Bad Econ News And Mutual Funds Continue To Shrink

Futures were dropping even before the disappointing economic news, despite the talk of a Lehmanbailout [facilitation, takeover]. It's not rallying because 1) the Street figured out that these events do not stop the drop in the markets; traders simply move on to another target, and 2) shorting any notable rally has been the most consistent way to make money this year. AIG down 11 percent pre-open, Merrilldown 6 percent. Wachoviadown 2 percent pre-open.

Producer Price Index, a measure of inflation at the wholesale level, was lower than expected (good news), while retail sales were below expectations. This will give the Fed a little wiggle room; certainly reduces short-term pressure to raise rates.

    • Retail Sales Plunge Despite Easing in Inflation Index
    • Home Foreclosures Rise to Record High in August

Washington Mutualreleased third quarter financial projections that should make some feel better: loan-loss provisions for this quarter would be less than the second quarter, and they claim they have enough liquidity and capital to ride out the current crisis. There will be a loss for the quarter, but it will be less than the second quarter, though a bit more than most estimates. No matter; stock is trading down about 6 percent. Any wonder that analysts like those at Fox-Pitt throw up their hands and say "Washington Mutual long ago stopped trading on fundamentals."


1) Today, Fox-Pitt joined Morgan Stanley in suspending its price target and ratings on Lehman, "since the stock has become disconnected from fundamentals." Yesterday Merrill Lynch analyst Guy Moszkowski changed his rating on Lehman from "neutral" to "no opinion."

1) Euro is rallying as Trichet talks tough on inflation. Commodities are lifting, with gasoline once again outperforming oil. commodity stocks like BHP Billiton, Massey, and gold stocks are trading up 2 to 4 percent.

2) Chipotle Mexican Grill cut third quarter earnings, saying "the impact of the weakened economy has been greater than anticipated." Down 14 percent pre-open.

3) Meanwhile, quietly and with little fanfare, investors continue to take money out of mutual funds. This week, there were outflows of $1.3 billion from equity funds (excluding ETFs), according to AMG Data. The represents 14 straight weeks of net redemptions. There have been some weeks where ETF flows were positive, but this category is still largely used by professionals. Bottom line: mutual fund industry continues to shrink.


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