Harry Newton's In Search of The Perfect Investment
Technology Investor. Auction Rate Securities. Auction Rate Preferreds.
8:30 AM EST Wednesday, May 14, 2008: If
you took my advice on First Solar, now might be a good time to take a little
profit. It's a good company, in the right space (photovoltaics) and at the right
time, but growth seems to have slowed and its P/E is a whopping 113.
in May and go away. Or maybe wait in 2008? Many
wizened stock market players sell all their equities in May, invest the proceeds
in money market funds and go play for the summer. They re-enter the stockmarket
in October. This practice is known as "Sell in May and Go Away."
Cumberland Advisors is a respected operation. This is from yesterday's client
in May and go away. Maybe to wait in 2008?
statistics are compelling. According to the Ned Davis (NDR) database, starting
in 1950, $10,000 invested in the S&P 500 Index every May 1st and then
liquidated every October 31st would only be worth $10,026 today. Thats
right: had you stayed out of the stock market from November through April
and only been in the market from May through October, you would have had no
change during the last 57 years. 21 of those years would have been negative;
36 were positive. This happened during the same period that stock prices were
rising about 75% of the time and markets made extended upward moves.
results of the reverse strategy. Buy the S&P 500 Index on November 1st
and sell all your stocks on May 1st. The outcome is dramatically different.
Your original $10,000 would now be worth $372,890 as of April 30th closing
prices in 2008. Out of the 58 periods you would have had positive results
in 45 of them and negative results in only 13 years.
in May and go away has a history of success.
Last year, 2007,
was an exception. The stock market gained 4.52% between May 1st and October
31st. It peaked in the middle of October. The months in between were rocky,
as the financial turmoil unfolded. However, the rockiness was mitigated by
the early Fed actions in August and September and by the belief that the subprime
mortgage-related damage would be contained.
seasonal period was also an exception.
When it became
apparent that the damage was not contained, the market swooned and we got
the results we all know. In the period from November 1, 2007 through April
30, 2008, the net loss in the S&P 500 Index was 10.57%. In between, we
saw testing of the lows in mid-January and right before the January 22nd surprise,
a Fed interest rate cut. We saw a second testing in mid-March when the Bear
Stearns saga unfolded and the Fed intervened to save the financial system
from developing counterparty risk.
We looked at
the NDR data to see if there were periods in which the exception occurred
back-to-back, and we found only six times when the May-October period was
positive and the subsequent November-April period was negative. The most recent
was in 1993. When there were back-to-back exceptions, the subsequent summer
period was not pleasant. Three of the six times the market was down and the
other three were not up by very much.
So what do we
do now? Is this back-to-back period history a warning? Do we base any decisions
on 6 data points when the most recent was 1993?
Before we answer,
there is an additional factor to consider. That factor is the Fed.
studies modified the Ned Davis database. We added a component in which we
assessed whether the Fed was easy, tight, or neutral. We measured the Fed
by what they did and not by what they said. If they were lowering rates, they
were easy. If they were raising rates, they were tightening. If they were
unchanged, they were neutral.
were compelling. When the Fed is tightening policy between May and November
the results are nearly always horrible. When the Fed is neutral the results
are flat, fair, or poor. When the Fed is easy, one can ignore the negative
summer seasonal influences and remain invested.
Right now we
deem the Fed to be easy. They brought the Federal Funds Rate to 2% at the
April 30th meeting. They have announced an enlargement of the Term Auction
Facility (TAF). The May 5th larger $75 billion TAF auction has successfully
narrowed credit spreads. It did so in conjunction with the increased swap
lines between the Fed and several central banks. Remember, the currency swap
line between central banks has an effect that is similar to the TAF. That
is because it adds dollars to non-Fed member banks, and those dollars help
ease pressures in the global (nondomestic US) markets. We saw this in LIBOR
and LIBOR-based credit spreads like the TED spreads and the LIBOR-OIS spread.
note: OIS is the acronym for "overnight indexed swap." That is the
market-based pricing of the expected Federal Funds Rate. It used to be obscure
but now has become one of the most important interest rates to watch. The
Fed is using it to make decisions, and we see that in the minimum bids specified
in auctions. Some argue that the LIBOR-OIS spread is now more important than
the TED spread. We're not sure. We watch both.
We also deem
the Fed to be easy because of other Fed initiatives. The Fed has expanded
the list of collateral that can be used when institutions are borrowing from
them. They have also enlarged the swap lines with foreign central banks. The
repo mechanics of the Security Lending Facility (TSLF) have dramatically relieved
the pressure for Treasury securities used in securing repo transactions among
the primary dealers. In a globally linked world we find these actions are
forms of easing, even though they are not cutting the direct Federal Funds
causes us to delay following the seasonal pattern of sell in May.
We have just seen a multi-year decline of fund flows into domestic US mutual
funds. The worst quarter was March 31, 2008, which was negative by over $100
billion. The last time we witnessed such a decline was in the 2001-3 period.
During this period, the worst quarter was March 31, 2003, with a negative
flow of $85 billion. That followed a similar multi-year decline.
In the summer
of 2003 the US stock market dramatically repealed the seasonal rule. From
May 1st to October 31, 2003 the S&P 500 average was up 14. 59%. That was
the strongest summer gain since 1982.
Can mutual fund
flows reverse and cause 2008 to be a repeat of 2003? Is the rebate-driven
fiscal stimulus a consideration? Or are other factors like election-year politics
or an unresolved housing price decline sufficiently strong to offset these
positive factors? If yes, will the sell in May rule apply?
At the present
time we remain invested in US stocks despite the sell in May" history.
As long as the Fed seems easy, we can maintain our posture, as we have been
doing all year. Were we to see the Fed go to true neutral, were the Fed to
actually commence a withdrawal of these initiatives and easing, we would have
to respect the sell in May adage and raise some cash.
For now, we
watch the TAF auctions and the spread between the London Interbank Offering
Rate (LIBOR) and the Overnight Indexed Swap (OIS) rate and the TED. These
are some of the ways to observe whether or not the financial systemic damage
is being repaired. We will measure that repair function by the credit spreads
and stay fully invested as long as they continue to narrow.
David R. Kotok,
Chairman and Chief Investment Officer, email: firstname.lastname@example.org
How to start your own business. From
In today's article you once again mentioned that one should start his/her
own business. I totally agree with your opinion. And I have been looking for
a business idea over 1 year and can not find any good one. With limited financial
sources (under 100k), it is very hard for me to start one.
Could you please refer any website or resources where I can find useful information
? I will greatly appreciate it if you do so. Thank you again for taking time
to read this email and responding it.
My answer :
Call every business broker within 500 miles and tell them you want to buy a
business. Get their material. Go visit the most promising. Then figure which
one to buy or which one to start one yourself. You could also Google for "fast
growing businesses." You'll be surprised at the breadth of what you'll
Starting or buying
a business is not typical. That decision may determine what you'll do for the
next 20 years of your life. If it takes a year to find the "right"
one, take the year.
New Century. You must see it. It's at New York's
Lincoln Center. I saw it last night.
fly like rockets in The New Century, the rollicking bill of
short plays by Paul Rudnick. And more often than not, they hit their targets
smoking. For this playwright, stereotypes are meant to be worn extra-large,
preferably in neon brights. Building on time-honored traditions within
gay and Jewish humor, Mr. Rudnick turns stereotypes into bullet-deflecting
armor and jokes into an inexhaustible supply of ammunition. As is made
clear by The New Century, directed with precision timing
by Nicholas Martin, Mr. Rudnicks insistence on staying determinedly
on the surface does not mean that hes not aware of the darkness
beneath. Frivolity for his characters is a solid existential choice in
a threatening universe. Its Absurdism lite, a sensibility that is
universally accessible. Ben Brantley
go see it. --
love mail order catalogs: Usually they're the
same. But not this one, which arrived yesterday. A bright entrepreneur has created
a catalog of "unique, innovative products for tall and plus-sized men and
cover features a 650-lb capacity sand chair for $139.95. I don't make this stuff
will be boys. From
A 13 year old
from Texas who stole his Dad's credit card and ordered two hookers from an
escort agency, has today been convicted of fraud and given a three year community
order. Ralph Hardy, a 13 year old from Newark, Texas confessed to ordering
an extra credit card from his father's existing credit card company, and took
his friends on a $30,000 spending spree, culminating in playing "Halo"
on an Xbox with a couple of hookers in a Texas motel.
The credit card
company involved said it was regular practice to send extra credit cards out
as long as all security questions are answered.
The escort girls
who were released without charge, told the arresting officers something was
up when the kids said they would rather play Xbox than get down to business.
they were alerted to the motel by a concerned delivery clerk, whom after delivering
supplies of Dr Pepper, Fritos and Oreos had been asked by the kids where they
could score some chicks and were willing to pay. They explained they had just
made a big score at a "World of Warcraft" tournament and wanted
to get some relaxation. On noting the boys age the delivery clerk informed
arrived at the motel they found $3,000 in cash, numerous electronic gadgets,
an Xbox video console with numerous games, and the two local escort girls.
Ralph had reportedly
told police that his father wouldn't mind, as it was his birthday last week
and he had forgot to get him a present. The father, a lawyer said he had been
too busy, but would take him on a surprise trip to Disneyland instead.
Asked why he
ordered two escorts, Ralph said he thought it was the thing to do when you
win a "World of Warcraft" tournament. They told the suspicious working
girls they were people of restricted growth working with a traveling circus,
and as State law does not allow those with disabilities to be discriminated
against they had no right to refuse them.
The $1,000 a
night girls sensing something up played "Halo" on the Xbox with
the kids, instead of selling their sexual services.
is to one day become a politician.
Now that Israel turned 60, does it have to move to Florida?
birth control pills
The doctor that had been seeing an 80-year-old woman for most of her life finally
retired. At her next checkup, the new doctor told her to bring a list of all
the medicines that had been prescribed for her.
As the young doctor
was looking through these, his eyes grew wide as he realized she had a prescription
for birth control pills.
'Mrs. Smith, do
you realize these are BIRTH CONTROL pills?'
'Yes, they help
me sleep at night.'
'Mrs. Smith, I
assure you there is absolutely NOTHING in these that could possibly help you
She reached out
and patted the young Doctor's knee.
Yes, dear, I know
that. But every morning, I grind one up and mix it in the glass of orange juice
that my 16-year-old-granddaughter drinks. And, believe me, it helps me sleep
This column is about my personal search for the perfect
investment. I don't give investment advice. For that you have to be registered
with regulatory authorities, which I am not. I am a reporter and an investor.
I make my daily column -- Monday through Friday -- freely available for three
reasons: Writing is good for sorting things out in my brain. Second, the column
is research for a book I'm writing called "In Search of the Perfect
Investment." Third, I encourage my readers to send me their ideas,
concerns and experiences. That way we can all learn together. My email address
is . You can't
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