Bloomberg Quote of the Day: “I hope life isn’t a big joke, because I don’t get it.” – Jack Handey, must be someone who has just been told he is entering the ‘golden years’…a very bad joke!
…it’s funny but due to the low volume since March 24, the old “sell in May and go away” has kept popping into TB’s head even as the pros say stocks are in rally mode. On Friday, TB was talking with a former colleague who also brought up the expression. Then on Saturday, John Mauldin devoted a section of his weekly column to it,
http://www.frontlinethoughts.com/printarticle.asp?id=mwo051608. The data is compelling that if you bought in October each year and sold in May, each year, you would have been far better off…and probably slept a lot better too. This year with not only volume but volatility on both the VIX (S&P 500) and VXN (NDQ 100) at very low levels, normally indicative of complacency, the risks favor a selloff more than a continuation of the rally. This is because a majority of the guests on CNBC are bullish and Bloomberg reports this morning that more than 60 economists surveyed by the NABE predict that businesses and consumers will find it easier to borrow in the second half of this year, and the consensus (the elephant was designed by a consensus) is for 2.1% GDP growth in the second half. TB doesn’t know about you but he has never made money by following a herd. Before we go into the details of why May-Oct is not a good time to be in the market look at the following top stories from Bloomberg this morning:
TIPS Show Bonds See Bubble burst for Commodities Prices. Consumers expect prices to rise 5.2% over the next 12 months according to the UMich survey, the most pessimistic since 1982 while traders expect about 2.9% by January 2009, slightly below the 3.1% average of the past 20 years. This gap is the widest ever so the conclusion is that individuals are too pessimistic from looking at pump and store prices. According to TIPS pricing the bubble is about to burst and if prices then decline that will cause TIP prices to fall. But as TB sees it, timing it when the dollar remains weak may be problematic. Also, Congress is back on the warpath to get China to revalue the renmimbi which would be very inflationary.
While long TIPS yield 1.90% which is still very rich, the 5 yr tips is 0.71% above the inflation rate, a sign of strong fears of inflation and only rises to 1.35% in the 10 year TIP.
Saudi Increase (production) Will Not Lower Oil Price, Iraq Says. As Bush returns from the Middle East having sent a mixed message to Iran implying Iraq should talk to Iran while his Secretary of State and Defense Secretary think we should talk to them…what, you aren’t surprised?…oil surged yet again overnight, after all the last time he talked to the Saudi’s they thumbed their nose at us. As the Friday summary shows oil prices are almost totally out of backwardation as the long end of the contract curve is almost as high as the lead contracts…well less than one dollar, after Dec ‘15 surged over $5 Friday. Speculators do not play in the long end of the curve…that should be disconcerting.
Banks Hide $35 Billion in Writedowns From Income Statements, Filings Show. That is nearly 10% of all write-downs so far and is shown in quarterly reports to the SEC yet not disclosed…if that isn’t regulation run amok TB has no idea what is. Citi alone wrote down $2B on declining home loans on May 2, but did not disclose it in the earning statement or conference call. ING did similar with $3.6B euros ($5.6B), while only disclosing 80 million euros of write-downs. Is it any wonder that banks don’t trust one another, so why should you trust them? Once again, transparency rears its ugly head. TB has been arguing that there were more losses to come…and the worst thing that can happen is repeatedly convincing yourself that they are all out there only to be disappointed again. On Tuesday, TB posed whether another financial sector selloff was starting only to see them improve…until Friday when Banks declined by 1.5% and Insurers by 1% while Wall Street somehow escaped with just 1.2% in losses…watch closely.
Post-Subprime Economy Means Subpar Growth as New Normal in U.S. Even if we aren’t in recession, which a majority of economists finally believe we are, and even if we recover from it quickly as they expect…some say September which TB believes is far too early…growth will be much slower than we are used to it being. Understandable, as we no longer have an equity bubble or a housing bubble with those accompanying huge mortgage equity withdrawals which added about 2% to economic growth since 2002. Some see long term U.S. growth dropping from the 3% average of the past 154 year to 2-2.5%…and this bodes poorly for high single or double digit stock price growth we have become accustomed to. Along with this banks are raising credit standards and raising spreads charged to corporate lenders…and as in the prior story, David Rubenstein, chairman of the Carlyle Group (the ex-Presidents club) says there are even more losses to come…”enormous losses.”
Auction-Rate Losses Cost Google UPS Shareholders $1.8B…yes…Google! and UPS not to be confused with UBS. Google took a $10.8 million write-down on $259.6 million invested, while UPS wrote down $383 million of investments by $33 million. The other shoe hear is that they will have to reclassify them as long term investments which in some cases could trigger problems with creditors. Yet there has not been a single default in auction rate securities…strictly a liquidity problem brought about by stupid highly leveraged actions by Wall Street firms…this story is still continuing!
UBS $100 Billion Mortgage Wager Prompted $24 Billion loss over Nine Months. UBS, not to be confused with UPS…or USB (US Bancorporation), a year ago was bragging about record profits.
Of course knowing how our stock market functions, it might even rally on this news…go figure! OK, now that you are all ready to just run out there and buy stocks, here are the reasons to sell in May. Mauldin cites the data from the respected Ned Davis (NDR) database:
Starting in 1950, $10,000 invested in the S&P 500 every May 1st and liquidated every October 31st would only be worth $10,026…and that is before inflation! Out of those 57 periods 21 were negative and 36% of the time…a period when the stock market rose about 75% of the time and we had those long boom periods. But had you invested on November 1st and then sold all of your stocks on May 31, the $10,000 would now be worth $372, 890 as of April 30th. Out of the 58 periods you would have had positive results in 45 and negative in just 13.
This does not mean you should all go out and liquidate your holdings…particularly in taxable accounts but it means it is a good time to evaluate your holdings and cut anything you are not comfortable with. Much has been made of the billions in money market funds that is seen as poised to jump into stocks. Likewise, professional money managers are holding huge sums of cash…many 25% of assets and some as high as 40%…this is a rare occurrence…even rarer is the 30% or more of hedge funds sitting on 5-10% cash positions. Bulls claim that that money will come back in the market and fuel a huge rally, while bears, like TB, can say that it is a sign of fear and indecision about the economy and will thus stay there until and unless the market takes another plunge…so with sell in May that could become a self-fulfilling prophecy.
TB has for some time been advising clients to invest for income…not capital gains…a blend of income producing securities of various types and that theory is catching on…true, TB did not invent it but on his own he concluded this and has been steering his clients in this direction. Ideally gains will offset losses and maybe even some capital gains exceeding the declines while the income grows and is reinvested at an average rate of about 6% or more. Just something for you to think about.
Beware of low volume rallies…and in fact low volume markets…but in the summer doldrums a selloff is much more likely on bad news than a sustainable rally on good news: a lot more sellers than buyers on bad news is a stronger likelihood than a lot more buyers than sellers on good news…usually!
This weekend was unique for TB. First, on Saturday he attended the graduation of an Iraqi friend from the UC Berkeley Graduate School of Journalism. On the way there we drove past the Law School where the protests against John Yoo, the UC law professor who wrote the Bybee memo on torture, that has turned the U.S. into barbarians and put our own troops and citizens abroad in grave danger by ignoring the Geneva Convention. The friend, Omar Feikeki, worked for the Washington Post in Baghdad when the occupation (yes, it has turned into an occupation), began. Omar was selected to be the speaker for the class. After delivering a speech on how correspondents should respect and consider the risks that local reporters take, he introduced his girlfriend, Bahn, and proposed to her right there. It was touching and was the highlight of the day. Then, our mutual friend, Rajiv Chandrasekaran, who wrote the wonderful expose on the U.S. in Baghdad, Imperial Life in the Emerald City, delivered a speech on what journalists must do to get the information so that the true story can be told. Memo to files: never upstage your friend and mentor just before they are about to deliver a speech, LOL.
TB hopes you all saw the 60 Minutes piece on Kirk Johnson, who set up The List, to speed up the painfully slow process of bringing Iraqi’s who aided the US as interpreters etc. and whose lives are now in jeopardy. Omar wants to return home to start a newspaper and would even though he is at risk but his family has told him that now returning would place his entire family at risk. Far too many Iraqi’s who helped us have been abandoned by this Administration who cannot walk the walk…it is shameful what we have done and unprecedented…we brought home 100,000 Vietnamese who helped us yet have only brought 5,000 Iraqi’s over…well educated, American loving Iraqi’s…allegedly on fears of terrorism, but more likely as Johnson says…to avoid the embarrassment of our failure to set up a working government. We want democracy around the world but on our terms and don’t reward those who help us…very sad.
Then on Sunday, TB and a friend drove up to the wine country to visit two wineries we love in the Dry Creek Valley, A.Rafanelli, and Montemaggiore…the first a cult wine for their zinfandel and the second an up and coming small producer producing mainly syrahs. We learned how the rising cost of fertilizers and sulphites have risen by as much as ten times over the past year…add to this energy costs and their own cost of living and you see another industry that is under increasing pressure with only the high end and those who sell in Asia able to pass on the cost increases. Remember, winemaking is glorified farming, something every vineyard owner knows…you do your best but you are the mercy of external forces.
Hava a terrific day!
TB
Trader Bill thinks it is clear to anyone reading these missives that they are merely commentaries…as he sees it…and do not necessarily reflect the views of anyone other than his own. Information is gathered from sources he has found reliable, but no guarantees of accuracy are implied. These are merely observations of events in the marketplace offering in an attempt to offer a non-mainstream viewpoint. Hope you find it useful.
Copyright TBD Capital LLC May 19, 2008
