement after talks in Washington yesterday. They pledged to ‘take all necessary steps to unfreeze credit and money markets’ without detailing how that would be accomplished.

“Signaling they would intervene to avoid a repeat of last month’s collapse of Lehman Brothers, the officials promised to ensure major banks have access to cash and are able to tap public funds for capital. By refraining from specific fresh measures such as embracing a UK plan to guarantee loans between banks, they still run a risk of disappointing investors.”

Source: Simon Kennedy, Bloomberg, October 11, 2008.

MarketWatch: US recapitalization plan for financial firms
“As the financial crisis threatens to spiral out of control, US Treasury Secretary Henry Paulson is taking extraordinary steps through the extensive authority granted to him under emergency rescue legislation.

“With the legislation’s main mechanism – an auction system to purchase bad mortgage-based securities – still weeks away from implementation, Paulson now plans to make big capital injections into large financial institutions and get equity in return.

“In a news conference Friday evening, following the Group of Seven meeting in Washington, Paulson said the plan is to offer a term sheet for needy banks. The government will not get voting rights status for its injection in most cases. Paulson said the government’s efforts were focusing on ‘liquidity’ needs and ‘systemic risk’.

“Paulson said recapitalization was now ‘necessary’ and would let ‘taxpayer dollars go further’, because it is a ‘more efficient’ use of capital than the auction process, which is meant to deal with illiquid assets.

“‘This a plan I am quite confident will work,’ Paulson said.”

Source: Albert Bozzo, CNBC, October 10, 2008.

Asha Bangalore (Northern Trust): Coordinated Move of Central Banks Necessary But Temporary Panacea
“The Federal Reserve Bank, European Central Bank, Bank of England, Bank of Canada, Swiss National Bank, and Sveriges Riksbank (Bank of Sweden) implemented a coordinated cut of their main policy rates this morning. Excluding the Swiss National Bank, the other central banks reduced the benchmark rates 50 bps.

“The People’s Bank of China eased monetary policy 27 bps and the central bank of the United Arab Emirates lowered the repo rate 50 bps, while the Bank of Japan issued a statement of support. Norges Bank (central bank of Norway) sat out today’s round but announced it would bring its next policy meeting forward by two weeks, to October 15, when it will ‘consider rates’ in the face of recent developments.


“The most important message from this historic action is that central banks are standing ready to provide liquidity to prevent a systemic implosion of the global financial infrastructure arising from growing perceptions of counterparty risk. The world’s major central banks are using all tools at their disposal to prevent a replay of the Great Depression.

“Is today’s action the elixir that will fix the wide array of financial and economic problems that have crept across the globe? The honest answer is ‘no’. Are additional coordinated actions likely? Possibly, but the nature of the action will be related to the monetary policy options available to each nation.”


Source: Asha Bangalore, Northern Trust – Daily Global Commentary, October 8, 2008.

Financial Times: Moscow to pump $37 billion into biggest state institutions
“Russia on Tuesday stepped up efforts to tackle the financial crisis with a commitment to pump $37 billion in long-term loans into its biggest state banks, amid signs that the turmoil was spreading to the real economy.

“Even as Dmitry Medvedev, the president, unveiled the plan to offer the five-year loans – mainly through Sberbank, the state-controlled bank – three big Russian companies announced cutbacks in production because of a shortage of finance.

“Investors shrugged off the rescue plan amid mounting fears that the state funding would not find its way to the real economy. A previous state package to boost liquidity by more than $100 billion is being hoarded by the biggest banks instead of being lent out to entities most in need of cash.

“‘The bigger problem is question marks over future growth,’ said Chris Weafer, chief strategist at Uralsib investment bank. ”The lack of financial lubrication is causing the economy to grind to a halt. These funds need to be ramrodded into the system.”

Source: Charles Clover and Catherine Belton, Financial Times, October 8, 2008.

Eoin Treacy (Fullermoney): Concerted efforts required to revive confidence
“Central banks and governments are finally coming to the realisation that this is a global crisis and requires a global solution. The simultaneous rate cuts announced this week were a signal that this is now starting to happen. However, investors have lost faith in the ability of the authorities to deal with this problem. It is going to take further concerted efforts to revive confidence and a commitment to tackling the central themes of this crisis, i.e. rising foreclosures and the drying up of liquidity in the money markets.

“The focus of the current panic is that banks are unwilling to lend to one another because they don’t trust their counterparties or because they need the cash themselves. If government agencies take shares in their respective banking sectors, thus adding capital, the question will remain outstanding as to whether it is enough. If however, governments guarantee loans made between banks, it will almost certainly get the market moving once more. This approach runs the risk that suspect institutions will survive when they would normally have gone bust. However, given the extreme nature of this crisis, this question of moral hazard is going to be put off for another time.

“The best indicators of liquidity remain the TED spread and the OIS spread. Both made new highs today and remain in accelerating uptrends. The VIX also hit another new high today and further indicates that fear is the overriding emotion gripping investors right now. Stock markets are unlikely to find an important low until these spreads begin to contract.”

Source: Eoin Treacy, Fullermoney, October 10, 2008.

Financial Times: UK Treasury unveils bank rescue
“Britain’s largest banks are to be part-nationalised after the government took the momentous decision to pump tens of billions of pounds of public money into the sector to avert a banking collapse.

“The government is to put up to £250 billion into the banking system in an effort to keep banks lending. It will also offer a guarantee to banks issuing medium term debt, which could mean backing a further £250 billion of bank borrowings. But it is likely to demand dividend cuts and the end of big bonuses at the banks in return.

“Under the plan, announced by the Treasury on Wednesday, seven leading banks and the Nationwide Building Society will initially apply for £25 billion in permanent capital to raise their Tier One capital ratios, with a further £25 billion available as a stand-by and for other eligible institutions. The banks have agreed to conclude their recapitalisation by the end of the year.

“The banks involved are Abbey, now part of Santander of Spain, Barclays, HBOS, HSBC, Lloyds TSB, Royal Bank of Scotland and Standard Chartered as well as Nationwide. Other UK banks and building societies are invited to apply for the scheme as well.

“Referring to ‘extraordinary market conditions’, the Treasury said it would provide at least £200 billion under its £200 billion special liquidity scheme ‘until markets stabilise’.

“The government will also, for a fee, guarantee new short and medium term debt issues by the banks to help them refinance wholesale funding obligations as they fall due. It said it expected the take up of this guarantee to be of the order of £250 billion.”

Source: Financial Times, October 7, 2008.

Financial Times: Germany guarantees savings to avert panic
“Germany said on Sunday it would guarantee all private German bank accounts – currently worth €568 billion – in a dramatic move to prevent panic withdrawals as fears over he worldwide financial crisis spread to Europe’s largest economy.

“‘We want to tell people that their savings are safe,’ Angela Merkel, chancellor, said at an unscheduled press conference on Sunday. The scheme would cover existing accounts and others which savers might open.

“German government officials also late on Sunday said the country’s commercial banks had agreed to inject an extra €15 billion of liquidity into Hypo Real Estate, the ailing German mortgage and public sector lender, raising the bail-out agreed last week to €50 billion, the largest since the outbreak of the financial crisis. The original rescue attempt had threatened to collapse after it emerged at the weekend that the full extent of Hypo’s funding gap had not been disclosed.”

Source: Bertrand Benoit and James Wilson, Financial Times, October 6, 2008.

John Authers (Financial Times): Fed to start buying commercial paper


Click here for the full article.

Source: John Authers, Financial Times, October 7, 2008.

CBS News: Wall Street’s shadow market
Steve Kroft looks at some of the arcane Wall Street financial instruments that have magnified the economic crisis.


Click here for the full article.

Source: CBS News, October 5, 2008

Bloomberg: Lehman bondholders get little insight on price from CDS auction
“Lehman Brothers bondholders didn’t get a clear indication of how much they will recover in the firm’s bankruptcy from an auction of insurance on its debt, two analysts said.

“Yesterday’s auction determined that investors who bet on a default of Lehman’s debt by buying derivatives called credit default swaps should get 91.375 cents on their dollar. The price was set by auction administrators Creditex Group Inc. and Markit Group Ltd., with 14 financial institutions bidding. That figure was calculated based on an ‘inside market midpoint’ price of 8.625 cents on the dollar for Lehman’s debt.

“The auction has little to do with what bondholders will recover once Lehman’s bankruptcy, filed September 15, has been fought out in court by creditors, said Matt Dundon, managing director of distressed analysis at Miller Tabak Roberts Securities.

“‘I take very little directionality on the ultimate value of the bonds from the CDS auction,’ Dundon said.

“Kevin Starke, an analyst with CRT Capital Group LLC said there are too many unknowns so far in the Lehman case to accurately predict recoveries.”

Source: Tiffany Kary, Bloomberg, October 11, 2008.

Reuters: NY Fed calls Friday meeting for CDS players
“The Federal Reserve Bank of New York said on Wednesday it has summoned participants in the $55 trillion credit derivatives market to a meeting on Friday, which sources say will focus on determining which clearing house the market will support.

“Calls for regulation and centralized clearing of credit default swap trades have gathered steam in the wake of Lehman Brothers’ failure last month.

“Critics charge that credit default swaps are central to the spreading fears in the markets and pose systemic risks, as the market’s private nature makes it impossible to know the size of a counterparty’s exposures and where they are distributed.”

Source: Reuters, October 8, 2008.

BCA Research: Policy response – timeliness is key
“In a recent Special Report, we highlight that it took a massive policy response in prior real estate/financial sector crises (e.g. Norway, Sweden, Finland, Japan and the US) before markets stabilized. In fact, in each episode conditions did not stabilize until the vast majority of struggling institutions were supported or dissolved. In three instances the government needed to extend a blanket guarantee for the entire banking system. Moreover, the longer policymakers delayed a sizable bailout package, the greater were the economic and banking sector losses.

“Bottom line: History suggests that a rapid and sizable policy response (that deals with the majority of problem loans) is needed when faced with a banking crisis. Hesitation allows a negative economic feedback loop to develop, ultimately leading to greater cleanup costs. This is already evident in the US and Europe, where recessionary pressures are intensifying.”


Source: BCA Research, October 6, 2008.

Bloomberg: Treasury to hire asset management firms to jumpstart rescue
“Treasury Secretary Henry Paulson is hiring as many as 10 asset-management companies to join the lawyers and bankers he is recruiting to kickstart the government’s new $700 billion bank-rescue program.

“The Treasury began implementing the plan within an hour of Congress yesterday giving Paulson the powers he sought to combat the US financial crisis. Paulson is seeking to assemble a team to determine which toxic securities to target, how to value them and how to buy them. BlackRock, Pimco and Legg Mason are seeking to become money managers for the program, people familiar with the matter said.

“‘This is something that, for a typical company, would take no less than five years,’ said Lynn Turner, a former chief accountant at the Securities and Exchange Commission. ‘Anyone who thinks they can do this in two weeks is insane.’

“Ed Forst, the former Goldman Sachs executive Paulson hired to head the transition team, started work last week and is charged with helping establish the new Office of Financial Stability.”

Source: Rebecca Christie and Robert Schmidt, Bloomberg, October 4, 2008.

Financial Times: IMF sees greatest shock since 1930s
“The financial crisis will drive down global economic growth to its lowest since 2002 with a big risk it will drop even further, the International Monetary Fund has warned.

“Though Olivier Blanchard, the fund’s chief economist, said that the chance of another Great Depression was ‘nearly nil’, the IMF said that the US and European economies were mainly already in or close to recession.

“‘The world economy is now entering a major downturn in the face of the most dangerous shock in mature financial markets since the 1930s,’ the IMF said. ‘The situation is exceptionally uncertain and subject to considerable downside risks.’

“The fund said that global growth was likely to slow to 3.9% in 2008 and 3% in 2009, sharply down from 5% last year. Some economists regard 3% or 2.5% global growth as equivalent to a world recession, given the trend rates of growth in the global economy, but Mr Blanchard said that such definitions were unhelpful.

“The IMF chief economist’s optimism that the world would avoid a repeat of the Great Depression of the 1930s was based on an expectation that governments would follow the right policies. European governments were having difficulty in coordinating their response to the crisis and more action was needed to shore up their shaky financial systems, he said.”

Source: Alan Beattie, Financial Times, October 8, 2008.

CNBC: Lazear on the global economy
“Discussing the market slide and the $700 billion bailout package with Edward Lazear, Chairman of the Council of Economic Advisers.”


Source: CNBC, October 7, 2008.

Barry Ritholtz (The Big Picture): Fix the credit problem, not its symptoms
“Why are markets reacting so negatively to a near $1 trillion bailout? The short answer is that the Federal Reserve and the Treasury Department have been focusing on the wrong issues. They have been treating falling asset prices – a houses, stocks, bonds – as well as the lack of confidence between banks, as the actual issue. This is the wrong approach. Falling asset prices and a lack of confidence are a result of the underlying problem. You don’t cure alcoholism by getting rid of a hangover; you cannot resolve confidence issues by merely cutting rates.

“The primary problem is that banks are refusing to extend credit to each other. Why? Because they do not understand the liabilities of their counterparties. Translated into English, that means they don’t know if the other bank whom they are dealing with will still to be standing tomorrow.

“The thing roiling markets today is not the lack of confidence; It is capital, or more accurately, the lack thereof. Thanks to a series of very poor trades – excessively leveraged and absurdly risky to boot – banks are now dramatically undercapitalized.

“As we have seen in just about every historical financial crisis, the shortage of capital is the underlying cause of monetary mayhem. Too much debt, too little equity, makes any financial system cease to function.

“So what would solve it? The first step to accomplish this is triage. Identify the banks that cannot survive, and like Old Yeller, ‘gently’ put them down. Euthanize the bad ones so the good ones can survive. Nationalize ’em, sell their accounts to strong banks, and prevent further liabilities to the FDIC (which insures all accounts up to $250,000).

“Next, recapitalize the banks that can survive by buying preferred stock. That is what Warren Buffett did with General Electric and Goldman Sachs when he made his investments. The Treasury should announce a matching program, where any private investment into a Bank is matched by the government, dollar for dollar, and on the same terms. This fixes not merely a balance sheet issue (like TARP does) but the actual capital structure at the root of the current crisis. And it does so on terms that are good for the taxpayers too.

“As this process eliminates the bad banks and recapitalizes the good banks, normal lending will resume. Defaults and insolvency will no longer paralyze the financial industry. This is how Sweden resolved its financial crisis in the nineties, and how England just started to address their problem this past week.

“The good news is that the US is that there are signs the US is starting to move towards the Swedish / British / Buffett model. The bad news is that it has taken this long to even begin contemplating this.

“When banks know their counterparties are not in danger of going belly up tomorrow, they will begin lending again. Confidence will return once the underlying problem is resolved, and not a minute before.”

Source: Barry Ritholtz, The Big Picture, October 10, 2008.

Richard Russell (Dow Theory Letters): Fiat empire – Why the Fed violates the US Constitution


Source: Richard Russell, Dow Theory Letters, October 6, 2008.

Casey’s Charts: Market mayhem has the Fed off balance
“The Fed has resorted to new extremes in this financial crisis by selling off and lending its good assets, US Treasuries, in exchange for toxic waste. The result: the Federal Reserve’s balance sheet has been completely restructured – including innovative off-balance-sheet hocus-pocus – and looks like it’s headed for exhaustion.

“As the government’s primary tool for stabilizing the US banking system, the Fed is now in dire need of a new source of lending to bail out other troubled banks.”


Source: Casey’s Charts, October 8, 2008.

Bespoke: $700 billion and what it can buy
“Since the financial rescue package was signed into law last week, financial markets across the world have taken the pace of their declines to a higher gear. This has prompted people to ask what the Treasury is waiting for. Yesterday afternoon in a press conference, Secretary Paulson said that it ‘will be several weeks before our first purchase’.

“As shown in the chart below, when the TARP plan was first announced in September, that $700 billion was equal to less than 40% of the S&P 500 Financial sector’s market cap. Today, that $700 billion represents over 55% of the sector’s market cap. At this rate, by the time the Treasury opens up its wallet and starts spending that $700 billion, they might be able to buy the entire sector!”


Source: Bespoke, October 9, 2008.

Bill King (The King Report): Adjusted monetary base and reserves soaring
“The Adjusted Monetary Base has soared from $873 billion on September 10 to $1.017 trillion as of Wednesday. The compound annual rate of growth since August 13 is 114.2%. It’s not Weimar, but it is Argentinean.


“Adjusted Reserves are up 768.1% compounded annually since July 30. This is beyond Argentina.”


Source: Bill King, The King Report, October 10, 2008.

BBC News: US debt clock runs out of digits
“The US government’s debts have ballooned so badly the National Debt Clock in New York has run out of digits to record the spiralling figure. The digital counter marks the national debt level, but when that passed the $10 trillion point last month, the sign could not display the full amount.

“The clock’s owners say two more zeros will be added, allowing the clock to record a quadrillion dollars of debt. Douglas Durst, son of the late Seymour Durst – the clock’s inventor – hopes to replace the Manhattan clock with its lengthier replacement early next year. For the time being, the Times Square counter’s electronic dollar sign has been replaced with the extra digit required.”

Source: BBC News, October 9, 2008.

CNBC: Bernanke on the US economy


Click here for part 2 of the video.

Source: CNBC, October 7, 2008.

Asha Bangalore (Northern Trust): Sluggish labor markets – part of scenery
“Initial jobless claims fell 20,000 to 478,000 during the week ended October 4, 2008. Jobless claims filed following hurricanes Gustav and Ike led to a part of the advancing trend of claims seen in the past few weeks. The decline in the latest week reflects fewer initial claims in the hurricane stricken regions. Nevertheless, the elevated levels of both initial and continuing claims are consistent with levels seen in recessions.”


Source: Asha Bangalore, Northern Trust – Daily Global Commentary, October 9, 2008.

Zillow Survey: US homebuyers worried about interest rates
“I was a little surprised to hear it, but US adults who are in the market for a new home, or who plan to be in the market soon, are most concerned about interest rates.

“Interest rates were most often cited as a financial worry by US adults who plan to buy a home within the next two years, according to a Zillow survey, which was fielded by Harris Interactive. 68% of adults who plan to buy a home in the next two years said interest rates were a concern, while 63% said local property taxes were a worry, and 57% cited purchase price (respondents could choose more than one answer).

“Of those planning to buy a home within the next two years, 94% said they had at least one financial worry about buying a home. For people who plan to buy in three years or more, those worries changed a bit.”


Source: Katie Curnutte, Zillow, October 7, 2008.

Bespoke: We can’t get no … satisfaction
“A Gallup poll released today showed that just 9% of Americans are satisfied with the way things are going in the United States. As shown in the chart below (from gallup.com), this is the lowest reading in history. Mid-1992 and mid-1979 were prior lows for the poll, but this is the first time satisfaction has dropped below 10%. These low levels are usually indicative that change is coming, and politically, that’s just what we got in 1980 (Reagan) and 1992 (Clinton). There’s no reason to believe the outcome will be any different in this election either at this point.”


Source: Bespoke, October 7, 2008.

Bespoke: Cost benefit of lower commodities
“The impact of commodity prices on consumer’s wallets is now at its lowest levels of the year. With today’s decline in oil and most other commodities (besides gold), the average consumer is now saving an average of 62 cents a day compared to the start of 2008. This is a complete reversal of the spike we saw early in the Summer when higher commodities were causing the average American to spend an extra $4.77 per day.”


Source: Bespoke, October 6, 2008.

Financial Times: Distressed debt level rises to five-year high
“The number of companies with debt trading at distressed levels, a leading indicator of default rates, hit a five-year high at the end of the third quarter as the deepening financial crisis put further pressure on prices, according to Moody’s Investors Service.

“The ratings agency’s distressed index, which measures the percentage of junk-rated issuers that have debt trading at more than 999 basis points over safe government bonds, has risen to 29.6% – the highest level since November 2002.

“This is more than a six-fold jump from the same time a year ago, when the index stood at 4.5% and nearly double the level at the end of the second quarter when it stood at 17.7%.

“Moreover, following the defaults of Lehman Brothers and Washington Mutual, the amount of defaulted dollar denominated investment grade debt globally has reached the highest levels since Moody’s records began in 1994.”

Source: David Oakley and Anousha Sakoui, Financial Times, October 9, 2008.

CNN Money: Pensions lose $2 trillion
“Americans’ retirement plans have lost as much as $2 trillion in the past 15 months, Congress’ top budget analyst estimated Tuesday.

“The upheaval that has engulfed the financial industry and sent the stock market plummeting is devastating workers’ savings, forcing people to hold off on major purchases and consider delaying their retirement, said Peter Orszag, the head of the Congressional Budget Office.

“As Congress investigates the causes and effects of the financial meltdown, the House Education and Labor Committee has heard from retirement savings and budget analysts on how the housing, credit and other financial troubles have battered pensions and other retirement funds, which are among the most common forms of savings in the United States.

“More than half the people surveyed in an Associated Press-GfK poll taken Sept. 27-30 said they worry they will have to work longer because the value of their retirement savings has declined.”

Source: CNN Money, October 7, 2008.

Financial Times: BofA to raise $10 billion in capital
“Bank of America, the largest US bank, said on Monday it would raise $10 billion in capital and halve its dividend in an effort to ride out the credit crisis.

“The moves came as the bank reported third quarter earnings of $1.2 billion – a third of the level of a year ago. Ken Lewis, Bank of America chief executive, said it was ‘prudent to raise capital to very substantial levels in this uncertain environment.

“‘These are the most difficult times for financial institutions that I have experienced in my 39 years of banking,’ Mr Lewis said.”

Source: Deborah Brewster and Joanna Chung, Financial Times, October 7, 2008.

Bespoke: Global long term interest rates decline as investors seek shelter
“As the global credit crisis continues to roll, it’s little surprise that investors have been seeking shelter in the relative safety of government bonds. As a result, the yields on these securities are sitting near their lowest levels of the last year. The largest collapse in yields by far has come in Australia (chart lower left) where the yield on its ten-year government bond has declined by nearly 200 basis points in the last four months. When a commodity based economy like Australia sees this big of a collapse in its long-term interest rates, it’s a signal that the last thing on investors’ minds is inflation.”


Source: Bespoke, October 9, 2008.

Neil McLeish (Morgan Stanley): Bullish on credit
“Morgan Stanley has turned bullish on credit markets for the first time since the start of the bear market, according to Neil McLeish, head of European credit strategy.

“‘Valuation is extreme, even on a 100-year view, sentiment reflects outright panic and fundamentals for higher-quality credit are improving due to official intervention,’ he says.

“‘Investors should overweight investment grade credit, with a focus on the largest European banks and non-cyclicals.

“‘We continue to believe that 2007 represented not only the peak of a ‘vanilla’ cycle that started in 2003 but also the peak of a 30-year ‘debt supercycle’ that started in the early 1980s. The unwind of this supercycle should end with lower private sector leverage across the developed world and a smaller and less complex financial sector.

“‘However, we believe that credit markets are now pricing too high a likelihood of sustained debt deflation. Although policymakers have fumbled several times, we believe they will react more aggressively over the next few weeks and remind markets that the partial socialisation of credit risk should cushion the supercycle unwind for higher-quality credit.

“‘Nonetheless, we do not expect the real economy or earnings to trough until 2009. History suggests credit spreads reach their final peak only a couple of months before the final trough in the real economy, some time in the first half of 2009.’”

Source: Neil McLeish, Morgan Stanley (via Financial Times), October 7, 2008.

Bespoke: Comparing this week to the ’87 crash
“Most Dow stocks were down more this week than during the week of the ’87 crash. As shown, GM was down 45%, AA was down 41%, BAC was down 39%, CVX was down 27%, and AXP was down 25%. Only two Dow stocks were down less than 10% this week: JPM (-9%) and GE (-0.32%). Maybe the most important takeaway is the returns these Dow stocks have had since the ’87 crash. Who knows when, but we will go up again.”


Source: Bespoke, October 10, 2008.

Bespoke: World equity markets – $25.9 trillion gone
“Here’s one to take home with you tonight, although it might make it tough to keep your dinner down. Since last October, the value of stocks worldwide has fallen 41%, or $25.9 trillion. As shown in the chart below, Bloomberg’s World Market Cap index has fallen from $62.5 trillion at its peak on October 31st, 2007 to its current level of $36.6 trillion. On an individual country basis, the US has lost by far the most at nearly $7 trillion. China ranks second at -$1.77 trillion, followed by the UK (-$1.72 trillion), Japan (-$1.54 trillion), and Hong Kong (-$1.47 trillion).”


Source: Bespoke, October 8, 2008.

Richard Russell (Dow Theory Letters): Fear and panic spreading
“Fear and panic is starting to spread across Wall Street, Main Street and the world. Most investors have never seen market action like what we’re seeing now. This is real bear market action such as we’ve not seen since 1973-74. I expect this downtrend to end with an all-out panic-type crash. That would clear the air and serve to reduce the huge inventory of stock for sale. When the store of ‘stock for sale’ is emptied out, we will be close to the time when the institutional bargain hunters are ready to re-enter the market. That action will be characterized by a 90% up-day.”

Source: Richard Russell, Dow Theory Letters, October 7, 2008.

Barry Ritholtz (The Big Picture): Contrary Cramer buy call?


“As I have said in the past, I don’t like to harp on any one person. I also don’t want to be a Cramer stalker. But DAMN if that headline doesn’t smell like a giant buy signal.

“The market down 30%, the VIX spiking to 56, and Cramer giving a panicky SELL on TV this morning. We have a 9,500 downside target, and the likelihood of an emergency action makes us want to get long – at least for a trade …

“We are putting a toe in the water here.”

Source: Barry Ritholtz, The Big Picture, October 6, 2008.

The Wall Street Journal: A street longtimer speaks
“Seth Glickenhaus, one of the few still on Wall Street who worked there during the Depression, thinks the stock market may be bottoming – temporarily.

“Mr. Glickenhaus first worked for a Wall Street firm in the summer of 1929, and founded his own money-management firm in 1938. He thinks battered stocks are due to rebound, but he worries they could fall again later.

“He is keeping 20% of his clients’ money in cash, the highest level he remembers having.

“Now 94 years old, Mr. Glickenhaus still serves as chief investment officer of Glickenhaus & Co., which manages $1.8 billion for wealthy individuals and a few pension funds.

“‘You have one conspicuous difference between this and the 1929 break,’ he said, using a common Wall Street euphemism to avoid saying ‘crash’.

“‘In the ’29 break you had [President] Hoover and [Treasury Secretary] Andrew Mellon contracting all the way. They believed that it wasn’t the role of the government to get involved. This time, the government is moving heaven and earth to reverse the cycle,’ he said.

“Although Mr. Glickenhaus thinks stocks have fallen so far that a short-term rebound is likely, the economy is so weak and the financial system so damaged that a ‘recession or even possible depression will last for at least five years,’ he warned.”

Source: E.S. Browning, The Wall Street Journal, October 6, 2008.

CNN Money: S&P: most dividend cuts in 50 years
“Dividend cuts in the third quarter took $22.5 billion out of the pockets of investors during what one Standard & Poor’s analyst called the worst September for dividends in more than 50 years.

“Of the 7,000 or so publicly traded companies that report dividend information to S&P, 138 decreased their dividend during the third quarter of 2008 compared to 21 during the third quarter of 2007.

“That marks the worst September for dividends since S&P started keeping such records in 1956, said senior index analyst Howard Silverblatt.”

Source: CNN Money, October 3, 2008.

Bespoke: Withering stocks
“Below we highlight our trading range chart of the S&P 500 as well as its 10-day advance/decline line. People use the “crash” word very conservatively, but it’s safe to say that the 25% selloff over the last nine trading days is indeed a stock market crash.”


Source: Bespoke, October 9, 2008.

Eoin Treacy: Stocks very extended relative to 200-day moving averages
“Moving averages are a trend smoothing device that lag by definition. However, since a long-term moving average such as the 200-day is a mean level for any market, we are most interested when an instrument diverges from its mean for any significant length of time. These indicators provide useful barometers of how oversold both the Dow Jones and S&P500 have become.

“The S&P has never been so overextended relative to its 200-day moving average. Previous occasions when it got close in 1973, 1987 and 2002, all marked significant lows for the market. We have no evidence yet, that the S&P has found support but the more overextended it becomes, the sharper the covering rally is likely to be when the tide of sentiment begins to turn.

“The Dow Jones has only been more overextended relative to its moving average in 1938 and during the collapse of markets from 1929 to 1932. However, on every occasion, once the indicator bottoms, it has been a reliable signal that the market is close to an important low.”

Source: Eoin Treacy, Fullermoney, October 10, 2008.

Bloomberg: Mobius looking at Brazil, China, Russia after slump
“Mark Mobius said he sees bargains in Russia, China, Brazil, India, Turkey and South Africa and is ready to start buying after a record plunge in emerging-market stocks.

“‘We now have too many things to look at so we are picking the ones that are most down,’ Mobius, who oversees about $30 billion in emerging-market equities at Templeton Asset Management, said in a Bloomberg television interview from Rome. ‘If you look at valuations, you can see these stocks are at a point where maximum pessimism is playing a big role. I think we’ll be very happy a year or two from now.’

“Russia, China and Brazil have led this year’s 49% plunge in the MSCI Emerging Markets Index, on speculation that the global credit crisis will spur a slowdown in demand for the commodities that drive developing nations’ economies. The biggest annual slump on record dating back to 1987 left the gauge for developing markets valued at 8.7 times their average earnings, the cheapest since October 1998, according to data compiled by Bloomberg.”

Source: Daniela Silberstein and John Dawson, Bloomberg, October 9, 2008.

Fin24: JP Morgan – Buy South African gold shares
“JP Morgan said investors should buy South African gold stocks, especially companies such as the world’s No. 5 producer, Harmony Gold, that are heavily exposed to the sharply rising rand gold price.

“‘We believe there to be a short-term trading opportunity in the South Africa gold sector that has the potential at worst to offer outperformance of the Johannesburg Stock Exchange (JSE),’ JP Morgan analysts Stephen Shepherd and Allan Cooke said in a research note.

“Harmony and smaller producer DRDGold are the stocks most exposed to the rand gold price because all of their current production is sourced from South Africa, the analysts said.

“‘We believe there are substantial short-term gains in prospect through exposure to Harmony and, for investors with a higher risk appetite, DRDGold,’ they said.

Source: Fin24, October 9, 2008.

Bespoke: Europe just got 16% cheaper
“The US Dollar index staged another sharp rally today and is now up 16.35% from its lows back in March. The euro is down more than 16% from its highs earlier this year. For those that have plans to go to Europe anytime soon, at least it’s 16% cheaper for now. Unfortunately for foreigners coming here, it’s the reverse.”


Source: Bespoke, October 10, 2008.

Bloomberg: Yen unbeatable as credit seizure kills carry trades
“The same credit market collapse that drove Lehman Brothers into bankruptcy and sent bank borrowing costs in Europe to record highs is making the yen unbeatable.

“Japan’s currency was the best-performer in September and the only currency to appreciate against the dollar. Deutsche Bank AG, the biggest trader of foreign exchange, says the yen will rise 5% in coming months. New York-based Morgan Stanley is telling clients to buy the currency versus the euro and pound.

“After seven years of providing the cheapest source of funds for investors buying higher-yielding New Zealand dollars, Australian dollars and Brazil reais, the yen is appreciating as $584 billion of subprime mortgage-related losses force banks to restrict credit. It strengthened 4.4% on a trade-weighted basis in September, according to the Bank of Japan’s effective exchange rate, the most since August 2007, when the seizure in capital markets began.

“‘We are in a multi-year trend reversal,’ said Paresh Upadhyaya, a senior vice president at Putnam Investment in Boston. ‘We are going to see a global central bank easing cycle. The yen is the place to be in this environment of economic slowdown and heightened volatility.’”

Source: Ye Xie, Bloomberg, October 6, 2008.

Gulf News: Gulf central banks look to gold as uncertainty rises
“Central banks in the Gulf and elsewhere in the world will likely turn to gold as the global banking crisis boosts the metal’s appeal as a buffer against dire economic conditions, industry sources said on Tuesday.

“With bank shares across the world plunging and the US dollar still unstable, central banks have no better option but to diversify their reserves into gold, considered the only alternative to the US dollar and euro.

“Analysts said demand from banks will likely affect gold prices, and retail consumers will resort to investing in bullion as well, particularly in exchange traded funds (ETFs), coins and small bars.

“‘Gold will definitely see a revival as a reserve asset for central banks. The main purpose for the central banks when investing is not to generate the highest possible returns, but to provide a safe and sound financial basis for the currency and the economy built on it,’ Rolf Schneebeli, former head of the World Gold Council, told Gulf News.

“‘The only alternative to the US dollar is the euro. The pound sterling is probably not strong enough anymore. The yen and the Swiss franc, both strong currencies, do not have enough depth … Hence, gold is really the only alternative to the dollar and euro,’ Schneebeli added.”

Source: Cleofe Maceda, Gulf News, October 7, 2008.

Financial Times: Central banks all but stop lending bullion
“Central banks have all but stopped lending gold to commercial and investment banks and other participants in the precious metals market, in a move that on Tuesday sent the cost of borrowing bullion for one-month to more than twenty times its usual level.
“The one-month gold lease rate rocketed to 2.649%, its highest level since May 2001 and significantly above its five-year average of 0.12%, according to data from the London Bullion Market Association.

“Gold lease rates for two, three and six months and for a year also jumped to levels not seen in the last seven years.

“Traders said the jump reflects the fact that central banks – mostly European – have almost completely stopped lending gold in the last few days and are not rolling forward old leases after maturity. This is because of fears that some borrowers might not repay their bullion loans if they are engulfed by the financial crisis.”

Source: Javier Blas, Financial Times, October 7, 2008.

Peter Spina (GoldSeek): Prospects for gold look excellent
“Gold’s ultimate status as a money and a safe haven asset is showing its luster again today as the financial crisis escalates. Fiat money is flowing into gold as uncertainty and fear rocket to new heights. Volatility remains high across all markets and precious metals are not immune. This signals extreme fear across the globe and general sentiment is now quite harmonious in that things are set to get worse.

“I am expecting more aggressive monetary growth in the coming weeks and months. This will further debase the value and integrity of fiat currencies and capital looking to preserve its purchasing power will find safety in gold and silver. The relative value of currencies are immaterial at this point with only gold as the true barometer of the illness within the global fiat currency system.

“Physical demand has been unprecedented in recent weeks. Large premiums over spot prices with shortages of all kinds of bullion products being reported. Example, 100 ounce COMEX silver bars are being sold at $3+ above spot price where months ago the premiums was around $1/2 per ounce. US Silver Eagles are demanding $4-$6+ premiums over spot, months ago they would have commanded a $2 or so premium.

“Gold Eagles are going for $70 or more over the paper spot market price. This is the true market in the end and I do not believe in the full integrity of the gold/silver’s paper markets’ pricing mechanism at this time. I fully expect large price swings (extreme volatility), but the overall trend in the coming months will be to the upside.

“Gold and silver stocks continue to get battered with valuations becoming incredibly attractive. They are down with the general markets but in the near future I fully expect a vicious reversal in the precious metals stock sector. Gold and silver investments will attract the ever growing flight of capital out of general markets and investments. Short-term downside risks still do remain despite some incredible mid to long term prospects for mining stocks.”

Source: Peter Spina, GoldSeek, October 6, 2008.

Financial Times: Arthur Kroeber on China and the global financial crisis
“Arthur Kroeber, Dragonomics Research managing director and editor of China Economic Quarterly, discusses the effect the global financial crisis will have on China’s willingness to liberalise its markets and on its exports. He also gives his outlook for GDP for the next few years.”


Source: Arthur Kroeber, Financial Times, October 5, 2008.


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1 comment to Words from the (investment) wise for the week that was (October 6 – 12, 2008)

  • There is much confusion as to what some call the Bear Market bottom. Since the market is a fractal, meaning the parts are continued in the whole and simply become larger as the degree of trend expands, we are much closer to the top than the bottom. Although the Bear Market kicked off with the bursting of the “dotcom” bubble, we must now create yet another bubble before it can Crash, likely in the 4thQ 2009. Until then, this will be one of the most profitable run-away markets for traders, as volatility will remain high. Long-term (bull market) investors can expect good gains, but also many round trips…


    we are in a large scale transition to the downside, however we will likely reach a new high in the Dow. While Financials, Homebuilders, Real Estate Investment trusts wil get a good bounce to complete wave 2, before the collapse in wave 3. Before we can Crash we must have a market orgy, so that (almost) every last holdout gets fully invested.

    Meanwhile the upside started on Friday and we have just a small correction to go from Monday’s high, before the next big move up. To see our latest analysis with Elliott Candle Charts.


    Eduardo Mirahyes

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