Weekly Recap and Looking Forward
Oct 26, 2008
Posted by Jody Eisenman | Filed under Uncategorized
The stock market had another rocky week, losing almost 500. After Monday’s gain of over 400 points, the rest of the week was pretty awful. NASDAQ fell over 9% even including Monday. We are on pace to have one of the worst 2 month periods (Sept-Oct) in Wall Street history. Despite this, I still hear brokers, financial advisors and some portfolio managers on TV urging investors to “stay the course”. There are two obvious problems with this.
Firstly, the economy is in shambles. There is a chance that the entire auto industry could go under without government assistance, and this is on top of the $25BB already pledged. Unemployment is rising. Consumer spending is dropping. Secondly, anyone who rode this entire wave out is already down a huge amount, and is unlikely to recover it for some time (and I’m talking years). Some areas have completely collapsed. For example, the gaming area, thought to be somewhat recession proof, has seen their worst declines in history. MGM Mirage has gone from 95 to 11. Las Vegas Sands, a previous high flyer, peaked at 148 last December. It now trades at close to 6. General Electric has lost over half it’s value. Potash, a commodity company whose stock seemed to go up almost every day, peaked at 240 in June, and is now at 68. The airlines collapsed when oil skyrocketed, but have not really recovered much since. Of course, the financial industry has been one of the worst areas in the market. Morgan Stanley has gone from 67 to 16. Bear and Lehman are done. The largest insurance company in the world, AIG, has gone from over 60 to under 2. Merrill Lynch, despite it’s plans to be acquired by Bank of America, has lost over 75% of it’s value. Even the supposed strong banks are down. JP Morgan Chase is trading 15 points off it’s high, and only 6 off it’s low. Even mighty Goldman Sachs, despite having Warren Buffet infuse capital, is trading 150 points off it’s high. Although most of these companies are getting crushed due to the credit situation, others have dropped due to eroding commodity prices. If you are unfortunate enough to own any stocks off 40-50% or more, do you really think it’s likely you’re going to recover your money soon? Not likely. What this market has shown us, beyond a shadow of a doubt, that one must protect their portfolio.
How does one do that? Well, the simplest way is via stop losses. Suppose you think XYZ company is a great buy at 20. Well, set for yourself a predetermined loss, and stick to it. So, one thing you might do is to put a stop loss with your broker at 17. This will essentially limit your loss to 3 points, or 15%. You can have these put in automatically, so that even if you aren’t watching your positions or go on vacation, it doesn’t matter. Another way to protect yourself is through put options. Of course, options are a sophisticated strategy that may not be appropriate for you. However, I think this is something you should at least discuss with your financial advisor, such that you can make an informed decision. Feel free to contact me if you want more information.
Now, as I have discussed previously, you are seeing a massive de-leveraging of the financial markets here. Many hedge and mutual funds are facing redemptions, and are forced to sell in order to meet them. When you combine this with a severe credit crunch and declining earnings, it’s not a pretty picture. What most financial advisors have not come to grips with is that the situation today bears no resemblance to anything we have faced in the 75 years (maybe ever). Thus, the advice to “sit tight” cannot possibly be based on reality. Chances are, your broker is paralyzed with fear.
The really frightening thought is that the Fed has tried massively to arrest this slide, from cutting interest rates (which will probably happen again) to guaranteeing corporate commercial paper, to the $700BB TARP. Here is a link to an interesting article on this from AP:
http://news.yahoo.com:80/s/ap/20081025/ap_on_bi_ge/meltdown_evolving_bailout_2
There is not really that much more they have left that they can do. Meanwhile, the average American is starting to get squeezed through a combination of rising unemployment, a collapse of their pension plan, collapsing housing prices and a severe credit crunch. Last week, GE Capital announced that they plan on availing themselves of the US commercial paper guarantee. That’s lovely, but what about the tens of thousands of smaller companies that can’t borrow? And what does it say about the credit markets that a company the size of GE Capital (whose parent is the $175BB General Electric) can only borrow money by getting these guarantees?
The market is technically oversold here, and it wouldn’t surprise me if we get another rally this week, although my guess is that it will be relatively short in duration. The VIX (Chicago Board of Options Volatility Index) closed over 79, which is an all time high. Generally, readings over 30 show a technically oversold market. In fact, the VIX never even traded above the low 40’s until about a month ago. Despite this, the stock market continues to decline. As I stated Friday, we are in panic mode, and I think it would be foolish to try and guess the bottom. Of course, there are always individual opportunities available, as long as you are nimble enough to trade. Above all, stay on top of your portfolio. If you desire research on any individual situation, please feel free to contact me.
