Investing in the stock market: the November syndrome

Sweet November… well, not really: the war continues for purposes unknown to most and oil prices continue to rise. Credit woes dominate financial headlines, and value stocks appear intent on extending their correction to a seventh month. Investors want a stronger dollar, while lower interest rates (and lower taxes) are clearly more beneficial. No political party has a candidate who supports real tax reform for both investors and corporate job creators, nor has America’s self-defeating Regulation Industry stopped growing faster than most world economies. In terms of issuance breadth alone, November is turning out to be the worst month (or best buying opportunity) since July 2002, and possibly October 1987. Who makes this good/bad determination, though? Wall Street institutions, the media, investment letter writers? Why are rallies considered good and corrections bad? Will we remember 2007 as the year of the Grinch or will the leaves and the market stop falling in favor of a Santa Claus rally? Only the ghost knows for sure.

Every fall, whether it’s a good year on the market or not, I remind my clients that the last quarter of the calendar is a very special time. November is particularly exciting because it hosts the convergence of four Katrina-level forces, all of which are part of the conventional wisdom on Wall Street, while none of which lead to smart investment decision-making. And this year we have a special treat in the form of a Category Three market correction in the Value Stock sector. (October ’87 was a Short Five; June ’98 to January ’00 was a long Four.) A five-force November Syndrome can be particularly destructive; no wonder the media pays so much attention to it… carnage at last!

Force One is the mad dash of lemmings to make losses on stocks and/or income securities for no investment reason at all…simply because they have fallen in price since the time they were purchased. Assuming (as I always do) that we are dealing with “investment grade stocks”, lower prices should logically be seen as an opportunity to increase positions at low cost rather than an opportunity to reduce the 2007 tax liability on our other investment earnings. Losing (your) money is only a good idea in the eyes of accountants, particularly if the reasoning for buying the security was sound in the first place and assuming the issuing company is still profitable. This “tax loss” madness is comparable to breaking into your boss’s office and demanding a cut in pay, and could be eliminated entirely through smart tax reform. Have hope investors, I’ve heard a rumor that candidate Romney is talking about eliminating taxes on investment gains.

Likewise, letting your earnings run, per Force Two’s instructions, to push horrible things into 2008 is just plain silly. Talk to those geniuses who didn’t make a profit in 1999 (or Aug ’87) and are still waiting for their stocks or mutual funds to pick up! The goal of the capital investment exercise is to make a profit…the faster and more often the better. There are no guarantees that earnings will wait for you to pull the trigger at your personal tax convenience. And patting yourself on the back when you have unrealized gains inside your income portfolio is just as absurd. Which is better, 10% profit today or 6% over the next twelve months? Profits should be taken when they appear… the investment gods are watching.

Force Three takes the form of a trade, and is innocently called a Bond Swap… one of two reasons your broker sold you those short-duration odd-lot positions in the first place. He now has the opportunity to steal his pocket by trading them at a “good tax loss” for another bond with “about the same yield.” You get a double dip commission (yes, I know it’s not in the confirmation notice, but there is a markup on each side of the trade) and you get a longer duration or lower quality bonus. In a way, it is now okay to buy the longer duration bond. Seriously, this is how they finance their Christmas shopping! If he isn’t fooled by the swap scam, he won’t be too upset… anyway, the rapid turnover of his portfolio earns him a handsome 3% on each issue that matures.

As if all this weren’t enough, Wall Street hits them some more with a self-serving strategy gleefully referred to by the media as institutional holiday window dressing…a euphemism for consumer fraud. In this annual Shell Game, managers of mutual funds and other institutional funds dump stocks that have been weak and load up with those that are at their highest prices of the year. Always keep in mind: (a) that Wall Street has no respect for your intelligence and (b) that the talking heads in the media are artists, not investors. Institutions need to show how smart they are by having quarterly and annual reports that reflect their unerring brilliance, so they boldly sell low and buy high with their retirement savings.

It would be an understatement to say that the sum of these year-end strategies usually adds to the weakness of the weak and “tests” the intelligence of buying the strong. The November Syndrome is a short-lived annual investment opportunity that most people are too confused to notice, let alone appreciate. Simply put, go out and buy the November lows and wait for the periodic mystery effect of January to happen. The media will talk about this phenomenon with wide eyes as many of the hideous turn torrid, seemingly for no reason. What’s going on, you might ask? Well those professional window dressers are now selling their high priced honeys and replacing them with the solid companies they just sold at a loss. Interesting place, Wall Street…difficult but manageable. Take the profits and pay the dreaded taxes. Buy November lows, even add them to existing positions. More often than not, this turns out to be a winning strategy if you stick with investment grade stocks.

Note: The 2nd Edition of “Brainwashing” has arrived.

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