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SEPTEMBER 2013 INVESTMENT JOURNAL: HEAD FAKE 
  
  • Syria tensions ease
  • The Fed met and decided not to take away the punch bowl yet
  • Congress can't agree on a budget so the Government shuts down
Markets in September mostly gained ground, rallying on relief that the Syrian situation was not going to escalate, and then selling off as disappointment set in over the Fed's September 18th announcement:   
   
           
Developed market equities are the only categories showing meaningful returns this year, and the last 3 years:
   
    
     
Investors breathed a sigh of relief as the month began when Russia skillfully inserted itself as mediator in the Syrian conflict. As usual, the real story behind the headline is economic: Russia saw an opportunity to secure the placement of gas pipelines in Syria, a key conduit point for Russian gas destined for Europe. Experienced market observers did not miss this "head fake".
  
While tensions have eased for now, most observers expect a delicate balancing act to unfold, which could turn quickly on any misstep. Oil prices are weaker for now, but remain highly sensitive to any change in scenarios.
  
Complicating the mix is Iran's new conciliatory stance towards the West, which many have claimed is another "head fake" to distract the world from its ongoing nuclear weapons program. While the world waits for progress, these issues will remain perhaps the largest unresolved risk for investors for quite some time.
  
All eyes were on the Fed as mid-month approached. Most investors were anticipating an announcement that they would start to reduce their program of "quantitative easing" which began almost five years ago. Instead, the Fed said they would wait on more evidence of economic recovery before slowing their purchase of bonds / printing money. This was a real "head fake", since Bernanke and others had been talking up "tapering" throughout the summer, and markets softened as the month closed.
  
To add insult to injury, Congress met the last day of September to try to agree on a resolution to keep funding the government, but failed. Many federal workers were told to stay home, as non-essential agencies and departments were shuttered. Markets wilted but seemed to take it in stride (much of the gridlocked outcome seems to have been priced in already.) 
  
The consensus seems to be that the longer the gridlock, the more tenuous stock markets will become, especially as the US debt ceiling is reached on October 17. While things may become quite volatile for a few weeks, US stocks still have a healthy price momentum posture, and any near term weakness would be an opportunity to add: 
  
    
 
Far from the gaze of most US investors, Angela Merkel won re-election as Germany's Prime Minister, underscoring the triumph of the Euro-centric bloc that will insist on keeping the Euro together at all costs, including the loss of national sovereignty (just ask the Greeks and Cypriots how they have fared so far under this plan). Meanwhile, the Italian government collapsed (yet again) last month, and there are heightened concerns that a "too big to fail" country like Italy could really start to rattle the room soon. 
    
As we enter October, the US budget mess is likely to dominate the headlines. Seasoned investors know that surprises are what drives markets, though, so it will pay to be ready for the unexpected (good advice for a trip to the Haunted House too.) Don't let the Halloween Spooks get to you, and have a great month!

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