**Afghan Related Losses? ** - Wednesday 2nd September

So the world did not disappear in a black hole of August selling madness, political leaders did not totally embarrass themselves by donning the skimpiest swimwear possible and gallivanting around beautiful and extremely pricey resort destinations to the chagrin of their devoted and embattled subjects – that’s a good thing. The bad thing though, is that not much has really changed in the last 60 days of summer – so much seems to have taken place but the reality that must now be setting in to those that retake their positions at their same old desks, with that same old mouse mat beside their keyboard and a quickly fading tan in tandem with the joy and memories of time well spent in the last 4 weeks, is the daunting prospect of getting through another 4 months of market and economic news without a major hiccup.

So where are we in the markets? Same exact place we seem to have been back before the summer rush of blood to the head, what with excitement that corporate earnings were apparently recovering (when in reality they were simply a little higher than the exceptionally low expectations companies had put out) and a total disastrous meltdown had been averted – but what now? The S&P has shed 3% in the first two days of September trading, and global markets have all responded in kind with some continued losses in China exacerbating recent falls there – the CSI300 shedding 25% in the last 40 days, but still returning 56% YTD. Europe has not escaped the sudden return of negativity as investors take certain trades off the table and cash-in on the reasonably well returning positions they had precariously left on during their breaks. Now that the kids are back at school, and with the final few months of the year always such a tough stretch for markets, only the absolutely brave and fearless will be willing to risk a decent looking portfolio YTD return.

Bad September…Bad Quarter?
It was suggested some time back that by the time September came around and investment “professionals” were all back at their desks, the reality of continuing macroeconomic worries and less than great news would overcome the most optimistic and daring of investors – the first two days of September are not necessarily the beginning of the end (again) but also not much of a surprise after such a robust July and August where markets across Europe and the US shrugged away any negative indicators and appreciated an avg. 11% in that time, alongside Treasury and Gilt spreads narrowing and yields increasing to return the global economic picture to a far more “normal” setting.
Although a growing army of commentators now believe any relapse into Sep-Oct ’08 territory is a distant possibility with the aggressive stance governments have taken to re-establish a credible floor, there remains the fear that with any stress testing, a little crack in a building’s structure can suddenly give way to an almighty crash if the foundations are truly unsound.

Oil has returned back below $70/brl as it continues a very volatile period of trading over the last two-weeks. In tandem, currencies have seen most action in cable, with swings of 3% every couple of days. Gold has remained impressively steady around the $950/pz, and now would be the time for any attempt to breach the $1,200/oz level by mid-October as some had been suggesting earlier in the year.
The Baltic Dry Index has not been able to put in a decent streak in the last 3 months, which could be a little worrying as September is normally the month where all major toy companies start to finalise their orders ahead of Christmas (as I’m sure you are aware, Toy Firms makes 85% of their annual sales in the month leading up to December 25th) and shipping rates are often locked in at the time of ordering – does this mean that retailers are expecting a less than spectacular Christmas period and are content with the rather feeble inventory levels that they must be sitting on? Or have we just not had confirmation of what the next big festive toy will be? Either way, high unemployment levels and simple anecdotal evidence from those on the ground suggests not everything is in a strong state of recovery as authorities and the media would like us to believe.

Where’s the fire?
News over the summer period is notoriously slow. Hence a lack of material to pounce upon for a greater flow of commentaries. The most controversial development in the last couple of weeks was of course the release of the convicted Lockerbie bomber back to Libya (with a rather unsavoury hero’s welcome). One can’t help but wonder whether the (continuing) outrage would have been slightly dampened if it had taken place during a slightly busier news period – but having been in the US at the time of the release and experienced first hand the aggressive and over-inflammatory tone of reporting that the likes of Fox News and others employed, it is no real surprise that the US reaction has been so severe. Personally, reports that wild-fires across California are still raging out of control a little more worrying as attempts to recollect where exactly that match was thrown out of the car dominate the mind.

Stick that in your pipe…
A possible explanation for the seemingly illogical rise in markets over the last couple of months and sudden awakening leading to three days of negative returns? Reports that Opium production in Afghanistan has seen a “sharp drop” (10% in the last year) after a period of very low Opium pricing. It may be that whatever investment professionals were sticking in their pipes and smoking over the last few months, is starting to run out.

Rgds,
Hani