Hypochondria 10/08/08

Good evening,



What a range today – up 180, down to 233 with a close at 189. I guess they’ll update my Almanac for next year. I agree with Paulson the recovery will require patience.



David Gaffen at the WSJ quoted Phil Roth of Miller Tabak – “Right now we’re in a sort of broad capitulation phase so everything is getting shelled and the last thing you want to do is pick some point on some chart and say that’s where its going. We’re at an emotional point where chart points can be breached by breathing on them.”


Redemptions on hedge funds and mutual funds continue to contribute to selling pressures. I think we can see the hedge fund process continue to play out over the next 3 weeks.



I was watching the Food Network this weekend. I love to play around in the kitchen and it’s one of the few areas where I don’t feel like I need to play by the rules so I can gently borrow from them and make my own creations. I’m going to go out on a limb with this one – I noticed that Emeril Agassi and Jim Cramer have a lot in common. They have a lot of theatrics with bells and whistles – well on the side of Emeril I believe it’s called onomatopoeia. I’ll venture to say though that neither is at the top of their game thus they have to resort to theatrics to keep your attention.



I bring up Jim Cramer and CNBC for a reason or two. Most everyone I know is glued to CNBC. I do believe for the most part their guests are well intentioned but ill-equipt to deal with the individual investor. Let’s review CNBC’s objectives – they want peaks and valleys so while they are screaming to sell out your portfolio their purpose is to sell ad space. If this is your objective – then by all means sell. But I don’t think that’s most folks’ objective. Emotionally this feels like it won’t turn around but it will. If you’ve got cash start nibbling on those things that are undervalued – of which there are some good ones. Ultimately, unless you believe every stock in DJIA is worth 35% less than it was a year ago there are some good buys.



Today’s markets are hard and the uncertainty is even more challenging. Humans are adaptive learners. Let me take you back to some recent history – in 2000 and 2001 Warren Buffet was called the “stupidest investor.” He had “lost his touch.” He was “out of touch with technology.” He didn’t understand the “new economy.” However, today he is the “Oracle of Omaha.” I want to ask you though if you believe his strategy has changed in the last 5-10 years ? I don’t think so. I just think he keeps his eye on the ball and isn’t distracted by all the clutter. Be an adaptive learner. Recognize this is a cycle.



Forecasting:

In all but one case, the last recession, the market begins to rally before the end of the recession.



Recession Market Bottom Gain in first 12 months



Jan 80- Jul 80 Apr 80 31.2%

Jul 90 – Mar 91 Oct 90 33.5%

Mar 01-Nov 01 Feb 03 38.5%



On to the better news ! The crucial credit markets show teeny tiny motions of response to loosening in the credit freeze up. This is good news for you. They may be tiny moves but they are the first moves we’ve seen in weeks and weeks.



Warm regards,
Rachel



OOOPS – I almost forgot the forecast** ! Just wanted to make sure you were paying attention.



Data: High for S&P500 last 5 years, 3rd Quarter 2007 1,526



Mean for S&P500 for the 5 year period 1,278



Low for S&P500 for last 5 years 4th Qtr 08 1,035 (10-6-08)



Assumptions: Regression to the mean



Normal Distribution of returns



Probabilities: End of 3rd Quarter 09



50% chance at 1,278 or better (+23.5%)



75% chance at 1,157 or better (+11.8%)



1% chance at 790 or worse (-23.5%)*



*this is the adaptive trend model

Remember that all forecasts are wrong, some are useful. The issue is what do you believe about the economic resilience and stability of the US Economy. If you think that in the long-haul that Warren Buffet is right, then these numbers may be comforting. If you believe the world is coming to an end, these numbers have no value.




Sources: Art Cashin-UBS, Richard C Marston – Wharton, NBER and **Merrill Lynch Research – proprietary PIA Forecaster. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of October 7, 2008, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Merrill Lynch to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.