MARKET OVERVIEW

Rarely has Wall Street experienced dislocation on the scale seen in October 2008. The market crashes in October 1929 and October 1987 are the closest reference points. Global equities imploded last month, as alarm over the health of the world economy rose to a fever pitch. During the first eight trading sessions, the S&P 500 ceded 23%. Aggressive monetary actions helped avert an Armageddon scenario. Still, outside October 1987, last month was the worst for the S&P 500 since its start in March 1957. Bloomberg reported a stunning $9.5 trillion in equity losses.

With roots in the housing bust, the slow-motion crash of 2008 cut its teeth during Lehman Brothers’ bankruptcy on September 15. Lehman’s collapse ignited a powder keg of risk aversion. Bank lending effectively ceased. Industrial production plunged. Business investment retrenched. Investors fled equities as the form of a severe recession darkened the horizon. Record client redemptions forced hedge and mutual funds to dump stocks. The selling drove prices even lower and fear levels higher.

The burgeoning crisis concentrated the minds of the world’s monetary authorities. The Federal Reserve joined the European Central Bank and the Bank of England in an unprecedented round of coordinated interest rate cuts. Central banks in at least eleven other countries followed suit. Globally, governments earmarked $3 trillion in emergency bailout and economic stimulus packages, including the $700 billion authorized by the U.S. Congress. The International Monetary Fund offered multi-billion dollar lifelines to Iceland, Hungary and Ukraine as their economies wobbled. The Fed superseded the private lending market, openly purchasing short-term corporate debt. Combined, the measures helped stabilize market confidence, and stocks pared losses as October shuddered to a close.

The outlook for earnings remains weak. On October 1, Thomson Reuters estimated 3Q08 profits for the S&P 500 fell 4.3%. On October 31, the estimate was -11.7%.

EQUITY UPDATE

STYLE AND MARKET CAPITALIZATION

Investors searching for shelter last month found no quarter. Regardless of style or market capitalization, share prices collapsed. The Russell 1000, Russell Midcap and Russell 2000 indexes all posted their second-worst month since incepting in January 1979. The ‘Black Monday’ crash of October 1987 remains the worst month for the indexes. Small caps fell harder than large caps, in part because of a spike in hedge fund selling. Hedge funds tend to own more small companies than large companies.

S&P 500 SECTORS AND INDUSTRIES

Every S&P 500 sector and industry lost ground last month, with the large majority of categories down by more than 10%. Financials was the worst-performing sector; on average, insurance and real estate firms took a more than 30% haircut in their market value in October. Consumer discretionary was the third-worstperforming sector, weighed down by a more than 40% one-month drop in auto industry stocks. Auto-related shares are down nearly 70% so far this year. Four hundred and seventy S&P 500 companies closed lower.

INTERNATIONAL EQUITY

The credit crisis rocking Wall Street ravaged foreign equity markets. Japan’s Nikkei Average plunged a record 24%, touching a twenty-sixyear low. That means no appreciation for Nikkei investors between October 1982 and October 2008. The British FTSE 100 fell 11%, its biggest decline since the 1987 market crash. The MSCI Emerging Markets Index crumpled 27%, the most since the Russian debt default in 1998. The MSCI All Country World Index fell 20%, the most in its twenty-year history. All forty-eight countries in the index closed in the red. Thirtyseven countries lost more than 20%.

ECONOMIC SCOREBOARD

Assessment of Current Economic Indicators

POSITIVE

Monetary Policy-Fed trimmed rates to four-year low 1.00% on Oct. 29; more cuts possible

Inflation-CPI slid from 5.4% in Aug. to 4.9% in Sept.; Core CPI unchanged at 2.5%

Oil Prices-Prices retreated 33% in October, biggest monthly drop on record

Valuations-The forward-looking P/E of the S&P 500 fell to a 10+ year low of 9.6 in Oct.

NEUTRAL

Housing-Sales are rising year-over-year, but starts and permits are still sinking

NEGATIVE

GDP-Contracted 0.3% in 3Q08 on biggest drop in consumer spending in 28 yrs.

Geopolitical-Iceland, Hungary, Belarus, Pakistan and Ukraine requesting IMF help

Consumer Confidence-Plunged to a record low in October, according to the Conference Board

Business Inventories-Stocks increased a second month in August due to a sharp drop in sales

Industrial Production-Tumbled 2.8% in Sept. on hurricanes and Boeing strike; most since 1974

Retail Sales-Skidded a third month in Sept.; longest contraction since at least 1992

Investor Sentiment-Market fear surged to an all-time high on Oct. 24 (CBOE VIX)

Employment-159,000 nonfarm jobs lost in September; most since March 2003

Corporate Earnings-Estimates continue to deteriorate; fifth straight quarter of contraction likely

As of 31-Oct-08