What I’m Watching this Week – 8 October 2012

Fear can’t kill you, but it sure as hell will make you sweat profusely

The “October Effect” is the theory that stocks tend to decline during the month of October.  Historically, October hasn’t produced the most confidence building events on record to be honest (the crash of 1987 occurred on the 19th which saw the Dow plummet 22.6% in one day is in recent memory as is October of 2008 where the S&P 500 was down by more than 27% at one point in the month).  I don’t buy into the theory as the statistics produce a different reality.  However a recent survey shows that a majority of individual investors were unable to correctly identify the fact that the S&P 500 index has risen in the last 3 years (2009, 2010 and 2011).  The barrage of confusing and outright false headlines, often with a political motivation, has sent some ordinary Mom and Pop investors fleeing, waiting to see the election result, what happens in Europe, whether there is a recession, and what happens with the fiscal cliff.  They are traumatized and that disaffection is widespread.  Many are just simply unwilling to commit, out of pure fear.

Others, not paralyzed by emotion or the bloviating of the “talking head political pundit’; haven’t let the rhetoric distract them from their analysis of data.  They didn’t sell in May – In fact they bought, and it wasn’t bond or money market funds it was equities.  The callous influence of politics gave these investors’ confidence. Why?  Because their understanding of the data accurately reflected what we fundamentally see:  modest growth – far less than what is needed for a healthy recovery but certainly not a recession. They were rewarded again by last week’s ISM manufacturing index registering in expansion territory at 51.5, that’s baseline but solid growth.  The employment situation is consistent and its ongoing improvement is respectable.  The payroll job increase was within expectations and the upward revisions to the prior months obviously proved to contribute a significant benefit.  The hourly wage moved higher. Household employment gains revealed a swell in part-time employment, about 2/3 of the newly employed. This is better than unemployment, but less than ideal.  And lest we forget, the controversial decline in unemployment.  Jack Welsh and the other conspiracy believers, be damned, I doubt a department full of career bureaucrats (republican and democrat) would destroy their careers to provide political cover to this President or any other President.  Didn’t Nixon try something like that?  I don’t recall that as working out so well.  Allowing a political opinion to influence the interpretation of data and its judgment is indicative of a culture of pathetic panic.  Facts are pesky little things you know.

I remain optimistic.  How much risk am I or should anyone else be willing to take at this point in time?  The correct answer is different for everyone and currently a large number have decided to watch from the sidelines.  “Markets can remain illogical far longer than you or I can remain solvent” are words from John Maynard Keynes and words to follow.  And when they do regain some logic and the markets rally, many are afraid that they have arrived too late to participate.  Dennis Gartman states “In trading/Investing, an understanding of mass psychology is often more important than an understanding of economics.   The news has been encouraging, if you care to look beyond the noisemakers.  I remain optimistic, cautiously attentive.

And now the list, as of close of market 5 October 2012.
(available via free subscription – email me at dcherry@nelson-securities.com with ‘Subscribe’ in the subject line for my weekly list of stocks, etfs and mutual funds that I’m watching.)