Mighty Casey Goes to Bat 10/10/08

Good evening,



To celebrate take a market strategist to the Might Casey Lounge and I’ll explain why I’m only as good as my last bat. It’s been a long year this week.



Ultimately, we live in a long stage of boredom. A random crisis occurs and those who make the best decisions in the crisis succeed. We are in the latter. The boredom has expired.



I've taken a good bit of time to compile the following information I believe it will provide a long-term enough perspective to frame where we are.



A study of the history of crises reveals a lot. Starting with the bombing of Pearl Harbor, history reveals there have been 20 major crises that have caused the stock market to drop significantly. Since most investor’s attention to the market fluctuations have only come over the last 10 years, they do not realize the frequency of crisis in the capital markets. All of those crises were resolved, markets recovered, and then ultimately went to new highs. Although the types of crises were different, the average recovery time for the market from when the crises started to when the market recovered to its pre-crisis level was 72 weeks. We are somewhere between weeks 30 and 50 depending on when you identify the start of this crisis. The one significant outlier was 347 weeks and was initiated by the bombing of Hanoi during the Viet Nam War. We should note that all crises seem unique at the time you are experiencing them.



Conclusion: The crisis will be resolved and the market will recover.



What would be a signal of the stock market bottom: Here the word is capitulation. Capitulation is when investors throw in the towel and emotional pain has triggered a fear based decision to flee. Stock markets traditionally hit a bottom and start going up after those investors who are desperate to sell are gone. Think of it this way, the only individuals who can push the market down are those who are in the market. They push it down by selling and providing supply, while demand is low. I disregard the short sellers because they are not as large a player as most people think and because their shorts represent pent up demand. If the majority of the sellers leave the market, its daily prices changes stabilize. Once equilibrium has been established, then any increase in demand (a buyer) faces reluctant sellers and prices start to creep up. Investors (mostly institutions, who are largely in cash) start to feel that they will miss the market recovery and start to systematically buy, pushing the price up. By the way, individual investors are normally the last out of the market and the last back in.



Conclusion: A significant sell-off (which may have started Thursday) followed by stabilization would be a significant bottom signal. Monday may have some continuation of selling based on the fact that mutual fund orders to redeem (sell) entered today will be funded by sales Monday.






Sources: Art Cashin – UBS, Merrill Lynch Research – proprietary PIA Research. 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.