Weekly Recap - October 19, 2008

In one of my favorite classes at the GSB, “Power and Influence in Organizations”, Tanya Menon divulged the secret of happiness right from the start of the first class. I felt like I got my money worth. The secret of happiness is “low expectations”, therefore limiting the downside.
Now we have the same low expectations for the markets as well. To us, the quants at the GSB, that means lower prices today. The market is on sale, and instead of running to buy some more, the investors are running for the exits. The most quoted person this week was Warren Buffett, who said again and again “Be fearful when others are greedy and greedy when others are fearful.” The expectations bar is set pretty low because now its benchmark is the Great Depression!
In my previous email, I made the case for the next stage of investors’ panic – capitulation. And we see some of that now in the market. IBD reports that shareholders yanked a net $104.4 billion from stock and bond mutual funds in September, because they received their statements and were staring at declines of 20-40% in their account balances. In an bout of overreacting, they project the same losses in the future, and they don’t like what they see. Panic sets it and they pulled the plug. This starts to look like capitulation. That also means we’re very close to a bottom, if we did not already reach it.
Some data for the week
DJIA – closed at 8852, up 401 pts, or 4.8%
Nasdaq – closed at 1711, up 62 pts, or 3.8%
S&P 500 – closed at 941, up 41 pts, or 4.6%
Credit crisis continues to choke the economy. Retail sales fell 1.2% in September, factory activity shrank and consumer confidence suffered it sharpest drop in more than five decades. There were some bright spots when Google(Ticker: GOOG), Johnson & Johnson (Ticker: JNJ) and Coca-Cola (KO) reported strong earnings showing some economic resilience.
While we see evidence that credit woes are having a more serious impact on the economy, there are also encouraging signs. The London interbank offered rate (LIBOR) on three-month dollar loans between banks fell eight basis points to 4.42% on Friday, and 40 basis points for the week. Some pundits say that it will fell sharply this week, as banks resume lending. There is a report cited that JP Morgan loaned $15 billion into the interbank market.
New home construction sank 6.3% last month to an annual rate of 817,000 units, the lowest since the 1991 recession. Applications for building permits, a gauge of future building, fell 8.3% to a rate of 786,000, matching a 17 ½ year low. This is not all bad news, because it means that the building inventory will start to come down.
Other news:
Consumer Sentiment Plunges – The Reuters / Univ. of Michigan confidence gauge dived to 57.5 in mid-Oct from 70.3 in Sept. That’s just above June’s long-time low, and the sharpest 1-month decline since the survey began in 1952.
Credit Card Charge-Offs Soar – Moody’s said balances written off as not being repaid shot up to 6.82% in August, up 48% from an year earlier. The July charge-off rate was 6.36%. Moody’s expects charge-offs to continue to rise through ’09, surpassion peaks in past recessions.
Inflation Pressures Fading – September consumer prices were flat, while core costs, ex food and energy, rose 0.1%. Core inflation held at an elevated 2.5%, but producer price data showed a rapid retreat far up the pipeline.