The gremlins and goblins of Halloween night was a fitting end to the most volatile month in the financial markets, since market data has been collected. With the 3-month LIBOR at around 3% banks are feeling confident enough to start lending to each other (obviously with massive governmental cash and guarantees)this newly found comfort should slowly trickle down to businesses and the consumer. The threat of inflation remains in retreat led by the decline in oil prices and other commodities including food. The root cause of the financial crisis – the housing market – continues to show some signs of abating with increased sales volumes albeit still at declining prices. Real plans, backed by cash to renegotiate and modify mortgages should solve the ever lower prices over time as inventories decline. The recession (although technically we still need a second quarter of negative growth to comply with the definition of a recession – two negative growth quarters) may well not be as drastic and lasting as is the accepted wisdom of the day would predict, as a result of the relaxation in lending, continued low interest rates in a low inflationary environment and a stabilizing housing market. The results of the presidential election, but more importantly the announcement of the president elect’s cabinet should indicate the administration’s economic direction for at least the next four years.

Stocks are down more than 40% from their peak last October. But does that make them a bargain? By one common measure of market value, stocks look inexpensive. The companies in Standard & Poor's 500-stock index are trading at just over 13 times the past 12 months' per-share operating earnings, based on Friday's market close. That is well below the 10-year average of about 21 times earnings, and lower than 18.36 times in the second quarter, according to data from Standard & Poor's. Some investors who care a lot about value say the market is cheap. Warren Buffett has urged investors to buy U.S. stocks, despite fear that things could get worse. Other ways to measure stock-market values also make stocks look inexpensive now. As of Friday's close, the S&P 500 was trading at 1.74 times the book value of its component stocks, compared with a 15-year average of 3.26. Even adjusting for inflated balance sheets that would exaggerate the book value, the ratio still would be about two-thirds the historical average, says Howard Silverblatt, senior index analyst at S&P. But if the economy slides into a deep recession, as some predict, and earnings continue to slide, current stock prices won't look cheap. Those who say it is a good time to buy acknowledge that prices could fall further. "We accept the probability that we will see even cheaper prices," Mr. Grantham said in an interview. Based on his analysis of past bubbles, he estimates the S&P could bottom somewhere between 600 and 800, and that is excluding the credit crisis or investor panic. He says those factors could set the bottom even lower. "If you don't have the heart to deal with a drop from here, keep your cash reserves," Mr. Grantham said in an interview. In the downturn of 1982, U.S. stocks bottomed at about eight times earnings. Estimates for full-year 2009 operating earnings per share for the S&P 500 now stand at $97.31, down from predictions of $103.85 in September and $108.77 in June. Based on the current value of the S&P 500 index, that makes for a ratio of about nine times next year's earnings, lower than the current P/E ratio. But most people think those estimates are too high.

For the entire article from THE WALL STREET JOURNAL click here:

Rates on 30-year mortgages spiked this week as the tumult in financial markets continued to be felt in housing finance. Mortgage giant Freddie Mac reported Thursday that 30-year, fixed-rate mortgages averaged 6.46 percent this week, up from 6.04 percent last week. The sharp increase pushed 30-year rates to the highest level since the week of Oct. 16. Analysts attributed the increase to the impact the financial crisis is having on bond markets. The upheavals on Wall Street last month drove investors to the safety of Treasury securities. Now that the panic is easing a bit, investors are moving out of Treasury bonds into other investments. That movement means less demand for Treasury securities, pushing their yields higher. That increase drives up rates for mortgages linked to those investments. “Long-term mortgage rates followed long-term Treasury bond yields higher this week, pushing fixed-rate mortgages up,” said Frank Nothaft, chief economist for Freddie Mac. A year ago, the nationwide average rate on 30-year mortgages stood at 6.26 percent, 15-year mortgage rates averaged 5.91 percent, five-year adjustable-rate mortgages were at 5.98 percent and one-year adjustable-rate mortgages stood at 5.57 percent. Rates on 30-year mortgages hit a high for the year of 6.63 percent in late July and then dropped to a seven-month low of 5.78 percent the week of Sept. 18.

For the entire article from MSNBC click here:

J.P. Morgan Chase & Co. launched an ambitious plan Friday to modify the terms of $70 billion in mortgages for borrowers who are behind on their payments or soon could be. The move by the New York bank will cover as many as 400,000 borrowers. They'll be moved into loans carrying lower interest rates, smaller principal amounts or other more-affordable terms. The changes will particularly focus on a type of loan structured in such a way that the borrower's outstanding balance sometimes grows month after month. J.P. Morgan inherited $54 billion of such loans with its takeover of the beleaguered thrift Washington Mutual Inc. in September. The plan comes amid intense national focus on a root cause of global financial turmoil: rising home foreclosures, and what the role of banks and government should be in helping struggling homeowners. The banking industry is under much political pressure address the foreclosure problem. Rival Bank of America Corp. has two loan-modification pools in place, one hashed out with state attorneys general. At the government level, after other programs failed to halt the rise in foreclosures, the Federal Deposit Insurance Corp. recently floated a plan that could help three million troubled borrowers; it is being considered by the White House. The FDIC also is assisting strapped borrowers who had mortgages with IndyMac Bancorp, which the FDIC seized this summer. The U.S. government has tackled problems in the banking system and credit markets, but thus far hasn't succeeding in stanching the bleeding of failing homeowners. Economists and government officials agree that the economy and financial markets can't fully revive until there's a halt to the decline in housing prices, a phenomenon that is worsened by foreclosures.

For the entire article from THE WALL STREET JOURNAL click here:

The wildest month in the history of Wall Street ended on Halloween with both scary and thrilling price movements. October was the worst month for the Standard & Poor’s index of 500 stocks in 21 years — since the 1987 stock market crash. But the final week was the best week for the market in 34 years. As befits such a wild month, it was the most volatile in the 80-year history of the S.& P. 500. The huge gains of the final week were reminiscent of the sharp recoveries from bear market lows in 1974 and 1982. Both of those moves came while the economy was mired in recession, as it almost certainly is now. If Monday’s stock market lows prove to be the low prices for this cycle, the bear market will have ended with the S.& P. 500 down 46 percent from the peak it reached in October 2007. That would make the bear market almost, but not quite, as bad as the 1973-74 bear market, which ended with the index down 48 percent. In the 2000-2 bear market, the fall was 49 percent. The hectic market action in October spread across most of the globe. Remarkably, the American market was one of the calmer markets during the month. Several had more volatility and larger swings in prices. Nor was the volatility limited to stock prices. Oil prices fell 33 percent during October, making this the worst month for that market since oil futures began trading in 1983. Oil is down to just under $68 a barrel, from a peak over $145 in July. One volatility measure, shown in the accompanying charts, is the number of days in which an index closes up or down at least 4 percent. In normal times, the market goes years without having even one such day. There were none, for instance, from 2003 through 2007. There were three such days throughout the 1950s and two in the 1960s. In October, there were nine such days. The accompanying chart shows the months, from 1928 through the present, when the S.& P. 500 had at least five days with 4 percent moves. Most of them were during the 1929 crash and the Great Depression. Until now, September 1932 held the record for the most days with big moves, at eight. Two days during October ended with the index leaping more than 9 percent, something that had happened only nine times in the previous 80 years. For the week, the S.& P. 500 was up 10.5 percent, the best weekly gain since a 14.1 percent rise in the week that ended Oct. 11, 1974. If the rebound this week indicated that the bear market of 2007-8 had ended, it lasted just over a year and hit bottom on Monday, at 848.92. It recovered to 968.75 by week’s end. There were similar moves in most major indexes. The Dow Jones industrial average ended the week up 11.3 percent, at 9,325.01, and the Nasdaq composite climbed 10.9 percent, to 1,720.95. For the month, the S.& P. 500 was still down 16.9 percent, the worst showing for the index since it fell 21.8 percent in October 1987. The Dow fell 14.1 percent, and the Nasdaq index lost 17.7 percent. Both moves — weekly and monthly — affected every sector and nearly every stock. Only seven of the stocks in the S.& P. 100 fell this week, while just nine were up for the month. Of the 30 stocks in the Dow industrials, only one fell this week. General Motors dropped 16 cents to $5.79 amid talks on a possible merger with Chrysler and additional government aid. For the month, all 30 were down, with Alcoa turning in the worst performance with a decline of 49 percent. But in the final week, it rose 22 percent, ending at $11.50 after trading as low as $9 and as high as $22.35 during the month. It traded at more than $47 last year. During the bear market, financial stocks led the way down. The S.& P. financial index fell 65 percent from the high it reached in early 2007 to the low close on Monday. By Friday, the index had recovered 17 percent. Internationally, Russia led the volatility parade, with an astonishing 17 days with 4 percent moves in the Micex index. It might have had more if Russia had not closed the market on Oct. 10, fearful of the selling panic that was sweeping the world. That index ended the week up 42.5 percent. For the month, it was still down 28.8 percent, Many countries, among them Britain, Japan, India and Brazil, also showed more volatility than the United States. That volatility was so high everywhere was an indication of how linked markets have become in the age of globalization. It is not just that most industrial countries appear to be in recession, or close to it. Another factor is that investors now own portfolios of shares from around the globe, and in times of stress may sell what they can, instead of just what they want to unload. The period from 2003 through 2007 — when there were no daily moves of at least 4 percent in the United States — became known as the “Great Moderation” to some economists. That very lack of volatility encouraged investors to take more risks by borrowing money, and encouraged others to lend it. All of the big days in September and October came after Lehman Brothers was allowed to fail. That Lehman was not deemed important enough to save signaled to investors that there was risk where they thought there was none and caused a sharp tightening of credit for many borrowers, despite efforts by central banks to push interest rates down. The big advances, on Oct. 13 and again on Tuesday, came as hope grew that the financial system would be protected. The first came on the Monday after the Group of 7 finance ministers promised to take steps to protect banks. This week’s big move came amid indications that central banks would aggressively cut interest rates. Such wild volatility may be an indication that a bottom was reached. The biggest week since World War II did come at the end of the 1973-74 bear market, and the biggest week in the 1980s, a gain of 8.8 percent, came just after prices hit bottom on Aug. 12, 1982. Or the wild moves could just show how baffled investors are by a series of events unlike any they can remember.

For the entire article from THE NEW YORK TIMES click here:

THE good news is that the world seems to have dodged a catastrophic banking collapse. It is too early to know for sure—some emerging markets are in trouble and stockmarkets are behaving violently. But interbank and commercial-paper markets suggest that the blind panic is abating. The bad news is that the world economy is weakening fast. Across the globe falling asset prices, tighter credit and declining confidence have left firms and consumers unable or unwilling to spend and invest. The usual mechanism is through interest rates. Economic orthodoxy looks to central bankers to smooth demand, because short-term interest rates are easier to calibrate than tax and spending and are controlled by technocrats rather than politicians. America’s Federal Reserve cut its policy rate by a further half point, to 1%, on October 29th. Held back by fears of inflation, Europe’s central banks have cut much less—a timidity that ought to be abandoned now that the risk of inflation is evaporating: both the European Central Bank and the Bank of England should cut rates boldly at their meetings next week. But it would be a mistake to expect too much from rate cuts. The financial system’s stresses have made them less effective, as banks hoard cash and scale back lending. And in America, at least, short-term rates have little room to fall further. So the next policy front should be fiscal. Cutting taxes puts extra cash straight into people’s pockets. By stepping up their own spending, governments can directly boost demand and employment. True, stimulus increases short-term government deficits—but the fiscal damage from a prolonged slump would be greater still, as Japan showed in the 1990s. With the private sector unwilling to spend and nervous investors clamouring for safe government bonds, there is little risk of crowding out private investment.

For the entire article from the ECONOMIST click here:

The global financial crisis has led to a stark reappraisal of risk. Markets had ignored any chance of default for so long that their U-turn now looks more like a handbrake turn. Risk aversion has cascaded through asset classes: first came US subprime mortgages, then liquidity and solvency concerns around banks. Now government bank bail-outs have shifted attention to the creditworthiness of states. As sovereign debt comes under scrutiny, small economies face huge pressure. Their best hope of escaping the turmoil relatively unscathed is to be in a club, bound together by explicit or implicit guarantees. That is why new clubs are in the making, while existing ones are seeing their popularity soar. The International Monetary Fund is introducing borrowing arrangements for well-managed emerging economies that stumble through no fault of their own. Under this facility, loans will be extended quickly with no strings attached. About half a dozen privileged countries can also count on swap facilities provided by the Federal Reserve and the European Central Bank. While these efforts will go some way towards calming markets, they risk shifting adverse attention towards the unlucky countries excluded. Countries outside safety nets want to get inside them. But countries inside will want to avoid sharing the cost. Offering help to vulnerable countries is the right thing to do. Rapid widening of the eurozone deserves more careful thought.

For the entire article from the FINANCIAL TIMES click here:

Politics is not the art of the possible. It consists in choosing between the disastrous and the unpalatable. John Kenneth Galbraith (1908 - 2006)

 

Please be sure to add JdeVilliers@LJLFunding.com to your "Safe Sender's" list so that you can continue to receive this information without disruption.

Please click here for instructions on how to do this.