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Market Intelligence: Rough Augusts and 'Too Big To Fail'

Jim Kingsland
Wednesday, 1 Aug 2007 | 9:17 AM ET

August may mark the depths of summer vacation season, but it's been getting a bad wrap in recent years on Wall Street. Over the span of just about two-decades, the eighth month of the year has become among the weakest for the S&P 500, according to the Stock Trader's Almanac.

Not only is August dangerous for the market, but September and October loom as historically rough months as well - the silver lining being formation of October market bottoms leading to stronger end of year performance.

One of the most notorious August to October periods was during the Long Term Capital Management collapse in 1998. From the market's peak in July of that year to its October low, the S&P 500 tanked by 22% before rebounding sharply at the end of the year.

"Goodbye to July," says Sam Stovall, chief investment strategist at Standard & Poor's equity research, "but don't get too happy. February, August and September are the only 3 months of the year where the S&P has posted an average decline. And since September is even worse than August, things could get worse in September if they're bad this month."

As August kicks off for Wall Street, the subprime meltdown continues to spread in magnitude.

"It's an enormous arena," says David Leibowitz, managing director of Burnham Securities. "It's taking its toll on leveraged buyouts and private equity deals. The question has become 'will the source of funding be there on the terms originally thought likely when the deal was done'? How do you get your bond issue out?"

Leibowitz says there a flip side of the coin as investors try to look through "the carnage." That says Leibowitz "is the 'too big to fail' doctrine remains in force."

"You may recall (former Fed chairman) Greenspan used those words after some major money center banks were severely hit price wise," says Leibowitz referring to past episodes of major turbulence in the financial markets. "If similar problems were to afflict brokerage and banks and stock performance were to be more challenged, the Fed would reiterate that any needed capital would made by the banker of last resort.

Where might investors find refuge in this market? Leibowitz says, "you would start with oil related stocks, also defense and from there you might want to take a look at food companies, certain utilities because of yields, and 'sin stocks'". Leibowitz says "the best performing stock in the Dow Industrials since 9/11 has been Altria -- the tobacco company. 'Sin stocks' cover a wide variety of arenas - tobacco, alcohol and gaming."

Volatility

Volatility is expected to reign supreme. "Short and sharp" moves in the market is becoming an operative phase on Wall Street. Cronus Capital's Kevin Ferry, at the Chicago Mercantile Exchange says, "down here it’s all about the violence of the moves."

"This is the most participated break ever. There’s more ways to be short and more ways to leverage yourself short through exchange traded funds and futures contracts than ever before," explains Ferry. "That makes swings back up extremely sharp and violent and people get squeezed in their positions."

Analysts Action

The analyst community has started coverage ofBlackstone. 5 firms in total initiated coverage, with Bank of America, Deutsche Bank and Citigroup rating Blackstone a Buy. Price targets range from $33 to $38 a share.

Citigroup is out with its 10+ List of stock picks. On the list: Bank of America,Coca-Cola,ConAgra Foods,Intel, Marriott International,Marsh & McLennan, MetLife,Microsoft,Occidental Petroleum,Owens Illinois,Raytheon,Republic Services,Saks,WellPointandWeyerhaeuser.

After recent weakness, Citigroup upgraded Apple to a Buy. Its target is $160.

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