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Exposed: The 'September Effect'

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“Exposed: The ‘September Effect’”
by Brian Maher

“September is officially in swing. America’s youth are back at their desks; its adults are back at the grindstone. Here in Baltimore, a late-summer heat wave has us in siege… like a fever that won’t let go.
Marketwise, many consider September a calm before dreaded October. The Panic of 1907… the Crash of 1929… “Black Monday” 1987 — all fell in October. October’s record is so felonious that market observers have fashioned a term for it — the “October effect.” But is it true? Is October worthy of its blackened name?

Today we haul the defendant into the dock… interrogate its record… and announce a verdict. But let us first look in on today’s proceedings… Stocks were “mixed” today, as the phrase has it. The Nasdaq was down 96 points.

Why? Twitter CEO Jack Dorsey and Facebook COO Sheryl Sandberg appeared before Congress today.
There they got a good grilling about foreign election meddling and their efforts against it. “When you have these corporate executives dragged to Congress,” says Robert Pavlik, chief strategist at SlateStone Wealth, “that makes the market more nervous.” The S&P was down eight points today… while the Dow Jones worked a 22-point gain.

But returning to the question of the hour… is October the great menace we’ve all been led to believe History says… no. October’s bankrupt reputation appears more a string of sour luck; its conviction based on circumstantial evidence. Stephen Williamson, former vice president of the St. Louis Fed: “Stock market crashes have occurred sufficiently infrequently in history that there is not enough evidence on when they are more likely to occur.”

In further vindication of October, the folks at Yardeni Research prove the average October market return is a positive 0.4%. A slender gain — but a gain. Meantime, Investopedia informs us that more bear markets have ended in October than begun in October. Downturns in 1987, 1990, 2001 and 2002 — all reversed in the year’s tenth month. We must conclude an innocent man has been pitched into infamy… and sent to the gallows on false charges.

But if October isn’t the menace many believe, does another month rise in its place? Yes. Which month?September — this month. “Since the Dow Jones industrial average was created in the late 1890s,” financial columnist Mark Hulbert notes, “September has produced an average loss of 1.1%. “The 11 other months of the calendar,” Hulbert adds, “have produced an average gain of 0.8%.” One or two renegade Septembers alone cannot account for its villainous record, says Hulbert: “On the contrary, the month has an impressively consistent record at or near the bottom of the rankings.”

Like the Dow Jones, September’s ill luck covers the S&P. Bank of America Merrill Lynch strategist Savita Subramanian has examined the S&P’s median September return since 1928. The results were damning.
The evidence — the damning evidence, smoke billowing from the gun barrel: October is a month of honey in comparison. Perhaps it is time to replace the “October effect” with the more deserving “September effect”? But no more talk of Septembers past.

What about September present?
After closing August at or near record highs, stocks have entered September with a slight limp. Of course… we are not one week into the month. But if history is a reliable barometer, watch out for the next three weeks…

North Korea appears to be playing with firecrackers again. An emerging-markets crisis issuing out of Turkey remains a possibility. There are trade wars to consider. Meantime, stocks are wildly overvalued on key historical metrics. Mix the ingredients and markets are becoming “increasingly fragile,” says our own Nomi Prins: “Uncertainty will be a big factor in markets and economies through autumn… Given the rise in uneven patterns globally, it is clear that markets are entering an increasingly fragile period. Expect rising volatility this fall to become central to even the mainstream financial media outlets. Words to the wise, perhaps — for the wise.”

Do we hazard our own prediction of September doom? Of course not. Here at The Daily Reckoning, our curiosity is strong… but our commitments weak. “Sometimes right, sometimes wrong and always in doubt, we just try to connect the dots,” in the words of our co-founder Bill Bonner. We have even suggested markets could “melt up” from here — before melting down sometime next year or the year after. We are nonetheless under bonds to remind you…

September is one of the most dangerous months to speculate in stocks. Along with, as the great scalawag Mark Twain said: “July, January, April, November, May, March, October, June, December, August — and February.”

Below, Nomi Prins shows you why you should be on alert right now. What does it have to do with the “Turkish butterfly effect?” Read on.”

“Look Out for Emerging-Market Contagion Effects”
By Nomi Prins

“Even though summer technically lasts until Sept. 21, the reality is that after Labor Day, markets often snap into a hectic fall mode.  A recent Reuters article notes that, “President Donald Trump’s relentless “America First” trade push is hurting confidence in many countries, rising U.S. interest rates are putting strains on emerging economies and currency problems have hit crisis levels in Argentina and Turkey.”

When considering the markets over the last few weeks and seeing how the Turkish lira in particular has fallen 40% against the dollar since the start of the year, I started thinking back to my first job on Wall Street. At the time, I was earning my degree in mathematics, and my senior thesis was on chaos theory. Chaos theory aims to find “hidden order” in a seemingly chaotic environment. This hidden order is often reflected in symmetry and in repetitive events. Within the field of chaos theory is a subtheory called the butterfly effectBuilt upon the math and science behind it, the main idea is that small changes somewhere can lead to drastic changes elsewhere over a given period of time. The shock waves of the butterfly effect and its ripples don’t follow a straight path from one point to another. Instead, changes unfold in a more hectic or chaotic manner. For example, a hurricane in China can be connected to a butterfly flapping its wings in Brazil.

Applying this theory to financial markets, what Wall Street was learning back then is something that matters even more to markets today: that associated data, numbers and markets are all connected — and not always predictable. With respect to markets, Wall Street discovered there are more than just mathematics driving behavior. Added into the market equation are factors such as human nature, the media, leverage, speculation, the cost of capital and geopolitics, to name just a few. 

When the Turkish currency dropped by 20% alone in mid-August, it shocked the financial system. What we saw was the “Turkish butterfly effect” as part of the reason that Wall Street’s major indexes have been jumping up and down over the last month. On Aug. 13, Turkish President Tayyip Erdoğan started throwing his weight behind the latest trade war skirmish by declaring that Turkey would boycott electronic products from the United States.

The very next day, investors saw global markets sink as the lira plummeted, causing more foreign investor capital to leave Turkey.The belief became that the lira was far from hitting its lows versus the dollar and that the Turkish central bank wouldn’t (or couldn’t) raise rates enough to stabilize its currency. Turmoil and confusion had officially erupted in Turkey. While the Turkish currency temporarily stabilized, the worst is far from over. By Aug 23 the lira resumed its dive and continued to show signs of weakness.

In many ways, President Erdoğan did exactly what the Fed and the European Central Bank (ECB) have done for a decade. He advocated for his central bank to lower rates and offer up cheap lines of credit. The major difference from Europe and the U.S., however, is that Turkey’s central bank action led to more acute consequences. It caused 16% inflation and a seismic current account deficit because foreign money zoomed in for the good times and out for the bad. Loans were taken out in dollars and euros to finance companies and expensive projects across the country.

Now with the Turkish currency dropping and many of the country’s loans coming due, outflowing money means that Turkey’s problems will only get worse. Turkey will be forced to reckon with how to repay debt amid rising interest rates and a diving currency.

In addition to the free-falling lira, Turkish companies are operating under the weight of an estimated $220 billion in foreign corporate debt. The harder that becomes to service, the more likely companies will default. Sweeping defaults in Turkey, should they occur, would not be an isolated event. On a global scale, banks around the world, particularly in Europe, still have exposure to Turkish corporate debt.
Defaults would cause shocks across European banks, already beaten up by the Turkish situation, and ripple over to U.S. banks with greater exposure to Europe.

Adding more to the economic pain, President Trump had handed Turkey a death sentence by doubling the aluminum and steel tariffs (to 20% and 50%, respectively) that the U.S. imposed upon imports from Turkey on Aug. 10. According to one report, “The United States is the fifth-largest country where Turkey exports its goods and trade volumes amounted to $20.6 billion in 2017.”
While this might seem to be more of Turkey’s problem, and a tactical move by Trump, it is more complicated than that.

Building from the butterfly effect, U.S. construction and engineering companies could see the cost of steel rise due to a lack of supply. That could induce them to cut American projects and American jobs to compensate.

Why Does This Matter to You? If Turkish imports dry up, associated companies could default on their debt, causing negative impacts on the levels of stocks, some of which could be in your portfolio or attached to your 401(k) plan.  The butterfly effect in Turkey could alter the financial weather in Kansas, Ohio or Massachusetts. That’s because major investors that have money tied into local Main Street economies have also invested in emerging markets (EM) — like Turkey. If those investors decide to pull their investments or stop investing in EM economies, the risk is that they could back away from stock investments altogether to protect their money — triggering a broader crisis of confidence.

EM chaos could further such efforts as investors look for reduced portfolio volatility. As it stands, the crisis in Turkey appears to have more teeth and staying power. In part, that’s because end of summer trading is thin, meaning rumors and fear play larger roles. However, it’s also because Turkey has major geopolitical ties with the rest of Europe. As with Greece, those fears could travel throughout Europe and spread globally. Some already have.

What Turkey symbolizes is larger systematic instability. Central banks don’t like chaos. What we saw following the 2008 financial crisis was trillions pumped into markets “to help the economy” and to reduce market fears. With money at such low rates, governments could borrow for the future to pay for present costs. Corporates could do the same, as could consumers. The world became saturated in cheap debt. Because debt was so cheap, the interest paid by government and corporations was also low. That meant investors and speculators had to pile on more and more risk to get higher returns. This is what has translated into one of the major drivers of the bull market we’re in today.

But at some point, an impasse between debt and stability will be reached. As tension builds and markets remain volatile, questions will build around the Fed’s pivotal decision whether to raise rates or pause them when it meets on Sept. 25. The Fed doesn’t just look at growth figures, inflation statistics and even jobs numbers. It undoubtedly is aware of liquidity and markets. If Turkey ignites what’s already a looming debt crisis, the Fed may have no choice but to wait on raising rates. For you, that means you expect central bank credit to keep flowing (what I call dark money) and the status quo to continue.”


Source: http://coyoteprime-runningcauseicantfly.blogspot.com/2018/09/exposed-september-effect.html



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