Monday, October 1, 2007


“There is no terror in a bang, only in the anticipation of it”

Alfred Hitchcock

excerpts from this week's report:

"With one half of the dreaded September/October time frame behind us and having got the call for the first half correct (see September 4th commentary and report, “September Swoon? Not Likely.”), it’s time to look at the second half of the dreaded duo – October – and see what might be in store for investors.

There are several concerns for the month ahead, none of which have to do with the spooky history of the month. Here are five for your consideration:

Concern # 1 is more of a political than economic issue. Specifically, October is expected to contain a number of congressional hearings re raising the capital gains tax. And while the prospect of such an increase is doubtful (given an almost certain veto from Bush), just the thought of where this is all headed is enough to add more uncertainty into the equity valuation risk equation. Moreover, this concern ties into the next concern.

"Concern # 2 is also a political one and has to do with the forward-looking, predictive nature of..."

"Concern # 3 takes the same six-month predictive feature of equities and considers the ARM (adjustable rate mortgage) resets that will likely..."

"Concern # 4 centers on the earnings outlooks for 2008 and the uncertainty and..."

"Lastly, concern # 5 deals with valuation. As the table below indicates (see report), only a robust growth phase in earnings (possible) and a decline in rates (unlikely, given the weakness of the US dollar and other factors) will tilt the expected return for equities toward its traditional rate of 12%. If earnings and/or rates move in the wrong direction (from a valuation perspective) however, then the yellow zone (see report) will fast become the more probable target range. Moreover, research data shows that whenever the Fed cuts rates, equities may have an initial one month burst but that is typically followed by a modest mid single digit return (+6.9%, to be precise) over the ensuing twelve months, not far from the valuation model you see below (see report). Given all the uncertainties that have been noted above and others not included in the equation..."

Investment Strategy Implications

"Now, to be clear – an October swoon is not a plunge. And although October will likely witness the return of volatility, the net effect for the month should be down some, say a give back of the 3% gains of September. As for specific actionable steps, I refer you to the Model Growth Portfolio.

As Mr. Hitchcock puts it so well, anticipation can be more frightening than reality. October should provide more than its share of anticipatory chills and thrills."

also in this week's report:

* Valuation Model
* Model Growth Portfolio
* Investor Sentiment Data
* Technical Analysis Focus
* Sectors and Styles Market Monitor
* Key Economic Indicators

To gain access to this and all reports, click on the subscription info link to your left.

No comments: