August Endgame

This month generally ends badly and September fares worse than August. Of course, the past is no guarantee of future results. As all we have to go on, though, it bears keeping mind.

Despite the imploding housing market, Dick Green at isn’t worried about the economy:

A major concern in the stock market is that economic growth is slowing too rapidly. The housing data last week exacerbated this concern. Two economic releases this week will show that economic growth in fact remains reasonably strong. There is no evidence that a recession or anything close is developing.

He expects the Q2 GDP to be revised from 2.5% to 3% on Wednesday, and the employment report on Friday to be healthy with 1% growth and unemployment under 5%.

Lest you become sanguine from Mr. Green’s cheerful economic outlook, I provide for you the following conclusion from his Monday missive:

Of far greater significance to the stock market outlook is the inflation outlook. The financial markets have taken a positive view of the inflation outlook with the good July numbers. The outlook here is far less certain than for the economy, however. It is far too early to conclude that inflation has hit an inflection point. Inflation, not the underlying economic trend, is where the risk to the stock market lies.

Back to the nail-biting.

I own chip stocks and have been looking to buy more shares on significant weakness. I expected since the beginning of the year to get that weakness in Aug/Sept, but so far no luck. Chip stocks are doing pretty well and Donald Luskin at SmartMoney thinks that with the stock options scandal fading and earnings looking ever so slightly up, tech might be back for real.

If we don’t get weakness ahead of the end-of-year rally I’ve been forecasting, that’s fine, of course. I’m a long-term tech bull. I already have open positions. I’d just like to add more to those positions to make more money when I eventually sell. Recent upgrades have re-ignited interest in chips, but that might fade again in September.

I’m not the only one banking on a correction before the rally. Sam Stovall at Standard & Poor’s The Outlook wrote:

A market pullback would give investors a more favorable entry point, as well as more attractive valuations, from which to spark a rally in share prices, possibly in anticipation of a projected easing of interest rates sometime in early 2007. September seems to be the most appropriate time for this correction, since the S&P; 500 has posted its worst performance during this month, falling, on average, 1% since 1970 vs. an average increase of 0.9% for the remaining months (none of which posted average declines during this period).
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The fact that so many of us want a dip before the rise may keep that dip from ever coming. I’m still hanging on, though, with a wad of cash and a shopping list and a desk filled with historical charts that say my patience will be rewarded.

Marc Faber of The Gloom, Boom & Doom Report says so, too. He wrote last Wednesday, “Two-year US Treasury notes yielding close to 5% (yields have come down 35 basis points over the last two month) offer a valid alternative to asset markets for the next three months or so.”

Here in Japan, where I live, unemployment is down and job vacancies are at a 14-year high. That’s fuel for a consumer spending boom. Japan is second only to the U.S. in terms of global economic influence, so a Japan gone shopping is a Japan that the global economy will like. I made a small profit on my Japanese investments earlier this year and have an eye on a few companies that look poised to do well. I may also open a long market position again this fall.

The reason the market rose on Monday, according to most reports, was that oil fell some 3%. This is a familiar book to pull from the shelf. Oil up, stocks down. Oil down, stocks up. Newsweek has cooked up a nice article on why oil prices behave the way they do, and why they’re generally moving up. To further understand the business of oil and its widely dispersed interests, I recommend that you see the film Syriana. See it twice or three times if you want to catch all the subleties. Not interested? Maybe you want to give oil a toss and find a good liquefied natural gas investment instead.

Here at The Kelly Letter, subscribers remain net long but with a tactical hedge in place against a September downdraft. Executed perfectly, we’ll close the hedge at a profit and use the proceeds to buy shares in select cheap stocks for the end-of-year rally.

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