Quote for the quarter. “There’s no present.
There’s only the immediate future and the recent past.” – George Carlin
The quarter in brief. In the
third quarter of 2008, we saw the end of an investment banking era. We saw a
level of government intervention in the financial markets unseen since the
Great Depression. We saw a bold federal response to a potential freeze in the credit
markets. We saw some things that perhaps we never thought we’d see. Days of
exuberance gave way to a new bearish mood, as investment banks, mortgage
lenders and thrifts paid dearly for assumptions that real estate would always
go up, that any loan was permissible, and that owing 25 or 30 times your net
worth was financially acceptable. On Main Street, the consumer tried to hold up
as the markets and the broad economy rode through a tough three months.
Domestic
economic health. In July,
we got some surprisingly positive economic indicators, along with a dive in the
price of oil. We learned that retail sales had increased by 4.3% in June, and wholesale
inventories had increased 0.8% in May.1, 2 June
durable goods orders increased by 0.8%, defying economists who had predicted a 0.4%
decline.3 But
producer prices and consumer prices had really jumped in June – PPI had shot up
1.8% (although core PPI only rose 0.2%) and CPI went up 1.1%.4, 5 Also,
the service sector had contracted: the Institute for Supply Management’s June
index was at 48.2.6
By August, the message was pretty clear: while oil prices and
retail gas prices were down for the second straight month (oil fell more than
7% in August), the spring surge in energy prices was now taking its toll on
producer and consumer prices.7 Wholesale
prices had climbed 1.2% in July and 9.8% across the preceding 12 months; they
hadn’t posted such a year-over-year gain since 1981.8 July
consumer prices went up 0.8%, and the year-over-year gain was 5.6% – an
inflation pace unseen since 1991.9
Still, consumer spending rose 0.2% for July.10 But unemployment
hit a four-year peak of 5.7%.11
In September, independent investment banks that had been Wall
Street titans for the past 20 years faced a choice: change or die. By the end
of the month, Lehman Brothers, Morgan Stanley, Goldman Sachs and Merrill Lynch
had either folded, mutated, or were bought up. In a four-day period alone,
Lehman Brothers went bankrupt, Merrill Lynch was gobbled up by Bank of America,
and insurance giant AIG was nationalized by U.S. government regulators. Then Washington
Mutual was bought out by JPMorgan Chase. Citigroup said it would acquire
Wachovia (but in October, Wells Fargo moved to take it over instead over
Citigroup’s protest).12 In
response to pleas from Federal Reserve Chairman Ben Bernanke and Treasury
Secretary Henry Paulson, the Bush administration presented a plan to ward off a
credit market freeze: a request for $700 billion to buy troubled assets. It was
rejected in the House of Representatives 228-205 on September 29, prompting a
stunning plunge in world stock markets and inspiring a quick revision of the
proposal.13 Elsewhere
in August, unemployment kept climbing, to 6.1%.14 Other indicators dropped. PPI fell 0.9% in August, the
biggest one-month dip in two years; consumer prices dropped 0.1%.15, 16 Industrial
output dipped 1.1%.17
Major
indexes. There’s no way to sugar it: this was a lousy quarter for stocks.
The bright spot, of sorts: the Dow didn’t
lose as much in the third quarter as it had lost in the second quarter.
|
% Change
|
3Q 2008
|
Y-T-D
|
|
DJIA
|
-4.40
|
-18.20
|
|
NASDAQ
|
-9.19
|
-21.49
|
|
S&P 500
|
-9.01
|
-20.68
|
Source: CNBC.com, 9/30/08 18
Indices are
unmanaged, do not incur fees or expenses, and cannot be invested into directly.
These returns do not include dividends.
Global
economic health. The
slowdown was on around the globe, and in Europe, the end of the third quarter found
the European Central Bank contemplating its first interest rate cut in five
years.19 We
learned that Eurozone GDP was -0.2% for the second
quarter.20 The European
Commission predicted a flat third quarter and 0.1% growth in the fourth quarter
for the 15-country Eurozone, which statistically
would not amount to a recession. But it did see a recession for the economies
of Germany, Great Britain and Spain. Inflation, meanwhile, came down from a
high of 4% in July to 3.8% in August.21
In Japan, GDP shrank by 3% in the second quarter, the biggest
such contraction since 2001.22 In
China, growth slowed in 2Q 2008 to a 10.1% annual rate, with the inflation pace
dropping from 8.7% in February to 6.3% in July.23 In early September,
Merrill Lynch had cut its Asia ex-Japan growth forecast to 7.7% for 2008 (revised
down from 8%) and its 2009 forecast to 7.3% (revised down from 7.8%).24
Elsewhere around the planet, Brazil’s resource-heavy economy grew 6% in the
second quarter.25
World financial markets.
Our stock market may have had a bad quarter, but we held
up fairly well in comparison to most markets across the rest of the world. In Great
Britain, the Dow Jones Stoxx 600 Index lost 12%, and
the FTSE 100 sank 13%. Germany’s DAX fell 9.2% for the quarter. The Shanghai
Composite Index slipped 16%; in Japan, the Nikkei 225 lost 17%. Brazil’s and
Russia’s main stock exchanges lost 24% and 47% - in fact, the stock market was
so strained in Russia that government regulators actually halted trading at
points during the quarter.26
Commodities
markets. It was a
quarter of decline and correction on the NYMEX and COMEX. Gold lost 6.1%,
silver 30.5%, copper 25.4% and platinum 50.4%. Crude oil and gasoline moved
south: oil dropped nearly 29% in 3Q 2008, and gasoline futures fell 27.3%. Oats
were down 33.2%, wheat 22.9% and corn 35.6%; soybeans were down 33.6%, but rice
only lost .4%. For what it’s worth, pork bellies gained almost 29% in the
quarter.27 It was a rough three months, yet
given the current state of the stock market, it would not be unusual to see commodities
surge again.
Housing & interest rates. The big news, of course, came September
7: the federal government seized control of Fannie Mae and Freddie Mac. In July, the Treasury
reassured the financial markets that it would stand behind both companies; in September,
it put them under conservatorship, a move akin to a Chapter 11 bankruptcy.
The Treasury announced plans to buy up to $100 billion in senior-preferred
shares in each company so that Fannie and Freddie could stay solvent.28 Both
companies were given permission to expand their portfolios into 2009, then
shrink them beginning in 2010 to a total of $500 billion – about a third of
their present size.29
Across the
quarter, indicators were largely in the red. As of late September, adjusted
Commerce Department figures had new home sales falling 2.9%
in June, up 4.0% in July, and down a whopping 11.5% for August. A bright spot
many people didn’t notice: the inventory of unsold new homes was down to 408,000 by
August, the lowest since 405,000 in August 2004.30 Existing home sales
mirrored this pattern. National Association of Realtors data had residential resales down 2.6% for June to a 10-year low; in July, sales
rose 3.1%, but resale prices were down 7.1% from a year ago and a record number
of homes were on the market. August
saw a 2.2% decline, to a sales pace 10.7% below that of a year before.31,
32, 33
Here’s
some good news: the national averages on mortgage rates went down during the
third quarter, with a sharp September dip resulting from the government save of
Fannie Mae and Freddie Mac. At the end of the quarter, 30-year
FRMs were averaging 6.09%, where they had
averaged 6.45% in the last week of 2Q 2008. Over the quarter, averages on 15-year
FRMs came down from 6.04% to 5.77%. Averages on 1-year ARMs fell to 5.16% from
5.27%. Only 5-year ARMs saw averages rise during the quarter, from 5.99% to
6.02%.34, 35
Fourth quarter outlook. Can the government fix the credit crisis by pouring
cash into the financial markets? Maybe, but no one is assuming that the Wall
Street rescue plan is a cure-all for the entire economy. We may be midway through
a severe recession … or technically, we may be just entering one. Recent
unemployment, housing and manufacturing indicators suggest things may get a
little worse before they get better. So what does that mean for you? It means
that it’s time to hang in there, plain and simple. Any history of the stock
market will show you a long ascent punctuated by an occasional downturn. When
the market rebounds, you don’t want to miss the best days of the recovery, and
the compounding that goes hand in hand with a bull market. This is a time for
perseverance, not a time to hide or blithely change course. You don’t want to
find yourself outside the market when the market changes for the better.
Please feel free to
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The Dow Jones Industrial
Average is a price-weighted index of 30 actively traded blue-chip stocks. The
NASDAQ Composite Index is an unmanaged, market-weighted index of all
over-the-counter common stocks traded on the National Association of Securities
Dealers Automated Quotation System. The Standard & Poor's 500 (S&P 500)
is an unmanaged group of securities considered to be representative of the stock
market in general. It is not possible to invest directly in an index. NYSE
Group, Inc. (NYSE:NYX) operates two securities exchanges: the New York Stock
Exchange (the "NYSE") and NYSE Arca
(formerly known as the Archipelago Exchange, or ArcaEx®,
and the Pacific Exchange). NYSE Group is a leading provider of securities
listing, trading and market data products and services. The New York Mercantile Exchange, Inc. (NYMEX) is the world's
largest physical commodity futures exchange and the preeminent trading forum
for energy and precious metals, with trading conducted through two divisions –
the NYMEX Division, home to the energy, platinum, and palladium markets, and
the COMEX Division, on which all other metals trade. The Dow Jones STOXX 600
Index is a subset of the Dow Jones STOXX Global 1800 Index and represents
large, mid and small capitalization companies across 18 countries of the
European region. The FTSE 100 Index is a share index of the 100 most highly
capitalized companies listed on the London Stock Exchange. The DAX 30 is a Blue
Chip stock market index consisting of the 30 major German companies trading on
the Frankfurt Stock Exchange. The Shanghai Stock Exchange Composite Index is a
capitalization-weighted index that tracks the daily price performance of all
A-shares and B-shares listed on the Shanghai Stock Exchange. Nikkei 225
(Ticker: ^N225) is a stock market index for the Tokyo Stock Exchange (TSE). The
Nikkei average is the most watched index of Asian stocks. The Bovespa Index is a total return index weighted by traded
volume and is comprised of the most liquid stocks traded on the Sao Paulo Stock
Exchange. The MICEX Index is the real-time cap-weighted Russian composite index,
which comprises the 30 most liquid stocks of Russia’s largest and most
developed companies from 10 main economy sectors. These are the views of Peter
Montoya Inc., not of Gary Hokin and/or Nikoh
Securities Corporation/ Hokin Investment Advisors, and should not be construed
as investment advice. Neither the named Representative nor Broker/Dealer gives
tax or legal advice. All information is believed to be from reliable sources;
however, we make no representation as to its completeness or accuracy. The
publisher is not engaged in rendering legal, accounting or other professional
services. If other expert assistance is needed, the reader is advised to engage
the services of a competent professional. Please consult Gary Hokin at (847)
559-1002 for further information. Additional risks are associated with international
investing, such as currency fluctuations, political and economic instability
and differences in accounting standards.
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