One of the arguments we've seen a lot lately is the idea that September and October have historically been the worst months for the stock market, coupled with rebuttals by bullish analysts along the lines that the discussion of this historical tendency by the bears makes it likely that nothing bad will happen this time.
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As of last week, the Market Climate for stocks was characterized by moderately unfavorable valuations and mixed market action – still very strong for breadth and major indices, but with a continuation of dull volume sponsorship, elevated bullish sentiment, strenuous overbought conditions, and other factors. Overall, we can't rule out a further advance on speculative enthusiasm alone – hence our index call exposure of about 1% of assets, but the recent advance is now looking tired and aged, and we should certainly not rule out the alternative of a significant correction.
With mortgage delinquencies and foreclosures still pushing new records, and little reason from employment data (and particularly temporary hiring) to suggest a turnaround in job creation, it appears very likely that we will observe further deterioration in the balance sheets of major financials over the coming quarters. My impression is that significant balance sheet losses are already mounting unreported (but don't show up in gleeful “operating profits” because of weakened mark-to-market rules earlier this year). Eventually, push will come to shove, but it's not clear when, so it's not particularly useful to sit at the edge of one's seat waiting for the other shoe to drop. It might very well take until next year.
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...
As of last week, the Market Climate for stocks was characterized by moderately unfavorable valuations and mixed market action – still very strong for breadth and major indices, but with a continuation of dull volume sponsorship, elevated bullish sentiment, strenuous overbought conditions, and other factors. Overall, we can't rule out a further advance on speculative enthusiasm alone – hence our index call exposure of about 1% of assets, but the recent advance is now looking tired and aged, and we should certainly not rule out the alternative of a significant correction.
With mortgage delinquencies and foreclosures still pushing new records, and little reason from employment data (and particularly temporary hiring) to suggest a turnaround in job creation, it appears very likely that we will observe further deterioration in the balance sheets of major financials over the coming quarters. My impression is that significant balance sheet losses are already mounting unreported (but don't show up in gleeful “operating profits” because of weakened mark-to-market rules earlier this year). Eventually, push will come to shove, but it's not clear when, so it's not particularly useful to sit at the edge of one's seat waiting for the other shoe to drop. It might very well take until next year.
Read the complete commentary
