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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.
»
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Stops are for myopic traders who twitch all day long. I am proud to tell you that I doubled and tripled down on some of my long-term solar positions after they fell 50% because I knew they were being manipulated by the big hedge funds. That's called conviction and knowing where the big macro picture lies.
Wow. "Doubling down cause you KNEW you were right"? Just promise us, that if/when you blow your account out, you will tell us. The market teaches humility to all sooner or later.
My god, how do you fit onto the ZeroHedge server with that head of yours?
Yeah, I'm with you on this one. I never trust a "Buy! Buy! Buy!" guy until I've heard him say "Sell! Sell! Sell!" once. The jury is still WAY out on our boy Leo.
Dow and SP500 daily charts are breaking down.
My USD indicator still gives BULLISH warnings.
http://www.zerohedge.com/forum/market-outlook-0
Do you ever sell? If so, when? Did you cash out prior to mid 2008?
It pays to be prudent.
Well - I am going to the bank today to get myself the 5%, 30 years fixed rate, interest only for 10 years, that they have been pushing lately with "Financiel Stabilitet A/S" probably buying it - 'cause if I was the market I wouldn't:
I smell Death.
Someone, Ukraine perhaps, doesn't matter really because everyone is in the brown, will default and long rates will rise. Doubling the long rates will make the bonds my mortgage is made from drop maybe 30% to Worthless so I can buy them back in the market later and thus pay back my debt.
Buy and hold? More like buy and hope.
In some sectors (renewable energy, for example), buy and hold is fine. For the overall market, it won't do much to boost your portfolio.
"I told him this liquidity rally is only in third gear and will go to fourth and filth gear,"
I actually agree with you, the amount of money that is going to be printed going forward is going to make the past 18 months look puny.
As priced in USD or any other fiat currency, the markets are going nowhere but up.
As priced in gold, the markets are going down big time.
Are you sure the stock market AND the USD can't rally in unison? Let's see Friday's employment report. Pay careful attention to any upward revisions to previous reports, not just the headline number.
Good call today on the employment numbers, but yeah, I am sure the dollar and stock market can't sustain any simultaneous rally (the dollar against gold, that is). Unlike in Canada, where your dollar is effectively backed by natural resources, ours is backed by fannie/freddie counterparty risk.
You need to understand the situation with fannie/freddie and the MBS market - there are no buyers for their paper at today's prices, which will force the Fed to keep buying, which will continue to kill our currency. There is literally no way out of it - giving fan/fred full faith and credit spikes our national debt, but no full faith and credit means interest rates on their mortgages go up, leading to a 90% FHA market. despite what the Fed claims, they have not slowed MBS purchases relative to issuance, so that market is still on life support.
fan/fred counterparty risk will only be priced better if/when the delinquency numbers get down to reasonable levels, but that is years away, given the number of underwater borrowers - that is a smouldering wreck that will take years to clean up.
Interesting to hear your thoughts on the Canadian economy re: a par CAD. i would think the Southern Ontario auto plants have a target on them, while the west is breathing a sigh of relief now that the tarsands are back in black. Maybe you can do a post on that - outlook on Canada assuming dollar stays around par. personally i am bullish on Canada, but think the profile of the economy is going to change.
ghost,
I follow and agree with your analysis, but I don't agree on the "how we get from here to there".
How can the Fed announce QE 2.0 or the US Gov announce Stimulus 2.0 (aside from repurposing re-paid TARP funds for a jobs package) in the face of a positive print for Q4 GDP and slowing job losses and gold over $1200/oz?
I think the Fed/US Gov needs a correction, even a significant one, in risk assets in order to have the political justification for QE/Stimulus 2.0.
But I'm interested in your perspective, how do you think the Fed will announce QE 2.0, what do you expect to be the content of the announcement, and when do you think they will announce it?
Here is the way I see it playing out.
The Fed WILL actually stop buying MBS in March. Within a few weeks, spreads will widen significantly.
You see, there are no buyers at todays prices. There are buyers, but at a much wider spread.
Did you know that right before the crisis hit, the Chinese owned more Fannie/Freddie paper than they did USTs? That is one huge buyer who is not coming back. Stupid American IMs might jump back into investments that burned them, but not the Chinese. I get the feeling they are plenty happy with their new strategy of stocking up on commodities.
So spreads will widen, and mortgage rates will increase.
In a normal housing market, that wouldn't be a huge deal. 6 - 7% mortgage rates are pretty low by historical standards.
But we are far, far, far from a normal housing market. Despite all the recent pumping, prices are still 30-40% below the peak in many markets, and a lot of borrowers still have debt far exceeding the value of the house. Look at ANY delinquency data, delinquencies are not only not declining, their rate of increase isn't even slowing.
Against that backdrop, the Fed will have no choice but to re-enter the market in a big way to drive down spreads. The NAR, MBA, etc will scream for it.
Added to that is we have Zimbabwe Ben who has never seen a problem that can't be solved by more money printing.
I am as sure of this as anything I have ever been in my life - the Fed will be purchasing MBS well into 2011.
Thanks for the reply.
Yes I did know the Chinese held more agency paper than Ts. Do you know how much rotation from agencies to Ts they have accomplished in the last year or so? I have not been able to figure this out from the TIC data, but I admit I haven't look too closely.
What about options other than QE 2.0 to keep absolute mortgage rates below 6%?
-Have primary dealers plough into agencies/MBS
-Have the US Gov explicitly back new agency paper on a go-forward basis
-Allow mortgage spreads to rise, but drive a flight to quality in Ts that brings down the 10 year lower still
I'm expecting something more covert than a direct, new expansion of the Fed's balance sheet, which BTW has held fairly constant in the last 12 mos, at least relative to the explosion in Oct 08 or relative to the explosion that would be caused by QE 2.0.
PDs don't have to buy MBS, only Treasuries.
As for bank buying, without ff&c even they won't buy at today's prices (besides the MSR hedging they do, but not as an investment - they can buy Ginnies for the same yield with no capital haircut - even if the capital rules are changed, from a counterparty standpoint it doesn't make sense to buy fannie/freddie over ginnies).
ff&c only for go-forward paper? we might see a variant of that, but my guess would be is all go-forward issuance is just done through the FHA rather than have three monsters with ff&c.
rolling everything into the fha would make the most sense, but i have a strange feeling Timmay is getting pressure to keep fannie/freddie as-is, and somehow resurrect that lobbying and fee-generating goldmine.
but even if the govt did guarantee fannie/freddie mbs on a go-forward basis, that is just another unfunded liability that will hurt the dollar, the market won't fall for that shell game.
Don't know if they can drive treasuries down enough to make up for the spread in a non ff&c mbs. they can cover some of the ground, but not all of it.
of course, the ultimate solution is a private-market one - keep the FHA for the poor and needy, and everyone else on-balance sheet through the TBTF, funded by a covered bond market. But that will never happen with the neophytes in this Administration.
Every plausible solution to the Fannie/Freddie fiasco points to a weaker dollar to me, and the likely solution is very little change for fannie/freddie and continued MBS buying.
"Leveraging Big-Time by Local Development Companies
I would just like to show readers the type of leveraging that is going on in China. Hainan Highway, set up by the Hainan government ten years ago to finance highway construction, is an early example of the thousands of local development companies that now pervade China. They usually get a bit of capital from the government and use that to borrow money from banks or issue bonds to investors. Fortunately, some of these entities are listed so we can see how they work. Note, however, that because they are listed, they already represent "the best of" local development companies. finance.Sina.com has a very powerful feature that breaks down various parts of listed companies' annual and quarterly reports. See here.
So here, Hainan Highway has total asset of around 2.7 billion RMB. The largest category is various kinds of accounts receivables. Well, that sounds good, except the annual report also states that the largest debtor to Hainan Highway is the founder of the company, Hainan Department of Transportation!! Moreover, its debt to Hainan Highway ballooned from around 150 million in 2008 to nearly 450 million RMB! Okay, so this is what is happening. Local governments use some land or revenue cash flows to start these entities, which then go and borrow money from banks and investors. Then, local governments in turn borrow from these entities, especially those that generate some cash flows. My question is: since these loans to local government is identified as asset, can these companies borrow even more from banks on the basis of this "account receivable?" I think they can!
Again, this is happening to thousands of such entities across China!"
http://chinesepolitics.blogspot.com/
"they saw all the mistakes the Western world made and decided its best to be better prepared for the future."
What does this mean? The mistakes of the Western world in not building huge, completely empty cities or the heavy over levering of provincial and municipal political units because the stimulus directive, combined with central government's reluctance to cancel any existing project in order not to lose face, means that if 1000 cranes bloom now, they will continue to bloom no matter what the coming trade wars will bring.
Or maybe he is referring to the coming tax grab from the various citizens to cover the various NPL loans?
Or the various farmers stocking up on copper? And the bubble in garlic? Why -- they saw the danger for all those Pizza Hut franchises in Hunan and Tibet -- running out of garlic sauces.
Maybe its the surge in illegal golf courses and the subsequent need to use SATELLITE TECHNOLOGY TO TRACK ILLEGAL USE OF LAND? Yea -- the West really fucked up on that one too.
Sigh. I hate Western projections of China that take the base assumption that the Chinese are some sort of paragon of Asiatic genius, using their cold calculating brains to outsmart the degenerate Westerners. Yea everyone thought Japan had America's number in the 80s too -- Remember Robocop 3? All that 'stockpiling' and 'avoiding Western mistakes' didnt really work out for them and it wont work out for China. Especially as it becomes more and more expedient for the Democrats to call for tariffs to shore up whatever remains of the their employed base.
Oh and quick question: if the world's largest importer and the world's largest exporter get into a trade war, who losses? Hmmm lets see, hmmm I wonder who...
Rally of a lifetime? So... you're saying I should buy stocks now and sell when we hit the 2007 highs in a few months? Got it. Thanks for the advice. I knew others were making this more complicated than it needed to be with all that confusing debt and interest rate talk. Finally some clarity.
No, you should be buying T-bills and gold bullion, waiting for the Apocalypse. -)
Aren't you the smug f**k? Pride goeth before the fall, pal.
Let's all buy shares of common stock in technology companies!
That will be great to get involved in large cap tech again, as insiders crank up the massive option grant schemes. Grant, exercise, dump to the public....grant, exercise, dump to the public...grant, exercise, dump to the public..
Repeat as necessary for a few decades because the public and buy and hold mutual fund industry apparently really are that dumb!
Leo, the stock market is in the same place it was a decade ago, and realistically it will still be at these levels in 2019. Most companies go out of business over time, or at the very least see massive deterioration of revenues, and bloated payroll and benefit costs that sap all growth.
hmmm... that picture of Santa makes me wonder...is his rally just getting started, or is it time to clean up and go home...
Leo, you used to bug me, and I often disagree with your perspectives. But I admit you're starting to grow on me and I do look forward to your articles. :)
I can't wait!
Really looking forward to filth gear. That should be a ride!
Will it be even faster than ludicrous speed? So that's what happens after you go plaid; you get dirty!
Even faster than obscene speed? What happens when off balance sheet real estate falls back onto WFC, BAC, et al., balance sheets? Is that beyond bolistic speed flying through hot apple road plops? Who are you giong to call to clean up the puppy mess on confettied paper? The kids are at the canabis co-op playing video games.
Brave? and complacent - what a mixture.
"Don't part with your illusions. When they are gone you may still exist, but you have ceased to live."
-- Mark Twain
China will most likely announce Stimulus V2 this weekend, so Australia may be in for a heck of a Santa Rally too:
Economy to ride a second wave of China stimulation
"THE Australian economy is set for another free kick as the Chinese government is expected to sign off on a second stimulus package after its annual Central Economic Work Conference to be held in Beijing at the weekend."
http://www.theaustralian.com.au/economy-to-ride-a-second-wave-of-china-s...
Re: All that over-capcity in China...don't forget most of those factories etc were built and paid for by Western manufacturing companies. No skin off China's nose, it is, however a real problem vis a vis rural and city push pull!
Brave, brave man to be posting so optimistically on this bearscape website...
Leo,
Bravo! You have been dead on from the beginning of this rally. As much as I love to hate you, I have to tip my cap in your honor.
Markets can be irrational much longer than Zero Hedge can remain solvent.
Yikes, sounds like Wall Street jibber jabber. Technical divergences are mounting, Santa is wearing out his welcome in a hurry.