As investors, I believe, we were all happy to watch the month of August pass us by and turn to September for a fresh start. The month of August was horrible with the first 10 days posting a loss of more than 11% on the Dow Jones. The second half of the month we saw light, and began to trend higher, which gave investors a reason to be optimistic about the future. Yet September has started rough and after considering what's ahead, I am no longer optimistic, regarding the fresh start of the new month. Throughout September, there will be several important announcements which could affect the trend of the markets or push the major indices lower. Below is a look at a few key dates, what it could mean for the market, and four particular stocks.
So far in the month of September, the Dow Jones has lost over 370 points as flat unemployment, a poor manufacturing index, weak construction data, and a federal lawsuit against financial institutions forced investors to sell. Although the loss of 370 points is large, a significant portion of the dow impact was the result of 3 companies. International Business Machine Corp (NYSE:IBM) accounted for 37.39 points, Caterpillar (NYSE:CAT) accounted for 42.68 points, and 3M Company (NYSE:MMM) accounted for 27.4 points of the total loss, with each stock being affected by the weak economic indicators.
I am expecting more loss from the markets during the month of September, as there are several key events set to take place that are scattered throughout the month, with each presenting a strong chance to move the markets lower if investors hear something unpleasant.
- Sept 8 - President Obama speaks on Jobs/Economy and unveils a proposal to create new jobs. This announcement, or speech, is not what I expect to drive the markets lower, although it could. I expect Congress' reaction will drive the markets lower as I expect them to be reluctant to agree to any plan that will increase spending. If the market believes that Congress may not approve the plan or if the markets believe Obama's plan is unrealistic then it could drive the markets lower as investors may believe that Washington is running out of options.
- Sept. 15 - Greece needs more aid! Greece has, arguably, the most significant financial crisis in Europe which plays a large role in its overall financial health. Investors are hopeful that Greece receives aid quickly and without any problems. A large portion of the loss experienced in early August was related to the European debt crisis as high sovereign debt affected the stock of American banks. Financial institutions across America posted loss with the same intensity, as European banks, despite being completely different institutions.
- Sept. 20 - All eyes will be on Ben Bernanke, once again, as investors are still hopeful the chairman will implement some type of quantitative easing. Mr. Bernanke spoke in Jackson Hole last month insinuating that federal aid was being explored and could potentially come in the future. I personally, do not believe that investors will get anything positive out of this speech. Mr. Bernanke was correct on his analysis of the economy as large corporations are posting strong earnings and regardless of speed, the economy is growing.
- Sept. 30 - The short-sale ban for many European financial stocks will be discussed and possibly lifted for the countries which implemented the regulation. I do not believe the ban will be lifted as the countries are in no position to open the banks to more loss. However, I do not believe the ban has been successful, and further reflects an act of desperation. Despite its relevance, if the ban is lifted, I believe it will have a strong impact on financial institutions in America since our banks trade heavily on global financial news. I cannot imagine U.S. markets trending higher if the ban is lifted, regardless of its meaning.
These events are almost perfectly positioned throughout the month to cause potential distress within the markets. The market has a pessimistic view as it rarely trends higher on positive developments, but trends lower on news with little importance. This reflects our consumer confidence levels, which are at lowest levels in several years, as investors are not confident in our markets or economy.
I expect two industries to get hit the hardest: the banks and automotive stocks. The banking industry is an obvious choice as investors believe this news pertains to banking stocks in some way. The automotive stocks have done a great job at trading with the markets, regardless of individual company performance. Therefore, it makes sense that these stocks would be affected as well. I believe the reason that these two industries trade so low with the market is because of investor's past experience with these stocks, more specifically Bank of America (NYSE:BAC), Citigroup (NYSE:C), General Motors (NYSE:GM), and Ford Motors (NYSE:F).
I believe the reasons that these two industries, and more specifically these 4 stocks, trend so low with the market is because of its performance during the recession in 2007-2009. Both Bank of America and Citigroup were a part of the federal bailout program, the TARP, as both companies approved bad loans and had toxic assets which cost shareholders nearly all of their investment. General Motors and Ford both felt the full effects of the recession as sales dropped drastically causing both companies to lay-off 1000's of employees, with GM filing for Chapter 11.
These 4 stocks combined, have lost nearly $80 billion of market cap value since August 1 and much more year-to-date. Bank of America has its share of problems; it's dealt with lawsuits, questionable assets, questionable management decisions, problems raising capital, among other issues that have all come under public scrutiny over the last few months. Citigroup is facing many of the same lawsuits and could have a large portion of toxic assets, but the company is improving financially. It has posted better quarters with much higher net income and revenue as of late, which shows progress.
Both Ford and General Motors are posting higher sales each month, have posted better earnings, and both have reinvented product lines with fuel efficient vehicles. However both have trended lower despite the increased sales and total progress within the corporations.
Since the economy has so many questions, and is looking at a potential rough September, investors have traded in fear rather than judging fundamental performance by a company. I believe that these 4 stocks are in a great long position for large gains. Citigroup, Ford, and General Motors have shown that each company is moving in the right direction by posting solid earnings and even Bank of America is moving in the right direction by selling off assets and making efforts to correct organizational issues.
I believe that each of these stocks will continue to move in the right direction, long term, but with the month that is ahead, investors will be trading off fear and not fundamentals. Based on my experience, psychology and trends control the market short- term, but fundamentals and company performance control the market long-term. I expect for each of these stocks to post large gains, from current prices, within the next year. The panic should diminish and the market will improve when the larger companies post earnings that exceed the value of its stock. Yet, the month of September may be rocky, which could give investors another chance to load up on these stocks before the market realizes that the panic was unjustified.
Disclosure: I am long GM.