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Harry Newton's In Search of The Perfect Investment Technology Investor. Auction Rate Securities. Auction Rate Preferreds.

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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.

Sell 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 email:

“Sell in May and go away.” Maybe to wait in 2008?

The long-term 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. That’s 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.

Consider the 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.

So “sell 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.

The November-April 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.

Our internal 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.

The findings 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.

Readers please 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 Rate.

Another item 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:

How to start your own business. From reader Edwin:

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 find.

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.

The New Century. You must see it. It's at New York's Lincoln Center. I saw it last night.

The one-liners 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. Rudnick’s insistence on staying determinedly on the surface does not mean that he’s not aware of the darkness beneath. Frivolity for his characters is a solid existential choice in a threatening universe. It’s Absurdism lite, a sensibility that is universally accessible. — Ben Brantley

In short, go see it. -- Harry Newton

Buy tickets at

I 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 women."

The cover features a 650-lb capacity sand chair for $139.95. I don't make this stuff up.

Boys 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.

Police said 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 the authorities.

When police 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.

Ralph's ambition is to one day become a politician.

Israel turns 60
Now that Israel turned 60, does it have to move to Florida?

Grandma's 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 sleep!'

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 at night.'

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 click on my email address. You have to re-type it . This protects me from software scanning the Internet for email addresses to spam. I have no role in choosing the Google ads on this site. Thus I cannot endorse, though some look interesting. If you click on a link, Google may send me money. Please note I'm not suggesting you do. That money, if there is any, may help pay Michael's business school tuition. Read more about Google AdSense, click here and here.

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