Quote of the month

“Make no little plans; they have no magic to stir men’s blood … make big plans, aim high in hope and work.”
– Daniel H. Burnhamins

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The Month in Brief

“Tumult” is not too strong a word. September was rocky, historic, and often agonizing for investors. The landscape of Wall Street changed dramatically. The Dow Jones Industrial Average behaved more like the CSI 300. The Bush administration came up with a radical response to an emergency gripping the financial markets – and then watched as it was defeated in the House by Representatives who were paying at least as much attention to election season as the economy. Banks had to be bailed out in America, and nationalized overseas. The U.S. government pumped $85 billion into one of the world’s largest insurers. The common U.S. indicators emitted recessionary signals. We don’t see (or want) too many months like these.

Domestic Economic Health

Wall Street reacts to economic indicators, but in September, the broad economy and the federal government began to react to Wall Street. In a four-day period, Lehman Brothers went bankrupt, Merrill Lynch was gobbled up by Bank of America, and AIG was nationalized by federal regulators.1 The Federal Reserve allowed Morgan Stanley and Goldman Sachs to transform from investment banks into bank holding companies. Factor in the Bear Stearns bailout in March, and you had the end of an investment banking era.2 Then Washington Mutual was bought out by JPMorgan Chase, and Citigroup acquired Wachovia.

Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson came to the White House and showed the Bush administration the writing on the wall: the credit markets were in danger of freezing, with the real possibility that major corporations could perish if something wasn’t done.1 So the administration (specifically, Secretary Paulson) came up with a request for a $700 billion allocation to buy troubled assets, in an effort to stabilize part of the financial markets. It was rejected in the House of Representatives 228-205 on September 29, leaving policymakers to regroup and hopefully pass a revised bailout package by early October.3

There were other news items. Unemployment rose to 6.1% for August, we learned at the start of the month.4 Interestingly, factory orders and durable good orders both rose for July (though this would not carry into August).5 Producer prices dropped 0.9% in August, the biggest one-month dip in two years; core PPI rose 0.2%, while consumer prices dropped 0.1%.6, 7 (This made some analysts wonder if inflation was easing.) August industrial output dipped 1.1%.8

Global Economic Health

On September 10, the European Commission forecast total Eurozone growth of 1.3% for 2008, as opposed to 2.6% for 2007. EC stats had the Eurozone economy contracting by 0.2% in 2Q 2008; the commission predicted a flat third quarter and 0.1% growth in the fourth quarter. Should this take place, the Eurozone would narrowly escape a recession – but the EC did predict a recession for the individual economies of England, Spain and Germany.9 But European banks like Dexia and Fortis (and European mortgage lenders) were struggling, and Eurozone consumer confidence was falling, hitting a seven-year low. But – this is interesting – inflation has been falling in the Eurozone, dropping from 4% in July to 3.8% in August to 3.6% in September.10

Turning to the economies of Asia … a Bank of Japan survey found business sentiment at pessimistic levels for the first time since 2003. In South Korea, however, inflation declined to 5.1% in September from 5.6% in August. China’s Purchasing Managers Index rose to 51.2, indicating manufacturing was expanding again in September. India’s PMI index dropped slightly, but it was still above the monthly average.11 A Reuters poll of economists forecast growth in China declining to 9.9% for 2008 and 9% for 2009. (Yes, only 9%.) Recently, analysts at the late great Merrill Lynch had put Asia ex-Japan growth at 7.7% for 2008 (down from 8%), and 2009 growth at 7.3%, revised down from a projection of 7.8%.12 Japan’s unemployment rate hit 4.2% in August, as industrial production in the world’s second-largest economy dropped 3.5%.13

The month ended with a disturbing global credit development: the overnight Libor rate, or London Interbank Offered Rate that European banks charge each other for loans in euros, jumped 4.3% in one day after a weekend of European bank bailouts.14

World Financial Markets

It was a poor month for stocks around the world. The U.K. FTSE 100 index dipped 13% in September, and the Dow Jones Stoxx 600 dropped 11.1%. In France, the CAC 40 slipped 10%, and Germany’s DAX 30 index lost 9.2% during the month.15 Compare those losses to the chart below and you’ll see that our markets performed comparatively better.

Asia’s key indexes were hurting: the Nikkei 225 touched a three-year low at month’s end, on the same day that India’s Sensex flirted with a two-year low.16 Hong Kong’s Hang Seng index fell 15.2% for the month.17 The MSCI All-Country World Index declined 14% for September.18

Commodities Markets

It was just one of those months – even many commodities posted double-digit losses for September. But gold went up, of course - 5.46% for the month. Silver and copper futures, however, fell 10.45% and 15%, while platinum dropped more than 31%. Oil futures fell 13.1% and gasoline futures 13.4%. Wheat fell 15.1%, soybeans 21.1%, and sugar 6.5%. Coal futures eked out a 2.1% gain. The U.S. Dollar Index rose 2.7%. 19

Housing & Interest Rates

The credit crunch was evident, and the indicators had a recessionary feel. August housing starts declined 6.2% from July while building permits declined 8.9%.20 August new home sales were down 11.5% from July levels, and new home sale prices were down 5.5%.21 At September’s end, the Standard & Poor’s/Case-Shiller Home Price Indexes put single-family home prices 16.3% below where they were a year ago.22

Mortgage rates, of course, improved notably in the wake of the U.S. government takeover of Fannie Mae and Freddie Mac. Those who qualified enjoyed a break, and refinancing crossed many minds. After a few weeks of descent, rates on 30-year mortgages rose during the last week of September – they were at 6.09%, still better than 6.42% a year earlier. At the same time, 15-year FRMs were averaging 5.77%, 5-year ARMs 6.02%, and 1-year ARMs 5.16%.23

Major Indexes

September is often a month of mild decline for stocks; the less said about this September, the better.

% Change
1-Month
Y-T-D

DJIA
-6.00
-18.20

NASDAQ
-12.05
-21.49

S&P 500
-9.21
-20.68

Source: CNBC.com, 9/30/08 24

Indices are unmanaged, do not incur fees or expenses,
and cannot be invested into directly.
These returns do not include dividends.

October Outlook

Congress will almost certainly pass a rescue plan to bail out Wall Street early in the month. Should that not happen, some other options are on the table: the Fed could lend additional money to financial firms, and it could cut interest rates again. Meanwhile, the retooled Fannie Mae and Freddie Mac could start buying some mortgage-backed securities from banks. But assuming the rescue plan is passed, could stocks possibly post gains for October? It will be a real challenge, as the Treasury program to buy troubled mortgage-backed securities does not constitute a cure for all sectors of the U.S. economy – but it looks like a step in the right direction.

The key economic releases for the rest of October are: August factory orders (10/2), September unemployment and wages and the September ISM services index (10/3), August pending home sales (10/8), August wholesale inventories (10/9), August business inventories and September PPI, core PPI, and retail sales (10/15), September industrial production, CPI and core CPI (10/16), September housing starts and building permits plus preliminary October consumer sentiment (10/17), September existing home sales (10/24), September new home sales (10/27), the Conference Board’s October survey of consumer confidence (10/28), September durable goods orders and a Fed rate decision (10/29), advance 3Q GDP (10/30), and for Halloween, September personal income and personal spending (10/31).

This piece was written by Peter Montoya Inc., and not the presenting Representative or the Representative’s Broker/Dealer, and should not be construed as investment advice.

Archived Articles

■September 2008

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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. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. All economic and performance data is historical and not indicative of future results. The market indices discussed are unmanaged. Investors cannot invest in unmanaged indices. Please consult your Financial Advisor 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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Citations

1 http://bloomberg.com/apps/news?pid=email_en&refer=home&sid=awekS4PaIZrw [10/1/08]
2 http://financialpost.com/story.html?id=811581 [9/22/08]
3 http://npr.org/templates/story/story.php?storyId=95187236 [9/29/08]
4 http://reuters.com/article/topNews/idUSN0439189920080905 [9/5/08]
5 http://washingtonpost.com/wp-dyn/content/article/2008/09/03/AR2008090301149.html [9/3/08]
6 http://reuters.com/article/marketsNews/idUSN1227119920080912 [9/12/08]
7 http://bloomberg.com/apps/news?pid=20601087&sid=atAGtERtW_Ok&refer=home [9/16/08]
8 http://sltrib.com/business/ci_10473604 [9/15/08]
9 http://rte.ie/business/2008/0910/eurozone.html [9/10/08]
10 http://iht.com/articles/2008/09/30/business/30eurostat.php [9/30/08]
11 http://rttnews.com/Content/AllEconomicNews.aspx?Id=728113 [10/1/08]
12 http://guardian.co.uk/business/feedarticle/7839651 [10/1/08]
13 http://latimes.com/business/la-fi-asiatrading1-2008oct01,0,6872149.story [10/1/08]
14 http://ft.com/cms/s/0/50ac44e8-8f17-11dd-946c-0000779fd18c.html [9/30/08]
15 http://online.wsj.com/article/SB122282009510292525.html?mod=googlenews_wsj [10/1/08]
16 http://iht.com/articles/2008/09/30/asia/01markets.php [9/30/08]
17 http://forbes.com/afxnewslimited/feeds/afx/2008/09/30/afx5487831.html [9/30/08]
18 http://bloomberg.com/apps/news?pid=20601087&sid=a0PeALhiaraY&refer=home [9/29/08]
19 http://cnbc.com/id/26960538 [9/30/08]
20 http://bloomberg.com/apps/news?pid=20601103&sid=aLJzVKRcnlqA&refer=us [9/17/08]
21 http://reuters.com/article/newsOne/idUSTRE48O5MN20080925 [9/25/08]
22 http://news.yahoo.com/s/nm/20080930/bs_nm/us_usa_economy_homes_index_2;_ylt=AjDVAYvlrZyBBc0gl7.AqjSz1g4B [9/30/08]
23 http://online.wsj.com/article/SB122239564751777801.html?mod=googlenews_wsj [9/26/08]
24 http://cnbc.com/id/26960538 [9/30/08]