Stocks plummet, Dow down 733

Testing the 8451 Dow low may be very coming soon. Dow dropped 733 to 8577 with very heavy selling going into the close, decliners over advancers 8-1 & NAZ was down another 150 (seems like triple digit losses are becoming common at the NAZ). S&P 500 FINANCIALS INDEX had another bad day in all this mess & uncertainty:

Value 210.23

Change -21.10

% Change -9.1%

The Alerian MLP index dropped 12 to 194 taking it well below the psychologically important 200 level. The Dow Jones REITs were punished severely, dropping an amazing 25 to 167.

In all this confusion gold was up 8 but oil pulled back below the important 75 level. Exxon Mobil, largest oil company, a Dow stock & recently joined the S&P 500 Dividend Aristocrat list, dropped 10 (yes, I said TEN) to 62. Earlier this year it traded at 95. Fears of a deep & long recession on running high!

CLX08.NYM

..Crude Oil Nov 08

....74.48

... 4.15 ..(5.3%)

Federal Reserve Chairman Bernanke, gave a speech at lunch time trying to soothe nerves. It didn't work as Dow sold off another 100+ during the speech, taking it to "down 500." Below is a quick but key paragraph from his comments plus 4 links to get an idea of what markets digested today.

++++++++++++++++++++++++++++

The U.S. faces ``a very serious too-big-to-fail problem,'' in which the insolvency of a large financial company could threaten a market collapse, Bernanke said in reply to an audience question. ``There are too many firms that are in some sense systemically critical.''

++++++++++++++++++++++++++++


•Bernanke Urges Limits for Asset Bubbles, Bank Power to Promote Stability
•JPMorgan's Dimon Expects More Loan Losses as Economy to Get `a Lot Worse'
•SEC Clears U.S. Banks to Postpone Writedowns on Value of Some Securities
•Bush Says U.S. Taxpayers Will Get Back `Most' of Money Under Bank Rescue


NASDAQ -- 10 years




This is a chart for the tech heavy NASDAQ which has suffered badly just in the last year, falling close to 50% (similar to Asian stocks which make & sell to these companies). Last night while Asian markets traded, the term "risk averse" was used frequently. As investors sell Asian suppliers or US tech stocks, much of that money is going into risk averse securities. For example, the 90 day US T-bill has a discounted interest rate of 14 basis points (that's the annualized rate)! That means to get $100 from the Treasury in 3 months, an investor will buy it for 3¢ less $100 today, that's risk averse!

I have a friend who has been day trading part time for a decade (including the ugly period at the start) & has done well over the entire period. He said watch for hedge fund selling in the last hour. I think we saw that today! Already the Mon rally seems like ancient history. Markets are catching on even that even with recent patches from central banks, there are no quick fixes. We may just have to endure a rough recession.

Stocks down, here we go again

Dow tumbled 326 (cracking below 9K again), decliners over advancers 7-1 and NAZ pulled back another 54. Banks sold off once again keeping below the July 15 low of 232. The S&P 500 FINANCIALS INDEX pulled back 10 to 221. REITs have gotten pummeled, down 10 to 182, to 5 year lows making for just another very ugly chart:


Dow Jones REITs -- 5 years




Lousy retail sales brought sellers back in full force. The Commerce Dept reported retail sales decreased 1.2% in Sep, far worse than an expected 0.7% decline & the biggest decline since a 1.4% decline 3 years ago. A 3.8% drop in auto sales was the biggest factor in the decline as consumers struggled to find financing (taking us back to bank loan problems). This was the 3rd consecutive month of declining retail sales, the first time since 1992.

•Retail Sales in U.S. Fall Most in Three Years on Job Losses, Housing Woes

A slipping economy is even pulling down oil prices, near the 12 month low:

CLX08.NYM

Crude Oil Nov 08...

76.33....

2.30 (2.9%)

The Alerian MLP index pulled back 9 to 198. A month ago, it had an 8 point pop which I said was probably a record. Since then, such moves have become common. Maybe that's because the VIX, Volatility Index, is back up 5 today to 60, heavenly heights never before seen!

Last night, Asian markets were selling off 1-2%, expecting more dreary news on the US economy & today European markets also tumbled. One index followed closely in Asia is the Baltic Dry Index. Yesterday it fell fell 11% to 1,615, the lowest level in 5 years. Rates for larger ships fell 17% yesterday, bringing this year's plunge to 85% below the peak. This results from less trade & harder to get letters of credit from banking institutions, vital in Asian trade.

•Shipping Rates Plunge on Credit Freeze, Decline in Demand for Commodities

Macro economic reality seems to be getting the better of the extreme optimism on Mon, Dow may have to head south to test Fri lows.

Recovery rally ends

Yesterday's monster rally faded as reality started sinking in.

Dow pulled back to a 77 loss. While off the lows it started the trading day up 300. Advancers were ahead of decliners by 20% & NAZ pulled back 65 on worries about a recession hurting business. S&P 500 FINANCIALS INDEX rose 14 to 231, but off earlier highs at 239. The Alerian MLP Index pulled back from earlier highs to settle up 8½ at 207. Junk bond funds rallied with their extraordinary high yields but REITs pulled back sharply. The Dow Jones REIT Index fell 14 to 192. That's the kind of day it was after yesterday's monster rally. Even oil pulled back from early gains as reality of earnings reports started to weigh on the markets.


Crude Oil Nov 08

...79.09

... 2.20 (2.6%)

The euphoria over more help for banks is slipping. Sadly, nobody is quite sure how it will all work out. The Federal Reserve is pumping money into the system & everybody hopes it does some good. The problem is they're making it up as they go along!

•Paulson Tells Banks to `Deploy' Capital Under $250 Billion Investment Plan


Early earnings are starting to grab headlines. Pepsi was hammered on earnings below forecasts, laying off 3,300 & guiding downward the annual estimate by a few cents, down 7.70. This may be a warning that ugly news will be dealt with harshly.

• PepsiCo profit misses view; to cut 3,300 jobs- Reuters

Johnson & Johnson (JNJ), a Dow company, reported excellent earnings. The stock gained 4 early in the the day, but that fell back to a 2¼ gain at the close (after a late day rally from near break even).

Johnson & Johnson tops estimates, shares rise- AP

The VIX,volatility index or what some call the fear index, remains in heavenly levels not imaginable a couple of weeks ago. 20 was considered a very high number, the 54-75 range was not on any body's radar screen. At 55, it's down 20 from yesterday's peak but still off any chart made just last month. Note prior peaks around 30 in Jan, Mar & Jul 15 lows. Emotions are running high driving a lot of the trades.



Volatility Index (VIX) -- 2008 YTD




It looks like little was resolved in today's trading. There was a lot of back & forth producing only modest changes as confusion is behind many of the trades.

My latest update on MLPs was just posted at SeekingAlpha in the last hour. Loyal fans will find nothing new. I still like them as solid long term investments with their high yields:

MLPs: Still Alive and (Reasonably) Well

Monster rally fizzles

After the mother of all rallies, reality is returning to the markets. The bank rescue plan sounds good, but keep in mind the regulators are making up the rules as they go along. And we're going into earnings season which promises to be not very pretty. Macy's (M), one of the largest retailers, already is painting a gloomy picture, other retailers will follow with similar stories:

Macy's Needs A Miracle

Dow is down 75 (down 400 from today's early morning highs), advancers ahead of decliners 2-1 while NAZ is down 52 on worries about a weak economy hurting stocks. S&P 500 FINANCIALS INDEX after the 33 point monster rally yesterday is up another 8 on the bank plan. The Alerian MLP index rose 8 bringing the gain to 40 off super lows. About every security participated in the monster rally. Even junk bond funds found buyers yesterday bringing their yields to under 20%, but today, as with other securities, enthusiasm is waning.

• U.S. to Buy Into Top Banks- CNNMoney.com

Oil is having another good day. Confidence of buyers is a good sign but implications of higher oil prices is not helpful. Gold is down 5 to 833 today.

CLX08.NYM

Crude Oil Nov 08....

82.62....

1.43 (1.8%)

• Oil rises above $84 as financial panic eases- AP

The chart for the Dow shows the dramatic & unprecedented decline over the last couple weeks with a violent rebound yesterday (as predicted here). After such a dramatic decline, history tells us that base building is needed. Base building after this record amount of damage could take months not just a weekend.


Dow Jones Industrials -- 1 month





Among other problems are hedge funds & their influence. They have had a terrible time in the market sell-off & must have contributed with heavy selling to meet their redemptions. Even with new rules for banks, they remain an important wild card moving markets in a big way.

•Hedge Funds Concede Errors, Profess Optimism After Worst Month in 10 Years


This is the time to try to keep cool heads & digest all that has happened especially in recent days & weeks. Earnings releases may not completely dominate the news in the next few weeks, but they will be key in explaining the health of the economy.

Many capital gains have evaporated

Devastating barely describes the destruction in the stock markets over the last few weeks. The Dow chart, shown in my prior posting, shows the Dow tumbled more than 3K in the last 3 weeks. This damage can only be described as overwhelming, healing will not come quickly.

Just last week, Coca Cola (KO), one of my IRA stocks, dropped 10 for no real reason. They didn't do anything wrong. However in just one week the stock depreciated 20%. That story was repeated for about every stock, not just in the US, but in the world. Forget about a V shaped recovery for stocks or economies around the world after all the destruction the markets have gone through in recent weeks. The long term recovery will be slow & painful. Everybody will have to hunker down & get used to markets with new rules. Sure, markets are more greatly oversold than they ever have been. There will be a rebound pop which could be 1K or more lasting a few days. But that won't cure anything, not after the deep & extensive damage that has been done. Markets will be on defense for a long time going forward.

The VIX index, measuring volatility or what some call the "fear" index, has risen to levels which could not have been imagined just 2 weeks ago. Shown in the chart below, 20 used to be considered a very high number & 40 was considered astronomical. On Fri it hit 75, but closed at 69.95. These extraordinary levels are not expected to last but major damage has been done which will take a long time to repair.


VIX -- Volatility Index -- 2 months





The concept of capital gains will have to be rethought after all stockholders have seen 25-50% of equity values wiped out in a few weeks. Popular TV shows are asking about what to do.

Yields will become increasingly important, not for just the brave. Today every dividend is under a dark cloud. The elite S&P 500 Dividend Aristocrats are losing members quickly. These are S&P 500 companies with a minimum track record of 25 consecutive years of higher dividends. While S&P hasn't disclosed much information about them in the last couple of years, many have been dropped or may not last much longer. Out of 7 banks in the group 4 years ago, only 2 remain. General Electric, a Dow stock with AAA credit rating & member of this group, yields over 6% but has to defend its ability to pay the current dividend. Others have essentially record high yields (over 5-6%) indicating the market views the dividends as risky. While this is an excellent group from which to select companies, careful selection is more important than ever as long track records are not always helpful in predicting future dividend payments & increases.

MLPs offer record high yields. Double digit yields are common with many in the 12-15% range (or even higher) & much of the dividends are not taxable in the current year. Pipelines make for a boring business, but are important in building US infrastructure. REITs owning property have have hard assets, like pipelines, offer record high yields, also in double digits with some of the dividends being free from taxes or taxed at lower rates. For the very brave, junk bond funds yield over 20%. No tax advantage here, but in 4-5 years the dividends could recover the original investment. Plus there are many excellent companies with yields of 3-4% following the sharp fall in their stock prices. Yields will have increasing importance as thoughts of making money via capital appreciation have been dealt a severe blow.

I have talked a lot about the destruction in MLP land, but think it is a good metaphor for typical stocks. The Alerian MLP index, which measures the industry, peaked last year at 342 only to pull back sharply at the start of the credit crunch in the middle of last year. The index dropped 60 in just 3 weeks & that was eye popping! After a partial rebound, it kept slipping lower & lower this year to the 260s. Recently it dropped more than 100 from an already low starting point in roughly the same 3 weeks. Now the index has sunk to:

______AMZ____ AMZX___ yield

Oct 9...167½..... 397..... 13%

After almost 13 years, the basic index is up from the starting point at 100. However, when reinvestments are included (AMZX), the index is up 4 fold even after falling from a record of 750 last year. The current value of 397 equates to an average annual compounded growth rate of 13%. This comparison shows that reinvested high yields can produce good returns over the long run even when they end at a dreadful time such as now. The trick is selecting securities which will survive thru thick & then!

October is already one brutal month

This has already been one brutal month, but there are still 3 weeks to go:


Dow Jones Industrials - 2 months





Dow Jones Industrials

30-Sep-08...... 10,851

9-Oct-08......... 8,451

Down............. 2,400

Central bank leaders are meeting this weekend trying to find fixes for ailing markets. Let's see what they come up with!

Dow's losing streak extended

Sellers went home a little early on Fri allowing the buyers to take over in the final hour. But buyers could not carry the day. Dow had been up & down big (below 7K at the lows) but ended down 128, decliners over advancers better than 2-1 & NAZ was up a few. S&P 500 FINANCIALS INDEX rebounded strongly from the 172 yearly low to close at 197, up 13. Most of the other indices had similar stories. The Alerian MLP index came back from another low (152) to close at 163, down only 4.

Oil price crashed once again:

CLX08.NYM

....Crude Oil Nov 08

...78.76

... 7.83 (9.0%)

As a footnote, Exxon Mobil, a Dow stock, dropped 5½ to 62, another yearly low.

In this brutal Oct sell-off, all yield based securities have been punished badly. Badly!! Junk bond funds are yielding around 20%, seemingly discounting the end of the world & the hereafter. I just got a statement form one of mine which RAISED (I repeat raised) the div over 10% a few months ago. The reward was to drop the price another 10% to a new record low. Since then the stock must be down another 1 (it's a low price stock). REITs have always had high dividend yields, so they are even higher in today's depressed markets are even higher. Yields are well into double digits are common. The yields for MLPs are largely tax free in the year in which they are paid & much of the REIT divs may be tax free or taxed at capital gains rate, etc. But these guys just can't get no respect with a Dow down 6K from its peak one year ago. That's how it goes.

In MLP land, double digit yields are routine, with many 15+%. Kinder Morgan (KMP), the largest, raised the quarterly distribution 3¢ yesterday to 1.02, the units are up modestly from the time of the announcement (but down about 20 from its peak a few months ago). Others have announced increases in the last couple of days. They are trying to fight back the lower unit prices with these increases, but the battle is a tough one. Yields of 12-15% are common.

Kinder Morgan shares rise after distribution boostAP

In these tough times, try to get rest over the weekend. It may be tough, but try. Long term thoughts for very smart investing are difficult to come by these days. But they will win out! Program those thoughts into your minds.

Panic has a firm grip on stocks

Just another in one of those unbelievable days for US stocks. Bigchart graph on the right show it all. Stocks opened down 700, then broke into the green now heading south once again trying to make it 8 straight loser days. No point dragging out all those boring statistics, they tell the same dreary story. However, gold pulled back to little changed.

There is not a shortage of glum news out there. Central bankers are having a tough time once again trying to figure out what coordinated means. Morgan Stanley (MS) & Goldman Sachs (GS), down 38% & 16% respectively, are facing downgrades (not helpful to the markets). If they have to sell, they've got a lot of stock to sell. General Electric (GE) released not very pretty earnings (as expected), hanging in there at 19 with a 6½% yield.

Below are my recent articles at SeekingAlpha:

• MLPs Still Attractive After Recent Selloff on Oct 08, 2008 about EPD, EEP, BPL
• Attractive Outlook for MLPs Following September Lows
  on Oct 02, 2008 about BBEP, CEP, BPL
• Buying Gold: What is High and What is Low?
  on Sep 24, 2008 about GLD
• Why Buy Real Estate Investment Trusts?
  on Sep 18, 2008
• Why Buy MLPs? Part II
  on Sep 17, 2008 about XOM
• Why Buy High Yield Bond Funds?
  on Sep 15, 2008 about HYG, JNK, PHB
• Why Buy MLPs?

With stocks on defense in the last hour, they may continue to sell off. Of course, shorts may get tired & have to buy back before going home in front of the weekend. This looks like it will be one of the worst weeks ever! Sadly, as I've said before, the bleeding does not look like it wants to stop.