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 2005 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.