Five Months Down For Stocks: Time For A Bounce?

Goodbye September!  The S&P 500 is sporting a healthy 10% decline for the year and nearly an 18% drop from the peak.  The recommendation to move primarily to cash and fixed income back in April has served us well.  So, what about October? 

October has been the month that has seen the end of bear markets more often than not.  Unfortunately those bear market endings generally consisted of very large declines.   The month of October this year is, unfortunately, laden with risks.   The government is still engaged in trench warfare which means little assistance from the Whitehouse.  The Fed has effectively thrown the towel in at this point with "Operation Twist" which will do little to bolster the economy or the financial markets.  The Greece/Europe standoff is quickly coming to a head and Greece will most likely have to default which will put tremendous pressure on the European economy.   Europe and China are slowing rapidly and it is a race to see whether it will be the US that drags the world in to a recession or vice versa.  As you can see there is more than enough systemic risk to disrupt the markets.   Unfortunately, we are going to plaster those systemic risks with a good solid coat of financial risks as the 3rd quarter earnings season kicks off.   Analysts estimates remain very high and earnings season could prove to be a disappointment with the slowing of corporate profits combined with a weakening of incomes and a despondent consumer.

Now for the stats.  September was the 5th negative month of returns in a row which has only happened 5 times previously.  The reason I point this out is twofold.

First, there have been numerous analysts pointing this fact out lately touting that this is the time to get back into stocks because of the rarity of 5 month negative return periods.   However, a look at the data tells us a potentially different story.  

If we average each of the 12 months following 5 months of negative declines and look at average monthly returns we find  that the better buying opportunity generally comes after a reflex bounce.  

This is assuming that September was the bottom. 

Which brings me to my second point.  What if September wasn't the bottom?

What these analysts don't tell you is what happens if October turns out to be a negative month as well?   There have been four 6 month periods of negative returns the markets since 1930.   After each 6 month period the market did indeed bounce.  Unfortunately, 3 out of 4 times those bounces let to brutal market declines with one of those 6 month periods bouncing before starting a slide into the 9 month long crash of 1974 which still holds the record.

Also, what is interesting is that after 6 months of negative returns a 3 month bounce occurred 3 out of 4 times which turned out to be a suckers rally.  The subsequent six months led to negative return and that second bottom, with the exception of 1974, was the better buying opportunity.

With the both a high level of financial and systemic risks in the market today combined with a lack of support from the Federal Reserve, the odds of a strong rebound from these levels looks questionable. 

If September turns out to be the bottom of the market then our technical indicators will signal to us a better time to wade cautiously back in to the risk pool.   However, if October turns out to be negative then most likely we have much more work to do before a better buying opportunity presents itself. 

Finally, if our economic models are correct and we are on the verge of a second recession then stocks do have further downside risk.  A reflexive rally is certainly possible BUT should be sold into.  This is the first rule of trading during negative market trends as we currently witness today.  During an average recessionary bear market stocks decline by 33% on average.  As stated previously, with the markets currently down around 18% from the peaks this year, this leaves roughly another painful 20% to go.  Of course, I did say "average" recession.  In the current economic environment my concern is that the next recession will be anything but "average". 

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SABMiller FINALLY Manages To Take Over Foster's After Months Of Being Rebuffed

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You have to be ruthless and persistent to win in a hostile takeover, and that's what SABMiller has just proved.

Australian brewer Foster's has finally caved to a $10.2 billion bid from the UK-based brewer and bottler, after three months of telling them to shove off, according to the Wall Street Journal.

Here's all the drama that led up to the final deal:

SABMiller first tried back in June, but the $10 billion bid quickly rejected -- Foster's CEO John Pollaers later said it was "so far from reality, it wasn't worth engaging," according to the Wall Street Journal.

It just got more hostile from there. In August, Foster's rebuffed another $10 billion offer, saying that it "significantly undervalued" the company. 

Then it really got ugly. The brewer accused Foster's of making misleading financial statements and tried to get Australia's Takeovers Panel to intervene, but it refused the review.

SABMiller actually reduced its cash offer to $9.6 billion in another bid earlier this month, and was once against told that it was "inadequate." Foster's gave up the fight just over a week later after the bid was increased back over the $10 billion mark.

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Russia Finally Decides To Back Libyan Rebels After Criticizing NATO For Months

Fred Wier is a correspondent for the Christian Science Monitor.

Russia has been one of the loudest critics of NATO's air war against forces loyal to Muammar Qaddafi over the past six months.

But on Thursday Moscow suddenly pushed the mute button on its criticism, joined a Paris conference of some 60 nations aimed at consolidating support for the victorious anti-Qaddafi insurgents, and surprised many by extending immediate official recognition to Libya's rebels as the country's only legitimate government.

"The Russian Federation recognizes the Transitional National Council of Libya as the ruling authority and notes the program of reforms announced by it, which envisions developing a new constitution, holding general elections and forming a government," the foreign ministry said in a terse statement posted on its website Thursday.

In recent weeks Moscow had urged the rebels to seek a negotiated settlement with Mr. Qaddafi, and President Dmitry Medvedev suggested earlier this week that Russia might withhold official recognition from the TNC until it demonstrated an ability to unite Libyans and control the country's whole territory.

But the foreign ministry statement offered a small, diplomatically-worded hint on the reasons for Russia's swift about-face: "We presume that the contracts previously concluded by the Russian Federation and Libya, and the other mutual obligations of the parties continue in effect in relations between the two states and will be carried out in good faith," it said.

In plain terms, Russia has economic interests to protect – $10 billion worth.

These include about $4 billion in arms contracts that were negotiated with Qaddafi, including a $1 billion deal to supply anti-missile systems that was shut down by sanctions when the war began. There is also a $3 billion contract for the state-owned Russian Railroads company to build a high speed rail link between the Libyan cities of Sirte and Benghazi, and another $3 billion or so in oil and gas related contracts signed by Qaddafi with Russian state companies such as Gazprom and Tatneft.

Experts say that by dumping Qaddafi, with whom Russia has long enjoyed good relations, Moscow is only acknowledging the inevitable. But as nations gather in Paris to consider Libya's way forward, the backroom scramble over economic contracts, past and future, is already underway.

"Yes, Russia's recognized the (rebel) government, what else could it do?" says Boris Kagarlitsky, director of the independent Institute of Globalization and Social Movements in Moscow.

"This drama is reaching the final curtain, and until today the Russian Foreign Ministry has been in a kind of paralysis. So, at last they understood that if they continue waiting, everyone will move on without Russia," Mr. Kagarlitsky says.

Some analysts suggest the imminent rebel victory in Libya may politically benefit Mr. Medvedev in his increasingly fierce but still undeclared competition with Prime Minister Vladimir Putin for the establishment nomination in Russian presidential elections, now barely six months off.

Medvedev has consistently been gentler than Mr. Putin in expressing Moscow's criticism of NATO for "going beyond" the UN Security Council's Libya resolution – which authorized the use of force to protect Libyan civilians – by using airpower to help the rebels overthrow Qaddafi. At one point Medvedev publicly chastised Putin for referring to the NATO action as a "crusade."

Analysts say that the Kremlin's fast footwork on Libya may cause momentary embarrassment, but no lasting pain in Moscow.

"Russia's relations with Qaddafi were never based on love, but were all about mutual pragmatic interest," says Irina Zvigelskaya, an expert with the official Institute of Oriental Studies in Moscow.

Now, she says, there is a worry that the "Libyan provisional government may give economic preferences to Western companies, because it was the West that supported them directly. ..."

"But now's the right time to acknowledge the realities on the ground. We had pragmatic relations in the past, so there is reason to hope that they can be restored in future," she says.

This post originally appeared at The Christian Science Monitor.

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