Dear subscribername,

Just like the rise of oil this year went up one side of the Eiffel Tower and down the other, the recent drops in the world stock and bond markets are also unsustainable. As you will see in some examples below, today’s values are so low that value investors are soon to rush in. 
 
First, let's look at last week and Friday in particular. It was the worst percentage and point drop week in the history of the Dow Jones and S&P500, down 18.2%.  Even the week of the Crash of 1929, the Dow Jones was off only 8.2% by the end of the week.  In 1987, the Crash week ended with a loss of only 13%.  These worst weeks all occurred at the bottoms of those bear markets.  From historical all time highs, the deepest top to bottom drops in 1974 and 2002 were about 45% (1987 was only down about 37%). At the lowest point on Friday, the markets were down a total of about 46% from their recent highs.  Only in the third year of the Great Depression have the markets dropped lower.  A number of other record levels were achieved on Friday, October 10th as well:  we had the highest ever volume on the NYSE of 11.16 billion shares traded (volume is a weapon of the bull), the NYSE recorded the most new lows as 2901 issues hit new lows while only 10 issues traded at new highs (9 short funds and the self storage company Public Storage).  We also saw all time highs on multiple volatility indexes. Friday's lows were successfully tested today and held.  There is talk of depressions and financial Armageddon, yet at worst I believe we are currently in a moderate recession.  Keep in mind that there was over 25% unemployment during the Great Depression and we currently have 6.5% rate nationally.
 
However, this market has brought valuations to levels that were last seen during the Great Depression. On Friday, October 10th, General Motors traded down 90% to $4.80 per share.  GM has $36 per share of cash in the bank, which means that they have a total market capitalization of $2.7 billion and yet they have $20 billion in cash. One of our favorite corporate bond funds has had the net asset value of their bonds go down from $20 per share to about $14 a share yet the fund recently traded to below $8 per share (at $8 it yields roughly 19.5%).  At the depths of the Great Depression, 1 out of 12 companies were selling for less than their cash on hand per share; on Friday, it was 1 out of 10. The estimated P/E on the S&P500 for the next 12 months is 10.8.  Yes it was lower in 1983 (7 P/E), but short term interest rates were at 20% not 2%.  We are seeing some of the best stock valuations in the last century.
 
Even so, people believe that this time will be different and we will go down much further and never recover. I for one believe that this time will be the same.  We will recover and not because of Government bailouts ($700 billion is only 6% of the current discounted value of all U.S. bank assets), but because the free capitalism market system works and the emotion that follows "panic" is "greed."  I do not believe for a minute that we are at the bottom of this economic cycle or that earnings will not get worse. However, the stock and bond markets have over discounted the very worst possible scenario, and at the least, we should trade at considerably higher values in 6-12 months.  Today’s valuations should not be ignored and if you have any available capital for the stock and bond markets, I suggest taking advantage of prices that I do not believe will last long.  
 
Mark Van Mourick