Stock prices have fallen sharply over the past two days, after a disappointing earnings announcement from General Motors yesterday, more fallout from the subprime mortgage debacle, and dismal retail sales announcements from the leading U.S. chain stores.
However, those of you who've followed our advice in The ETF Strategist have done quite well this week, as both our Conservative and Aggressive portfolios have advanced in price during the past two days, while the Dow Jones Industrial Average has fallen 395 points from Tuesday's close.
In fact, all of our recommended ETFs have outperformed the major market averages over the past two days, with our three best-performing recommendations rising 4.9 percent, 4.2 percent, and 2.9 percent, respectively. In comparison, the S&P 500 had declined 3.0 percent since Tuesday.
Not surprisingly, many of the Wall Street cheerleaders have begun to throw in the towel and admit that worldwide economic growth may slow next year, while inflationary pressures will likely continue to rise — something I've been telling our readers since late July.
Yesterday's market meltdown was blamed largely on General Motor's announcement that it recorded a $39 billion loss for the third quarter ended Oct. 31, after three money-losing years forced the company to write down the value of future tax benefits. GM's loss was the fourth-largest quarterly loss among S&P 500 companies since 1990. The company's CEO said that he's concerned about GM's fourth quarter earnings, due to defaults on subprime mortgage loans at GMAC LLC and slumping U.S. sales.
Adding fuel to the flame, Washington Mutual — the largest U.S. savings and loan — fell yesterday by the most in 20 years, after New York Attorney General Andrew Cuomo said he found a pattern of collusion on mortgage appraisals linked to the company. Cuomo subpoenaed Fannie Mae and Freddie Mac, the two biggest U.S. providers of home-loan financing, seeking information on mortgages they bought from Washington Mutual. In addition, he told Fannie Mae and Freddie Mac that they should either stop buying Washington Mutual's loans or hire an independent examiner to value them
Yesterday's final blow came from a report issued by the Royal Bank of Scotland Group, which stated that U.S. banks (both commercial and investment banks) may face as much as $100 billion of write-downs because of Level 3 accounting rules — rules that allowed banks to value assets based on unobservable inputs reflecting assumptions about the way assets should be priced. (Under a new accounting rule (FASB 157) that goes into affect on Nov. 15 of this year, companies will be required to provide more information about the value of their assets.
In essence, FASB 157 will hold companies more responsible for estimating the market value of their assets. Wall Street's larger investment firms have already written down approximately $40 billion of assets related to mortgage-backed securities because of record foreclosures.
In light of the new accounting rules, I expect to see further write-downs at investment banks during the next two quarters. Morgan Stanley, the second-biggest U.S. securities firm, has 251 percent of its equity in Level 3 assets, making it the most vulnerable to write-downs, followed by Goldman Sachs at 185 percent.
Meanwhile, U.S. retailers today reported their worst October sales in 12 years. In addition to announcing dismal same-store sales, numerous retailers (including Wal-Mart, the world's largest retailer, and The Gap (GPS), the biggest U.S. clothing chain), also reported sales that were lower than downgraded analysts' estimates. In fact, 70 percent of retailers missed Wall Street expectations, compared with a historical average of 43 percent, according to research firm Retail Metrics.
Commenting on the disappointing sales results, J.C. Penney's CEO said, "Our customers are clearly facing headwinds that are impacting both sentiment and discretionary spending levels, including weak housing market conditions, high energy prices, and uncertainty in the mortgage and credit markets" — something I began forecasting in mid-September.
In response to today's negative retail sales announcements, one of our recommended ETFs that sells short stocks in this sector rose 4.2 percent today.
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