Monday, December 3, 2007

November 2007 Rewind – The Write-Down Elevator Ride

Mortgage bank subprime write-down news and reoccurring recession fears predominated the trading environment this November, together pushing the major U.S. equity indices into their largest monthly decline and second “official” 10% correction of the year.


Over $80B in cumulative subprime write-downs have now been announced, with wide-ranging predictions of another $100B to $300B yet to come. Meanwhile, the White House revised its 2008 Gross Domestic Product growth estimate downward from 3.1% to 2.7%. November also found oil on the verge of breaking the psychological $100 per barrel mark, stoking consumer spending fears that were all too well confirmed by sentiment readings at multi-year lows.

In a more positive vein, the broad stock market declines and weak dollar proved too tempting for a number of sovereign wealth and private equity funds to pass up. Most notably, the Abu Dhabi Investment Authority took substantial, albeit non-controlling stakes in Citigroup (C)($7.5B) and Advanced Micro Devices (AMD)($0.7B), while Citadel made a 20% investment in E*Trade Financial (ETFC)($2.6B).

Together with an all out promise from Messrs. Bernanke and Kohn of further Federal Reserve rate cuts ahead this December, a put was effectively placed under the market, supporting a significant bounce going into the final days of the month. In fact, the magnitude of the S&P 500's final four-day rally had not been seen in over four years time. What is it that they say about the largest bounces occurring in _ _ _ _ markets? Grrrr!

By the end of the month the S&P 500 and Dow Jones Industrial Average were down 4.4% and 4.0%, respectively. In contrast, and unlike last month, the technology heavy NASDAQ 100 showed relative weakness, down 6.7%. While that effect was likely an attempt to fund margin calls and rotate into oversold financials, recession fears had an especially strong impact on Small-Cap stocks, which were down 6% to 7%. Meanwhile, the ten-year note ended the month below 4%, its lowest level since 2005.

In spite of this traditionally bullish season, I am concerned that should we see another test of the recent lows, whether it be this month or early next year, a more substantial breakdown may ensue. Let’s hope for the bulls that this volatility elevator slows and climbs more steadily upward this month. Happy Holidays to you all.



The Style Box below was calculated using the following PowerShares™ ETFs: Small-Growth (PWT), Small-Value (PWY), Mid-Growth (PWJ), Mid-Value (PWP), Large-Growth (PWB), and Large-Value (PWV).

The Standard & Poors 500, Dow Jones Industrial Average and NASDAQ 100 may be traded through ETF proxies, including the SPY or IVV, DIA and QQQQ, respectively.

Sentiment: Negative
Volatility: High (VIX 17-31)
Direction: Lower

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