Your Personal Trader - DJIM Journal '08

It may look grim as hell, but the markets ain't going to zero, even at this insane pace of 5-6% daily declines. What is going to 'zero' and what may save this market is a zero interst rate policy for as long as it needs to be. Deflationary recession is shouting out. The FED has to make a statement to go zero for as long as it takes. We don't have anything juicy to add tonight, the numbers below speak for themselves. We don't need to speak of another potential relief rally.

It was late October that we said..."the U.S markets are lagging the crashes in percentage terms seen all over the world markets and may need to get a dose of their own medicine". Well, it's been a hard pill to swallow..

Equities           Level      1Day        Week       Month YTD
S&P 500          752      -6.7%     -17.4%        -16.1%    -48.8%
NASDAQ           1037     -4.7%     -16.5%        -16.2%    -50.3%
DJIA     7552     -5.6%    -14.5%     -11.3%    -43.1%
FTSE                3875    -3.3% -7.1%      -4.1%    -40.0%
Hang Seng     12299   -4.0%      -7.0%         -13.8%    -55.8%

This is the ' ZERO' call from JPM tonight..

Deflation could incent inventory liquidations...Fed needs to say "low for long" w/ZIRP - ALERT

The S&P 500 closed at 752, closing below 800 for the first time since October 2002 and putting us back to 1997. In May 1997, the S&P 500 closed 800 on its eventual rise to 1576. Deflation and a Fed at Zero Interest Rate Policy are only the most recent ofthe multitude of concerns raised as the recession gains in severity.

Deflation will have an impact on the Industrial supply chain. Already, our Industrials analysts have noted that companies are leaning towards liquidating inventory as their expectations of price declines in commodities and products disincent inventory builds.
In other words, the deflation that is talked about has broader implications, and would put further downside risk to our $75 S&P 500 EPS estimate for 2009. Already, our $75 estimate looks like a reach, suggesting that Street bottoms-up of $88 is even more unrealistic.
The implication is that the Fed will need to make sure businesses and households do not develop long-term deflation expectations. Our Fixed Income teams and Economists note that it will be important for the Fed to say “low for long” to prevent this negative inflation bias.
Since mid-September, we had to alter our view on equities as this turned from a potentially minor bear market to a major/more severe decline. And given the lack of visibility of the depth of the macro downturn, we see a folly in trying to call “a bottom” at this time. But at the same, a lot has been discounted given the now 53% decline in stocks, but we just do not know if the whole recession has been discounted.
Finally, there are some positive developments. It seems that short-term markets have seen broad and material improvements. Demand for short-term paper has moved from overnight only to one-month and three-month products. The ZIRP would potentially expand demand for government, agency instruments, further aiding shortterm markets.
Elsewhere in credit, the news is still grim – CMBS now in the 40s, High Yield now reflecting 58% implied default rates.

Bottom line. Stay defensive as we lack visibility on the ultimate magnitude of the economic downturn and we still do not know whether redemptions and forced selling are distorting prices. It has not paid to be a contrarian (annihilated months ago) nor focus on valuation. The VIX at 81 now implies at +/- 28% move in the next 30 days (as a less than 1 std. deviation event). In other words, an S&P 500 range of 541 to 963.