Another Ugly Day

Today the lows were tested again and then broken. We are now at the levels last seen in 2003. Yesterday, the breadth of the market gain was narrow but today the downward route was broad and deep. On the NYSE, for every stock that rose,16 declined. The DOW was off 5.1%, the S&P dropped 6.1%, and the NASDAQ declined 6.5%. The VIX fear factor was up 10% which propelled the downdraft. If only the volume soared to extreme heights, we would have had another moment of capitulation. We are still expecting that day to come and hopefully it will be soon.

The news was unpleasant from everywhere today. The CEO's of GM, Ford, and Chrysler were begging Congress for a loan while taking a beating from the House Members. Commercial Mortgage securities showed new signs of stress which rocked the real estate market and put a crimp in financial stocks. Bank America, Citi, and JP Morgan all hit new lows. Housing starts hit another new low also. Just as all the news seemed so rosy, the Federal Reserve cut its growth forecast.

With days like this, who needs to wake up tomorrow. Junk bond yields are at new highs of about 20% while leveraged loans are back down to 70 cents on the dollar. The economy is a mess and financial institutions seem to be in the continual downward spiral. Where is the bottom? Fear is building and investors couldn't be more frustrated. Losses continue to pile up and we haven't even seen the corporate bankruptcy cycle kick in yet. We would suspect the default rate to be at least 10% next year. The stress on balance sheets continues to build and it is imperative that investors avoid stocks that have debt obligations coming due in the next 2 years.

There is no safe place to hide in the stock market unless you are short. It is best to be in high quality liquid companies but the short term may still mean painful losses. When the tide turns, you will be well positioned to take advantage of the rising market. Times are tough but brighter days will appear when we least expect it.