Markets & September Heebeejeebies – Hide or Ride?

What’s an investor to do when everything expected has already come to pass, and it’s time to strategize for the future – but the potential September/October abyss is in the way?

Having warned myself months ago about the coming rout in the bond market – see my post from June BONDS – Where we go from here! (And what about equities?) – I am sort of wondering why the consensus remains somewhat oblivious to the calendar.

The phenomenon isn’t imaginary. Have a look at the chart – click on it to enlarge – and read this true story (from my book) of what can happen quickly at this time of year:

During October of 1987, my wife and I were touring around Europe. Consequently, I had no idea about the market collapse that would be labeled the “crash of ‘87.” Upon my return to work, I was delighted to discover so many of the companies I had invested in (The Gap comes to mind as one of them) were ridiculously cheaper than when I had left for my vacation a couple of weeks earlier. The stock market seemed to me like a big warehouse sale……….When the boss came to my office, he was taken aback by my obvious jubilance. “What are you up to, Mal? How are you coping?” I responded, perhaps not wisely, that things were fantastic, and told him I was buying stocks like crazy. I later learned from my immediate supervisor that the big boss that same day suggested I should be fired immediately.

I wasn’t fired, and the bargains I picked up turned my portfolio into a gem. I was assigned more funds to manage a year later.

From 1987 to 1990 Canada bond yields rose from 8% to nearly 11% (roughly). The Toronto Stock Exchange (sensitive to materials & resources) and the S&P rose 34 – 35% (both expressed in $US).

	Date	Rate
Low	1987-11-05	$1 CAN = $0.7510 US
High	1990-08-23	$1 CAN = $0.8859 US

However, the $C appreciated about 18% over the same time period. Despite the October’87 Crisis, a bet on resources and materials when they were cheap and the economy transitioning into a ‘growth’ mode was quite rewarding. And it was at a time when rates were rising. Rates have been rising of late too, but it’s hard to say when they get to natural levels versus artificially depressed levels.

There should be a shock to the system (October?) as the cost of capital for industries continues to rise:

From WSJ August 22nd: Moody’s said its ratings for Goldman Sachs, J.P. Morgan, Morgan Stanley and Wells Fargo are on review for possible downgrade. Bank of America and Citigroup are on review, direction uncertain, the agency said. Both banks have improved standalone ratings that could offset the effects of the removal of government support.

In all likelihood, the interest-sensitive sectors (financial, insurance) will suffer selling, bonds won’t attract money and economy-sensitive sectors will become in vogue. This can all happen – bigger caps going down while smaller cap materials firming up – while the overall market appears to be in decline. Admittedly, I may have been too early (a curse of much younger men usually) when I wrote about it in March – Global resources boom imminent! but the wheels now seem to be turning.

I love it when I see stuff like this:

“EIA Expects Brent Prices to Decline through End of 2013…” (from their August 21st This Week in Petroleum Production newsletter) while pointing to temporary ‘disruptions’ to explain recent strength.

These agencies are almost always wrong when it comes to predictions, and in this case the EIA is (still) underestimating the impact of rising demand, focusing too much on the supply-side.

As I’ve published previously (see China will be the next big surprise!) stronger demand in China (as well as North America and Europe) will drive growth, and the FED & ECB won’t have to fuel it….the heavy lifting has already been done.

Whether it’s energy (stocks like Suncor) or base metals or other commodities, the time to buy is during the frantic months of September and October and Christmas will be merry indeed. It’s no wonder that Warren Buffett has elected to buy a big stake in Suncor.

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