1. 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 equi-
ties 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 aver-
sion. 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, govern-
ments 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 The Fed superseded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%.
by Greg Meier
O C T O B E R 2 0 0 8
AT THE MARGIN
October YTD
S&P 500 -16.8 -32.8
NASDAQ Composite -17.7 -35.1
Dow Jones Industrials -13.8 -28.0
MSCI EAFE -20.2 -43.3
MSCI EAFE Growth -19.8 -42.2
MSCI EAFE Value -20.6 -44.3
MSCI EM -27.4 -53.0
MSCI ACWI xUS -22.0 -45.0
MSCI Europe -21.2 -45.0
MSCI Japan -14.8 -33.6
Russell 1000 -17.5 -33.6
Russell 1000 Growth -17.6 -34.3
Russell 1000 Value -17.3 -32.9
Russell Midcap -22.4 -37.5
Russell Midcap Growth -22.0 -40.2
Russell Midcap Value -22.8 -34.7
Russell 2000 -20.8 -29.0
Russell 2000 Growth -21.7 -33.7
Russell 2000 Value -20.0 -24.3
ML High Yield Master II -16.3 -25.2
As of 31-Oct-08
Market Performance (USD)
V O L . 1 2 N O . 1 0
IN THIS ISSUE
Market Overview . . . . . . . .1
Perspective . . . . . . . . . . . .2
Equity Update . . . . . . . . . . .2
Chartbook . . . . . . . . . . . . . .3
Economic Scoreboard . . . .4

2. PERSPECTIVE
THE END OF PROSPERITY
Unfortunately, my worst fears are rapidly
unfolding and the stock market is now
its own version of the end of prosperity. The
dynamic, however, is truly deadly. Financial
panics, if left alone, rarely cause much
damage to the real economy, output,
employment or production. Asset values fall
sharply and wipe out those who borrowed
and lent too much, thereby redistributing
wealth from the foolish to the prudent. When
markets are free, asset values are supposed
to go up and down, and competition opens
opportunities for profits and losses. Profits
and stock appreciation are not rights, but
are rewards for insight mixed with a willing-
ness to take risk. People who buy homes
and the banks who give them mortgages are
no different, in principle, than investors in
the stock market, commodity speculators, or
shop owners.
These issues aren’t Republican or
Democrat, nor liberal or conservative. They
are simply economics, and bad economics
will sink any economy no matter how much
we wish to believe this time things are
different. They aren't.
Each of these government actions sepa-
rately increases the tax burden on the
economy and doesn't do anything to
encourage economic growth. And the stock
market knows it. The stock market is
forward looking, reflecting the current value
of future expected after-tax profits. An
improving economy carries with it the pros-
pects of enhanced profitability as well as
higher employment, higher wages, more
productivity and more output. Just look at
the era beginning with President Reagan’s
tax cuts, former Federal Reserve Chairman
Paul Volcker's sound money, and all the
other pro-growth supply-side policies.
Arthur B. Laffer,
Ph.D.
Ph.D. and M.B.A. —
Stanford University
B.A. — Yale University
EQUITY UPDATE
STYLE AND MARKET
CAPITALIZATION
Investors searching for shelter last month found
no quarter. Regardless of style or market capi-
talization, 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-worst-
performing 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 for-
eign equity markets. Japan’s Nikkei Average
plunged a record 24%, touching a twenty-six-
year 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. Thirty-
seven countries lost more than 20%.
AT THE MARGIN is a
monthly publication of:
Nicholas-Applegate
Capital Management
600 West Broadway
San Diego, CA 92101
PHONE 800.656.6226
619.687.8000
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 Copyright 2008
..>Nicholas-Applegate
....Capital Management
2
Dr. Laffer previously
worked on President
Reagan’s Economic
Policy Advisory Board,
and was Chief
Economist for the
Office of Management
and Budget. Dr. Laffer
is a trustee on the
Nicholas-Applegate
Institutional Funds
board, and is the
founder and CEO of
Laffer Associates. He
recently co-authored,
“The End of
Prosperity — How
Higher Taxes Will
Doom the Economy —
If We Let It Happen,”
with Stephen Moore
and Peter J. Tanous.

3. 3
Source: Bloomberg
As of 29-Oct-08
Billions
Corporate Borrowing: Uncle Sam Turns on the Taps
1200
1400
1600
1800
2000
2200
00 01 02 03 04 05 06 07
Outstanding Commercial Paper (weekly)
$
Source: Federal Reserve
As of 31-Oct-08
Billions
Joe Consumer Tightens His Belt
-10
0
10
20
1943 1956 1969 1982 1995 2008
Consumer credit (monthly change)
$
CHARTBOOK — RESEARCH FROM THE FIELD
The VIX Index, which reflects an estimate of
future market volatility for the S&P 500 Index,
has exploded to the upside in recent weeks.
This measure of volatility is at nearly twice
the levels of both the Internet bubble and
September 11, 2001 terrorist attacks. The
stock market is truly experiencing extraordi-
nary times, with six of the ten largest S&P
500 point drops in history occurring in the last
seven weeks.
Consumer debt outstanding plunged $7.9
billion in August, the most on records dating
back to 1943. The contraction reveals a new
weak point for average Americans already
struggling with a housing recession, job losses
and sinking real wages. It could portend
another leg down in consumer spending.
The August decline was predominantly a
factor of non-revolving debt like auto and
student loans, which fell at a 5.4% annualized
rate. A category of revolving debt that includes
credit cards also declined, down 0.8%.
Commercial paper, or short-term, unsecured
loans made to companies to finance day-to-
day operations, rose for the first time since
Lehman Brothers filed for bankruptcy mid-
September. This event indicates credit
markets are beginning to thaw; however,
much, if not all of the recent demand was
due to the Federal Reserve's program to
prop up debt rather than “natural” buyers.
Source: Bloomberg
As of 31-Oct-08
Value(WeeklyHigh)
Date Daily Point Change
9/29/2008 -106.62
10/15/2008 -90.17
4/14/2000 -83.95
10/9/2008 -75.02
8/31/1998 -69.86
10/27/1997 -64.65
10/7/2008 -60.66
9/15/2008 -59.00
10/22/2008 -58.27
10/19/1987 -57.86
S&P 500 Historical Moves
The VIX Index: Wall Street's Fear Gauge Explodes
0
20
40
60
80
99 00 01 02 03 04 05 06 07 08

4. 4
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ECONOMIC SCOREBOARD
COMMENTS
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
Assessment Of Current Economic Indicators