September went out of its way to contribute to it being a losing month. It never showed a day during the month making it positive for September.

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Well, September has come and gone and it definitely outperformed its historical norms.  As we stated in last month's newsletter, September is historically known as the worst-performing month of the year, and the unpredictability which accompanies it is very notable. Just as August more than outperform its historical averages, September turned around and did the exact same thing - except in the opposite direction.


     September is the middle month of the historically worst 90 days of the calendar year and has averaged being a negative month over long periods of time by approximately one-half of 1%. For September of 2020, it outperformed this negative average by 8 fold. Dropping approximately -4%. Usually, during election years, the losses in the month of September get muted largely and produce minor losses in the -.2% range. Obviously, September’s -.4% result expanded those election year loss averages by 20 fold. When stated that way, it seems rather monstrous and no one likes a -4% monthly loss, September 2020 is notable from an analysis standpoint as being far outside the norms. 

Next, we have October, the final month in the annual risk trilogy of the worst ninety days of the calendar year. While some of the single worst days of market history have occurred in October (of the 20 largest single-day losses in U.S. market history, 9 have occurred during October), October only logs a minor loss when average losses for calendar months are analyzed. October will be very interesting.  With the next round of stimulus still hanging in the balance, large layoffs are already in play, most notable are American Airlines and United Airlines. Other large layoffs are pending.


    As you can see in the graph below, the volatility for 2020 has definitely been in place almost since the year started. Out of the last 9 months, just 3 of these first 9 months have shown negative returns and yet we currently sit with a total gain for all this risk that's been taken for a total gain of simply about 3%. The really crazy part is this, corporate profits are way down from last year and even the year before, so why are stock prices up and why is Wall Street applauding the higher market so much?


The S&P 500 Index compared to the long term government bonds for 2020 year to date is shown below.



Meanwhile, we can also see that long-term US government bonds have maintained their own strength as well as their performance return over stocks for the last 24 months, September 2018 to September 2020. 


    Typically when anyone is taking on risk in business, they want to be compensated for the risk they take. Otherwise, why would anyone ever be willing to take risks if there was no possible benefit at all to taking that risk?

     Think about taking out a mortgage. If people are a higher credit risk they're going to have to pay a higher interest rate to borrow money. If your house is more likely to burn down due to the construction or the condition of it than your neighbors, you're probably going to pay a higher insurance premium than your neighbor does. But with all the risks that we've seen here in 2020, investors really haven't gotten paid for that risk on a buy-and-hold basis. Again, think about a mortgage, that risk is managed by the way they underwrite a potential customer’s credit history, income, other debts, claims history, etc.. Think about insurance, insurance companies manage risk every day every way they possibly can. 


      Now some of you might say, Well, the risk that COVID-19 could not be foreseen in terms of the time frame or the severity or those types of things". I would freely agree that you're 100% right but the other item and much more calculable item is that markets were under great internal stress before the year even started. Yes, there was a block of stocks that were performing very very well in 2019 and carried the markets higher but there was a much larger host of stocks in 2019 which were not faring well at all, and their problems were being masked by some of their larger counterparts. 


     As we're currently discussing risk, one of the risks we've mentioned in the last few newsletters is the risk of inflation. We did point out last month that we've been seeing a good bit of inflation in the pricing of housing for the last few years whether you're buying or whether you're renting. We also mentioned that some of the construction components, sometimes used for housing and sometimes used for more commercial type buildings, things like lumber and concrete and steel have been rising at a pretty great clip here as of late.

     Now we're seeing some information that brings to light another motivator for inflation. Food costs. 

     Rising food costs are some of the worst types of inflation. They are extremely penalizing for lower-income persons. Rising food costs have little to no workaround.  About the only ways to combat rising food costs for lower-income earners is to either buy less food or buy lower quality foods. Neither of these is particularly beneficial.

     When I was in college, one of my best friends worked at night restocking grocery shelves. Once a week the grocery store would have this 1 hour, late-night sales of dented and no label cans.  Large boxes just filled with dented cans as well as cans with no labels-you'd simply buy a shiny metal can and hope it was something you liked. The cans were .05 each. I do recall being able to identify a certain brand of peas, label removed, at about 50 yards away. We'd also be able to buy fresh fruit that was not looking too fresh. Bananas which looked like they had been used as hammers. Apples that appeared to have been used for batting practice and bunches of grapes which looked like they had initially started through a wine press.  Not great looking stuff, but it was cheap. 

     We all had some money but there was always a fishing trip to the beach we wanted to take or spring break was coming up or a girl we had some affections for which all seemed more important than spending our cash on food in better condition than we mostly had been raised eating.

     In the graph below, you can see starting in April of 2020, food began to inflate at more than twice the rate it has for a long period of time!  So, housing costs are rising AND food costs are rising.  Two main staples for the survival of most human beings.



     Another area of risk seems to be comically very well illustrated in the cartoon below. In the cartoon it seems no matter the places our feet may tread, we could easily step in something better suited to be on our boots rather than our head! Yes, it is once again campaign and election season and much is being said, and also likely, much is being spread.  Our only encouragement would be this, VOTE.

  So, in summary, we have looked at short term risks for the here and now. Aug, Sept, and October taking us 30 days forward up to election day. We have looked at the ongoing risks already in play, housing costs are running higher, construction costs, and the like.  We have also pointed out the longer-term risks, inflation which is begging to brew higher in food costs which can have a greater adversarial effect on low-income earners.  All of this is set against a backdrop of corporate earnings we mentioned again which began to fall more than a year ago. So, markets are up, profits are down and these two cannot continue their divergence in the long term.

     Please let us know if you are interested in having an online appointment with us rather than doing a face-to-face meeting.  We have been doing online meetings with clients long before Covid showed up.  We do reviews, updates, or introductory meetings online if you would like for us to.


We remain watchful. 


Ken Graves, Chief Investment Officer

Capital Research Advisors, LLC 

Capital Research Advisors, LLC, 
4185 B Silver Peak Parkway, 
Suwanee, GA 30024 
800 -767- 5364 
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If it seems to you that lately my comments here about mortgage rates dropping so much are "over the top", you might be right. As this newsletter was being prepped and I compared the current mortgage rates to what they were just a year ago, I was again dumbfounded by how inexpensive it is today to borrow money to buy real estate! 

They will go lower still.
 A Most Common Question

     In conversations lately, it feels like the most common question being asked of me is, "So what is the recovery going to look like?" If you read much about economic recoveries, the most hopeful of these types of outlooks related to the global pandemic states we will have a "V" shaped recovery.  This really describes the idea that the global economies will or have all headed "south" (down) and they will take about the same amount of time to rebuild and return to normal as they take/took to go down.  While I admire the optimism of those that want a V recovery, I have to say that based on history and really, more importantly, the mechanics of economic deteriorations, you can hope that is what happens all you want but hope is not how economies are built or rebuilt and hope is not an effective tool to use going forward. 

     REMEMBER, economics and investment markets are NOT directly connected, they are more like second cousins. 

     So when an economy truly breaks down, the rebuilding cycle is fraught with problems. Typically, the way things "used to work" gets destroyed and those "things" were often part of the real problem(s) to start with.  Hindsight being what it is, people see the problems with the system well after the fact and they want to avoid being labeled "Oh, one of those guys" like the plague.  So, innovation kicks in, the old is out, the new is in and off to the races they go based on the latest and greatest new way(s) of doing things. 

     I recall when Lee Iacocca took over at Chrysler.  He had just been fired as the President of Ford in 1979 and was soon after named as the President of Chrysler. He got to Chrysler and they were losing money faster than they could count it going out the door. Iacocca realized that the way Chrysler had become one of the Big Three automakers was also something that was now killing the company.  They were buying massive loads of iron ore and having it shipped to them, stacking it into vast mountains to sit and wait for it to be smelted for use.  The time delay between the purchase of the ore and usage was months to a year or more. So, they paid for it at purchase and the mountains of ore would sit there and Iacocca realized it was actually mountains of cash, desperately needed cash. Iacocca stopped it immediately and wanted ore delivered and turned into steel in a week or less.  It is what is now known in manufacturing as "Just in time delivery" so he could convert the stockpiles of ore into much-needed stockpiles of cash so Chrysler could stay alive.  This further gave way to "Just in time manufacturing" which is now used the world over.  All of which is now aided greatly by technology which was not developed back in the early eighties. 

     So Iacocca recognized what was standard in his industry, he realized it was killing Chrysler, and brought in a whole new concept and process.  Many back then "knew" Iacocca trying to pull off this crazy feat would kill Chrysler and Iacocca would go down in flames, erasing his great legacy just as Alexander Hamilton did right after the turn of the 18th century.

     Back to economic recoveries. So some have forecast for a "U" shaped recovery. More of "the economy went down hard, it will stay down for a while and then rise back up." the problem here is just as it is with the "V" idea.  When economies break, they do not rebuild quickly but they make fundamental shifts and grow back in new ways.  There are lots of opportunities for new ways of doing things but they are often untested.  People will accept them but it will be slow. 

     Another theory is there will be  "K" shaped recovery.  The K recovery views the situation as one where the economy fell, has risen some but has not truly bounced back yet and much of the economic recovery will not be kind to some companies. They are that bottom focused part of the K leg.  They are going out.  Others have done decently so far and they will continue to work hard to push forward and upward.  Those are the upper part of the K leg.  We tend to mostly agree with the "K" recovery model. 

     We have developed our own view and did so before the "K" view rolled out.  Our view is a "<" model.  It is abundantly clear that economies around the world have fallen so we saw no need to depict the first movement to show the breaking of the economy.  We do fully and firmly believe/already see some companies rebounding and moving higher but many others rose some but are clearly in trouble.  Not only are they headed lower, but many are also headed out.  This is clearly indicated by the number of companies that have already filed for some kind of bankruptcy protection and also feel the pipeline to bankruptcy is going to stay somewhat full for a continual period of going forward.  We also like the fact that the "<" is the less than symbol, showing that what is currently happening in the economy is less than what is needed in the contemporary time setting.  It is currently less than what is needed to build a full recovery but that too will change and new ways of accomplishing business will come about to benefit all involved.




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This report/summary is to be considered general in nature, reflects our opinions and is based on our best judgment at the time of writing. All information is deemed to be from reliable sources but we cannot guarantee its accuracy. No warranties are given or implied as to their promise of occurrence in the future or their accuracy. It is the readers’ responsibility to decide if any of our opinions are suitable for their own individual situation, and in what manner to use the information. No specific decisions should be made based on this report. These opinions should not be construed as a solicitation for any service. Past performance does not guarantee future results. The opinions expressed in this piece are those of the author and do not necessarily reflect the opinions of Ceros Financial Services, Inc.

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All the information in our newsletter is believed to be reliable and much of it is based on the proprietary research of Capital Research Advisors, LLC itself. However, because of the volume of information we review and the frequency with which it changes the information can only be provided as is on a best efforts basis. The information is not intended to be actionable investment research and therefore should not be used as such. Sources for this information include, but are not limited to, CBS MarketWatch, Big Charts, Bloomberg, Streetscape, Money/CNN, Futuresource, Stock Chart, Yahoo Finance, AmiBroker and

Capital Research Advisors, LLC,
4185 B Silver Peak Parkway,
Suwanee, GA 30024
800 -767- 5364
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