http://www.sancoservices.com/StockMarketInvesting-TheNovemberSyndrome.htm
Sweet
November... well, not really: The war lingers on for purposes unknown to most
and oil prices continue to rise. Credit woes dominate the
financial headlines, and value stocks seem intent on extending their correction
into a seventh month. Investors want a stronger dollar while lower interest
rates (and lower taxes) are clearly more beneficial. Neither political party has
a candidate that supports real tax reform for both investors and corporate job
creators, nor has the counter productive United States Regulation Industry
stopped growing faster than most world economies. In terms of issue breadth
alone, November is becoming the worst month (or the best buying opportunity)
since July of 2002, and possibly since October of 1987. Just who makes this
good/bad determination anyway, the Wall Street institutions, the media,
investment letter writers? Why are rallies considered good and corrections
bad? Will we remember 2007 as the year of the Grinch or
will the leaves and the market stop falling in favor of a Santa Clause rally?
Only the phantom knows for sure.
Every
fall, good year in the market or not, I remind my clients that the final
calendar quarter is a very special time. November is particularly exciting
because it hosts the convergence of four Katrina-level forces, all of which are
part of Wall Street's conventional wisdom while none of them lead to intelligent
investment decision making. And this year we have a special treat in the form of
a Category Three market correction in the Value Stock sector. (October '87 was a
Short Five; June '98 through January '00 was a long Four.) A
five-force November Syndrome can be particularly destructive; no wonder the
media is giving it so much attention... carnage at last!
Force
One is the mad rush of the lemmings to realize losses on equity and/or income
securities for absolutely no investment reason at all... just because they have
fallen in price from the time that they were purchased. Assuming (as I always
do) that we are dealing with "Investment Grade Securities", lower prices should
more logically be seen as an opportunity to add to positions cheaply than as an
opportunity to reduce the 2007 tax liability on our other investment earnings.
Losing (your) money is only a good idea in the eyes of accountants, particularly
if the reasoning for buying the security was sound in the first place, and
assuming that the issuing company is still profitable. This "tax-loss" lunacy is
comparable to barging into your boss' office and demanding a cut in pay, and it
could be eliminated entirely by some intelligent tax reform. Have hope
investors, I've heard a rumor that candidate Romney is talking about eliminating
taxes on investment earnings.
Similarly, letting your profits run, as instructed by Force Two, in order
to push the awful things into 2008 is just foolishness. Talk to those geniuses
who didn't take profits in 1999 (or in August, '87) and who are still waiting
for their stocks or Mutual Funds to bounce back! The objective of the equity
investment exercise is to take profits... the more quickly and more frequently,
the better. There are no guarantees that the profits will wait for you to pull
the trigger at your personal tax convenience. And patting yourself on the back
when you have unrealized gains within your income portfolio is equally absurd.
What's better, a 10% profit in your hand today, or 6% over the course of the
next twelve months? Profits need to be taken when they appear... the investment
gods are watching.
Force
Three takes the form of a trade, and is innocently called a Bond Swap... one of
two reasons why your broker sold you those short-duration, odd lot positions in
the first place. Now he has the opportunity to pick your pocket by exchanging
them at a "nice tax loss" for another bond with "about the same yield". He gets
a double dip commission (yeah, I know it's not on the confirmation notice, but a
mark-up is applied to each side of the trade), and you get a bond either of
longer duration or lower quality. Somehow it's OK now to buy the longer duration
bond. Really, this is how they finance their Christmas Shopping! If you don't
fall for the swap con, he won't be too upset... the rapid turnover of your
portfolio nets him a cool 3% on each maturing issue anyway.
As if
all of this isn't enough, Wall Street gangs up on you some more with a
self-serving strategy that is blithely referred to by the Media as Institutional
Year End Window Dressing...a euphemism for consumer fraud. In this annual Shell
Game, Mutual Fund and other Institutional Money Managers unload stocks that have
been weak and load up on those that are at their highest prices of the year.
Always keep in mind: (a) that Wall Street has no respect for your intelligence
and (b) that the media talking heads are entertainers, not investors.
Institutions must show how smart they are by having quarterly and annual reports
that reflect their unfailing brilliance, so they boldly sell low and buy high
with your retirement nest egg.
It would
be an understatement to say that the sum of these year-end strategies typically
adds to the weakness of the weak and "proves" the intelligence of buying the
strong. The November Syndrome is a short-lived annual investment opportunity
that most people are too confused to notice, much less appreciate. Simply put,
get out there and buy the November lows and wait for the periodic and mysterious
January Effect to happen. The media will talk about this phenomenon with
wide-eyed amazement as they watch many of the horrid become torrid for,
seemingly, no reason at all. What's happening, you might ask? Well, those
professional window dressers are now selling their high priced honeys and
replacing them with the solid companies they just sold for losses. Interesting
place, Wall Street... tough but manageable. Take the profits and pay the dreaded
taxes. Buy the November lows, even add to existing holdings. More often than
not, this proves to be a winning strategy if you stick with investment grade
securities.
Note: The 2nd Edition of "Brainwashing" has
arrived.
Steve Selengut
800-245-0494
http://www.sancoservices.com
http://www.investmentmanagementbooks.Author
of: "The Brainwashing of the American Investor: The Book that Wall Street Does
Not Want YOU to Read", and "A Millionaire's Secret Investment
Strategy"