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October 2012 Investment Journal 


Markets in October were flat to down. Equities reflected weaker than expected earnings, amid a growing realization that global growth is slowing. Bonds held their own, while commodities fell and gold back-pedaled:
Since Hurricane Sandy dominated the news late in the month and has been extensively covered elsewhere; we'll just comment that closing the markets for two days makes a farce of the so-called global electronic markets. Backup plans and redundancies, mirrored servers and offsite preparations were all sent back to the nineteenth century as the NYSE shut-down illustrates how utterly unprepared the US is for any disruptive geophysical or terrorist event. Photons and buried fiber don't need a highway or subway to operate, and, with all empathy for the human tragedy involved, it is not necessary for floor traders and back office personnel to report on site to operate an electronic market. All we can say is that it's time to stock up on currency, junk silver, generators, and food if this is the best continuity plan US exchanges can offer.
The big take-away this month was the start of a disappointing earnings season. Major technology bellwethers ranging from Intel to Apple ratcheted down their forecasts, with all of them citing slumping demand overseas. Industrial bellwether Caterpillar cut its full year profits forecast sharply, on a wave of order cancellations and pullbacks, citing economic uncertainty. About 60% of S&P 500 companies have missed their revenue growth targets this reporting season, and analysts are lowering earnings estimates en masse. Something appears to be rotten in Denmark. Could this be the start of the long awaited correction?
Many sources cited the escalating territorial dispute between Japan and China over an island claimed by both, and an internally divisive change in China's leadership (Congress), as new elements adding to the global slump. Toyota, for instance, saw a 50% drop in Chinese sales in September alone as consumers there boycotted Japanese brands. Honda slashed its forecast by over 20% for the year for the same reason. Investors should expect more tales of woe by Japanese exporters.
In Europe, Spain's debt rating was cut to BBB- by S&P on October 10, just one notch above "junk", joining Moody's at Baa3. Later, on Oct. 22, Moody's cut the ratings on five Spanish regions (like US states) further into junk territory, including Catalonia, home of Barcelona and the fiercely independent minded Catalans. Madrid cancelled a bond auction because "no one showed up". Almost all of the Spanish regional authorities have asked the federal government for support. Of course, Spain does not have the funds, and the markets await a "formal" Spanish request for help from the ECB to see how much will be forthcoming (printed up). Meanwhile, Greece is broker than broke, and talk centers mainly on the eventual "Grexit", or how Germany will force Greece to leave the Eurozone. The endless drama continues, with no end in sight.
In the US, there was renewed focus on the upcoming fiscal cliff, a looming breach of the debt ceiling, and, of course, the Presidential election. Most observers say that, regardless of who is elected, there will be some sort of last minute "deal" that will patch things up until 2013, when the real work begins. If anyone in DC is awake, they might notice that all their stalling and quibbling is affecting businesses and families, who cannot plan for the future with any certainty.
Meanwhile, the US Fed met and declared no change in policy. What else can they say after their Sept. 13 "Masters of the Universe" bombshell? They'll keep buying bonds and suppressing interest rates until the cows come home, or the economy starts to recover, whichever comes first. As if they can "command" economy with a wave of their magic monetary wand. Since the announcement last month, major "risk-on" markets like stocks are off their highs by 3-5%. It looks like the "sugar high" is over, and now investors are staring at the reality of "no bang for the buck". Investors are increasingly questioning "what is the end game?" of endless QE programs.
As if to accentuate the money printing strategy of global central banks, the Bank of Japan agreed to boost its asset purchase program - "QE 9" - by $138 billion. (Japan has been caught in a deflationary trap for over two decades, and its experience should demonstrate clearly the futility of printing money to stimulate growth, but this has somehow eluded the US Fed). As the month closed, the Bank of China pumped a record $60 billion into their countries money markets to support more infrastructure spending: "Sino-TARP".
In the Mideast, there is a growing consensus that Israel will pre-emptively strike Iran sometime after the US elections and before next summer, when experts agree they will have enough fissile material to arm a nuclear weapon (did anyone notice the warm up raid on a Sudanese weapons plant this month?): 

While a surging oil price may be temporary, the more lasting effect will probably be an increased polarization of allies and enemies in the region, with Russia and China lining up behind Iran, and the US with Israel.
We'll know very shortly the outcome of the US Elections, which will result in short term relief for investors. Large issues remain unresolved, however, and investors are looking for progress, especially from the "do nothing" Congress. Bold action is required. We'll be back to you next month with an early read on the post-election markets.
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