Weekly Recap - October 26, 2008

Halloween came early this year. On Friday, we’ve almost closed down the shops, i.e. NYSE, to go home early. Before the opening, the markets have promised us a good beating, pointing to a lower low. The Dow reached 500 pts drop intraday but then recovered and dropped “only” 312 pts at the close. Much of the blame this week was on the weakening economy, hedge fund selling for redemption, and jitters about the global depression… sorry, recession.

The Dow ended the week off 5.35% to 8378.95, which is 40.85% down from its October 2007 record of $14,164. The S&P500 fell 6.78% during the week to 876.77, its lowest close since April 2003. And the Nasdaq fell 9.3% on the week to 1552.03, down 45.7% from its Oct. 31 multiyear high of 2859.12.

The dollar may provide a clue when the bottom may appear. The majority of the positions people are being forced to unwind have been financed with dollars. The hedge funds redemptions contributed to the 6.5% increase in the dollar against the euro this week alone, so a slowing in the dollar may give us a clue. Many funds have a November 15 notification deadline for year-end redemption requests, so money may be flowing back into the markets after that date. We do expect a short term rebound. The S&P 500 is 25% below its 50-day moving average, something that’s only happened five times since 1928. Each time the S&P 500 has typically rallied at least 14%, according to Bespoke Group. Many companies are now priced like never before, especially in the technology sector. In the contract-manufacturing industry, stocks have shrunk to nearly unheard of price/earnings multiples. Sanmina SCI (SANM) now trades for 4.3 times forward earnings, Jabil (JBL) trades for 6.5 times, Flextronics (FLEX) trades for just 3.4 times next year’s estimates. The stocks are priced as if the entire industry is bankrupt.

Other news:
- Around the world – Russia’s exchanges were closed early on Friday and won’t reopen until Tuesday. The Russian market is down 76% for the year. Other emerging markets have also suffered big losses: Brazil is off 50% and China is down 56%.
- Currency – the Japanese yen hit a 13-yr high of 90.35 against the U.S. dollar, as the carry trade continued to unwind. The Russian ruble fell to a two-yr low despite Moscow’s efforts to support it with billions; the Mexican peso fell to a record low against the dollar. Brazil, which has seen the real lose one-third of its value in August, flooded the market with dollars. South Korea’s won plunged to a 10-yr low against the dollar. Gold futures rose 2.2% Friday but fell 7.3% on the week to $730.30 an ounce.
- Goldman Sachs will cut 10% of its work force
- Chrysler is slashing 25% of its white-collar jobs