Report from Europe: Does September Mean Sell?

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, (Cerberus, who have big holdings in GMAC and Chrysler, formally denied that some of their funds were in trouble), chatter of Wells Fargo (WFC) 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 leave 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. Regional banks and financial names like AIG (AIG), Freddie Mac (FRE) and Fannie Mae (FNM) 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 (expectation 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 (2PM ET).

So Why all The Fear and Loathing for Stocks all of a Sudden ?
Yesterday the US manufacturing ISM 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 to 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, but Bair 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 (ALU), 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 (ING) (-5%) and Spain’s Santander (STD) (-3%) and Italy’s Unicredit (-2%) are dragging the Stoxx 600 down in early trading, while UK banks RBS (RBS), Lloyds (LYG), Barclays (BCS) are all off 4-5% following on from Wall Street's lead where AIG, Citi, E Trade (ETFC), CIT (CIT), Hartford (HIG), and MetLife (MET) got thrashed last night.
• To the upside today we have BP (BP) who have announced that they have made a “giant” oil discovery at its Tiber Prospect in the deepwater area of the Gulf of Mexico.
• Nokia (NOK) have entered into a tie-up with Facebook called “Lifecasting” and several new handsets that will allow users to update their social networking account via their phone (if you must).

Comments

[Roger Knights:]

"Does September Mean Sell?"

'Tember!

Sep 02 02:51 PM

[Roger Knights:]

"Does September Mean Sell?"

'Tember!

Sep 02 02:51 PM

[manya05:]

I think you got to the core of it on your point #3. Markets will soon realize that governments came out with the bazookas and missiles, hit it as hard as they could, revived the economy a little bit...we did not fall off the cliff completely, but now what? without more stimulus, who or what will be the engine to pull us out and get us back to sustainable growth?

Sep 02 02:52 PM

[markfl:]

The ATA finally came out with their July truck tonnage, showing a graph that seems to indicate trucking is trying to find a bottom. I think you can reasonably say we might be near the beginning of the end of the recession, but the outlook going forward is extraordinarily murky.

"Trucking serves as a barometer of the U.S. economy, representing nearly 69 percent of tonnage carried by all modes of domestic freight transportation, including manufactured and retail goods."
www.truckline.com/News...

Sep 02 03:01 PM

[Mad Hedge F...:]

fdghj. While the month of October has the reputation as the neighborhood slut, it is in fact September that does the real damage to your pocketbook. Yes, that September, the one that started yesterday. Since 1929, the average September has dropped by 1.3%, compared to an average rise of all months of 0.5%. Remember, Lehman went bust in that month last year, and with lead market Shanghai suffering a diabolical August, you have to wonder if history will repeat itself once again.

Sep 02 04:04 PM

[Graham and ...:]

We're acting on the belief that this September will be "normal," which is to say, we've been selling.

Sep 02 04:07 PM

[tobi:]

Why should things drop just because it's september only because that on average happened most years before ? Our Lehman September probably was such a great absolute impact that it screwed up a decade of positive septembers. Does that mean markets will go higher ? I highly doubt it. Does it mean we go down because it's september ? This just smells like sell in may and go away, we saw how well that worked. This is not a market to apply historical averages to anything, it's a time of insanity in every aspect.

Sep 02 05:13 PM

[Griller:]

Was that a yes or a no. The Mole must be an academic.

Sep 02 08:51 PM

[p church:]

From rough approximate calculations, the S & P 500's PE is in the neighborhood of 27 ------ $2 over the historical top part of range. This September sets up for a very good selloff.

Sep 03 09:07 AM

[TeresaE:]

If anyone is basing recovery on ISM numbers, look out below.

Does ANYONE outside of the industry realize that "American manufacturing" is not 25% of the size it was in '99? No, they don't.

To think that "manufacturing" is a leading indicator in a country with virtually NO manufacturing is yet more insanity at its finest.

Sep 03 10:09 AM

[HerrHansa:]

Lots of EU residents take holiday in August, and then return en mass to work in September. It is easy to see a somewhat self fulfilling prophecy in an early sell, choppiness, then oversold conditions. That would be enough to suck people back into the market, giving a short lift, and then BOOM, more selling. Anyway, that's how some Septembers past have gone, though of course no guarantee of the same happening now.

Even if it goes as many Septembers past, the overall month might not be much different. It still looks like a mostly sideways market. I do think there are some buying opportunities, and quite likely I will take some profits to allow for flexibility. I don't think we are even close to a normal market yet.

Sep 03 02:01 PM

[JoeSixPack:]

Gold touched $1000/ozt.

Sep 03 06:07 PM

[manuel:]

S&P indicates a P/E of over 100 on reported earnings on its website, not 27.......

Sep 03 06:52 PM

[saltyrear:]

the essay is superb but it is nebulous as what action to take. do we sell in september? don't be timid in stating so.

Sep 03 11:39 PM

[Nettligent:]

Our international market has changed to October Means Sell.

Sep 17 04:20 AM