This page has been archived and commenting is disabled.
Santa Rally or Rally of a Lifetime?
Submitted by Leo Kolivakis, publisher of Pension Pulse.
Let's
have some fun for a change. Now that I bored you to death with all my
relentless posts on the great pension plunder, let's talk markets.
John Heinzl of the Globe and Mail reports Santa arrives - right on schedule for a market rally:
Here
at Investor Clinic, we're skeptical of axioms that purport to hold the
secret to achieving great wealth in the stock market. We don't "sell in
May and go away," for example. Nor do we time our buys and sells with
the U.S. presidential election cycle.Being fans of the
buy-and-hold approach, we prefer to invest - and stay invested - in
companies that increase their earnings and dividends. The problem with
trying to time the market isn't only that you might guess wrong; you'll
also face higher commissions and taxes.
But there is one
seasonal pattern that intrigues us enough to dig a little deeper. We
refer to the stock market's exceptionally strong performance in the
month of December.Is it just chance that the market almost
always rises as the Christmas decorations are going up? Is it an excess
of rum and eggnog? Should investors try to take advantage of this
trend?
Before we try to answer these questions, let's look at the numbers.
In the past 25 Decembers, Canada's benchmark stock index has risen 23
times and fallen just two, including a 3-per-cent drop during last
year's financial maelstrom. The only other losing December over that
period was in 1996, when the index slipped 1.5 per cent.
The
average gain in December over the last quarter-century was 2.37 per
cent, which is more than three times higher than the roughly
0.7-per-cent average advance for all months. With yesterday's 260-point
or 2.27-per-cent rise on the S&P/TSX composite index, this December
is off to a flying start.
Sure, it could be random luck - but
not likely. A few years ago, Thomson Financial crunched the December
returns from 1969 through 2005 and found a 99-per-cent probability that
something other than chance was behind the outsized gains.
So what factors might explain December's jolly performance?
Well, for starters, there's investor emotion. When the holidays are
approaching, people are in a cheerful mood, and that optimism colours
their perception of the market. December is also when year-end bonuses
get handed out on Bay Street, and some of that cash may be plowed into
stocks.
Tax-loss selling may be another factor. In the fall,
investors sell their dogs to trigger capital losses for tax purposes,
pushing the market down in October and November. But that downdraft
attracts bargain hunters who lift prices back up in December, or so the
theory goes.
Window-dressing may also come into play. Eager
to make their books look pretty for year-end statements, fund managers
buy winning stocks as the year draws to a close, giving prices a boost.
A final theory is that the Santa Claus rally is a
self-fulfilling prophecy. Because everyone anticipates that the market
will rise in December, they buy stocks, and sure enough, that's what
happens.
So if December is such a great month, should
investors place a big wager on the market on Nov. 30 and sell on Dec.
31, aiming to pocket a quick profit? Unfortunately, it's not that
simple.
Although December has produced remarkably good
results, on average, there is a lot of variability in the monthly
returns, ranging from last year's 3-per-cent slide to an 11.8-per-cent
gain during the tech mania of 1999. There have also been several
Decembers when the market rose less than 1 per cent, which would barely
cover the costs associated with buying and selling an index ETF
(depending on the size of the trade and the commissions charged).
It's also important to remember that the December data are
backward-looking. Whatever the cause of December's strong performance -
it may be one factor, two factors, or a whole bunch of things - it's
impossible to know whether the future will look like the past.
"The statistics prove December is a fairly reliable month for good
performance in the market, and I can't dispute it," says Tim Burt, CEO
of Cardinal Capital Management in Winnipeg. He predicts this December
will continue that trend, as the end of the recession and improving
corporate earnings give stocks a boost.
But he doesn't advocate trying to get in and out for a quick buck.
"That's a speculative trading strategy. We would never recommend people
do that," he says. "We're buy-and-hold, long-term investors. So really
what happens month to month is immaterial to us."
The nice
thing about being a buy-and-hold investor is that you'll never miss out
on big gains - whether they come in December or any other month. So
instead of trying to time the market's ups and downs, just sit back and
enjoy Santa Claus's generosity.
Just between you and
me, in the markets we're heading in, buy and hold isn't going to help
you one iota unless you're buying and holding the next big bubble,
riding the wave up and hopefully getting out before the rest of the
herd gets crushed.
As for the Santa rally, it arrived back in
March thanks to Uncle Ben who gave the hedgies and prop trading desks
at the major banks a green light to buy every risk asset out there. For
those of you still pondering Dubai or do you sell, you're
missing the rally of a lifetime:
Royal
Bank of Canada says markets are returning to a more normal "performance
environment." RBC Dominion Securities today set a 2010 target of 1,200
for the S&P 500 and 12,925 for the S&P/TSX composite index.
Good news for investors from chief strategist Myles Zyblock: "The
equity market has been on a blistering run since early March, with the
large-cap indexes up by just over 60 per cent and bested by the
small-cap benchmarks to the tune of a full 10 percentage points. These
nine months most likely define the rally of a lifetime … While the
embedded return expectations have turned more conservative with time,
typical preconditions for a cyclical bear market such as policy
tightening, a pending earnings recession or widespread investor
optimism remain absent."
I worked with Myles back in my
BCA Research days. Glad to see he's finally jumped on board to see that
this rally still has ways to go.
I had lunch with Keith Porter on Thursday. Keith was an AVP at the Caisse, successfully managing emerging market equities for over ten years. He's a great guy with
a great sense of humor and deep knowledge not just of emerging markets,
but of markets in general. You can find his latest thoughts, along with
those of others, on the Sceptical Market Observer blog.
Anyways,
Keith and I enjoyed sushi and chatted a bit about the pension fund
world and markets. He's not sure if he wants to get back into the big
pension funds again and I don't blame him. These places are run by
politicians and the people that survive are typically the sneaky,
weasel politicians who know nothing about running and making money in
the markets.
They're not all that terrible. Some are better than
others but I told him to proceed cautiously and to look carefully at
who is leading the fund. The last thing you want to do is end up
working at a big pension fund run by an insecure fool who lusts power.
You're better off doing your own thing if that's the only option
available to you.
On the markets, we had an excellent discussion
covering global banks, China, Brazil and the Fed. Keith thinks that the
banks got gifts in the form of free money and the bailouts were a
mistake. We both agreed that the UK economy is way too leveraged to the
financial services industry.
But his comments on China were
particularly interesting. Keith thinks that all this talk of excess
capacity in China is missing the bigger picture. He told me that China
is planning and preparing for the future so they have every reason to
over-invest now and build up their infrastructure and stockpile the
resources. It makes sense when you think about it; they saw all the
mistakes the Western world made and decided it's best to be better
prepared for the future.
There are still problems in China, most
notably the disparities between the rural and urban population, but
they're making leaps and bounds in almost every area, including clean
energy where China is securing first mover advantage in the market for renewable energy.
On the markets, Keith remains sceptical of the rally and recently asked Am I Missing Something? He did, however, admit to me that the liquidity rally can go on for a lot longer than we think.
I told him this liquidity rally is only in third gear and will go to
fourth and fifth gear, especially in the hot sectors. He agreed with me
that some sectors are already bubbly and will likely get more bubbly as
we move along.
And
that's where I'll end my comment today. I know some of you got worried
about Thursday's late day selloff or are worried about Friday's jobs
report. Don't be scared, nothing has changed. Uncle Ben wants asset
inflation and he's hoping that it will repair household and more
importantly, banks' balance sheets.
And what Uncle Ben wants is
what Uncle Ben gets, for now at least. So don't get too flustered or
worked up about Friday's jobs report. Either way, the markets will continue
to grind higher. Oh, and that major pullback that all the experts are
waiting for? It won't happen because everyone is expecting it. The
rally of a lifetime still has legs to run.
»
- advertisements -
This is similar to what happened in Weimar Germany. The deflation due to the global recession in 1920 hid the inflation and everyone thought Germany was recovering with the rest of the world. They didn't realize they were in a paper bubble and they ended up reducing their nation to Third World status.
Heh, people who know nothing about how stock markets work really should listen and learn from those few commentators who do know (eg. the author of this article) instead of misleading others - and themselves.
P/E is forward looking. 100 P/E on 10c earnings will drop to 50 on 20c and a mere 33.33 on 30c earnings. What we had was the worst global recession since WWII and historically low earnings (or even losses) for the majority of (traditional) businesses. i'm not saying there aren't overpriced stocks out there - i'm just saying for anyone who knows how to read a balance sheet (apparently not many ZH readers), and willing to exercise some common sense, there still good investments to be found.
My local stock market mostly tracks the DJIA. During the worst of times, the market practically discounted all economic growth for the past 10+ yrs. A potent combination of panic stoked by exaggerated losses coming off inflated books in ~other countries~. Investing in equities was almost like taking free money off the table.
Oh one little caveat: this looks set to be a jobless recovery for time yet (common view, i suppose). Different sectors get affected differently. Though they might all rise with the tide, one should be selective in what he buys.
Thanks for sharing your wisdom with us, Leo. It's too bad so many readers apparently do not/cannot appreciate what you've been trying to share.
Where's the evidence Leo knows how to read a balance sheet? He blathers about "liquidity", touts Chinese solar stocks and cuts and pastes articles written by other people. Have you ever seen him comment on a company in a manner that suggests he is a fundamental investor who analyzes financial statements? He's not even claiming that fundamentals are attractive.
You're quite right, i don't claim to know exactly which school of investing the author subscribes to, as i've only just recently begun frequenting this site (mixed feelings so far - the quality gap in content can be huge).
If you had read my comment carefully, you'd find that my brief explanation on P/E ratio was directed at the misguided crowd who kept claiming the markets are too expensive at current valuations; and not a suggestion that the author was a fundamentalist. i said he knew how markets worked, but i did not say that was how he worked the markets.
And what's more with the massive depreciation of the dollar, 10,000 dow ain't what it used to be. Do the pundits here even know what that number really means? Or do you just treat it as a figure that jumps up and down for your amusement and gambling pleasure?
After all that's said, why the need to constrain oneself to certain school of investing anyway? i'm a typical investor who picks stocks to buy based on fundamentals. But numbers had nothing to do with why i decided to buy in the early part of this year. It was something else entirely. Here's the story:
There was a weekend computer fair at the time. It was a 3-day event, starting on fri and ending on sun. The following monday i heard over the radio that the fair was a big success, garnering $70 mil worth of sales over the 3-day period. That struck me was noteworthy given that we were in the throes of global recession, with just about every economic report spelling 'doomsday' in bold letters.
The reason for the fair's success was simple: latent demand. The silent masses who survived the crisis relatively unscathed were tired of waiting and wanted to spend. So i began buying stocks (including one healthy bank). The local index dropped another 200 points over the course of my accumulation, but i kept buying till i was left with 5% cash.
The little things in life can be so beautiful.
Does that qualify me as a fundamental investor? Probably not. Not that it matters, i'm just happily sitting on my laurels until something new comes along.
I am an economist by training who has worked at large Canadian pension funds across traditional and alternative investments. I don't pretend to be a financial analyst as most of them are a total joke. I pay attention to what the best hedge funds are buying, not what the financial analysts are recommending. I prefer to see people with skin in the game. You can question my calls but please do not question my experience and the way I see things. I had enough of your petty attacks and will just ignore you.
As I stated before, money talks and bullshit walks. What is YOUR call? Do you have skin in the game? If not, then you're just another blowhard who has no idea about making money in these treacherous markets.
My blog and my posts speak for themselves. I will not always be right but I am not afraid to put my balls on the table and to make a call. Fundamentals are important but they can be superseded by liquidity for a very long time. That's all I am really saying.
Fundamentals are important but they can be superseded by liquidity for a very long time. That's all I am really saying.
That's fine. I've been saying that's all you're saying, despite your suggestions that you somehow track and measure "global liquidity flows".
"No, you should be buying T-bills and gold bullion, waiting for the Apocalypse. -)"
It IS coming. But don't let that stop you from picking up nickels in front of the steamroller, LEO.
Ha!
"It IS coming. But don't let that stop you from picking up nickels in front of the steamroller, LEO."
Only steamroller I see is the liquidity steamroller that will crush all the shorts. They're the ones who are going to get their heads handed to them.
Well, Smugster, there's an exogenous event just up the road. It's called the US mid-terms. I know people like YOU are happy as a clam, but for regular Americans (and Canadians?) things are not NEARLY so hunky dory. And guess what? The Divas in Congress are already worrying about their chances come November and are trying to get on the right side of things (and I don't mean Republican) for lever-pulling time. I don't think your Masters of the Universes are going to be as completely in charge of a number of critical issues as you presume. I know, you're a genius, but I think it's mostly in your own mind. We out here in the 'real world', people who really WORK for a living, making the things you consume, serving your drinks and meals, cleaning up after your messes (real and rhetorical) or wish they had jobs and could, are not nearly as stupid, uninformed, complacent and willing to be lead as you think. We are pissed off, Leo, and we WILL be heard.
Trust me, you and yours' time is coming and I for one look forward to seeing all of you crash and burn.
Literally.
"Lower your flags and march straight back to England, stopping at every home you pass by to beg forgiveness for a hundred years of theft, rape, and murder. Do that and your men shall live. Do it not, and every one of you will die today."
I am not smug and know all too well the game is rigged in favor of Wall Street insiders. I am trying to level the playing field.
Yeah, but Leo, you are inconsistent: A liquidity flood will help stocks AND gold (would not touch t-bills myself either).
If you were arguing this rally is based on underlying strength of the economy, fine, interest rates would eventually be raised and gold would be crushed.
But how can you simultaneously claim that we will get a liquidity flood, but then claim gold will suffer? Gold will only suffer if/when the liquidity flood turns into a liquidity drain.
Me thinks you haven't done enough research on our esteemed Fed head - Zimbabwe Ben won't raise rates anytime in 2010, nor will he slow down on his QE for any length of time.
ghostfaceinvestah,
The liquidity rally only means that asset prices will decouple from fundamentals, but those fundamentals are getting better. At one point - and here lies the big kink - central banks will have to coordinate a gradual removal of all this liquidity. If they screw up, raising rates too fast and too aggressively, we are going to head right back down.
As for gold, I see it as an inflation or deflation hedge but given the opposing headwinds of these two major forces, we might just see a protracted period of low growth, low inflation. In this environment, I prefer other sectors over gold.
Some pundits will boil it down to abundant liquidity, a term they can seldom adequately define. But if it’s a case of an endless stream of cheap money, remember in Japan rates have been microscopic for years, and while the Nikkei certainly did enjoy no fewer than four 50% rallies and over 420,000 rally points, it is still more than 70% lower today than it was two decades ago. So, liquidity and technicals can certainly touch off whippy tradable rallies, but they don’t take you all the way to a sustainable bull market. Only positive economic and balance sheet fundamentals can do that.
Another way to look at the situation is that when you hear and read about “liquidity” driving the market, it is usually a catch-all phrase for “we have no clue” but it sounds good.
- David Rosenberg
David,
Liquidity can be a catch-all phrase for those that "have no clue", but have you seen the amount of money China's sovereign wealth fund (CIC) and other wealth funds are pouring into these markets? They are also investing billions in PE and hedge funds, yet another important source of liquidity. Having allocated to these funds, I track developments in those sectors very closely to track liquidity trends (as best as I possibly can).
Will the US end up like Japan? It's surely possible but not a foregone conclusion by any stretch. The demographics are different and the world is different. Either way, even if the overall indexes go sideways, there will be speculative pockets in some sectors. I am betting it will be in renewable energy.
I am not David, I was quoting David Rosenberg from one of his recent "Breakfast with Dave" commentaries on those of you who continue to speak of "liquidity" because you have nothing more meaningful to say.
I'm throwing a BS flag on your alleged tracking of "liquidity trends". It is inconceivable that some rblogger is able to track global liquidity (whatever that means) when the world's central banks can't do it. Please, let's hear about your methodology, as if you actually have any.
Either way, even if the overall indexes go sideways, there will be speculative pockets in some sectors.
How about if the overall indexes go down 40-50%, what do you think will happen to your high beta speculations then?
"It is inconceivable that some blogger is able to track global liquidity (whatever that means) when the world's central banks can't do it. Please, let's hear about your methodology, as if you actually have any."
So far, my tracking of global liquidity has allowed me to profit from this rally. I don't pretend to have a crystal ball, but those of you who ignore the unprecedented liquidity built into the financial system will do so at your peril. If all you want to do is short this market based on fundamentals, go ahead, but your going to get your head handed to you.
Yeah, your "tracking of global liquidity" that you can't even begin to explain. Why the need to pretend you're more than a speculator, to suggest that you have some way of tracking global liquidity?
Leo,
I look forward to the day that you get your ass handed to you trading.
Fact: Earnings don't justify prices at these levels.
Hence you're recommending that people gamble. I don't even bother to read your work anymore.
In defence of Leo, he HAS been correct, maybe not for the right reasons, but based on some of his writings I think he knows deep down what has driven this rally - liquidity.
You are correct, earnings don't justify these prices. Based on earnings, dividend yield, etc, the market should be about half its current value.
But we live in a world where our entire economy is measured by a fiat currency backed by nothing. Thus, the frame of reference can be moved at any time, at least in the short term.
In the long term it is my belief that this will lead to the total destruction of the fiat currency system, but in the short term the flood of liquidity pours over everyone like a hot shower on a cold day, making everyone feel better.
If liquidity ever gets pulled, this market will drop like you have never seen in your life. But it may be just that we have a currency devaluation.
Arrogance like Leo's deserves to be specially 'rewarded'. Here's to a crash and burn sequence for you, Mr. Kovalikis, of the highest order. Wipe that smug grin right off your face.
Mid-day update: some profit taking but KEEP BUYING THEM DIPS:
http://finance.yahoo.com/q/bc?s=%5EDJI&t=5d&l=on&z=m&q=l&c=
Cheers,
Leo
Be careful Leo , as you know, the market humbles.
Bear market rallies often end on good news...
It will end when sufficient liquidity is removed from the global financial system. We're not even close yet and while the overall market may languish, there will be massive pockets of speculative liquidity going into some stocks or other assets.
Fight the tape, hedgies. Fight it. Grab it by its electrons and wrestle it to the ground. Live every day as if it were your last, and one day, you're sure to be right.
dollar = ZING!
So if I read this right the economy is getting better so stocks will go up. But if the economy is getting better the dollar will go up and stocks will go down. I hardly see a strong rally unless the dollar continues to be crushed and oil and materials go up and up (to say nothing of gold). For example, it can hardly be promising that retail is going up and Exxon is going down. Not that everyone shouldn't own one of those ugly Kindles (soon to be the betamax of ebook readers).
"But if the economy is getting better the dollar will go up and stocks will go down. "
Huh? Why is this so ingrained in your heads? The USD and stock market can rally in tandem - it has happened many times before!!! As the economy gets better, earnings grow and analysts revise up their earnings expectations.
Congratulations on your bullish market. From what I can see it's based mostly on the premise of "don't fight the Fed". I must say that it's worked fine, so far at least. I'm a bit unsure of what to make of your prediction-come-true of a NFP "shocker" and of upward revisions for the previous months. It was just yesterday that the Services PMI showed a contraction in service jobs and yet you stuck to your bold forecast. You must have some pretty good contacts - I can only surmise. Are they always this forthcoming with good "tips"? Please keep us posted by all means!
zenon,
The employment indicators of the manufacturing and non-manufacturing ISM are poorly correlated to monthly payrolls. My analysis looks at quarterly profits, quarterly business investment and new orders. It was only a matter of time before payrolls picked up. I got NO PULL with the Fed...LOL, they probably hate me since I exposed their asset inflation policy!
Your "analysis". Who do you think you're kidding?
Leo you are without question the most accurate prognosticator on this site - You have called it correctly since March.
Leo's been right, gotta hand it to him. I would like to hear what the impetus for the 4th and 5th(filth) gear is going to be. I see the chase for performance by the fund managers for 2009, but I dont see in continuing for 2010 (at least in the beginning of).
Fourth and Fifth gear will be downshifts......if FAS 166/167 gets legs.
There is NO WAY Bernanke et all are going to let us see the emperor has no clothes
Sadly must agree. ABA is furiously waterboarding everybody to kill it. They'll be working the boards on Christmas morn if necessary.....replacing water with spiked egg nog.
Sigh.
Leo,
Congratulations for reading the market right; after all we're in it for the money not to fight an ideological battle or something. But, would you mind telling us, how in the hell did you know that the nfp report would be a "shocker" and that previous month reports would be revised upwards? It was only yesterday that the Service PMI showed contraction in service employment and today the gov reports 86K new service jobs. Looks like you have some good sources of information. Are they always that forthcoming (wink)? Please keep us by all means posted!
The employment indicators of the manufacturing and non-manufacturing ISM are poorly correlated to monthly payrolls. My analysis looks at quarterly profits, quarterly business investment and new orders. It was only a matter of time before payrolls picked up.
Oh everything is jolly...hohoho. Yes, RY reported increased earnings but too much, to my mind, is accounted for by the trading desk. Their US ops stink and are they have no clue what to do to remedy. No size to leverage econ of scale and they are not willing to go "all in" and buy a big regional player. Scared or prudent? A little of both I guess, yet Mr Mkt has the stock trading at 1-2% from an all-time high!
Yup...times are good. Get on board! Who cares what is risk is. Stocks only go up. QED.
This from another Leo Kolivakis power lunch: "I told him this liquidity rally is only in third gear and will go to fourth and filth gear, especially in the hot sectors."
Considering the amount of fraud and corruption in the FIRE sector, I'd say we're already in "filth gear". It was probably a freudian slip, but I like that "filth gear" and I'm going to continue to use it. Don't worry, I'm going to call it the "Kolivakis filth gear."
Also, this gem, "And what Uncle Ben wants is what Uncle Ben gets, for now at least."
Glad you hedged that with, "for now at least." "Not Obvious" Bernanke got roughed up yesterday and now there is a bipartisan hold on his confirmation. A poll on CNN had him losing the public opinion the last I saw it. The only thing Santa Claus may give Ben this year is a confirmation, by the skin of his teeth.
Thanks, my mind was not in the gutter. I corrected that mistake. Uncle Ben will get reappointed because he's been good to Wall Street.
This market IS the gutter. Our fore fathers didn't risk their lives and well being so that an unelected banking plutocracy could rob Americans of their wealth, i.e. spending power. The FR is cancer on this great country. As for your comments on the Ben/Wall Street axis, sometimes the trend is not your friend.
WHOA! Bloomberg reports that Payrolls in U.S. Decline 11,000 in November; Unemployment 10%:
I told you that from here on, we're going to have a few months with upside economic surprises. Keep an eye on upward revisions to previous reports. Markets will like these figures and the USD and stock market will both rally.
Bruce,
Markets overshot to the downside last year due to deleveraging as Bear Stearns and Lehman folded. Now, unprecedented stimulus will lead to a major overshoot to the upside. Let's wait and see the job figures and how the day unfolds.
I am going to disagree with you Leo.
2009 has been a F-You year. By that I mean that it has been very unpredictable. Things that have happened have never happened before.
We have come a long long way off of the lows of March. I think too far. There a lot of bad things are in the air right now. So I think the F-You market will surprise again. December will stink.
bk
CBC reports that Canada gained surprising 79,000 jobs in November:
Stay tuned for the US employment report. Will be interesting to see headline number and any revisions to past reports.
i think the Canadian economy is in much better shape than the US, but see my post above, would be interested in your thoughts of your economy vis-a-vis the strong loonie.
I clicked on Leo's profile a fewmonths ago. His pic showed a 50+ year old man standing next to his motorcycle. The 50+ year old men I have known that rode motorcycle's, didn't understand risk too well.
Printing presses running at full tilt? Check. Equities and risk assets up. Check.
>Well, for starters, there's investor emotion. When the holidays are approaching, people are in a cheerful mood, and that optimism colours their perception of the market.<
C'mon, Leo, you're such an incessant pumper, despite
stocks being (at minimum) 20-25% above fair value. And
spare us the old chestnut about holiday optimism,
considering the nosebleed liquidity bubble we've have ALREADY had this year. I can approximate your age
and market experience by your posts and would infer
you have yet to experience a true "come to Jesus" moment.
You youngsters always imagine you can get out before
being run over by the herd. One of these days, the boyz
will open her up below your stops and then what will you
have?