Does September Equal Stock Market Sell?

By: PaddyPowerTrader

It doesn’t take much to spook investors on the first day back in school. After a stonking ISM number that 2 months ago would have been worth a triple digit gain, we end up the day off 2% (led by a 5%+ dump in financials) on some vague rumour of a “West Coast Bank” in trouble, hedge funs collapsing, (Cererbus, who have big holdings in GMAC and Chrysler, formally denied that some of their funds were in trouble), chatter of Wells Fargo doing a rights issue to repay the TARP (very unlikely and later denied) and a rather sobering outlook of what the “new normal” may be like from the bouffant Bill Gross of PIMCO. And this down move came in the heaviest traded volume since May 7th, with the VIX ratcheting up to levels not seen since early July.

Is the post stimulus sugar high going to leaving investors with the shakes? As I pointed out the other day, the US tax system encourages mutual fund managers to sell loss making stocks to offset capital gains on their portfolios as the tax year for them is the end of September.

U.S. stocks have opened soft today. Region banks and financial names like AIG, Freddie Mac and Fannie Mae were again struggling, with the latter two on a report that the Mortgage Bankers Association proposed a new framework for the government’s role in the secondary mortgage market. The MBA said it will ask Congress to transform Fannie and Freddie into smaller, private companies that would issue mortgage securities guaranteed by the government.

US datawise we’ve had a -298k print on the ADP private sector jobs report (expectations was for a -250k fall ), a drop in weekly mortgage applications , a rise in the Challenger job cuts survey and a weakish factory orders number ahead of the biggie (Non Farm Payroll report on Friday, with the consensus forecast being -225k). Note, the ADP’s is an exceptionally poor guide to the NFP figure (for reasons which remain a mystery).

U.S. Stock Pessimism Climbs Most Since July 2007, Survey Says

Bloomberg reports the following are results from Investors Intelligence’s analysis of investment newsletters for Aug. 26 through Sept. 1. The New Rochelle, New York-based firm determines the proportion of writers who are bullish and bearish on U.S. stocks, as well as the percentage who anticipate a correction, or 10 percent decline, in the market. Some technical analysts, who try to predict stock moves based on price and trading patterns, track investor sentiment as a contrarian indicator. They interpret greater optimism as bearish and increased pessimism as bullish.

Note: When bullishness sank to 22.2 percent in October 2008, it was the lowest since November 1988. The bearish reading of 54.4 percent that month was the highest since December 1994.

Still ahead today we get the minutes of the Fed’s Aug 12th FOMC meeting just after 19.00 BST this evening.

So Why all The Fear and Loathing for Stocks all of a Sudden ?

Yesterday the US manufacturing ISM has surged to 52.9, but 10-year Treasury yields are trading at the lower end of their 3-month range. 10-year Bund yields are trading at a 4-month low. Equity markets are struggling to build up on the strong economic data. The CRB index lost 3.5% yesterday, and is down 7.5% over the past 4 weeks. So what’s going on? Are the green shoots turning into tumbleweeds?

1) Increasing questions about the sustainability of the recovery: The inventory-led recovery of the manufacturing sector is welcome, but will not be sustainable unless the consumer takes the lead. There is a startling contrast and disconnect between US consumer and manufacturing trends. Unless real consumer spending surge to about 4% (annualised), it is hard to see how manufacturing trends can remain at current levels. Slowing US job losses will help, but will to a large extent be offset by a sharp softening in real wages over the next 6 months (as wage growth falls and headline CPI mechanically recovers). US consumer credit, down for 5 months in a row, will hardly give the consumer any firepower. The UK consumer credit numbers yesterday provided a painful wake-up call to those who have been dismissing deleveraging.

2) Risk asset valuations may be stretched. As some equity strategists point out returns are typically best before the ISM crosses the 50 threshold, with only 1/3 of returns made thereafter (the full cycle is measured from the bottom to the top of the ISM survey). The recent sharp rebound in cyclical stocks could well be running too far ahead of fundamentals. Indeed, earning expectations, at 20+% in both the US and Europe, look ambitious. In credit space too, the tightening in spreads – which had reached levels unseen since the fall of Lehman’s has stalled.

3) Fading (reversing?) policy action: For a long time I have stressed that policymakers – at least on the fiscal front – had very little room for manoeuvre now. Given the horrifying long-term fiscal picture, it is doubtful whether any future fiscal stimulus – if needed – would manage to support the economy. Worse, in some areas there are fears that policy will be reversed. For instance, fears that China will slow commodity imports have depressed the Baltic Dry index of late. Fears that the government will force a slowdown in lending trends seem to have been a key factor behind the Chinese equity market correction. And even in the western world, France and Germany are pressing for quick reforms towards tighter bank solvency ratios ahead of the G20 meeting. The press this morning is reporting wide concerns with the EU insurance sector on fears that Solvency II (due t apply from 2012 on) will cause a sharp increase in capital and reserves requirements. Policy concerns might be overdone, as governments and central banks will be wary of not getting in the way of the recovery.

Market Moving News

Overnight data. Spot iron ore vessel bookings to China in August by Australia and Brazil (the world’s two largest exporters) fell to a 9-month low. Shanghai Securities News says that banks extended around CNY 320 Bn in new loans in August, the lowest monthly amount so far this year. However, IGM quotes unnamed lending officials as saying that the number may have been as low as CNY 250 Bn.

New Zealand: The Fonterra Cooperative Group (the world’s top dairy exporter) says that international dairy prices rose 24.2% at its latest auction, extending the 26% rise seen from August. Good news for Irish dairy and food stocks ! Nothing like a bit of pricing power.

In the US FDIC’s chair Bair joined the lengthening line of officials warning about the threat posed by the commercial real estate sector. She described it as a ‘looming problem’ though the sector is already displaying significant refinancing challenges for the banks aside from the sheer capital depreciation seen in the sector). Bair warned that commercial real estate will increasingly be a driver behind bank failures. Meanwhile, she also addressed some of the criticism being levelled at the FDIC – first regarding the loss share agreements it has arranged. There are concerns that these place the FDIC at enormous risk, butBair said that the agreements have saved the insurance fund around $11 bln over the last two years. She also said the FDIC would try not to tap the Treasury for further credit – to do so would be a ‘pretty profound decision’ she said.

US Fed member Fisher noted that the various official actions and rescues of the last 18 months or so have made the too-big-to-fail problem worse by creating financial institutions that are even larger and more interlinked. He said at some point in the future the Fed will need to deal with the problem that it’s created. Note – such have been the efforts of the Fed and the FDIC that the outcome has been massive industry consolidation and in many ways a concentration of risk. Look at the FDIC’s warnings on commercial real estate for instance, yet it is assisting the merge of failed local banks with other local banks, pulling together increasingly large exposures to CRE.

Equity News

• European equities in the news today include Alcatel Lucent whose shares were down in early trading following an announcement of plans to sell $1.23 billion of convertible bonds. UK Insurance names are again under pressure on a story that British insurers may be forced to raise as much as £70bn to conform with new EU regulations. European banks, Belgium’s KBC (-8%), Holland’s ING (-5%) and Spain’s Santander (-3%) and Italy’s Unicredit (-2%) are dragging the Stoxx 600 down in early trading, while UK banks RBS, Lloyds, Barclays are all off 4-5% following on from Wall Street lead where AIG , Citi, E Trade, CIT, Hartford, and Metlife got thrashed last night.
• To the upside today we have BP who have announced that they have mad a “giant” oil discovery at its Tiber Prospect in the deepwater area of the Gulf of Mexico.
• Nokia have entered into a tie-up with Facebook called “Lifecasting” and several new handsets that will allow users update their social networking account via their phone (if you must)

And Finally…

• The “World’s 50 Safest Banks 2009” !
• If you’re in the market for some beach front property, Bernie Madoff’s crib in Montauk is up for sale.The Feds are asking for $8.75 million. I should warn you that the AP said it’s “not that palatial”.
• Coming soon to your office this autumn - “The Swine Flu Blues”
• Did We Fall Off The Bull On Tuesday?

Disclosures = None

By The Mole
PaddyPowerTrader.com

The Mole is a man in the know. I don’t trade for a living, but instead work for a well-known Irish institution, heading a desk that regularly trades over €100 million a day. I aim to provide top quality, up-to-date and relevant market news and data, so that traders can make more informed decisions”.© 2009 Copyright PaddyPowerTrader - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.