When Fund Managers Sell, It's Time to Go Bargain Hunting
You may not realize it, but the annual practice of "window dressing" – a process through which fund managers dump their worst-performing stocks and replace them with high flyers – can create some real bargains for retail investors.
The sleight-of-hand does actually little to improve the fund's performance, but it does keep a fund manager's biggest mistakes of the year out of the annual reports sent to investors. For that reason, most fund managers do some window dressing every December. And in years that the overall stock market has struggled – as it has this year – they're busier than usual.
Indeed, managed funds have actually fared worse than market averages this year. The Merrill Lynch composite index of hedge funds is down more than 7% on the year, and many mutual funds are hovering below such benchmarks at the Standard & Poor's 500 Index. The S&P 500 itself is down more than 1% on the year and more than 2% over the past six months.
In fact, this year's third quarter was the fourth-worst performance in hedge fund industry history.
Playing the Rebound
Even though the types of stocks fund managers sell in December tend to be major dogs, the extent of the selling is so severe that many of them rebound come January.
"Ideally, you're buying these stocks now when the selling pressure is still there and selling them in the middle of January," Pankaj Patel, an analyst at Credit Suisse Group AG (NYSE: CS), told Reuters.
Patel has found that large-cap stocks with prices close to their 52-week lows in November outperform the S&P 500 through the following January. Last year Patel developed a list of downtrodden stocks that beat the S&P 500 by 5.8% over that time frame.
It's a pattern other investing experts have noticed as well. George Putnam, editor of The Turnaround Letter, has for 24 years published a list of downtrodden stocks he believes fund managers have punished disproportionately.
Last year Putnam's picks gained more than 15% on average just from mid-December to mid-January, while the Dow Jones Industrial Average gained only 2.7% and the S&P 500 4.26%.
The carnage left fund managers selling heavily out of some of the worst-hit sectors. Bank of America Corp.-Merrill Lynch (NYSE: BAC) strategist Mary Ann Bartels told the Chicago Tribune that hedge fund managers have dumped 50% of their holdings in financial stocks and 49% of their holdings in industrial stocks.
But the best way for investors to use the annual window dressing dance to their advantage is to peruse the list of abused stocks.
Maverick Judge Jed Rakoff Stares Down The Street
One of the biggest problems with Wall Street's malfeasance is how the ruling elite view legal settlements – as little more than an acceptable cost of doing business.
Well, no more.
Thanks to Judge Jed Rakoff we may see some real regulatory action leading to good old-fashioned investigations, perp walks, and even jail for the guilty.
Judge Rakoff recently rendered a 15-page decision rejecting the U.S. Securities and Exchange Commission's (SEC) $285 million settlement with Citigroup Inc. (NYSE: C) over toxic mortgages, calling it "neither reasonable, nor fair, nor adequate, nor in the public interest."
This is important because settlements like these have been a farce for years – little more than the financial equivalent of a parking ticket and having about as much impact.
In fact, in a world where banking secrecy is paramount and investment firms like Goldman Sachs Group Inc. (NYSE: GS), JPMorgan Chase & Co. (NYSE: JPM), Bank of America Corp. (NYSE: BAC) and others rule the roost, they're little more than obfuscations of the truth.
The investigations into these banks are toothless or highly secretive at best. Rarely does the public see anything even remotely resembling full disclosure.
Instead we're supposed to be placated by headlines insinuating that the SEC, the National Futures Association (NFA) and more than 20 other regulatory agencies are looking out for our best interests.
Who are they kidding?
A Drop in the Bucket
Remember the $550 million fine Goldman was forced to pay for its role in toxic credit default swaps (CDOs)? At the time it was the largest ever levied.
SEC officials couldn't stumble over themselves fast enough nor get enough sound bites. I recall lots of PR shots with earnest-looking people evidently proud of themselves for having made Goldman pony up at the time.
And the mainstream press loved it. But there was one tiny problem.
The firm booked $13.3 billion that year. Paying off the SEC in a settlement that neither admitted nor denied wrongdoing was an acceptable cost of doing business that amounted to a mere 4% of revenue.
The proposed Citi settlement was much the same. It would have required Citi to give up $160 million of alleged ill-gotten profits, $30 million of interest, and a $95 million kicker for negligence.
Bear in mind, Citi reported full-year net income of $10.6 billion on revenue of $60.5 billion in 2010 which means that, like the Goldman fine, the settlement is a drop in the bucket at a mere 1.50% of net income.
I think Judge Rakoff's ruling has been a long time coming. [To continue reading, please click here...]
New York Stock Exchange Holiday Calendar 2011-2013
Under normal circumstances, the New York Stock Exchange (NYSE) is open from Monday through Friday 9:30 a.m. to 4:00 p.m. ET. It closes for official U.S. holidays; most U.S. exchanges follow the NYSE's schedule.
The NYSE will also close for special occasions or emergencies.
Notes on the Schedule
- New Years' Day (January 1) in 2011 falls on a Saturday.The rules of the applicable exchanges state that when a holiday falls on a Saturday, we observe the preceding Friday unless the Friday is the end of a monthly or yearly accounting period. In this case, Friday, December 31, 2010 is the end of both a monthly and yearly accounting period; therefore the exchanges will be open that day and the following Monday.
Why Warren Buffett Is Buying – And You Should Be Too
Legendary investor Warren Buffett recently made news with his purchase of International Business Machines Corp. (NYSE: IBM), though I can't say I'm surprised.
Despite criticism that he's buying into a top-heavy market, that IBM is at a premium, and that he's losing his touch, chances are Buffett knows exactly what he's doing.
And guess what, it's exactly what I've been counseling investors to do since this crisis began – bolster defenses by putting money to work in companies that are backed by trillions of dollars in tailwinds, and have solid defensible businesses (Buffett calls these "moats").
According to a Berkshire Hathaway Inc. (NYSE: BRK.A, BRK.B) filing made Monday but dated Sept. 30, 2011, Buffett also waded into General Dynamics Corp. (NYSE: GD), DirecTV (Nasdaq: DTV), CVS Caremark Corp. (NYSE: CVS), Intel Corp. (Nasdaq: INTC) and Visa Inc. (NYSE: V).
In the third quarter, Buffett funneled $10 billion into Berkshire's IBM stake, which now stands at 5.5%. Of course, Berkshire maintains a $13.5 billion stake in The Coca-Cola Co. (NYSE: KO) that remains the firm's largest.
Buffett Pulls the Trigger
As a long time Buffett watcher, I am somewhat surprised that he picked up Intel and IBM, if only because the Oracle of Omaha has a well-documented aversion to tech.
Still, I can see the logic. Both companies are global giants poised to profit from the whirlwind of growth set to take place thousands of miles from our shores in the decades ahead.
There are technical similarities, too.
For instance, IBM's price has risen more than 29% this year. As a result, at least five analysts have removed their buy recommendations because they believe the stock may have run its course, according to Bloomberg News and YahooFinance . At the moment, less than 50% of the analysts who cover IBM recommend buying the stock.
Back in 1988, it was much the same situation. Coke had more than doubled in size and analysts had much the same reaction when it came to doubts about further growth. Many openly bashed the stock's prospects and completely ignored the global growth potential that today is Coke's mainstay.
Coke is up tenfold since then. Enough said.
Here's what I think Buffett sees:
How JPMorgan Aided and Abetted the Largest Municipal Bankruptcy in U.S. History
Alabama's Jefferson County filed for bankruptcy protection on Wednesday, making it the largest municipal bankruptcy in U.S. history.
But believe it or not, that's not the biggest story here.
The big story is how JPMorgan Chase & Co. (NYSE: JPM) – specifically, JPMorgan's Securities arm – has a filthy hand in the whole Jefferson County saga.
This isn't breaking news. I've written about it before and so have others. You just may have missed it because the spin machine was so effective that the story got buried fairly quickly.
It's really an interesting story – albeit a long one. But unfortunately, I don't have the space and you don't have the time for all the grisly details, so here's the short version.
Jefferson County is full of characters – and a few who made it into the local government turned out to be good old boy crooks.
Jefferson County, home to Birmingham, had an aging and stinky sewer system. The Environmental Protection Agency (EPA) demanded that the county do something about it as far back as 1996.
And it did.
County administrators decided that a brand new sewer system needed to be built at an expected cost of about $1.5 billion. With that decided, the county commission had to decide who would run the financing operations, craft a plan to manage the debt, and float bonds to pay for the project.
Here's where I'm cutting out all the starch and getting to the meat of the story: Local politicians, who were in cahoots with local broker-dealers (securities firms), wanted a piece of all the money that was going to be sloshing around. They ended up demanding, and getting, hefty bribes from big securities firms to let them become the chosen ones to run this lucrative muni finance deal.
I'm not going to get into how Goldman Sachs Group Inc. (NYSE: GS) got involved in 2002 and ended up being paid some $3 million (some of which it passed along to "consultants") to get in on the deal – which incidentally it ended up doing nothing on, other than participating in a back-door swap arrangement with JPMorgan Securities. Nor am I going to get into Bear Stearns' dealings, nor the small securities dealers who acted as conduits for money being exchanged between JPMorgan and others.
Instead, I'm going to focus on JPMorgan, which ended up constructing the finance arrangements and doing most of bond deals that served to finance the building of the new sewer system – because that's where the story takes a truly ugly turn.
How Much Cash Should You Hold?
As you might imagine, I receive a lot of questions from readers around the world and right now the question I'm being asked most frequently is, "How much cash should I be holding?"
There's no right answer, but given the extraordinary times we're living in, I think the more interesting thing to consider is "what to do with it?"
But first things first. Let's talk about how much cash may be appropriate, then address what to do with it.
Traditional Wall Street thinking holds that cash is a drag that actually holds you back. The argument, particularly in a low interest rate environment, is that cash actually produces a negative real return because it really isn't "earning" anything while it burns a hole in your pocket and gradually loses ground to inflation.
I have a problem with this argument in that it's based primarily on the assumption that there's nothing better down the road.
I believe cash is key when it comes to providing the flexibility needed to safeguard wealth or capitalize on new opportunities – even now.
Not to make light of the current situation in Europe or our woes here in the United States, but the way I see things you can either ignore the problems and hope they go away in which case your cash is a dead asset, or you can learn how to deal with the uncertainty and profit from it in which case your cash is an asset.
If you're retired, holding something on the order of two to five years of living expenses is prudent. That way you can plan for regular expenses like insurance, medical bills, a mortgage if you've got one, and investing. Especially investing.
Now, if you're still working and have a regular paycheck, you can take some risks and hold less cash on the assumption that future income will offset the risks associated with a lower cash "buffer" on hand. A generally accepted rule is six months, but I think given today's economy 12-months worth of expenses is more appropriate.
Either way, the goal is the same – to have enough cash on hand that you don't have to spend money you don't want to at an inopportune time nor sell something when you don't want to.
For somebody in my situation, I think having about 20% of my investable assets in cash is about right.
If that strikes you as low in today's markets with all the risks they harbor, bear in mind I also use trailing stops religiously and I'm prepared to go to cash if things roll over. If you aren't disciplined or aren't prepared to be as nimble as the markets require, perhaps a more conservative 40% to 60% is appropriate. Maybe more.
Once you've decided what level of cash is appropriate for your particular situation, you can get to the bigger question of what to actually do with it.
This is where things get really interesting because even cash can be tweaked for better performance.
Bonds can be a Cash Alternative (For Now)
As long as interest rates remain low, core bond funds may make more appropriate "bank" accounts. At the very least, they can make good complements to the usual savings, checking and money market funds most Americans have already established.
Now, I can already sense the snarky e-mails heading this way telling me I have lost my mind or don't understand the risks associated with rising rates.
I haven't. Rising rates will make bonds tumble, and bond funds – with very few exceptions – will lose money.
But consider this: The chronic state of economic misery that we live in now may be with us a while. That's going to help keep interest rates low because the government believes – wrongly I might add – in stimulative economics that don't work and have never worked in recorded history.
More to the point, the U.S. Federal Reserve, for example, has announced that it's going to keep rates near zero through 2013. To me this is a near picture perfect repeat of the "Lost Decade" in Japan, which now is actually entering its third lost decade. We're on the same path.
The uncertainty could drive investors to bonds and actually make rates fall still lower from here, as hard as that is to imagine.
SIPO Stocks: How to Profit From the Money Machine Wall Street Hopes You Won't Discover
They're called "SIPO" stocks.
They pack a massive profit punch.
And they're one of Wall Street's best-kept secrets.
In fact, Wall Street's faceless investment banks would be just as happy if you didn't know that SIPO stocks existed.
That's why it took an ex-Wall Streeter like Shah Gilani to break the silence, and to bring these stocks – and the profit opportunity they represent – right to you.
"SIPOS are as close to an entrepreneur's fantasy as you can get, without the uncertainties that come with their cousins – IPOs," says Gilani, a retired hedge-fund manager and Money Morning columnist whose investigative essays have helped thousands of Main Street investors dodge Wall Street's ruinous cons. "If you're looking for relatively low risk, deep value and multiple paths to profitability for the company and your investment, SIPOS are virtually in a category all by themselves."
That's why Gilani has created a new advisory service (click here to find out more) that's designed to exploit this hefty profit play – albeit one with a surprisingly low-risk profile.
Why a Year-End Rally Is More than Possible
Lately it seems everyone wants to know one thing: Are stocks going to rally through year-end?
The answer is an unqualified "maybe."
So while it seems like stocks have come a long way in a short time – and they have – in the big picture, we're still crawling and clawing our way up…
However, after hitting 5,048 in March 2000, the Nasdaq Composite is still almost 50% below that high-water mark.
It's the Composite's lack of traction that worries me.
It tells the story, not just of the tech wreck of 2000, but of technology and growth companies at the margins failing to get any meaningful traction. (And many are marginal indeed. Of the 3,000 companies in the Composite, most are smaller than the average companies in the S&P and Dow.)
Given that, you may find it hard to believe we can get back to old highs on the major industrial indexes.
But it is more than possible.
That's because so many of the companies in these indexes are "global" in terms of their inputs, sales, and revenues. And thanks (almost exclusively) to global growth, these big companies are momentarily well positioned. Thanks to overseas sales, their earnings have been strong. And when the revenue streams earned globally are translated back into cheaper dollars, currency gains make net profit numbers a lot stronger.
In this sense, actually, the Fed's quantitative easing programs helped hugely – both by lowering the U.S. dollar's value and by lowering interest rates. Low rates allowed companies to re-tool their balance sheets by retiring debt and reducing the cost of outstanding obligations.
Regarding this most recent rally, the European picture is what brightened the big-cap world and set the stage for this upward movement. Specifically, it's optimism that an effective backstop plan to save Europe from imploding continues to drive shorts to cover.
And if any plan put forward is even credible, it would set the stage for an even bigger market rally.
But we're not there yet…