Wednesday, September 1, 2010

September Song

The markets are roaring today. Up almost 250 points at this writing on better than expected manufacturing numbers, plus riding the coattails of upbeat sessions in Europe and Asia. Rick Santelli on CNBC was quick to point out that August had a terrific opening, too, up 209 points on day one, but you know what happened in August if you've been following the markets. They experienced their worst August performance in almost a decade. Dog days they certainly were if you were long the market. According the the Stock Trader's Almanac talking about September: "S&P opened strong 11 of the last 14 years but tends to close weak due to end-of-quarter mutual fund portfolio restructuring.". In fact, September tends to be the worst month for the markets. This does not mean that the markets can't go up for the month, because they have before, but the probability that they will decline is historically compelling.

Merger and Acquisition activity has been dominating the headlines in the Wall Street press the past month. The bulls believe this is an indicator that the market has reached rock bottom and that this is a good time to be buying. I take the bearish stance and say that increased M&A activity puts pressure on the markets primarily because consolidation of the two companies will have to take place and this means layoffs. Less jobs means less houses will be bought and even less iPads will be in stockings hung by the fireplace come Christmas time. There is also the argument that the company being scooped up may think that their stock has no place to go but down so these lofty prices they get by being bought out is the best thing that could happen to them. Let's not forget that with M&A the acquirer needs to bolster growth from outside the company because it can't grow organically. That to me is a sure sign that things are slowing down for these behemoth blue chips that are in vogue right now because of the dividends they pay out.

I've got nothing against dividends, but some buy-and-hold-forever stocks like General Electric (GE) and JP Morgan Chase (JPM) drastically slashed their dividends two years ago. I will grant you that their ticker prices have increased considerably since March of 2009, but you made money only if you bought them at the right time. It's just not that easy to time the market. If General Electric (GE) and JP Morgan Chase (JPM) don't make you shudder when you think about the dividend income lost, just consider other market stalwarts like General Motors and Lehman Brothers. That's a world of hurt if you banked on those widow and orphan enterprises. I really believe we are in only the second or third inning of the 'Great Recession' or whatever you want to call it. A year and a half is just not enough time to correct the biggest financial fiasco since the 1930's.