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Dow by Oct 17: 9000 or 7000 ?

What a week with worst weekly losses ever for Dow and S&P. Both indexes lost 18% in one week. I thought these indexes are supposed to be less volatile unlike Nasdaq. But last week, all bets were off. Almost all stocks were having weekly fluctuations of 50%. What would next week bring ?

There are couple of important trends to watch out to predict what would happen next week ?
  • Would MUFJ close Morgan Stanley investment of $9B for 20% at $25 per stock ? (MS closed below 10 on 10/10). I am predicting that this deal would get closed on Tuesday though MS may give it discount and bring down the price just below $20. That would still much better than MUFJ just walking away. If that would happen, it would be repeat of Lehman story. But this time Paulson cannot afford to play "moral hazard experiment" he did with Lehman. If MS goes down, that would be end of American finance as we know it. But that won't happen. So in summary, MS would survive
  • US gov taking stakes in banks: British have shown a way which I think is well though plan even though it came over 2 days. US and other European governments should follow British plan and part-nationalize the banks by offering to take stakes in banks and this should happen quickly. If British can do in 2 days, why not Paulson do it in 2 days (he did act over weekends 4 times this year for Bear, Fannie/Freddie, Lehman and so on)
So despite all the gloomy news, I am optimistic and if I have to pick one number about DOW. I would predict it is more likely close near 9000 than near 7000. At this moment, I won't recommend any particular stocks since there are hundreds of good companies on sale prices (and I was dead wrong on some of my previous recommendations).

So if you have courage, start taking small steps and invest in mutual funds with focus on stocks. I am sure, in long-term, it would work out ok

Have a good weekend!

/Shyam

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