Weekly Recap - November 30, 2008

Back to normality? Some would say so, especially after the convincing rally for the past five days… ok, four and a half. Stocks jumped 18% in the four days leading to Thanksgiving, and they may establish a bottom, reinforcing hopes that the worst is over. The Dow Jones Industrial Average Index and the S&P500 have had their best five-day rally since the Great Depression. It could be that the government attempts to prop up an ailing financial system work? OK, keep your fingers crossed.
Dow Jones Industrials index closed at 8829.04, up 9.73% for the (short) week. S&P 500 climbed up to 896.24, for a weekly gain of 12.03% and Nasdaq closed at 1535.57, up 10.92%.
Next week may bring some down days. The history says the best five-days rallies were often followed by retreats averaging 2.4% over the next five days, according to Bespoke Investment Group.
There are reasons to be optimistic about the future. First, this is the human nature, and second, there are signs we can count on. China’s stock market, down 72% since 2007 peak, has recently recouped 11%. In the U.S., energy stocks have begun to outperform the S&P 500 since late-October. The markets may take a blow if there is another credit crisis blossoming somewhere (CMBS, maybe?) but we’ve gotten quite pessimistic lately. The public sentiment is really dismal. Hear this: the word of the year – “bailout” – according to Merriam-Webster, due to the highest lookups on its online dictionary. The VIX has made a lower low on November 20 at 81, which is less than its previous low, at 90. This means the panic is exhausting.

*Black Friday*
It’s called Black Friday because this is supposed to be the day when retailers are getting back to making a profit for the year. Well, early data shows that the holiday shopping season got off to a great start, much better than last year. Sales during the day after Thanksgiving rose 3% to $10.6 billion (preliminary data) compared to $10.3 billion last year. The data comes from 50,000 outlets tracked by ShopperTrak RCT Corp, a Chicago based firm. Now, that’s good, but a reason may be the deep discounts the retailers throw at consumers, to lure them into the stores. I think the holiday will still be one of the weakest ever, because the contraction in spending is still there, and the season is shorter – 27 days till Christmas compared to 32 last year.

*Thinking of buying Citi? Flip a coin. *
If you enviously watched Citi going from $3.11 to $8.29 in just one week, kicking yourself because you haven’t bought it then, you are not alone. But it will still be wiser to wait until the smoke clears until buying some shares. Yes, the shares are cheaper than dirt at $8.29 a piece, if you think that Citi will earn more than $2 per share later. The company has yet to prove itself that it can survive, let alone thrive, after receiving the lifeline from the government last week. Citi had to write down a staggering $44 billion since the third quarter of 2007, mostly because of the bad investment in the mortgage debt. As part of the rescue plan, the Treasury will invest $20 billion in Citi preferred stock via the Troubled Asset Relief Program, or TARP.
If you’re still keen to invest in Citi, despite its formidable challenges, you may be better served buying calls options. As of November 26, the premium for a January 2010 call with a strike price of $10 was around $2.65.