October was always the least dependable of months... full of ghosts and shadows.  Joy Fielding

If you are familiar with the history of the stock market, you know that October is a month which has brought quite a bit of pain to investors.  The most obvious example is the crash in 1929, which led to the Great Depression and a prolonged business slump for the United States and a lengthy period when stocks were disdained by the general public.  In 1987, October was again a month where an unlikely and unexpected selling tsunami took place, to the tune of a loss of over 20% in a day.  Yes, in a day, you read that right.  Naturally, stock market students see similarity in the environment today and those periods, sighting valuations, lack of fear, complacency, a top heavy market, lack of controls on technology  related providers, and too much algorithmic trading.  As we reach the middle of the month, so far, October has been, well, as nice as the weather in fall, meaning darn good (if you are long).

Last week began the earnings season and the largest banks, meaning JP Morgan Chase, Citi, Bank of America, and Wells Fargo, reported numbers very similar to the ones which they have been posting for a while now.  Profits of 6 billion, 5 billion, 4 billion, 3 billion.  Note the B's in these figures, and when banks roll in those kind of numbers, markets generally approve nodding.  The thing about the financial services industry is there are many segments which lead to profits.  Banks can make money in the following ways: retail and commercial banking, mortgage banking, credit card servicing, auto lending, investment banking, prime brokerage, merger and acquisition advising, asset and wealth management, treasury services, and proprietary trading (fixed income, currencies, options, swaps, etc).  Most banks don’t offer all of these services as each has areas which they specialize in.  These areas afford different multiples that investors are willing to pay, depending on the nature of the entities revenue mix, how many revenue streams there are, and obviously the size and growth rate of each.  In terms of scale, Chase just became the banks with the largest deposit base, overtaking Bank of America and Wells Fargo.  It also posts the highest profit figures (in excess of 6 billion a quarter) and is generally first or second in every market they compete in.  There is a reason Jamie Dimon is considered one of the best CEO’s in the world, and it is because operationally, Chase is an elite company.  

Turning toward the comparison to markets past, the grouping of today’s investment climate to 1987 or 1929 is a stretch at best, and far fetched, if one wants to be harsh.  Today we live in a world driven by technology and much more stringent regulations for banks than in earlier periods.  If you read about the Great Depression, as did ex Fed chief Ben Bernanke, who studied its root causes and repercussions, I am sure you are aware of the high borrowing amounts relative to the capital invested and the lack of regulation by those in power.  In many cases, the highest government officials were those most involved with nefarious and illegal activity.  In 1987, portfolio insurance and forced selling, again involving high borrowing amounts, were the root causes of the correction.  Keep in mind, in 1987, six months after the selloff, the market had recovered what it lost.  Companies today, like the banks, earn enormous profits and are able to employ that cash in a variety of ways, including buying back stock if the management feels it is undervalued.  Yes, there are issues the market faces which could lead to a correction, or worse, and I would put at the top of the list the growing importance of the exchange traded fund trend and algorithmic trading.  When billions of dollars are used to buy instruments where the logic behind the purchase is because the algorithms are programmed this way, there is little discrimination regarding price, what you are buying, and why.  If these trades start not to work, and investors lose faith in their algos (momentum buying and trading), the market could see a tough stretch.  Time will tell, but I think human judgment remains a big factor in investing, and technology is not going to change that, in my opinion. 

Halfway through the month, one week into reporting season, everything has been fine.  Investors are looking towards next week, when heavyweights like Johnson & Johnson, Harley Davidson, Goldman Sachs, and Netflix will give us their profit performance.  The thoughts of October past lie in the imagination of the investment world.  It will be interesting to see if they remain subdued, or appear suddenly, like, well, a ghost. 

If you have any comments, thoughts, or questions about the blog or investing, please email me atinformation@y-hc.com 

Yale Bock, Y H & C Investments, its clients, and the family of Yale Bock have positions in the securities mentioned in the blog,  Investing in securities involves risk and the potential loss of ones principal.  Past performance is no guarantee of future results.  All investment decisions should be considered with respect to ones risk tolerance, return objectives, liquidity needs, tax considerations, and one's overall financial situation.  The fact that Yale Bock has earned the right to use the Chartered Financial Analyst