by Addison Wiggin & Ian Mathias
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S&P 500 sinks to 11-year low… Chris Mayer explains massive forced selling on Wall Street
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Probably a good time to get our fiscal house in order… Rob Parenteau with some personal finance advice
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Have any stocks escaped the 2008 market madness? Sure… the 13 S&P stocks not in the red
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Traders flee equities, accept anything in return… bond yields sink to record lows
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Congress “faces reality”… Big Three bailout on hold until December
It’s one thing for techs to go bust. But S&P 500 companies that are supposed to be the "real economy" and throwing off dividends? Ouch.
“Yeah,” Chris Mayer responded by IM this morning after looking at this chart. “This is the most impressive collapse since the 1930s because of the its breadth. I mean, the S&P 500 getting cut in half from its high in about a year? The S&P 500?! Ouch, indeed…”
“There is massive forced selling on Wall Street,” Mr. Mayer goes on to explain, “as hedge funds and other big investor pools meet redemptions. In other words, say a hedge fund investor wants his money back. The hedge fund manager, if he doesn’t have the cash on hand to meet the redemption, must go out and sell stock to raise the money. It doesn’t matter if he thinks he’s holding a bunch of 50-cent dollars, he must get rid of something.
“In many cases, the presence of debt gives this forced selling greater urgency. If the hedge fund used debt to fund purchases of stock and suddenly has to meet margin calls — that’s more selling.
“The numbers coming in so far are just mind-blowing. Some of the big hedge funds have suddenly shrunk a whole lot. Consider these examples from 1440 Wall St.:
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Atticus Capital, another much-celebrated hedge fund, went from $8.1 billion to $510 million
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SAC Capital , run by the Steven Cohen, went from $14.4 billion to $7.7 billion
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Vinik Asset Management, lead by Jeffrey Vinik, who once ran Fidelity Magellan, went from $11.8 billion to $1.8 billion!
“Remember, this is as of Sept. 30.These numbers could be halved again. And also remember, these 13-F filings just show assets at that time. The reduction is a combination of selling and a decline in market value.
“Getting through this year could be rough on the existing portfolio, at least as far as outward appearances go. We’ve got tax-loss selling in the mix, too. I don’t like to guess about the market, but what the heck: My guess is we don’t see much relief until some of the money comes back in the new year.
“I don’t think investors are going to be happy holding cash or T-bills for long, especially when some of the valuations and yields in the market look so compelling. The markets swing between greed and fear. The pendulum is still on the fear side, but it won’t be there forever.”
We’ll be broadcasting the second installment of the Emergency Retirement Recovery Series Webinar on Monday, featuring Chris Mayer and hosted by John Wilkinson. It’s free… you can sign up here.
“With respect to your personal finances,” says Rob Parenteau the newly minted editor of The Richebacher Letter, “an environment like that above requires as a first step bringing household expenditures in line with income. Rolling over debt is likely to prove more difficult for households in the days ahead. Once household spending is no longer reliant on credit, reducing expenditures to pay down high-interest-rate consumer debt may prove to be one of the best investments available.
“Repairing credit scores might also prove a timely investment right now, as banks are likely to further tier customers, even after the credit convulsion has passed, and homeowners will want to be in good shape if and when mortgage rates come down enough to allow another refinancing wave to develop.”
For those more concerned about systemic failure in the U.S. financial system, we suggest you consider the services of outfits like EverBank and the Sovereign Society, to explore options for diversifying your portfolio exposures to different nations. More to come…
After yesterday’s decline, the S&P 500 has been reduced to 752, the lowest level since 1997.
Yesterday, we looked at all the S&P’s biggest losers of the credit crisis. So… lest you think we’re all gloom and doom here at The 5, today, we share with you the survivors (so far) in 2008. All 13 of ’em:
Hmnnnn… discount retail, drugs, breakfast cereal, tobacco… and Dr Pepper.
The Dow closed yesterday at 7,552. It opened up 100 points today. But if it closes below 7,181, Monday could be a real doozy.
As the market tested new credit crisis lows, yesterday’s yields on U.S. Treasury securities hit record lows, too. The yields on 2-, 5-, 10- and 30-year bonds all hit their lowest levels in the history.
Investors are still willing to accept next-to-nothing yields in exchange for shelter from the mass murder on Wall Street. But when this trend reverses, we expect it to do so quick and hard. When? Hmmmn… that’s complicated. And depends how far beyond support levels the Dow and S&P are going to fall before sentiment turns. Could be a while yet.
We must have jinxed Berkshire Hathaway by endorsing it earlier this week. BRK A shares dropped 12% Wednesday, their worst trading day in at least 23 years. The company reported a 77% decline in third-quarter profits year over year, and has been trading down for the last nine days in a row.
You can pick up an A share today for “just” $77,500… nearly $20k cheaper than our buy price of $95,000. Heh.
One of Berkshire’s latest buys, Goldman Sachs, hasn’t been going very well so far. That 10% coupon for this year is long gone, and Goldman shares have fallen below $50… $3 lower then their IPO price in 1999.
Citigroup has lost half its market cap since Tuesday. Shares of C dropped below $5 yesterday.
What may be an inconsequential price for the everyday investor is a big deal for funds of the world. Most institutional investors and pension funds are barred from owning stocks below $5 a pop. Money managers who have been clinging to Citi will likely have to pull the trigger before the end of this quarter.
And since market intervention has worked so well this year… Fannie Mae and Freddie Mac announced yesterday that they will postpone foreclosures during the holiday season. From Nov 26-Jan 9, the government-rescued enterprise (GRE) will be on foreclosure hiatus.
“We felt it was in the best interest of both borrowers and Fannie Mae to take this extra step to ensure that homeowners with the desire and ability to prevent foreclosure have an opportunity to stay in their homes,” said Fannie’s new CEO Herb Allison. During the freeze, Fannie and Freddie will work with another government agency, the audaciously named “HOPE Now,” to reduce payments and interest rates for at-risk borrowers.
The dollar didn’t benefit too much from yesterday’s sell-off. The dollar index is showing some resistance to the 88 level, having only exceeded it once during this dollar boom. As we write, it’s around 87.6.
Gold, on the other hand, is off to the races this morning. The spot price is up $25, to $775 an ounce. The dollar’s failure to respond to yesterday’s decline is helping reinstill confidence in gold. Plus, the S&P 500’s and Dow’s rapid approach to technical lows is ramping up “safe haven” buying.
And as we suspected yesterday, you’ll have remarkably cheap gas to fuel your holiday trips in the coming week. The national average gas price dipped below $2 a gallon today for the first time since March 2005.
Gas is down 50%, or $2.13 from its all-time high set in July. On average, a gallon today will set you back $1.98.
“We have to face reality,” admitted Senate Majority Leader Harry Reid. Not the reality that an automaker bailout is a bad idea… but the reality that no one outside of Washington supports it.
Congress will recess until the week of Dec. 8, so members can go home, , collect bribes, patronize their constituents, sleep with young aides and so on. When they return, the “Big Three” will present their case — make one last stand — and maybe, just maybe, this thing will be over.
Heh. Must be Friday.
“The incongruity,” writes a reader, $5 words in hand, “between the reported total compensation of the U.S. autoworker — roughly $70 per hour — and the impossibility that they are thus making about $150,000 a year to screw on lug nuts is reconciled by the fact that ‘total compensation’ combines salary plus those gilt-edged health benefits, FICA, Social Security, etc. Their take-home pay is closer to about $40 per hour — still good money, mind you.”
“I come from a different industry completely,” writes another, “than that of the automobile. But I was a dues-paying union member for 30 years until I retired at 52-years-old!
“It is regrettable that this country doesn’t think that labor unions are necessary anymore. That is why we now have the classification of ‘the working poor’: those who work 40-60 hours a week and can’t afford to buy food without food stamps; those that never get to take a vacation with their families because they cannot afford to take time off work without pay (they have no paid vacations), let alone go anywhere; those that will depend on Social Security for their retirement income. (It used to be known as the middle class.)
“Thank you very much, but I would rather pay dues to my crooked union and walk away with livable wages, medical benefits for me and my family and a pension that my trusty government cannot just decide to tap into. Also, there was a tremendous number of college graduates that worked for the same company, but they made more money out of their field! You act as if these companies just handed wages out to undeserving workers. Trust me, I DESERVE AND HAVE WORKED hard for the benefits that I have received in the past and those that I get now.”
Have a good weekend,
Addison Wiggin
The 5 Min. Forecast
P.S. We thought we found some more controversy surrounding I.O.U.S.A. yesterday… then we realized who was making the comments. Mike Norman is one of those nitwits you see on CNBC from time to time shouting inanity, never letting anyone else finish a cogent thought.
On the bright side, Norman’s most endearing quality is that he’s a perfect specimen of the modern airhead. A man who’s only chance of survival comes by way of leeching off producers in the greenrooms of today’s fictitious mass media. Without his ilk, life on the media circuit would be much less entertaining.
On the other hand, he’s one of the morons who helped get us into this mess in the first place. Here he is among a montage of people laughing in Peter Schiff’s face for calling a 15% correction in house prices back in 2006.
You can read Norman’s insightful review of I.O.U.S.A. here.
P.P.S. If you haven’t secured your copy of I.O.U.S.A. yet, now’s as good a time as ever. We’ve bundled it together with a companion book and some investment wisdom from Chris Mayer… a package available only to readers such as yourself. Get your bundle, here.