The Devastating Week That Was

 

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Goodness Gracious Late Cretaceous! Equity markets were pummeled back to the Stone Age this week.  Well, I am glad that I caveated my positive outlook for these last five days with a Black Swan comment, because that is exactly what we got. In one of the worst weeks in market history, equity commentators could only draw analogies to 1929. Once again, save some surprising US Dollar strength (UUP +0.3%), the S&P 500 (SPY) recorded a truly staggering 19.8% decline over a period of record ranges and little respite as credit markets refused to thaw on a global basis. (FT - Icelandic Banks; BW - Global Cuts)

In fact, the VIX options volatility index nearly reached 77 on Friday, now some +53% above its 15-day moving average. That is a whopping stretch, my friends (please be careful with recently owned options). However, for the first time in a while, the NASDAQ 100 showed relative strength, down a mere -13.4% on positive IBM earnings. Sectorwise, Transports and Real Estate also managed to show relative outperformance (IYT -9.0%; IYR -11.4%), while the Energy group (XLE) dropped an incredible -25.2% on the slowdown trade.

Trading in the upcoming week -- Week 42 of 2008 -- will be influenced by Inflation, Retail Sales, Beige Book and Jobs readings on Wednesday and Thursday, and Housing data on Friday, not to mention Options Expiration that same day. Market watchers will also closely monitor developing rumors of the demise of Goldman Sachs and/or Morgan Stanley, progress in the credit arena, and any related global coordination efforts announced at this weekend's G7 meetings. These last two weeks have represented new statistical territory in many respects (take a gander at those RSIs below), and while it may be asking a lot, be prepared for anything.

•  U.S. Earnings Calendar

•  U.S. Economic Calendar

Comments

[whidbey:]

The next week will be most influenced by what happened in the prior week. The bond market set the tone for all markets, but the liquidations that took place to honor CDS obligations is the harbinger of things to come, and fear. The big news is that many of the CDS counterparties are trying to get liquid and in the process destroying the equity and bond markets. Now TARP is a bank investment program which means (one guesses) that each bank is now a client of Treasury and hence bankrupt immune.

2008 Oct 11 11:28 AM

[Moral Hazar...:]

Excellent insight and commentary, Whidbey. Some of the best I’ve ever seen.

But it’s much more fun just to do a populist tribal dance around the camp fire with our spirit masks and spears and blame all this on Jim Cramer.

2008 Oct 11 12:28 PM

[sickofthehype:]

Whidbey - right on. Your quote should be a SA article in itself.

2008 Oct 11 12:38 PM

[jgpietsch:]

Certainly agree in all respects.

2008 Oct 11 09:43 PM

[jgpietsch:]

Also, what happens with all that cash... capital reserve, or put back to work...?

2008 Oct 11 10:34 PM

[User 265729:]

Think this week was bad, just watched the press conference by the IMF on Bloomberg... Sooooo calming.... They don't seem to be worried about anything.... I guess as long as you have your Cognac and Perrier the world is your oyster.

Can't wait to see next week! You could see one or more -1,000 point hits.

IMF, G-7, G-20 = more of the same BS

American way of life... RIP

2008 Oct 11 10:53 PM

[Market Student:]

Will be interesting to hear the developments out of the government next week. There is a talk of direct investments (in the form of preferred shares most likely) from the Treasury into banks. Paulson has mentioned that it isn’t a liquidity issue as previously thought, but rather a solvency issue. The 700B would certainly go much further in supporting banks if offered as a capital injection (because of fractional reserve banking) rather than simply taking bad assets of balance sheets. How soon (of if) this will occur and its effect on short-term borrowing remains to be seen.

However, at the same time, it seems that the economic damage from this contraction of credit is serious. Talking with some companies this week, many have cut all capex and are assessing plans to cut SG&A and fixed costs. I have a feeling that consumer spending will play a large role as well, due to restrictions on consumer credit. When banks contracted credit in ’89, consumer spending fell 9% on an annual rate. My view is that we have some more downside before we hit rock-bottom valuation, especially with deflationary concerns.

I’m looking back to performance of several industrials to see how business conditions changed during the ’90 recession to have a base-case idea of what ’09 earnings could look like.

2008 Oct 11 11:00 PM

[User 265729:]

Market Student:

It seems to me that the leaders of the G-7, G-20 and IMF have been living in their own bubbles too long. They don't appear to have a sense of urgency... When things melt down reality will come-a-knocking at all of their doors...

2008 Oct 11 11:06 PM

[The World's...:]

I have two scenarios:

1. We bounce and retest in the future the Fridays lows and it holds support.

2. We bounce then blast through the Friday's lows and we end up at the 2002-2003 market bottom levels.

The issue that I have is that the weekly volume seems sooo heavy compared to the volume of the 2002 and 2003 bottoms and I really don't like that. I am optimistic though. With the VIX at 75 there should be enough fear and capitulation so that the market will bounce from here. I will wait until the market lets me know it is ok to go long. I am not in the business to pick a bottom.

I also like to see how earnings go next week and see how the market reacts to them. I hope we do not see another Bank of America fiasco like earnings. That would not bode well with the markets.

2008 Oct 12 12:22 AM

[Dan Walker:]

Here is how significantly VIX impacted options; I had bought some GE calls at the onset of this decline and sold them at a profit with GE down in price due solely to the spike in VIX.

2008 Oct 12 03:16 AM

[gabe borens...:]

Clearly inflation is not an issue but deflation is .The steep decline in the home prices and more recent commodity implosion is indicative of deflationary trend ahead.
The implosion in the crude oil an other commodity prices is a positive catalyst as it will increase the real disposable income.
Given the record weekly decline in the Dow,reatil sales,beige book and the job data should not have significant impact on the market as the Armageddon assumptions are clearly embedded in the market.
At this point in time we need a rapid implementation of the 700billion dollars stability pacakage instead of wasting time on trying to create a perfect administrative infrastructure to implement aid allocation.
That 700 billion dollars is worth 5 trillion dollars of stimulus(using the multiplier of 7) - 40% of the U.S GDP.
The Treasury should consider investing directly in the key financial institutions
via preferred stock? but certainly without the "punishment" to the common stock share holders.
The issues are being addressed, but untill they are fully implemented,the expired "short" rule should be reinstated and applied to all of the stocks.
I would not worry about the slower response to the issues by the other economic zones .The foot dragging by the others,will increase the dollar demand( flight to quality) which then will be invested in the dollar denominated assets.
At this time the issues have been identified and are are being addressed.
It is the fear that is dangerous negative catalyst as it overwhelms the logic.
The time for concern was at least a year ago ,when today's issues have already emerged but were ignored.
I have issued a warning twice in the media but daily to my clients(major global institutions).
The first warning I have stated in an interview with Mark Gilbert (Bloomberg London).
The second warning I have issued on September 18,2007 (Bloomberg TV -Brian Sullivan)during the FED time.
Now that the issues have been identified and are being addressed,I am convinced that the markets offer an investment opporunity function of some minor incremenral time.
The volatilty will continue while longer as rationale neutralizes the fear.
While pessimists continue to express major negative scenarios,I believe that by the time Christmas arrives,economy will be back on the track(subject of the implemention of the approved measures).
To paraphrase one leader ,the only thing we should fear ,is fear itself and reporters who disseminate economic nonsense because they perceive themselves as economists .

2008 Oct 12 09:22 AM

[John Pseudonym:]

72% of our economy is "borrow and spend".

72% of economy has come to an end...

DOW come back to new highs...

Maybe when our children are our age...maybe...

2008 Oct 12 10:41 AM

[Fliujniligui:]

This is the "tout le monde capote " phenomenon. I am rushing in, not focusing on short term performance but only on short term survival. Short term performance is to be forgot and sacrificed in order to achieve long term results.

2008 Oct 12 12:50 PM

[User 265729:]

During the IMF conference that I watched yesterday a member of the media asked a question about the derivatives market that is in the HUNDREDS OF TRILLIONS OF $$$$ WORLDWIDE. Incredible...

They are using a pea shooter to kill King Kong. It ain't gonna work. They can make all the statements they want, but we are all so screwed.

The derivatives are only one shoe of the mess we are in. I know several small companies that are in the customer service business that have about $1/2 billion in debt and perhaps, when push comes to shove, $1 million in tangible assets. Everything else is pure pie in the sky... These companies don't even own their own buildings... They are all leased... Everything...

There are millions, upon millions, of these type of companies in the U.S.A. and elsewhere that are heavily leveraged without any tangible assets. Who would loan $1/2 billion to a company with few assets? Same morons that gave $750,000.00 home loans without employment verifications.

The cards are falling fast and the truth is all the governments in the world, even acting collectively, can't stop the conclusion of this game.

2008 Oct 12 02:47 PM