Tag Archives: Current Market Tactics

October 2013 Employment Situation: eye-popping gains

November 11, 2013 By in Constructing a Portfolio, Current Market Thoughts, economics, employment, Employment Situation report Tags: , , , , , , , Leave a comment

the report

Last Friday at 8:30 est, the  Bureau of Labor Statistics of the Labor Department released its Employment Situation report for October 2013.

Given the general tone of deep discouragement about the economy-retarding actions of Washington–and the impending government shutdown, in particular–the ES figures were surprisingly, even shockingly, good.

The economy added 204,000 net hew jobs during the month.  The private sector accounted for +212,000, government lost -8,000.

In addition, revisions to the two prior months’ figures were also strongly positive.  August job gains, estimated last month at +193,000 were upped to +238,000.  The September figures, initially put at +148,000, were increased to +163,000.  Together, therefore, revisions added +60,000 to the +204,000 total for October–meaning employment in the US on Halloween was over a quarter-million positions higher than estimated a month earlier.

One more positive:  economists, who had called the October ES figure at +130,000 new jobs, also estimated that the impending government shutdown depressed job creation by another +50,000.

There’s only one month since employment turned up in October 2010 where job gains are clearly on a par with, or better than, this October.  That was January 2012, where the final job tally was a gain of +311,000.

what this means

On the surface, the figures appear to be some sort of weird outlier.  If employment gains should be weak during any month, this October should have been it.  And that’s the way I perceive Wall Street to be taking the Employment Situation  report.

Suppose it’s not   …that the economy actually gained about +300,000 new jobs last month and will continue to do so.  This would mean that the US has shifted from creating just about enough new positions (+150,000 or so) to absorb new entrants to the workforce to creating around +150,000 a month more than that.   This would be enough to bring the economy back to full employment–reabsorbing the country’s 3 million long-term unemployed into the workforce in less than two years.

Hard to believe.

If it were so, that would mean that the “normalization” of interest rates–that is, bringing short-term rates from the present zero to 3%+–could/should proceed much more quickly than anyone now expects.

In some ways, that would turn my current idea for portfolio construction on its head.  In particular, it would imply a stronger dollar (therefore a weaker euro) and a preference for purely domestic US companies, not international earners.

I’m not making any changes yet.  I’d like to see next month’s ES first.  But I am putting the search for domestic-oriented EU names on the back burner.

US banks since the repeal of Glass Steagall

November 6, 2013 By in Banks, Industry Analysis, Portfolio management, Recent Market Action, Stock ideas, Strategy Tags: , , , , , , 2 Comments

In the 1930s, Congress passed a series of laws, collectively known as Glass Steagall, that barred commercial banks from engaging in brokerage/investment banking activities.  The rationale:  the linking of banking and brokerage in one company had spawned abuses that had a big hand in causing the Great Depression.

Fast-forward to the late 1990s.  Glass Steagall was gradually rolled back and then discarded. The rationale advanced by bank lobbyists in Washington?  …commercial banks were older, wiser and better-managed.  Banks also needed to expand their size and activities to compete successfully with the “universal” banks of the EU, which already were allowed to combine commercial and investment banking under one roof.

How’s that been working for us?

Well, in the decade-plus since, the new domestic “universal” banks:

–destroyed the mortgage market through wild speculative lending and widespread misrepresentation of the poor character of the mortgages they subsequently bundled up and sold off to others.  Voilà!   …the Great Recession.  (Perversely, though, the American banks caused near-fatal wounds to their EU rivals, who were the eventual “dumb money” buyers of much of the sketchy mortgage-backed paper.)

–last year, regulators began investigating the big banks for illegally colluding to manipulate short-term interest rates through LIBOR (the London Interbank Offered Rate).

–recently, a similar investigation has been opened up to look at illegal bank collusion in foreign currency markets.  According to the Wall Street Journal, so many bank senior currency traders have been suspended that too few honest traders (not an oxymoron, but close) may be left for global currency trading to function smoothly.

–reportedly, more investigations will be opened for other bank commodities trading, notably oil.

 

 

Wow!  I find this all hard to take in.  I have several reactions.

The first is that, either by accident or design, these investigations are only being launched after the worst of the financial crisis is over–meaning that the banks can withstand the financial and reputational shocks these inquiries are causing without triggering panic withdrawals by depositors.

The downsizing of the banks, now underway, probably still has a long way to go.  The best and the brightest younger minds will search for jobs elsewhere, fearing the industry taint may be deep and more enduring.

Despite the financial industry’s enormous political clout in Washington, continuing scandals argue that further legal restrictions on banks’ activities are probably inevitable.

This all suggests to me that big money-center banks will be uninteresting investments for a considerable time to come.

As a citizen, the banking mess is appalling.

As an investor, the current situation suits me fine.  I’ve never understood banks,  I’ve never been willing to do the work needed to see what’s going on underneath the covers–although I’m sure I would never have guessed the extent of the criminality they’ve been involved in.

In a practical sense, the banking scandals mean I can focus my attention on IT and Consumer Discretionary as sources for individual stock ideas, without worrying that Financials will move to the head of the pack.

What makes this important is that Financials account for a big chunk of the index.

As the S&P 500 stands today, the largest sector by market weight is IT at 17.7% of the index.  Financials (16%) is second.  Healthcare is #3 (13%).  Consumer Discretionary (12.5%) is #4.  Together, these four sectors make up about half the index.  Being able to ignore/underweight one of them with a high degree of confidence is a big deal.

strategy for 2014: yearend tax selling

November 5, 2013 By in Current Market Thoughts, Portfolio management, selling a stock, Strategy, yearend tax selling Tags: , , , Leave a comment

I won’t be writing my strategy thoughts for 2014 for a few weeks.  However, it’s not too early for all of us to be thinking seriously about yearend tax selling, both as a market phenomenon and as a part of our personal portfolio management.

A disclaimer before I begin:  I’m an investor, not a CPA.  To get all the ins and outs of the capital gains tax rules, read the appropriate IRS or other tax authority publications.

why it happens

For most taxable investors in the US and mo,st other areas I’m aware of, the tax year ends with the calendar year on December 31st.  (One major exception is mutual funds and ETFs.  Their tax years generally end on October 31st–giving them time to close their books and make required distributions to their customers–who must pay tax on these receipts–before 12/31).

Investment gains are taxable once they’re “realized,” i.e., once the investment is sold.  But tax is due only on the net gain–that is, after subtracting any realized investment losses–not the gross amount.

In an ideal world, we’d all be doing tax planning constantly.  The reality is different.  Professionals believe (correctly, in my view) that taxes aren’t the most important elements of portfolio construction, so sometimes, in my attention, they pay shockingly little attention.  The rest of us just wait around until the end of the tax year approaches.

the phenomenon

For taxable professionals, like insurance companies or banks, who hold “balanced” portfolios of several asset classes (stocks, bonds, alternatives), they’ll try to match sales of, say, money-losing bonds and money-making stocks so that the net effect is zero taxable income.

Or it may be that guidelines, either internal or regulatory, require them to prune large winning bets.  In that case, they’ll scour the rest of the portfolio for anything with a loss attached to it and heave that overboard–just to knock down the tax bill.

This all occurs in the six-week period from early November to mid-December.  Clunkers may be sold more aggressively but there’s also downward pressure on winners as well.

For individuals, the main focus of selling tends to be small-cap names that have performed poorly.  They tend not to be sold with a very light touch.  Instead, individuals typically dump them out without much/any regard for price–just to get rid of them.  This sets the stage for the “January effect” as these beaten up stocks rebound after the first of the new year.

taking advantage

If the advent of tax season isn’t the reason for doing some serious thinking about what positions we want to take into 2014, it can at least be the occasion for doing so.  For example, serial clunkers in our portfolios tend to find ways to make our eyes skip over them when we examine our holdings.  It’s much harder for them to hide when we’re specifically looking for red ink to make use of

Similarly, we all love our big winners.  But we also have to .remember that at some point the risk of holding a (for us) humongous position outweighs the possible future gains.  Yearend is a good time to consider whether to trim.  Don’t be like a hapless acquaintance during the internet bubble who rode JDS Uniphase from $ 3 to $1000 (a position of $100,000 to $30 million) …and back down again.  Think Mark Cuban instead.

A more aggressive tactic would be to shop around for rebound candidates among this year’s big losers.  They may be pushed down by, say, another 10% before the year is out as holders shove them out the door to take tax losses.  This is not my style, so I have no words of advice, other than that you better do your homework before taking the plunge.

“wash” sales

One more point:  You can sell a position that’s deep in the red to recognize the loss and then buy it back.  But the IRS says you have to wait 30 days before the buyback to be able to take the loss.

I’m not a fan of the tactic, although some people may be able to do this successfully.  For me, it would be perpetuating the delusion that I haven’t made a mistake.

backing and filling

November 4, 2013 By in Current Market Thoughts, Portfolio management, Technical Analysis Tags: , , , , , , 1 Comment

Backing and filling is what I think the S&P is beginning to do now, and will continue to do–possibly through yearend.

What is it?

I decided to Google the term before I started writing but didn’t find anyplace that has the idea right.  I’m not sure why.  Maybe in “modern” technical analysis (an oxymoron on a par with jumbo shrimp) people use a different term.

Anyway,

the basic idea has two aspects:

1.  that there’s a normal or natural, relatively sedate, trend of upward progress in the stock market.  For the S&P, it’s probably 8%-10% a year.

2.  Sometimes, however, either the market as a whole or an individual stock will rocket upward in a very short period of time.  Like what AMZN and GOOG did last month.  Arguably, the S&P as a whole has done so in 2013 so far, considering that the index is up by about 25% since New Year’s Day.

When this happens, there’s a price to pay for the too-rapid movement.

The market/stock has to “digest” the gains, as they say.  It does so in one of two ways.

It can tread water for a period of time, establishing a “base” for further advance by recording significant volume at around the peak levels.

Or, more frequently, it will retreat somewhat from the peak, fill in the “missing” volume at somewhat lower levels and return to the peak from there.  There’s no hard and fast rule for how much the stock/market will go down during this process, but technicians typically make projections based on fractional parts of the advance.  The most common ones used–on all occasions–are 1/3, 1/2 or 2/3 of the just-completed upward move.

Either is backing and filling.

I don’t know where the term comes from, but I’ve always thought of backing and filling as a construction metaphor.  A bulldozer builds a pyramid of dirt.  If the pile gets too high–and too pointy at the top–the dozer has to flatten out and broaden the mound before it can build it higher.

There’s also a psychological basis for backing and filling.  Suppose you bought GOOG three or four weeks ago.  Today you have a 20%+ gain in a very short time.  So you’re tempted to take your profit and put the money to work elsewhere.  That’s where the selling comes from.

The buyer?  He’s the guy who regrets not purchasing the stock when you did.  He probably won’t pay $1000, but $975 may look like an incredible bargain to him.

So the security involved tos and fros until the temporary selling urge is satisfied.

my take

I’ve begun to notice this happening with the stronger performers in my portfolio.  I don’t think this is a worry.  It’s just the way the market works.  As one of my professors used to say, “You can’t have ice cream for every course of the meal.”  I have no idea why not, but that’s what he said.