October can be the cruelest month for stocks
Mark Hulbert: The seasonal pattern that is the source of the “Sell In May and Go Away” strategy is based on historical averages, and there is wide variability in the year-by-year results. In fact, just over half the time since the Dow was created in 1896, that six-month stretch has done at least as well as it has this year.
The reason that this otherwise surprising data point is consistent with the “Sell In May and Go Away” pattern is that October historically has been the month in which stock market crashes have occurred — notably 1987 and 1929. Those outliers definitely bring down the average.
It’s particularly worth remembering this right now, since the seasonally unfavorable period still has a month to go. Given October’s reputation, it’s entirely possible that in one month’s time you will be glad you sold in May.
The following 10 reasons s why this October is shaping up to be a very bad one…
So much for the US recovery (we will never tire of saying that). After the first Q2 GDP revision bubbled up from 1.5% to 1.7%, the sellside brigade was confident that the rate of growth would continue and final Q2 GDP would be in line. Instead, we got an absolute shock of a print, with the final Q2 GDP print coming in at a ridiculously low 1.25% (rounded up to 1.3%), below the lowest Wall Street estimate of 1.4%, and the lowest number since the revised 0.1% reported in January 2011. Here is the final GDP trendline: Q4 2011: 4.1%; Q1 2012: 2.0%; Q2 2012: 1.25%.
Here’s a more detailed breakdown from today’s BEA report — it’s mostly ugly:
- Consumption fell to 1.5 percent in Q2, compared with 2.4 percent in Q1
- Investment fell to 3.6 percent in Q2, compared with 7.5 percent in Q1
- Exports increased 5.3 percent in Q2, compared with 4.4 percent in Q1
- Federal spending decreased -0.2 percent in Q2, compared with -4.2 percent in Q1.
Doug Short regularly updates this awesome chart that delivers the same information:
Pending home sales fell 2.6 percent in August from the previous month, missing economists’ expectations of a 0.3 percent rise.
Whether Atwater, California will join the prodigious ranks of Stockton, San Bernardino, and Mammoth Lakes to become the 4th Muni bankruptcy is up for vote on October 3rd (before a $2mm bond payment in November). As Bloomberg notes, the 28,000-strong Merced county town is suffering under the same weight of public employee costs, lost revenue, and a stagnant economy leaving it with a $3.3 million budget deficit. While some put their hope in the FB IPO, perhaps Bernanke should have mandated investment in AAPL for all these municipal comptrollers? The median income is 19% below the national average as the foreclosure crisis – which saw Atwater’s median home price drop by more than half – has depleted property-tax revenues dramatically. “We just started negotiating with our unions and they are going to have to take a major cut,” Mayor Joan Faul said. “We hope that once we declare a fiscal emergency, that they will realize that we are definitely in an emergency. If they want to save all the jobs, everyone is going to have to take a cut,”
There’s no getting around the ugly durable goods numbers this morning, shown below in blue, and “core” capital goods ex-military and transportation (mainly Boeing plane orders) in red:
It looks nearly certain at this point that manufacturing is in a recession.
4. ROSENBERG: A Crucial Economic Indicator Just Sank To A Level That Coincides With Recession 100% Of The Time
Economists often note that durable goods orders is one of the more volatile economic indicators that we get every month.
However, there wasn’t much sugar-coating anyone could do to the Thursday’s report that showed durable goods orders plunged 13 percent in August. Economists were looking for a 5.0 percent decline.
In his latest Breakfast with Dave note, David Rosenberg points to one sub-component of the durable goods report that sent a particularly scary signal.
The three-month moving average of core capex orders (i.e. nondefense capital goods excluding aircraft) was -4.1 percent in August.
“History shows when the trend weakened to the level we see today, the economy was in recession 100% of the time,” wrote Rosenberg. “So stick that in you pipe and smoke it!”
This is also bad news for jobs. According to Rosenberg’s data, this measure has an 83 percent correlation with private employment.
5. The “sleeping prophet” predicted back in 1940 that there would be major stock market crash in October of 2012
WALL STREET DOOMSDAY COMING IN OCTOBER!
According to Nouriel Roubini (Dr. Doom) and the prophecy of Edgar Cayce, Wall Street will have a major crash in October of this year.
Roubini reportedly feels that the alarming economic downturn will cause “the global financial system to implode,” according to a source close to a Wall Street executive.
What is most shocking is the Edgar Cayce, known as the “sleeping prophet” predicted back in 1940 that there would be major stock market crash in October of 2012.
We believe the balance of 2012 could remain challenging for investors, given the many negative indicators and warning signs. Certainly extremes in leverage in the Western economies and questions regarding growth in China present investors with a worrying post-2012 future. However, in our view there are nearly zero real choices available to global policy makers. The world needs growth and it is willing to go to extraordinary lengths to get it. This is creating distortions where old rules don’t seem to apply and where investors face a disturbing paradox:
- Those who are right are likely to be wrong
- Those who lose, often win
- Those who are imprudent can be rewarded
- Dumb money can win
Beware of a 25% Correction: ProMarket participants often refer to unanticipated occurences that rock the global economy as “black swans“. Yet Stanley Crouch, chief investment officer at Aegis Capital, told CNBC’s “Street Signs” that a “freckled swan” of powerful macroeconomic headwinds is building momentum.
“That’s the swan with the patches of all the problems that we already know are out there but they’re all in a combination,” he said.
“We paid in advance for this classic ‘buy the rumor, sell the news’ event,” Crouch said. While reluctant to say how deep major stock benchmarks could fall, he warned that the Dow Jones Industrial Average could “possibly” break 10,000 with the S&P 500 Index revisiting its lows from last fall.
“I think we see more downside pressure here ,” he said.
7. Spain Has Entered A Full-Scale Collapse And Created A Tremendous Amount of Instability Which Could Trigger An Imminent Lehman-Like Event And A Rerun of The Great Panic of 2008
In Spain, violent demonstrations over the state of the Spanish economy just outside the national Parliament building in Madrid on Tuesday evening made headlines all over the globe. You can view video of police brutally beating young Spanish protesters during those demonstrations right here.
Spain’s Troubles Threaten Eurozone (Dispatch)
Stratfor Europe analyst Christoph Helbling discusses the strains on Spain’s economic, social and institutional stability and the country’s impact on the eurozone.
Despite the 6.5% stock market rally over the last three months, a handful of billionaires are quietly dumping their American stocks . . . and fast.
With 70% of the U.S. economy dependent on consumer spending, Buffett’s apparent lack of faith in these companies’ future prospects is worrisome.
Unfortunately Buffett isn’t alone.
Fellow billionaire John Paulson, who made a fortune betting on the subprime mortgage meltdown, is clearing out of U.S. stocks too. During the second quarter of the year, Paulson’s hedge fund, Paulson & Co., dumped 14 million shares of JPMorgan Chase. The fund also dumped its entire position in discount retailer Family Dollar and consumer-goods maker Sara Lee.
So why are these billionaires dumping their shares of U.S. companies?
After all, the stock market is still in the midst of its historic rally. Real estate prices have finally leveled off, and for the first time in five years are actually rising in many locations. And the unemployment rate seems to have stabilized.
It’s very likely that these professional investors are aware of specific research that points toward a massive market correction, as much as 90%.
Before you dismiss the possibility of a 90% drop in the stock market as unrealistic, consider Wiedemer’s credentials.
CNBC: Adami pointed to the stock hitting a multiyear high last week.
Earlier, S&P Capital IQ Senior Manager Christine Short highlighted the threat of an earnings cliff.
“What the estimates are telling us right now is that we’re certainly heading for a earnings slowdown, if not a decline,” she said.
With revenue streams drying up and fewer places to cut costs, corporate America’s outlook for third-quarter earnings is looking grim.
So far, 103 companies in the index have provided guidance for the third quarter. Of those, 80% have guided below Wall Street consensus estimates, according to John Butters, senior earnings analyst at FactSet. That’s the most negative outlook since FactSet began tracking the figures in the first quarter of 2006.
The outlook doesn’t bode well for a market that’s at multi-year highs and will soon be facing added volatility as the November elections and the January “fiscal cliff” come closer.
Adding insult to injury, S&P 500 companies are projected to see earnings drop year-over-year for the first time in 12 quarters. Third-quarter earnings are currently estimated to drop by 2.7% for the S&P 500 as a whole, the worst forecast growth rate over the past 12 quarters, Butters added. At the beginning of the quarter, analysts had been forecasting earnings growth of 1.9%.
Companies will soon close the books on the quarter, and if comments from Intel and FedEx are an accurate indication, profit warnings could figure prominently in their reports. Multinationals are facing stiffer economic headwinds than at the start of the year. The U.S. dollar has appreciated against the euro, nicking sales in a region that’s already reeling. And growth rates have slowed elsewhere. These worries extend even to China, which is no longer the growth engine many companies had come to rely on.
Caterpillar , the world’s No. 1 maker of construction and mining equipment, issued its 2015 profit outlook Monday, saying it expects to see “fairly anemic” global growth through 2015. It estimated earning $12 to $18 a share in 2015 vs. an earlier forecast of $15 to $20. Caterpillar — dealing with a business slowdown in China, one of its fastest growing markets — is off 4% on the NYSE this year.
FedEx roiled the transport sector Sept. 18 when it slashed its full-year earnings outlook, citing a global economy in bad shape and showing little sign of improving soon. It was the second time in two weeks the parcel carrier had cut its profit estimate, both times blaming “weakness in the global economy.” That weakness has led some customers to seek cheaper way to move goods, even if it means taking longer to get them to market. Still, FedEx shares cling to a 1% gain for 2012.
Intel, the world’s largest maker of computer chips, cut its third-quarter revenue projection Sept. 7, citing cautious customers and dwindling demand from emerging markets. Intel said it is “seeing customers reducing inventory in the supply chain versus the normal growth in third-quarter inventory, softness in the enterprise PC market segment and slowing emergingmarket demand.” Intel shares are down 7% in 2012.
1. 5y5y forward inflation breakeven
2. Long-term inflation expectations from the University of Michigan consumer survey
3. Employment cost index
4. The Fed’s long-run forecast for the unemployment rate
5. ISM nonmanufacturing survey prices component
6. Overall commodity prices
7. The Baltic Dry index
8. Chinese renminbi (CNY)