Consumers weighed in on the economic data last week.  The University of Michigan’s confidence gauge fell to 57.5 in mid-October, from a reading of 70.3 in September, the sharpest one month decline since 1952.  Also, Retail spending declined 1.2% in September 2008, the biggest drop in more than three years.  On a better note, core inflation stood at 2.5%, a sign that inflation pressures are declining. 

The August industrial production figures for the US were down 1.5% in August, the largest monthly decline in decades.  That means less goods were produced, a sign of a slowing economy, specifically, an economy in recession. 

The Treasury department has planned capital injections of $250 billion into US banks with 9 of the top US financial firms receiving $125 billion, and $125 billion to go into smaller banks next month.  The Treasury is also guaranteeing many bank debts and interbank loans.  That is helping money markets, where the LIBOR rate declined by 42 basis points, meaning that money is not being rationed, banks are now lending to each other, and that the market is buying into the US Treasury’s and Europe’s capital injections and bailout plans. 

As for companies, JP Morgan and Citibank will receive a total of $25 billion, Morgan Stanley will receive $10 billion, and Bank of America will receive $25 billion, of which $10 billion is earmarked for Merrill Lynch.  (All from Investor’s Business Daily. October 20^th, 2008 page 1)

The Markets

The 10 year Treasury note is at 3.93%, up from 3.43% on October 6^th.  It reflects the likelihood that the US Treasury will issue long bonds to pay for the bailout plan, and rates will have to go up to be able to place the bonds.  Long bonds could suffer from higher interest rates and lower bond prices.  (Investor’s Business daily, October 20^th, 2008 page 1)

YTD, the S & P 500 is down 35.9%, the NYSE Composite is down 38.9%, NASDAQ Composite is down 38.9%, and the DJIA is down 33.27%.  (Investor’s Business Daily, October 20^th, 2008 page B8)

Among international indexes, China’s two indexes (A & B) are down 62.1% and 71.6% respectively.  The Morgan Stanley Developed markets index is down 40.2%, while their Emerging Markets index is down 50%.  (Economist October 18^th to October 24^th, 2008 page 112)

The best performing sectors in the past 65 days are Consumer Staples, up 16.62%, and Health Care, up 8.1%.  The worst performing sectors have been Energy, down 14.67, Materials, down 9.2%, and Industrials, down 5.54%, all in the past 65 days.  Only two sectors (of nine) are in rally, meaning, that most stocks are down, and that this is not a broad based rally. (from Stockcharts.com)

Interesting facts

Dividend rates are higher than short term money rates, a rare occurrence in the last 50 years.  (Economist October 18^th to October 24^th, page 86)

The DJIA is now trading below 9000, a level it hit in 1997.  That means investors who bought stocks more than a decade ago have no capital gains to show for it, only dividends.  (Economist, October 18^th to October 24^th, page 86)

25% of US homeowners have no equity or negative equity in their homes.  (Economist October 18^th to October 24^th, page 85)

Conclusion

It looks like the markets are attempting to bottom.  Consumer Discretionary stocks are starting to go higher, which normally only go up in bull markets.  However, bull markets have not historically started when credit is contracting.  This is the first time we have a worldwide recession, a banking crisis, and deleveraging all going on at the same time.  Right now, I am keeping equities to 20% or less, and buying short term Treasuries.