As the Credit Crisis Deepens, There Are Still Many More Questions Than Answers

By William Patalon III
Executive Editor
Money Morning/The Money Map Report

Is there any end in sight?  Will the G7 provide strong actions (or statements of confidence) to support the global markets?  Are these efforts by the world’s central banks helping or simply scaring investors?  Should more regulatory actions be taken?  Should exchanges suspend trading temporarily (as some suggest) until calmer heads prevail? 

With Lehman Brothers Holdings Inc. (OTC: LEHMQ) gone, investor worry shifted to Morgan Stanley (MS) and Goldman Sachs Group Inc. (GS) and both stocks plunged accordingly.  While Japan’s Mitsubishi UFJ Financial Group Inc. (ADR: MTU) still claimed to be moving forward with a deal that would bring Morgan a badly needed $9 billion capital infusion, some fear that the terms may be revised (or worse) by the time the deal is expected to close tomorrow (Tuesday).

Is another bailout (or even nationalization) in the cards?

Earnings season moves forward though, by now, investors should realize they are  weak and not overreact each time bad results are announced.  Intel Corp. (INTC), JP Morgan Chase & Co. (JPM), credit card issuer Capital One Financial Corp. (COF), and Southwest Airlines Co. (LUV) are among those reporting.

Meanwhile, both inflation gauges – the producer price index (PPI) and consumerprice (CPI) – will be released in the coming week.  As declining energy and commodity prices are reflected, hopefully investors realize businesses and consumers soon will reap some related benefits.  Can you folks please take note of something positive for a change? 

Market Matters

The intense market volatility, the never-ending downward spiral in stocks, the unsettling global economy, and the overall  “gloom-and-doom” talk that seems to enter every discussion we have these days has spawned fears of another Great Depression.

Undoubtedly, these are challenging times – and definitely aren’t for the faint of heart – as most investors are experiencing one or more of the so-called “Five Stages of Grief” (often all in the same day):

• Denial: Heck no, the market is not overpriced. Each sell-off represents a great buying opportunity.
• Anger: Those darn greedy Wall Streeters and politicos ruined it for Main Street folks like me.
• Bargaining: If only this market would settle down, I promise not to speculate on securities I don’t understand ever again.  I know I said that after the dot.com meltdown, but I really mean it this time.
• Depression: I can’t quit staring at my online brokerage statement.  I can’t work.  I can’t eat.  I can’t even participate in my weekly golf game.
• Acceptance: Since there is nothing we can do about it, is my portfolio allocated in the most suitable manner for my family and me?  (By the way, can we find good bargains in the market carnage?)  Sometimes, one just has to laugh to keep from crying (or worse). 

With the global financial markets in complete and utter collapse, U.S. President George W. Bush took to the airwaves to remind the American people (and others) of the steps the central bankers, the U.S. Treasury Department and regulators taking to restore economic confidence.

The bankers have acted in meaningful ways to inject liquidity into the financial system in an attempt to reignite the credit markets and provide businesses with access to much-needed cash.  The U.S. Federal Reserve also will purchase significant commercial paper to aid short-term corporate funding. [Check out Money Morning ’s special investigative report on the commercial paper market, which includes the Fed’s new plan to purchase commercial paper directly from corporations for the first time since the Great Depression.]

A coordinated intervention by the world’s central banks proved that the central bankers would work together to solve this crisis – rather than placing blame on the culprits (of which there are far to many to name). But there’s no guarantee these moves will work. [Check out Money Morning’s special investigative report on the Federal Funds target rate, which includes insights on why this strategy may not work – and could actually damage the central banks’ reputation in the process.]

The bailout plans across the globe may interfere with basic concepts of free-market capitalism, but most experts agree these plans were needed in this time of panic and uncertainty.  Indeed, it’s possible they should have been implemented sooner, and should have been even more aggressive than they ultimately proved to be.

In his comments late last week, U.S. President George W. Bush probably should have mentioned how oil prices had plummeted 45% in a few months and that consumers should feel much-needed relief at the gasoline pumps; shipping and travel costs also should drop in time for the holidays as diesel and jet-airplane fuel. He could have noted the plunging commodity prices, as manufacturers and farmers alike welcome lower agricultural (fertilizer) and metals costs they can pass along to consumers.

Just a few short weeks ago, inflation was a huge concern.  Why is no one talking about this?

Wells Fargo & Co. (WFC) beat out Citigroup Inc. (C) for Wachovia Corp. (WB), though legal issues continue [For a full report on the Wells Fargo/Citigroup scuffle, check out this story elsewhere in today’s issue of Money Morning.]

International Business Machines Corp. (IBM) pre-announced better-than-anticipated third-quarter earnings, while Alcoa Corp. (AA), General Motors Corp. (GM), and General Electric Corp. (GE) reported weak (but somewhat expected) numbers.  The global indexes dropped in a freefall to levels not seen in years as fear overshadowed fundamentals and the concerns became self-fulfilling.  The Dow Jones Industrial Average moved below 9,000, then 8,000, as volatility was out of control and 100 point gyrations occurred by the minute (especially at Friday’s close). [[For a full report on the Dow’s deadly drop, check out this story elsewhere in today’s issue of Money Morning.]

Mass redemptions prevented hedge funds and mutual funds from bargain hunting and all proceeds seem to be going into short-term Treasuries.  By Friday’s open, this year’s losses on the Wilshire 5000 translated into a loss of shareholder wealth (negative wealth effect) of more than $8 trillion.  Eight days and counting means another 20+% losses on the Dow.  No one is laughing (especially since it had set an all-time high exactly one year ago…to the day).

That sure seems like “depression” to me; please hurry up and bring on “acceptance.”                       

Market/ Index	Year Close (2007)	Qtr Close (06/30/08)	Previous Week (10/03/08)	Current Week (10/10/08)	YTD Change
Dow Jones Industrial	13,264.82	11,350.01	10,325.38	8,451.19	-36.29%
NASDAQ	2,652.28	2,292.98	1,947.39	1,649.51	-37.81%
S&P 500	1,468.36	1,280.00	1,099.23	899.22	-38.76%
Russell 2000	766.03	689.66	619.40	522.48	-31.79%
Fed Funds	4.25%	2.00%	2.00%	1.50%	-275 bps
10 yr Treasury (Yield)	4.04%	3.98%	3.64%	3.86%	-18 bps

Economically Speaking    

A relatively quiet week for economic releases was far from quiet in terms of related activity by the Fed and its counterparts.  In addition to adding liquidity via significant short-term financing, the world’s central bankers – the United States, the United Kingdom, the European Central Bank (ECB), China, Australia and others – acted in a coordinated effort to lower their key bank lending rates.

The Federal Funds target rate now stands at 1.5%, and many economists expect additional reductions of a quarter to half a percentage point either at – or before – the central bank’s policymaking Federal Open Market Committee (FOMC) Oct. 28 monetary policy meeting.

Investors should have taken some comfort from the coordinated global action – but did not. It really was a remarkable move: Indeed, the last time the Fed and ECB moved at the same time was in the aftermath of 9-11 terrorist attacks on New York and Washington. The United Kingdom even announced its own bank-bailout plan, with the obvious hope that businesses and consumers would be able to meet their borrowing needs again.  With the Group of Seven 7 (G7) finance ministers scheduled to meet in Washington this past weekend, economists remained hopeful that more coordinated efforts would lead to some semblance of confidence before the bottom falls out.

On the data front, retailers continued to struggle last month (as expected) as weak same-store September sales numbers reflected poorly on the upcoming holiday season.  While Wal-Mart Stores Inc. (WMT) enjoyed some decent results, the news was far worse for the likes of Target Corp. (TGT), J.C. Penney Co. Inc. (JCP), The Gap Inc. (GPS), and Abercrombie & Fitch Co. (ANF).

Buried deep inside the weekly news announcements were a few tidbits that should have been positively received by investors (if anyone was paying attention).  Pending home sales in August rose a surprising 7.4%, the best showing since June 2007.  Meanwhile, filings for new unemployment benefits actually declined in the latest report, a positive sign for the slumping labor market.  And finally, the August trade deficit moved lower (though ever-so-slightly) as imports of foreign oil declined from recent record levels.  (What say you, OPEC?).

Weekly Economic Calendar

Date	Release	Comments
October 7	Fed Policy Meeting Minutes	Hinted at possible rate cut
	Consumer Credit (08/08)	1st decline in borrowing in 10 years
October 9	Initial Jobless Claims (10/04/08)	Decline in benefits claims as effects of hurricanes subside
October 10	Balance of Trade (08/08)	Slight decline though shortfall with China expanded
The Week Ahead
October 15	PPI (09/08)
	Retail Sales (09/08)
	Fed Beige Book
October 16	CPI (09/08)
	Initial Jobless Claims (10/11/08)
	Industrial Production (09/08)
October 17	Housing Starts (09/08)

News and Related Story Links:

• Wikipedia:
  Kübler-Ross Model (The Five Stages and Grief).

• Money Morning Special Investigative Report (Part VI):
  Credit Crisis Update: An Inside Look at the Commercial Paper Debacle.

• Money Morning Special Investigative Report (Part VII):
  Inside the Credit Crisis: How the Fed’s Efforts to Lower the Fed Funds Rate May Leave it Powerless to Stop the Financial Meltdown.

• Money Morning Special Investigation of the Credit Crisis (Part I):
  The Real Reason for the Global Financial Crisis…the Story No One’s Talking About.

• Money Morning Special Investigation of the Credit Crisis (Part II):
  The Credit Crisis and the Real Story Behind the Collapse of AIG.
•  
• Money Morning Special Investigation of the U.S. Credit Crisis (Part III):
  How Complex Securities, Wall Street Protectionism and Myopic Regulation Caused a Near-Meltdown of the U.S. Banking System.

• Money Morning Special Report: How to Fix the Credit Crisis (Part IV):
  Dear Hank: Here’s How to End the Credit Crisis at No Cost to Taxpayers.

• Money Morning Special Investigation of the U.S. Credit Crisis (Part V):
  Heads They Win, Tails You Lose: Why the Bailout Plan Will Fail U.S. Taxpayers.

• Money Morning News Analysis:
  Federal Reserve Joins Central Banks Around the World in Cutting Rates, but Is It Too Late?

• Money Morning “Hot Stocks” Feature:
  Hot Stocks: IBM Bucks the Earnings Trend as Tech-Sector Stocks Trade Down to Bargain Levels.

• Money Morning Credit Crisis Update: Credit Crisis Update: Dow’s Wild Ride Convinces Some We’ve Seen the Bottom.

Tags: William Patalon III