The September Syndrome

As just about everyone knows, the stock market crashed in a big way in 1929. Analyst Nick Guarino reminds me that it rallied 15 times before it hit bottom fours years later, having lost 90% of its value.

And the truth is, when adjusted for inflation, the market didn’t break even again until 1960. (If you’re a “buy-and-hold” investor, you MUST account for inflation. It is the single biggest “invisible” tax in our wonderful Fed managed economy.)

But before people could get too happy with making money again, along came President Johnson and the “Great Society.” I don’t know who it was so great for – the market began crashing again in ’66. Once again, adjusted for inflation, it didn’t get back to breakeven for another 30 years.

So, 30 years from the Great Depression to the Great Society. Then 30 years from the Great Society to the Great Depression II. Each of the peaks resulted in 10-15 years of declines. Of course, they didn’t fall straight down. That’s the “trick” of the whole deal.

Each rally draws in a few more people, a little more money, until there are no suckers left. Then when the bottom hits, it has takes 15-20 years to “recover.”

It will take a very long time to recover from what we’ve been hit with: Exxon/Mobil lost two-thirds of its profits… that’s 66%! The “World’s Company,” GE, saw a 47% collapse in profits. Toyota, the recession-impervious carmaker, posted its largest yearly loss EVER and is looking at losses this year, too. Insurers have been hit. Computer giants have taken a whacking. Even Disney is down over 25% in the third quarter.

These are not “bumps in the road.” They are “driving off a cliff.” By some estimates, inflation-adjusted earnings are down 90% in the last 20 months.

We are now in just the second year of this disaster. We are witnessing an almost perfect copy of the first Great Depression. And there are more nasty little secrets in the economy, waiting like ticking time bombs to explode. We will see more businesses in trouble, more banks failing, more foreclosures and more commercial real estate losses.

At the end of June alone, there were over 5,300 commercial properties in the United States in default. That’s more than double the number from the end of 2008 – and there are still six months to count. Still think American companies are recovering? What will a 300% rise in commercial defaults do for jobs? Profits? Banks?

So don’t let the recovery pundits fool you, even though they’re out in force.

No doubt you’ve heard the optimists: “The Recession is over.” “The Recovery has begun.” “Better get in on the ground floor now if you hope to recover all that retirement money you lost last year.”

Just look at the evidence, they say:

• Markets up 50%. In the greatest bull run since the Great Depression, stock indices are forging higher. The numbers are swelling. Ride the wave!

• Housing numbers are turning north – Over the past six months, there have been some the fall in some housing numbers are slowing, and some have turned up. Building permits. Existing home sales. New home sales. New housing starts. Pending home sales. Hmmm… nice!

• Manufacturing looks like it’s exploding. Earlier this week, the Institute for Supply Management manufacturing index posted a stronger-than-expected rise at 52.9. Well above expectations, and well into the 50+ territory that signals expansion. Looking better and stronger than it has in 2 years. It would be a mistake to bet against it!

But you probably know what I’m going to say right now: Don’t believe a word of it!

No market goes up forever. Isn’t that one of the first lessons we learn when chasing a bull market?

This one is no different. Could it go higher? Sure. But just how far can you stretch a rubber band? Eventually, it is going to snap back.

And, as it happens, we’re heading right into “snapback” season.

Historically, the month of September is the worst month for stocks. Hands down. Indices fall more in this month on average than in any other month of the year.

In fact, the S&P has declined in 11 of the past 20 Septembers. You may be inclined to say, “That’s not so impressive.” But an average decline of 10 points is something worth noting. Additionally, 40% of those falls consisted of declines that were 75-125 points. That’s huge. No other month has such an anomaly. And it seems to me that this September may be ripe for the picking.

In fact, the first day of September was a real whopper. And Monday (although technically an August day) was not so august for US equities. Thus, as the calendar turns over, we have two days in the down column.

But as bad as September is, October has the reputation for being a real bloodbath. It certainly possesses a number of the largest down and crash days. But in order for a crash of monumental proportions to take place, there has to be some lofty level from which to fall.

I get physically sick when people tell me how they are moving (what’s left of their money) back into equities. I try to reason with them; I try to warn them. It breaks my heart to see pensioners barely getting by. You remember all the drama from recent years, how we were told that the elderly were forced to choose between food and medicine? Do you remember the seniors who were reportedly sharing their cat’s food so they could buy their prescriptions?

And that was during the go-go boom years. I cringe when I think of what lies ahead for them.

Will it start this fall? Has the band stretched far enough? Has Wall Street suckered in all the money that will venture out into the street? That’s all they’re after. Draw everyone out of the woods. Get all those who believe that it’s time to buy and hold into the game again. A 50% rally? Child’s play! This time the Dow is headed for 18,000!

Better tread carefully. This is without question the area of thinnest ice. One misstep by the government, a foolish line slip or a negative surprise, and the entire “recovery” falls like a house of cards.

Keep your money, and your exits, close… and don’t be afraid to take profit.

Regards,

Bill Jenkins
for The Daily Reckoning