Splitmaster Stock Split Newsletter 2008-10-11

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Author: Mike Celeste		Editor: Tony Ponzo		October Circulation: 6765

Stat Sheet Week Ending October 11th 2008


Changes	Weekly		Year to Date
Indexes	Points	Percent	Points	Percent
Dow	-1,874.0	-18.0%	-4,814.0	-36.0%
S&P	-200.0	-18.2%	-569.0	-38.8%
NAS	-297.0	-15.3%	-1,002.0	-37.8%

Highlight of this past week: Though this is no consolation, this week broke all records in the market by giving the biggest weekly point drop in history. Let's hope this coming week sets a record up move for one week.

Note: Once again, due to the extremely volitile and record breaking market, we are limiting the newsletter to the economic commentary as there is not much to talk about in any of the strategies for this week.

The Economy, The Markets & Commentary--How low can you go?

Today's Thought

The Economy, The Markets & Commentary---
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You are living through record setting times---and not nice records at that. The Dow saw the largest weekly drop in points, in history. We have also now surpassed the great percentage drop of the burst in the tech bubble in the early 2000's. The Dow has dropped 40.3% from the record high last October 2007. That's probably also a record time for a drop of that magnitude--1 year. Of course the Nas dropped 78% during that time of the tech bubble, so this drop is nothing close to that. The Volatility Index (VIX) made an historical high this week, too. It hit 76.94. To show relevance, last May 2008, it was 16. That's why option time values are so high, also.

This past Friday was just incredible. An investor could have purchased a put and a call at the open and made good profits on each one of them. I have never seen such fast movement in the Dow--and I don't think anyone ever did. In the first 15 minutes of the day the Dow dropped almost 700 points from the Thursday close and recovered 576 points in that same 15 minute span. That's a swing of 1260 points from the close of Thursday. Repeat--a swing of 1260 points in 15 minutes. We thought a 500 point swing in an hour the previous week was something, but it was nothing compared to this 15 minute swing. Hey, we're not through yet. Starting just before the last hour of the trading day, the Dow ran up 861 points in 35-40 minutes, then fell 478 points in just 5 minutes, followed by a rise of 249 points in 3 minutes. Everyone on CNBC was just shaking their heads in disbelief. There was nothing new in the news to cause this very extreme action, either. The President came on TV and only said what had been done up to this point--nothing new at all. This weekend the G7 will be meeting in Washington, and who knows what will come out of that??? As it is, we still don't know what is really happening with the bailout program that was passed

While the Nas ended its run down at 7 straight days, the Dow closed down on Friday, making it 8 straight days down. There was one comment on CNBC that made a point of a worst case scenario seeing the Dow drop to around 7,500. That was compared to the action in the 1930's great depression. The low today on the Dow was 7883, so we didn't come very far from that figure. Have we hit bottom? Who knows? These are unprecedented times and we don't have details.

Earlier, when I said the market was going to drop, this is what I meant--there is a real danger of the whole financial system crashing, and it wouldn't surprise me if they closed the markets for a few days or a week---there is no credibility that they are going to do the right thing--no one knows the details, with the Treasury Secy. the one person that has authority to handle the $700 billion--with oversight--probably by the same people that got us into this situation---the crooked politicians and the greedy companies that fed the campaign money to them. We should throw out every member of congress and start over, and also go after a refund from the people that walked away with hundreds of millions of dollars in golden parachutes. They knew this was wrong and couldn't continue what they were doing, loaning 100% of a mortgage to people that didn't have to prove their income---and then creating derivatives based on the mortgages, which just compounded the situation. When you are leveraged 30-1, it takes only a 3.3% downturn to require more capital (30 x 3.3=100%) Some firms were leveraged at 60-1 or more. They are so far away from having enough capital that 700 billion probably won't touch what is needed---and then go around the world and see that even that little country of 300,000, Iceland, got into this leveraging game, and is in danger of going broke--and undoubtedly should go broke. I keep hearing that these are intelligent people that are running the finances of this country---I take strong issue with it, and keep volunteering myself as being one of millions that could do a better job. Watch out, we are not done yet. And when the dust settles and assets are sold, mark my word, there will be those that got out with those hundreds of millions waiting to snap up the bargain basement prices that those assets will be sold at. It's happened before in the Savings and Loan debacle, and I'm predicting it will happen again.

It appears that we are being lied to, or at least not being given all the facts about this crisis. Pending home sales, those in escrow, were up 17% in the west, which includes the states hardest hit. That means that mortgages are being secured. How is this possible when the media is reporting that credit is locked up? Again on CNBC there was a reporter who went out in Chicago looking for a car this week. He was easily offered credit to buy he said. I called my bank and asked how come they are advertising mortgages at good rates, along with credit cards and they said they are having no trouble making new loans for mortgages and issuing new credit cards. I have a question that I can't get answered yet. If there is a lock on credit, where are the credit card companies getting the money to loan to people for use on their credit cards? Are they going to withdraw the line of credit that is not already being used? I have not heard of any of them doing that.

How do banks make money? I always thought it was by lending out money and charging interest for that. Of course, today we have additional methods that the banks use---an increasing number of fees being charged for everything they do. But, in the main, lending is how they make money. If they are not lending, as we are being told, what is going to be the effect on their earnings? The logical answer is that there is going to be drastic drops in earnings---if--what we are being told about credit is true. The capital reserves needed must be absolutely humongous and there must be a good number of banks around the world that don't have those capital requirements--and that we do believe, because of that leverage they used. If they were in the 60-1 leverage group, that would mean that if there is a drop of 1.2% in the value of the loan, they need more capital. Everything is fine when the market for the investment is racing upward, but boy, it can absolutely flatten them if the market drops, and it has dropped---big time. Mathematically you can't keep raising prices on houses more than income increases--at some point the math will make matters reverse--and it did--again, big time.

Just a quick mention about that other sore subject--oil prices. Less than a week ago I was asked how low I thought oil could go and I replied that I could easily see it going below $80/barrel. On Friday it dropped below 80 during the day before closing a bit above 80. That is a drop of about 48% from the high of 147 just a short time ago. We don't know about you, but out here in California the best price in our area is $3.47/gallon, a drop of 27% from the high prices we had. Again, the old story about the gas companies raising prices immediately when oil goes up, but drops very slowly when oil prices go down.

As a sidelight, it was reported that repossessions of autos is slowing down. It seems the lenders of auto loans don't want to repossess the car so they are giving the borrowers more time to come up with payments. If they take the car back they can't sell it for enough to pay the loan, so by delaying that they hope to recoup some more of the loan. Also, in the auto field, we do notice that car ads are using the selling price of the car as the lead item, when before it was the monthly payment that was the lead item. If payments are mentioned, it is for leasing.

Lastly, a sad result of all this. I had just pointed out to my partners that I would expect to see some suicides because of this financial crisis. The next day we had a local man kill his family and himself because of financial losses in the stock market and the loss of his job. The London reporter for CNBC today noted that there has been a marked increase in suicides in England compared to normal times. There will probably be more coming, too. And all this is the result of greed on the part of the people that represent us and the people that ran some very big companies. It's a shame we let them get away with it.

Good luck to all of us--remember, we can't go below zero, so there has to be a bottom somewhere and probably soon. Hopefully, if some news of confidence comes out of the G7 conference this weekend, we'll see a substantial up move in the markets this coming week. Remember, daylight always follows the darkest time of night.

Today's Thought---
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When you lose, don't lose the lesson...........Instructions for life.

Mike

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