Market Update - October 31, 2008

TRICK OR TREAT?

October has been a month that has been jam-packed with “tricks” and horribly short on “treats”.

Let’s briefly review some of the key happenings of the last week or so:

Trick

The economy shrunk in the third quarter as consumers cut back on spending.  The GDP shrank at a negative 0.3% annual rate.  It appears GDP will probably be negative in the fourth quarter as well; this would confirm the recession.

Trick?  Treat?

The government is considering a plan that would help 3 million homeowners avoid foreclosures.  A deal is pending which would allow $50 billion from the “rescue bill” to guarantee $500 billion of mortgages.  This could help restore confidence in the market for securities backed by mortgage loans.  That is where the global credit crisis started.

Trick

GM, in an attempt to stave off possible bankruptcy, has been involved in talks to acquire Chrysler.  GM is burning through more than $1 billion per month as it deals with slowing auto sales and a global recession.  GM is pursuing $5 to $10 billion in aid from the government.  Why would the government help GM???  GM has 177,000 U.S. workers and about 500,000 receiving pensions.  It is estimated that there are an additional 7.5 jobs with parts makers and other supply companies for every automotive job.  That is a lot of jobs!

Treat

The Fed cut rates by ½% to 1% on Wednesday.  This is an attempt to revive an economy hit by the most severe financial crisis in decades.  The 1% rate is the lowest since 2003-2004.  The hope is that other countries will follow with rate cuts in the next few weeks.

Treat

Credit is beginning to free up as is evidenced by the spread between LIBOR and the Federal Funds rate.

Note: Rate cuts do matter.  It causes an injection of additional reserves into the banking system.  Many loans will have their rates adjusted downward, enabling companies to borrow at lower rates.

Treat

Gas prices declined this week to $2.59 per gallon for regular.  As Larry Kudlow, MSNBC economist states: “This is like a tax cut for Americans.”

Trick (Terrible Trick)

October, when the market closes today, will wind up being the worst October since 1987.  The markets will likely finish down between 15% and 20% for the month.  Maybe the markets should just stay closed during the month of October!

THE BIGGEST TREAT OF ALL!

The Phillies won the World Series and are world champions of baseball.  This ends the “Philadelphia curse” of 25 years without a major championship.

Happy Halloween and thank goodness October is over!

Sincerely,

Edward J. Kohlhepp, CFP^®, ChFC

Edward J. Kohlhepp, Jr., CFP^®, MBA

“Today people who hold cash equivalents feel comfortable.  They shouldn’t.  They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value”.

                Warren Buffet, NY Times 10/17/2008