Stock Markets: Don`t Sell In May And Go Away

 

(Drivebycuriosity) - These days you could very often read the slogan: "Sell in May and go away ". I reckon this would be a huge mistake. There are at least 6 arguments against selling automatically in a certain calendar month:

1. The stock market  is far too complex to follow any rules. In the long run it trails the economic trend, in the short run stock prices respond to a flood of economic news which is often random. Usually corrections occur when the stock market has to respond to disappointing news and/or to revise previous price gains which went too far. Selling before a correction starts is a nice idea, but in reality many people sell too early and come back too late because nobody can predict the timing and the length of a setback.

2. History doesn`t repeat itself. The followers of the "sell in May rule" refer to the last year, when the stock market peaked on April 29th and to 2010, when it peaked on April 23rd. But both corrections started just coincidently in the months of April because the global economy temporarily crossed in both cases  some of the weak spots which are part of any long run economic upswing. These weak spots and the following reacceleration can occur any time. They don`t depend on seasonal facts.

3.The slogan could be self-defeating. If many follow and  sell in May their disposals would set the stock market under pressure and stocks would become cheaper. In this case  the rule followers would create a buying opportunity. When the rule followers come back to the market - say by the autumn - they would raise the stock prices. Following stubbornly the "sell in May rule" would therefore implement to sell cheap and to buy expensive.

4. I reckon that stock market is undervalued because the majority of market participants are still pessimistic and underinvested. Maybe some already sold in April to pre-empt the expected selling in May, which would (partly) explain the weak stock market in the early weeks of April.

5. The earning seasons for Q1 20012 proves that company profits are rising even in a sluggish economy thanks to the rising efficiency of the corporations. The climbing earnings should fuel further stock price gains in the coming months.

6. The U.S. economy is still on recovery track fueled by rising consumer spending. I also reckon that speculators who are now betting on a crash of the Chinese economy and a worsening of the European crisis will be disappointed and have to come back.

Thanks to climbing company profits and the healing of the global economy the S&P 500 could reach 1.700 points by end of the year. In this case the sellers of May could miss stock market gains of 20% or more this year.

Movies: The Hunger Games

Does history repeat itself? Will the Roman Empire come back? The Hollywood blockbuster "The Hunger Games" (directed by Gary Ross imdb ) seems to suggest a revival of the Roman Empire in the near future. The flick shows a world divided into a "Capitol" (Rome?) and a dozen "districts" (provinces?). The "Capitol" is extremely rich and technologically far advanced. Their capitol citizens are pretty decadent as allegedly the Old Romans were. Like the Old Romans they indulge in bloody spectacles where human life is sacrificed, now celebrated as TV reality shows.   Only "underdogs" live in the districts and they are dirt poor and seem to have a pre-industrial revolution technology. They have no rights and are sometimes game for the "Capitol" citizens. The whole system is ruled by a scrupulous dictator (Cesar?). For some reason, a randomly selected group of youths from the districts has to participate in a TV reality show and travel there to accomplish  deadly fights against each other till just one survives: The "Hunger Games".

The flick is somewhat entertaining but it shows clearly that the producers focus on young adults, the largest and most profitable market for the movie industries. The plot is violent, but this violence is well tempered and if you want eroticism and sex you are in the wrong movie. The story doesn`t bother much with logic. Some of the characters appear and disappear suddenly like the "deus ex machine" (god out of the machine wikipedia) in the classical Greek drama.

I enjoyed watching some of the actors, especially Stanley Tucci as the host of this TV show.  I also liked the coolness of Woody Harrelson even though his role as a cynical mentor didn´t give him as much elbowroom as the movie "Rampart" (). The leading actors Jennifer Lawrence and Josh Hutcherson did a solid job, but I am not sure if I will still remember them next week. Some of the characters, especially the Cesar like leader of "Capitol" and the general manager of "The Hunger Games", were plain and stereotypical. Watching them gave me the impression spotting "Bad Shakespeare".

The special effects were poor, especially for such an expensive production. There is a modern train which might impress Americans who are driving only by cars, but this kind of mass transportation is now very common in Europe. The "Capitol" looked like a construction of paperboard and the monsters where pathetic. The special effect pioneer Ray Harrihausen did a much better job in the 1950s. Maybe this was deliberate so that even the youngest visitors and their accompanying mothers weren't`t too disturburbed. "Hunger Games" is an acceptable family entertainment for a rainy day.

Economy: Welcome Home

In the recent weeks it looked like that the economic upswing in the U.S. has slowed down a  bit. The latest data from the job market and from manufacturing were disappointing. But this morning we got economic numbers which are encouraging again. The index of pending home sales (a forward-looking indicator based on contract signings) rose in March 4.1% and is now 12.8% above March 2011 (calculatedriskblog).

"A sale is listed as pending when the contract has been signed but the transaction has not closed, though the sale usually is completed within one or two months of signing," explains Marketwatch (marketwatch.com). "Pending home sales are considered a leading indicator of progress in real estate because they track contract signings", writes Bloomberg (bloomberg).

This is another signal that the U.S. home market has reached it´s bottom and will rise in the coming months. Rising home sales should help to accelerate the general economic upswing because homeowners could feel more wealthy and spend therefore more generously for consumer goods (wealth effect). Stronger consumer spending could compensate for the sluggish job market and for weak exports because of the mess in Europe - at least partly.

Stock Market: A Disaster For Pessimists

The current earnings season is a disaster for the pessimists. Bloomberg reports that 82% of the companies which reported their profits from the first quarter of 2012 have so far beaten the average expectations of the analysts (bloomberg). Earnings rose 11% on average, exceeding the 0.6% increase analysts projected when reporting began, adds Bloomberg (bloomberg).

The high beat rate has 2 reasons:

1. The majority of the Analysts was way too pessimistic. Weeks before the start of the earnings season they followed the gloomy zeitgeist and lowered the bar (their earning predictions) too far, mainly because of the weakness in Europe (bespokeinvest.com).

2. The solid profit growth rate proves that companies can raise their earnings significantly even in a sluggish global economy. This is the result of a continuing learning process which raises the efficiency of companies and boosts productivity. Part of this is  technological progress, including computers, chips, the internet and other software applications which allow the companies to keep the growth of their costs below the growth rate of their revenues.

Both, the pessimism of the analysts and the rising productivity, create buying opportunities and will fuel further gains on the stock market in the coming months.

Economy: Phoenix, Arizona - The Call Of The Desert

Yesterday we got news that U.S. home prices continued their fall. In February the S&P/Case-Shiller 20-city composite, which displays the development of home prices in 20 big U.S. cities, hit a near-decade low (.marketwatch). But one city shined:  Phoenix. Prices there were up 1.2% monthly. The capital of Arizona was the only city in the survey with back-to-back monthly gains — and up 3.3% annually.

This exceptional strength of the Phoenix home market seems natural for me. Last week my girlfriend and I visited the city while traveling through the U.S. southwest states Nevada, Utah and Arizona. We stayed 2 nights in the regional metropolis, one night in a hotel and the other
 in the home of friends.

I was impressed because Phoenix (wikipedia), which has around 1.5 million inhabitants, is built in the emptiness of the Sonoran Desert (wikipedia) and makes very generous use of the ample space there, called the Valley of the Sun. Arriving by car from the north we travelled at at least a half hour inside the boundaries of the metropolis and spotted still empty desert land. Sometimes we could see more of the famous Saguaro cactus (wikipedia) than houses.

We learned from our hosts that they and many other citizens prefer the extremely dry desert climate with warm winters and very hot summers (till 120 F, 49 C). We were told that many people who can not stand the humidity of the U.S. east coast and the gulf region or the bitterly cold winters in the northern U.S.and Canada migrate to this very sunny place. They also mentioned that the tax laws in Arizona are more friendly than in many other U.S. states. 

Phoenix therefore attracts many retired people who can extend their lifespans thanks to the healthy desert climate. And many large companies respond to the regional attractiveness and build their headquarters or large facilities there. Therefore the (relative) housing boom in the southern metropolis could last as long as the desert climate lasts.

Travelling: Fairy Tale Land In Cowboy Country - Zion Park, Utah

Traveling is full of surprises. 10 days ago my girlfriend and I flew from New York to Las Vegas, to start a 10 day car trip through Nevada, Southern Utah and Arizona. While planning this vacation in the U.S. south west we were kind of hoping for warm and dry weather, but the trip began very differently.

Las Vegas - a city built in a subtropical desert - greeted us with temperatures in the 50s F (around 12 Celsius) and drizzling rain. While driving northeast into the mountain area of Utah the weather got worse.

We spent April 14th in Zion Park in Utah. This Canyon is usually a desert area. But we experienced chilly rain and later snow, which made hiking on the rocky paths slippery and a bit unpleasant. But we got compensated a lot for that.

The park was partly covered by snow which gave rocks and trees a very special look. The bad weather kept many visitors away and we could hike almost alone in a fairy tale country.

We are looking forward to returning to this charming place.

Economy: Tug Of War

The oil price is hovering north of $100 and gas prizes at the pump are close to record high. But the U.S. economy is doing pretty well in spite of the high energy costs. The  current situation is a tug of war. The rising oil price is indeed sucking a lot of money out of the economy and is slowing down the recovery. High costs for gas and heating leave the consumers less money to spend for other goods. I guess the high energy costs are one of the reasons that the recent recovery is so disappointing slow.

But nevertheless, there are still other factors which are pushing the economy forward and are overcompensating the negative oil price effect up to now. Interest rates are very low. Consumers are still optimistic and free-spending as the solid retail sales prove (driveby). Manufacturing is still growing thanks to the rising consumer expenditures and the climbing export. And the job market is healing in spite of the weak numbers from last Friday.

There also are some factors which are diminishing the negative effect of the rising oil costs. Helpful were mild winter and spring which reduced the heating costs. Many companies and consumer also save money because the price of natural gas is close to record lows. But I guess one factor is more important: Companies and consumer use less of the expensive energy as they did in the past, thanks to the rising energy efficiency.

U.S. energy consumption per dollar of output in 2011 was 2% less than 2010 and half of the energy required in 1979 reported the U.S. Energy Information Administration (mjperry.blogspot). This is result of the ongoing technological progress which reduces the energy consumption of machines. From 2002 to 2011, the average fuel economy of vehicles sold in the United States improved 20 percent to 23.2 mpg from 19.4, according to consumer research firm Edmunds.com (reuters ). The fuel economy of 2012 models is more than 16 percent higher than in 2008, Edmunds.com said.

But not just cars are getting more and more energy efficient: Modern refrigerators, washing machines, air conditioners and many other household appliances use less electricity than older models. This is a clear response to the rising costs of energy and part of the technological progress. For centuries people respond to rising commodity costs and by finding cheaper alternatives. As a result oil is getting less important to our lives. Oil consumption was 4.8 percent of U.S. national income in 2010, compared with 9.7 percent in 1981, shows a Bloomberg report (bloomberg).

Economy: In Consumers We Trust 2012 II

The gas prices are marching to record highs, but the U.S. consumers stay still in spending mood. "Retailers from discounter Target to department-store chain Macy's reported better-than-expected sales in March", writes Associated Press (finance.yahoo). "Excluding pharmacies, companies that reported their results said sales grew 6.8% at stores open more than a year, well above the monthly same-store gains of 3% to 5% recorded throughout 2011” reports Barron´s (blogs.barrons.com).

The strong retail numbers are encouraging, because they are an important part of the consumer spending, which accounts for more than 70 percent of all U.S. economic activity. It looks like that the healing job market, in spite of the disappointing employment report from yesterday, and the rally on the stock markets are counterbalancing the negative impulse of the high energy prices.

As long as the consumer  spending, the engine of the economy, is still running smoothly, the U.S. economy will continue the upswing. This is also good news for the rest of world because rising U.S. consumer spending translates in climbing exports for companies in Europe, Asia and Latin America.

Stock Market: Why The Banks Are Wrong

Zeitgeist rules and its name is pessimism. "Bespoke", a stock market service provider, shows the current year-end S&P 500 price targets of the of the biggest U.S. banks (bespokeinvest). The average of these Wall Street strategists expects that the index closes at year-end at 1362 points. This would be minus 2.51% from the current level!

The most gloomiest bank in this survey is Morgan Stanley. Their strategist have just a target of 1167 points, meaning minus 16.46% from now. HSBC is not much better, they call 1250 points, translating in a loss of 10.52%. Goldman Sachs also is betting on 1250 points.

Even the bulls are cautious at best. The most optimistic target comes from UBS with 1475 points, meaning just a plus of 5.59%. The second place goes to Credit Suisse with 1470 points and a plus of 5.23%. It may be a coincidence that both banks have their headquarters in Switzerland. JP Morgan, the most optimistic Americans in this survey, follows with 1430 points, a pathetic plus of 2,37%. Citigroup expects 1425 points, meaning a gain of 2.01%.

I reckon that these strategist are way to pessimistic. They are following just the skeptical herd. I stick still to my belief (published here on 12.31.2011 driveby) that the S&P could gain in the whole year 30% and more and could close north of 1700 points. I still claim that the U.S. economy will stay on its recovery track guided by decent consumer spending and growing manufacturing, thanks to the rising exports to China and other emerging markets. I still believe that China will manage its soft landing, meaning that the economy will re-accelerate in the turn of the year. I still believe that the crisis in Europe will heal and Germany and other leading countries in this region will finish the year in a better shape than now.

Many funds are still under-invested and the administrators are under performance pressure. The interest rates are still pretty low and will continue to accommodate the economy upswing and the continuing rally in the stock markets. Globalization and accelerating technological revolution (iPads et.al) will deliver ongoing headwinds and the rising productivity will drive company profits further north. Enjoy!

Economy: Who needs QE3 anyway?

The stock markets are a bit under water today. If we believe the media the markets are disappointed because the Fed took Quantitative Easing 3 (QE3), meaning buying more bonds to pump additional money into the economy, from the agenda (finance.yahoo.com). Yesterday the Federal Reserve signaled it may refrain from further monetary stimulus unless U.S. growth decelerates. Some observers claim that the stock market has an "obsessive fixation on the Fed & Q3" (economicmusings.com), meaning that many traders have been buying stocks just as a bet on more expansive monetary measures. 

If these explanations are correct the negative market reaction should be very short termed. The Fed is right: There is no need for Q3 because the U:S. economy doesn`t need more monetary stimulation. The economic upswing is now self-sustaining because manufacturing is growing, thanks to rising exports to China and other emerging markets, cheap natural gas and the continued job market healing process. Both developments  are fueling the climbing consumer spending.

The abandonment of QE3 now seems to cool inflationary expectations, as the falling price of gold shows. Many traders have been buying gold because they were speculating that QE3 could trigger inflation. The new signal from the Fed also explains the fresh pressure on the oil price, because the speculation on QE3 was one of the arguments for buying oil futures, besides bets on a possible war against Iran. The falling energy price is highly welcome because it leaves the consumers more money to spend for other goods.