October 20th Stock Market Update

The Weekly Three …for two weeks October 7th-20th James Cullen Portfolio Manager

CollegeAnalysts.com

More of the Same, with a Twist • Fall Outlook Themes (9/22, S&P 500 = 1255) – Credit: Scarce and Expensive – Global Slowdown Reality, But Not Priced In Yet

• Themes for Last Two Weeks 1. Unprecedented Credit Market Stress as Global Slowdown Thesis Gains Traction • S&P Down Another 11% to 940 (-25% 1 Mo.)

2. Governments Scramble To Do Some/Anything 3. Warren Buffett Positive On & Buying Equities

Credit Market Stress • Sorry Fixed Income is Boring – But It’s Driving Equity Markets • A Spread Problem on Short Duration – 3 Mo. LIBOR @ 4.4% vs. 5.2% 1 Yr. Ago – 3 Mo. Treasuries @ 0.7% vs. 4.0% • Borrowing Costs Down 20% • But Risk-Free Return Down 80%

Who Can/Will Take More Risk Now? – We Can. Will We? For more info and several graphs, visit http://collegeanalysts.com/creditstress

Credit: Bespoke Investment Group

Credit Market Stress • But Absolute Rate Problem on Long End – Risk Premiums Simply Too High for Economical Borrowing

• Goldman Sachs (Aa-rated) – Effective Interest Rate >18% for 5-Yr. Preferred

• General Electric (Aaa-rated) – Effective Interest Rate >13% for 5-Yr. Preferred

• And the Speculative-Grade Mess Worsens… For more info and several graphs, visit http://collegeanalysts.com/creditstress Effective interest rates computed net of estimated warrant grant value

Speculative Grade Borrowing Costs >20%

Credit: Bespoke Investment Group

Odds of US Recession

The Slowdown Goes Global • European Banks Failing – Belgium, Netherlands, Luxembourg, Iceland, Germany, Britain All Injecting Capital • ECB Finally Cuts Rates; Golf Clap for Trichet

• China – Export Dependent Economy Cooling

• Russia – Commodity Price Rout Destroys Wealth – Leveraged Players Forced to Sell  Crash

Saving The Markets From Themselves • US, Western Europe – Bank Capital Injections for Preferred Equity – Coordinated Rate Cut

• Russia – Closed Markets for Two Days

• South Korea – Guarantee Bank Debt

• Federal Reserve – Backstopping Commercial Paper – Creative Policies to Add Lending Liquidity – Deflation Fears Driving Monetary Policy? Check the H.4.1 • Total Credit Out More Than Doubled YoY

Credit: David Merkel, CFA

What Would Warren Do? • “Buy American. I Am.” – 10/16 NY Times Op-Ed Article

• Investments in Goldman Sachs, General Electric – We Own Both Stocks – Great Terms for Berkshire

• Personally Bought Stock in Bank Wells Fargo (WFC), Possibly Others

Buffett: Buy American. I Am. • The financial world is a mess, both in the United States and abroad… In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary. So ... I’ve been buying American stocks. • A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. • In the 20th century… the Dow rose from 66 to 11,497. [Which investors lost money?] The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy. • 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.