The Cheshire Cat 11/20/2008

`Cheshire Puss,' [Alice] began, rather timidly, as she did not at all know whether it would like the name: however, it only grinned a little wider.

`Would you tell me, please, which way I ought to go from here?'
`That depends a good deal on where you want to get to,' said the Cat.
`I don't much care where--' said Alice.
`Then it doesn't matter which way you go,' said the Cat.
`--so long as I get SOMEWHERE,' Alice added as an explanation.
`Oh, you're sure to do that,' said the Cat, `if you only walk long enough.'"

I don’t know if it was Alice, the Cheshire Cat or the Mad Hatter that lead today.

We are really testing democracy shaping our world versus capitalism being the prevailing force. Right now we’re without a rudder. While I respect the one president at a time theme I believe it is hurting us in the short term. Could the weakness be attributed to the fact the market isn’t sure it can wait until January 20th for a solution ? It’s my understanding from a senior trader that these questions are beginning to become topics on the floor.

Recessions start their turn around in the midst of some of the most troubling news. We are certainly facing that. GM and Ford could go into bankruptcy. I believe the fear and uncertainty we’re seeing is a result of the fact that the American Economy as we know it has never been without an automotive industry. (Ironically, GM is one of the few green spots on my screen!) We are facing that possibility now. I continue to be disappointed in the posturing. If I’m going to give you some of my hard earned money, what are you going to do with it, how long will that last, why will it help? This isn’t sexy but it is tangible information with which to make a good decision.

Going back to something I said in mid-October, history tells us when we are presented with circumstances that are entirely new we don’t always believe we will recover. A quick example is when Kennedy was assassinated the market only dropped 2.9%. We had experienced an assassination as a nation and so we knew we would recover. When Nixon was impeached the market dropped 45% because we’d never had that experience before. However, I’d like to point out that even between the shifts of capitalism and democracy our economic resilience continued. This time will not be any different.

Don’t overlook the good news – last Thursday the S/P500’s dividend yield was higher than the 10 year T-Note yield for the first time since 1958. This alone is not a buying signal but is evidence that good news is out there. This is part of the history we’re living and making. (Peter Bernstein has a great commentary on this if you’re interested.)

The market is heavily oversold. The market has moved past questioning profitability into questioning survivability. Stay calm and reasoned. Ignore rumors. Keep you eye on the ball.

From the technical corner: First target is: DJIA 7400 and then 7000. Comparable S/P500 levels are: 700 or 680. I would have preferred we stay above 780.

And just for a moment of humor – If it’s the end of the world you don’t need to plan for it, it will only happen once and at least you have a front row seat!





Sources: Proprietary PIA Merrill Lynch Research, Art Cashin – UBS, Louis Carroll – Alice in Wonderland. 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 November 20, 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. There may be less information available on the financial condition of issuers of municipal securities than for public corporations. The market for municipal bonds may be less liquid than for taxable bonds. A portion of the income may be taxable. Some investors may be subject to the Alternative Minimum Tax (AMT). You cannot invest directly in an index. Discuss your investment needs with your financial professional before investing.