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Jordan Kahn, CFA of In The Money Oct 12, 2008 Email this article to a Friend  Printer friendly page

Here is Briefing.com's weekly wrap:

The week that was on Wall Street won't ever be forgotten as it has now has a distinctive place in the annals of stock market history.

The major stock averages plunged in dramatic fashion amid of torrent of concerns about the economic outlook and a prevailing sense of impatience, and uncertainty, about government efforts to unclog the credit market, which is the engine that drives economic growth.

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Sadly, it isn't hyperbole to say the stock market crashed this week. Granted it didn't have that fast-crash sensation like Oct. 19, 1987, when the S&P 500

The relentless selling pressure was said to be a byproduct of forced liquidation by hedge funds and mutual funds needing to honor redemption requests, efforts by investors to meet margin calls, and plain old short-selling by bearish-minded participants.

The most remarkable aspect of the week is that the selling persisted despite another litany of initiatives announced by central banks, and governments around the globe, that were aimed at bolstering liquidity and restoring confidence in the banking system.

The seminal event in that regard was a coordinated rate cut announced Wednesday by six central banks, including the Federal Reserve and the European Central Bank. The Fed for its part cut the fed funds and discount rates by 50 basis points to 1.50% and 1.75%, respectively.
This move by the Fed followed an action Monday to double the outstanding balances of its Term Auction Facilities to $900 billion and an announcement Tuesday of a new Commercial Paper Funding Facility that will provide a liquidity backstop to U.S. issuers of commercial paper.

The commercial paper market is where many companies obtain the financing that enables them to run their daily operations. It is traditionally one of the safer markets, but it had seized up of late on concerns about counterparty risk.

Elsewhere, Germany guaranteed all bank deposits, England put forth a plan to inject as much as $87 billion in new capital into eight, major banks, the Russian government said it will invest in Russian stocks and bonds, and the Chinese central bank lowered its key lending rate.

Iceland, meanwhile, took control of its largest bank, but then made the startling admission that it is at risk of national bankruptcy.

Each of these efforts underscored the global nature of the financial crisis and how it is going to take a global approach to fix things.

Mindful of the latter point, the meeting of G7 ministers in Washington on Friday was widely talked about. Nothing official had been communicated about that meeting as of this posting, yet conflicting reports about whether there would be another sweeping, coordinated initiative agreed to at the meeting caused some angst during Friday's trade.

Notwithstanding the market's behavior itself, there were plenty of other sources of angst throughout the week as well.

To begin, Bank of America (BAC) pre-announced a third quarter earnings miss, cut its dividend by 50%, warned of rising credit losses, and raised $10 billion in a stock offering that priced at $22 per share, which was a 32% discount to where BAC was trading ahead of its pre-announcement.

Shares of General Motors (GM) hit their lowest levels in more than 50 years on concerns about the company's financial condition, Alcoa (AA) missed third quarter earnings estimates badly, and a multitude of retailers slashed their third quarter earnings outlooks after communicating disappointing same-store sales results for September.

IBM (IBM), meanwhile, had a positive third quarter earnings pre-announcement while General Electric (GE) reported third quarter results in line with estimates.

While all of these happenings had an impact on the stock market, they ultimately took a backseat to the dealings in the credit market.

On the bright side, there were a few marginal signs of improvement. Overnight Libor rates moved down noticeably Friday (to 2.47% from 5.09%) while 1-day commercial paper rates also dropped noticeably in the wake of the Fed announcing its new funding facility.

The prevailing message in term funding rates, though, was that banks remained reluctant to lend to one another for anything other than the shortest of terms.

Separately, the TED spread, which is the difference between what banks charge each other for three-month dollar loans (three-month Libor) and what the government pays (three-month T-Bill) spiked 77 basis points on the week to 464 basis points. Prior to the subprime crisis hitting in July 2007, that spread was under 50 basis points.

The push for capital preservation in the midst of the stock market sell-off manifested itself in the 1-month T-bill. Its yield dropped 20 basis points to just 0.06%, yet the real rate, which is adjusted for inflation, is actually negative.

In other developments, the plunge in oil prices drove home the market's concerns about the specter of a global recession. Oil prices hit $77.09 per barrel Friday, before closing just shy of $81.00 per barrel. Still, that closing price marked a 14% decline for the week and a 46% decline from the all-time high hit in July.

The CRB Index, which is a broader measure of commodity prices, followed a similar course, losing 11% for the week.

As for the S&P 500, its closing price Friday marked an 18.2% decline for the week, leaving it just shy of the worst week on record, which belongs to the week of July 22, 1933, when the S&P dropped 18.5%.

A furious wave of buying interest in the final hour of trading Friday helped the S&P avoid "the worst week ever" label, although it was down as much as 23.6% for the week at its low Friday.
The Dow Jones Industrial Average wasn't as fortunate. Despite Friday's late recovery try, its 18.2% decline did indeed mark its worst week ever.

The bond market will be closed Monday in observance of Columbus Day. The stock market, however, will be open for a full day of trading. Like Columbus, it will be hoping to discover something special. Whether it does or not could hinge on the agreements reached -- or not reached -- at the G7 meeting. plummeted 20.5% in a single session. No, this was more of a slow-motion crash with the S&P dropping 3.9% Monday, 5.7% Tuesday, 1.1% Wednesday, 7.6% Thursday and 1.2% Friday.

by Jordan Kahn, CFA (In The Money )

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