Another frightening October

What is it about October that seems to drive the markets crazy? Yeah, I know that September is actually the worst month for the markets, on a statistical basis. But I have never come to dread September. I dread October. In fact we are going to cancel it next year. Sorry; there will be no Halloween. We are going right from September to November. Heck if Caesar can add a month, I can take one away!

September always feels good. The days are still long. The evenings are still usually warm. There might be a touch of fall in the air, and it feels good. The markets never get me down in September.

But come October, things seem to change. The days are getting shorter. The sun is setting earlier. The evenings are usually cooler. There is a touch of winter in the air. Is that the difference?

I have read all kinds of theories over the years as to why October has been the month of great turbulence. Some like to theorize that we humans are programmed to shut down as winter starts to arrive. Somehow it is our instinct, going back to ancient times, when the nights were long and spooky. We get afraid of the dark. Our behavior somehow changes. Do we really get spooked as the nights grow longer? Do ancient fears really take us over? Darned if I really know, but the markets sure seem to get crazy in October. Remember it was only a few weeks ago that we were at highs in the market for the year!

So far there has been no one day crash to replicate 1929 or 1987; no final sell off like the great bear market back in 1974. But we are being ground up by this markets action. Every day is torturous. The stock market loses a percent or two 4 days out of 5. The fifth day it rallies, just to frustrate us and give us false hope—or so it seems. This week has actually been the worst week for portfolios managed by K&A that I can ever remember.

There has been no place to hide. All the stock averages have been going down. Gold went down. The dollar went down. Bonds went down. Commodities, especially oil went down. Frankly we got smooshed. Today provided little relief. Only Google went up and darned if we don’t own it.

So is this market trying to tell us something in its behavior? Are we facing a recession? As long as I am being so frank I will tell you that frankly I don’t know. I do know one thing though. The net savings rate has been NEGATIVE in the U.S. for three months in a row. We hear “whispers” that it will be again for the 4th month in a row. I also know that I am hearing more commercials for REVERSE mortgages than ever before. That means that people are being encourage to suck equity out of their homes—the last bastion of savings left in America.

This week I spoke to a very astute professional real estate investor. He tells me that one of the next big things his company is getting ready for is to start a “vulture fund” to buy homes that are in bank foreclosures. He expects it to become a big part of his business. That’s gotta tell you something.

This weeks Barron’s reports, “According to Ned Davis Research, household debt now equals 90% of gross domestic product, compared with an average of 54% over the past 50 years. And that debt could grow more burdensome if credit-card companies raise their minimum payment standards under proposed federal guidelines. By some estimates, such a move would add at least $6 billion in extra monthly payments.”

The only thing that has been keeping this economy going for as long as it has is the deflationary effect of cheap goods from overseas and the tremendous inflows of foreign capital.

We can’t tell you that a recession is coming. We also can’t tell you which way the stock market is going in the next 60 days. We can tell you that Wall Street will be pulling out all the stops to generate a major year end rally. We will be paying attention to that and possibly trying to trade the rally opportunistically.

But our main focus right now is to position the portfolios as if a recession is right around the corner. When the U.S. consumer runs out of money, the economic music will stop. That day seems to be getting a lot closer.

All the best,

Paul Krsek
For K&A Asset Management, LLC

Disclosure and Disclaimer (updated 11/28/05):

E-lluminations and Illumination are proprietary newsletters written for clients, friends, and affiliates of K&A Asset Management, LLC (K&A).

Paul Krsek is the sole author of E-lluminations. While the views and representations found in the newsletter generally reflect the attitudes and opinions of the K&A Asset Management “team”, Krsek writes without editing and therefore is solely responsible for the content and opinions contained in E-lluminations.

Illumination is normally published as a joint effort by Robert Andreae and Paul Krsek.

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Sincerely,

Paul Krsek
Updated: November 28, 2005

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