A Positive Outlook on the Anniversary of Black Monday

As if substantive data was not enough, now superstition threatens the stock market. October 19, you see, marks the 21st anniversary of Black Monday, the infamous day the Dow Jones Index collapsed 22.6%.

I know what you are thinking. Two weeks ago, the Dow fell 18.2% over five days. So, your worst fears are confirmed then; we are currently traversing through black days indeed. The index is down 22.5% over the last five weeks, a period characterized by incessant decline. However, believe it or not, the Dow actually increased 4.7% last week.

Here’s more good news! There were no catastrophic corporate debacles of the “too big to fail” sort. No matter though... the federal government still found more use for funds we don’t have. The feds announced a plan to take an approximate $250 billion of the $700 billion emergency funds just allocated to them, to take a preferred equity interest in nine of the nation’s largest banks. “The Nine” are now implicitly “too big to fail,” just like Fannie Mae (FNM) and Freddie Mac (FRE) were, but shareholders are not in any way protected from future loss of interest, nor current dilution of it.

The government urged these banks to spread the money around the banking system, and lend to businesses and individuals as well. It’s widely expected that there’ll be a second round of government giveaway to the next tier of bumbling banks sometime soon. The market opened higher on the announcement, but closed lower on the day. This illustrates the lack of confidence investors have in their government and the financial system.

The government’s Depression Era-like action was distressing to many, especially since the Treasury deployed the Emergency Rescue funds differently than most of us were told they would. Recall, Paulson was supposed to use the money to buy illiquid assets from banks. Not only that, the action was something more characteristic of a socialist government than of a capitalistic one.

With recession now expected, but catastrophe seemingly averted, stock movement looks dependent now on economic reports and corporate earnings news. Thank the Lord, the week ahead holds little in store on the economic front. However, earnings season will be in full force, and considering analysts’ estimates still look bloated, this could drive disappointment. Expect guidance and forecast revisions, not to mention analysts’ ratings downgrades.

Besides correctly measuring the impact of recession on the companies whose shares you hold, the most important question to ask regarding your individual stocks now is how much of soft expectations have already been priced into them, and how well will my management team handle the situation.

On the economic front, Leading Indicators for the month of September is curiously seen increasing 0.3%, after falling 0.5% in August. Thursday’s Jobless Claims data offers notable risk to stocks. In recent weeks, the number of new benefits filers has eased off the 500K fear threshold. If claims were to jump above 500K now, it could prove powerful enough to drive further stock cascade.

This week’s earnings reports highlight: Monday – American Express (NYSE: AXP), Texas Instruments (NYSE: TXN); Tuesday – Apple (Nasdaq: AAPL), National City (NYSE: NCC); Wednesday – Amazon.com (Nasdaq: AMZN), Boeing (NYSE: BA); Thursday – Aflac (NYSE: AFL), Microsoft (Nasdaq: MSFT); Friday – Fortune Brands (NYSE: FO) and T. Rowe Price (Nasdaq: TROW).

Comments

[PainfullyAware:]

Things are on hold in the land of collapse until after the election.

Enjoy the breather; Things are going to get crazy.

2008 Oct 21 04:00 PM