5 Things To Ponder

by Lance Roberts

The financial markets are set to wrap up the month with roughly a 3.5% gain, depending on where today's action ends, which is historically on the positive end of returns for the month. The histogram below shows the annual percentage change for the month of August. Since 1930, there have been a total of 47 positive months versus 38 negative (55% win ratio) with an average return of 1.47%. However, if we strip out the 37.7% gain in 1932, the one outlier, the average monthly return falls to just 1.04%.

Learn About Tableau

September's prospects improve a bit from August with the overall win ratio improving to 58.3%. However, unlike August there is bigger propensity of market declines of between 5-10%.

Learn About Tableau

With the Federal Reserve ending their support of the markets by October, and as discussed yesterday, corporate share buybacks on the decline; two of the biggest supports of asset prices over the last couple of years is fading. What does this mean for investors going forward? That is the subject of this Labor Day Edition of "5 Things To Ponder."

1) A Classic Warning For Investors by Michael Mackenzie via Financial Times

"A look at the growing and already large divergence between the S&P 500 and the 10-year government note yield illustrates how the two big US markets are not only not cheap, but are also sending conflicting messages.

Here, equities and bonds can probably prosper in the near term until economic data conclusively settles the issue. Only then will the huge divergence between the S&P and 10-year yields snap shut with serious repercussions for some investors."

2) The Fed Has Become The Fundamentals by Jeffrey Cooper via MinyanVille

"A bull market will always find the silver lining, no matter how insignificant. Mirror image of human emotions and hysteria." - Marc Eckelberry

"There is a notion out there that the bull market has a long way to go since there is no sign of elation, such as in the months leading up to the top in March 2000. Fear is driving the market, not greed. Equities are up out of lack of choice, not out of reason.

Ebullience has not been a hallmark of the advance at any point in the last 5.5 years. Does a grand top require a manic phase? The top floor can be reached by an escalator just as well as an elevator."

3) It's Time To Be Defensive, Very Defensive via ZeroHedge

"What is wrong with changing your mind because the facts change? But you have to be able to say why you changed your mind and how the facts changed." - Lee Iacocca

"It’s important to underline that major US investment houses, and certainly every single sales person I talk to, believe US is about to accelerate in growth not slow down. Q3 could be ok but the real damage will come in Q4 as the lead-lag factor of geopolitical risk, lack of reforms and excess global supply leads to low inflation. Despite recent Fed optimism about an exit strategy the fact remains that few institutions are worse than the Fed in projections as even its simple target goals show."

Read Also: The Bubble Of All Bubbles - European Bonds by EconMatters

4) Equity Markets Running On Fumes by Izabella Kamins via Financial Times

"It is widely accepted the Fed’s QE programme has inflated asset prices way above fundamental values (higher inequality being one unwelcome by-product). Andrew Lapthorne has identified the mechanism whereby QE, by shrinking the available stock of investable government bonds, has encouraged investors to instead gobble up other debt assets all along the risk spectrum. Companies issuing at low yields into this buying frenzy are doing what they always like doing with debt in the final throes of an economic cycle they issue cheap debt to buy expensive equity. Decent profit (cashflow growth) may be more than sufficient to cover capital expenditure and dividends, but a gargantuan funding gap emerges as companies also undertake their corporate finance zaitech activities (see chart below, Andrew also calculates that currently almost a third of all buybacks are to cover the expense of maturing management share options QE is indeed making the rich richer!)."

5) Get Ready For S&P 500 2150 by Mark Hulbert via WSJ MarketWatch

"This incredible bull market, which pushed the S&P 500 above 2,000 earlier this week, is still alive and well. By the end of the year, the benchmark index may rise to around 2,150, about 8% higher.

So says Sam Eisenstadt, who has more successfully called the stock market in recent years than almost every other market timer I can think of — including many who I have featured in this column.

Eisenstadt, for those of you who don’t know of him, is the former research director at Value Line Inc. Though he retired in 2009, after 63 years at that firm, he continues in retirement to update and refine a complex econometric model that generates six-month forecasts for the S&P 500."

Bonus Read: Because There Is An Extra Day This Weekend

The Greater The Stock Bubble, The Less Monetary Theory Holds by Jeffrey Snider via Alhambra Partners

"I think the full answer lies in monetarism not being a flow of “money” and funds but rather a corruption of expectations, and thus activity. The idea of “easy money” now spans not just some marginal speculators touring the contours of the pink sheets for grand slams, but rather it has taken hold of everyone from the should-be-conservative retirees looking to regain their balances from even two bubbles ago to corporate boardrooms looking to get paid as much as possible before reality closes in once more and the bottom falls out. In trying to gear marginal economic activity toward financial means, central banks have instead totally financialized the entire affair to the point that far too much psychology, and thus attendant flow, goes only in that direction. In other words, instead of enhancing marginal economic activity it directly suffocates it."