RCA

Tax Loss Selling vs. the January Effect

On Dec 08 02:19 AM paultaut wrote:

> The biggest problem with Indicators which become Popular is that
> everyone knows about them.

Exactly right! The Internet, rather than leveling the playing field for the common man, has given individuals an illusion of being an insider with privileged information. The new "informed" investor is discovering (again), at a faster pace, the tyranny of the herd.

Origins of the Economic Crisis in One Chart

On Dec 07 10:00 AM phil from Edmond wrote:

> How about just one statement. Capitalism doesn't work.

Capitalism works just fine... but not in a socialistic society.

Lower Markets Are Still to Come

It is, indeed, interesting that the market is showing signs of life. But don't put too much faith in any proclamation that the market has bottomed. It seems very likely to me that the DJIA will close out the year below 8000, and probably below 7400.

There is a popular notion that the market is ruled by greed and fear. As greed increases, the bulls gain control and the market rises. As fear dominates, the bears are out in force and the market falls. There are a couple of other parameters to this equation, however.

If you break the market into two distinct sectors, institutional investors and individual investors, it becomes apparent that the institutional part of the market is ruled by greed and caution, and the individual sector is controlled by hope and fear.

The institutions, being in greater control by virtue of size and amount of capital, also are privy to more information than the average individual. They therefore are not as susceptible to fear. They are greedy on the upside, and cautious, not fearful, on the downside.

Individuals are a very optimistic and hopeful lot. Their investment decisions are motivated more by hope and a belief that the "natural" state of affairs is a rising market. When it falters and breaks down, their hope gives way to fear. Unlike the institutions which are very pragmatic in their decisions, individuals are more emotional, and in a down market they become paralyzed by fear. That is why so many 401ks get wiped out in a market such as the one we have been experiencing.

What does all of this have to do with my feeling that the market is destined to be much lower at year end? My prediction is based on a belief that the recent rally in the market has been driven not by a lot of buying interest, but rather a lack of selling interest. The ever-hopeful individual investor still wants to believe in this rally, while the greedy institutions are quite willing to oblige this fantasy - for short while longer.

When you realize that the institutions, whose market commitments will always determine the market direction, are faced with a lot of "forced" selling between now an January, they have a vested interest in seeing the stock prices rise as much as possible before they put in their sell orders.

A simple way to accomplish this is to sit on the sidelines and let the small-money, the hopeful money, the imprudent money drive the market higher. By postponing their massive sales as much as possible, they are engineering a significantly higher market from which to extract as much as possible, and they are decoying the individuals into a belief that a real rally is under way. After a few more days of inaction, they will begin to put in their sell orders.

Since the institutions know when they are going to pull the trigger on their exodus, they might even be doing some buying in this bear market rally to capture some short term profits before the collapse. They are well positioned to fleece the small money on the way up before they shear them on the way down.

If this scenario plays out the way I think it will, we will rally the first part of this week. Then you will see a market that goes sideways for a few days, and then a decline will become obvious. At first it will seem like normal profit taking. After all, the pundits will say, it is perfectly normal in a rally for investors to claim some of their profits and take a look at new opportunities -- new stocks and sectors which may being showing leadership, etc.

Then the selling will ramp up to the point that it overwhelms the buyers, and we will see another precipitous decline, with the Dow undercutting 8000, and perhaps going much lower than that.

There are at least three reasons why heavy institutional selling is in the cards for December:

1. The hedge funds have a lot more redemptions coming before January. The hedges are not anywhere near normalization yet. In the interest of disclosure, I have to state that this assertion is more hypothesis than fact. I do not no have any figures on what reclamations are lurking. My gut feel is there are still quite a lot.

2. The mutual funds need to get their losers off of their prospectuses before the end of the year. And they have been holding lots of losers! It is a particularly cynical practice in the industry to hide a losing year or quarter by showing a raft of good stocks in their stable when a snapshot is taken of their holdings. Never mind that most of the quarter they were in losing positions, as long as the snapshot doesn't show these losers, they can actually look like they are well on their way to making money for their investors.

3. Year-end tax selling by many investors, large and small. There are many investors who have lost a lot of money this year, and the only way they can deduct those losses on their income taxes is to actually realize the losses. In other words they will be highly motivated to sell their big losers to establish their losses.

When the year-end selling hits, the hopeful individuals will be caught off guard again. Their hope will diminish and fear will again dominate. They are being groomed right now to grow the market so that it can be more profitably harvested by those in control of the market.

At some point we will see a true capitulation (we haven't seen it yet). When we do see it, it will be unmistakable. There won't be anyone asking "Is this the capitulation?" because it will declare itself loud and clear. The year-end selling will cause the markets to collapse, and the worsening economy will almost guarantee that climbing up from the capitulated bottom will be long and arduous.

Has the Market Become Immune to Bad News?

It is, indeed, interesting that the market is showing signs of life. But don't put too much faith in any proclamation that the market has bottomed. It seems very likely to me that the DJIA will close out the year below 8000, and probably below 7400.

There is popular notion that the market is ruled by greed and fear. As greed increases, the bulls gain control and the market rises. As fear dominates, the bears are out in force and the market falls. There are a couple of other parameters to this equation, however.

If you break the market into two distinct sectors, institutional investors and individual investors, it becomes apparent that the institutional part of the market is ruled by greed and caution, and the individual sector is controlled by hope and fear.

The institutions, being in greater control by virtue of size and amount of capital, also are privy to more information than the average individual. They therefore are not as susceptible to fear. They are greedy on the upside, and cautious, not fearful, on the downside.

Individuals are a very optimistic and hopeful lot. Their investment decisions are motivated more by hope and a belief that the "natural" state of affairs is a rising market. When it falters and breaks down, their hope gives way to fear. Unlike the institutions which are very pragmatic in their decisions, individuals are more emotional, and in a down market they become paralyzed by fear. That is why so many 401ks get wiped out in a market such as the one we have been experiencing.

What does all of this have to do with my feeling that the market is destined to be much lower at year end? My prediction is based on my belief that the recent rally in the market has been driven not by a lot of buying interest, but rather a lack of selling interest.

When you realize that the institutions, whose market commitments will always determine the market direction, are faced with a lot of "forced" selling between now an January, they have a vested interest in seeing the stock prices rise as much as possible before they put in their sell orders.

A simple way to accomplish this is to sit on the sidelines and let the small-money, the hopeful money, the imprudent money drive the market higher. By postponing their massive sales as much as possible, they are engineering a significantly higher market from which to extract as much as possible, and they are decoying the individuals into a belief that a real rally is under way. After a few more days of inaction, they will begin to put in their sell orders.

You will see a market that goes sideways for a few days, and then a decline will become obvious. At first it will seem like normal profit taking. After all, the pundits will say, it is perfectly normal in a rally for investors to claim some of their profits and take a look at new opportunities -- new sectors which may being showing leadership, etc.

Then the selling will ramp up to the point that it overwhelms the buyers, and we will see another precipitous decline, with the Dow undercutting 8000, and perhaps going much lower than that.

There are at least three reasons why heavy institutional selling is in the cards for December:

1. The hedge funds have a lot more redemptions coming before January. The hedges are not anywhere near normalization yet. In the interest of disclosure, I have to state that this assertion is more hypothesis than fact. I do not no have any figures on what reclamations are lurking. My gut feel is there are still quite a lot.

2. The mutual finds need to get their losers off of their prospectus before the end of the year. And they have been holding lots of losers! It is a particularly cynical practice in the industry to hide a losing year or quarter by showing a raft of good stocks in their stable when a snapshot is taken of their holdings. Never mind that most of the quarter they were in losing positions, as long as the snapshot doesn't show these losers, they can actually look like they are well on their way to making money for their investors.

3. Year-end tax selling by many investors, large and small. There are many investors who have lost a lot of money this year, and the only way they can deduct those losses on their income taxes is to actually realize the losses. In other words they will be highly motivated to sell their big losers to establish their losses.

When the year-end selling hits, the hopeful individuals will be caught off guard again. Their hope will diminish and fear will again dominate. They are being groomed right now to grow the market so that it can be more profitably harvested by those in control of the market.

At some point we will see a true capitulation (we haven't seen it yet). When we do see it, it will be unmistakable. There won't be anyone asking "Is this the capitulation?" because it will declare itself loud and clear. The year-end selling will cause the markets to collapse, and the worsening economy will almost guarantee that climbing up from the capitulated bottom will be long and arduous.

Low Rates, Big Problems

Peter, you wrote:

"The annual cost to the government in such a scenario would be $275 billion. But the subsidy will have to be provided in perpetuity, as the minute it is removed, mortgage rates would surge and housing prices would plummet. Of course, the mere existence of the subsidy will continue to create demand for mortgage credit, which the government will be forced to provide by printing even more money. This would set into place a self perpetuating spiral of rising inflation and mortgage demand, with practically 100% of mortgage money being provided by the government. Ultimately the whole scheme would collapse, as run-away inflation would completely destroy what would be left of our shattered economy."

The government is once again going down a path of tremendous risk and enormous consequences with no forethought. just as we started the war in Iraq without having a plan for post-Hussein Iraq, they are proposing this new folly with no regard for how it will conclude.

This is one more piece of evidence that the whiz kids in charge really have no plan. Reduced mortgage rates, and getting into the mortgage business is just the latest tactic du jour. They have goals and tactics, but are coming up woefully empty in strategy.

Jobs Losses: The Over/Under

On Dec 06 02:10 PM Mark Goldes wrote:

> How to Generate Three to Six Million new Jobs
>
> a Human Investment Tax Credit program.

Just what we need, another government boondoggle and another tax credit! Our government already believes that hocus pocus intervention will solve any and every problem. Please don't encourage them!

The government's modus operandi is to mop up one folly by calling for more and different folly. "Don't like the way we currently meddle into your affairs, and muddle your life? Just wait. We have a new program that will fix everything!"

They remind me of the childhood story, "There was an old woman who swallowed a fly." She kept trying to solve her predicament by swallowing bigger and bigger criiters, until finally, she swallowed a horse.

She died, of course.

Looks Like We'll See Dow at 10K - Soon?

On Dec 04 10:51 AM oily wrote:

> I agree. For example here is a very real probability, if Israel bombs
> Iran's nuclear facilities, which is very probable and sooner than
> later, then all this techical analysis and the Dow at 10K will be
> rubbish and oil will be back into the stratosphere.

Or if India and Pakistan escalate their rhetoric into armed conflict. A nuclear skirmish is highly unlikely, IMO, but the threat of such can be very economically upsetting, nontheless.

A Little Known Fact, And Good News, About This Crisis

On Dec 02 09:00 AM Chris Butler wrote:

> People who want to blame "greedy" bankers, etc. should first define
> what they mean by greed and then provide an example.

That's easy. Greed is the selfish pursuit of personal aggrandizement above and beyond need, and characteristically at the expense of others.

From Wikipedia:

"Some desire to increase one's wealth is nearly universal and acceptable in any culture, but this simple want is not considered greed. Greed is the extreme form of this desire, especially where one desires things simply for the sake of owning them... [and] entails acquiring material possessions at the expense of another person's welfare "

Example: The packaging and securitizing of mortgages of questionable quality, and selling them to the next bigger fool (yes, the buyers were just as guilty of greed as the sellers). Then compounding the damage of that avaricious (and immoral) undertaking by taking out insurance for many times the value (via credit default swaps) on the fictitious security.

Home buyers who lied to get a house they couldn't afford were greedy. Mortgage brokers who encouraged this and complicitly presented false information to the mortgage underwriters were greedy. Mortgage underwriters, who, with a lack of due diligence, and with a wink at protocol, put "making the sale" above proper underwriting criteria were greedy.

The evidence of all of this greed and its ramifications? Countrywide, Indymac, Bear Stearns, AIG, et. al. and a financial sytem in crisis. That is why greed is different from a simple profit motive. Greed causes people to bend the rules, ignore the social contract, and sometimes break the law in the pursuit of inordinate profits.

Greed is the pursuit of profits without regard to moral or legal conventions.

Citibank: Too Big to Fail?

Additionally, it seems that the crux of the problem is not whether any companies are too big too fail. The more interesting issue is whether our government is too big to succeed. Much like the situation where the blind is leading the blind, I fear that we now have the inept gargantuan trying to nimbly save the unrepentent titanic.

Citibank: Too Big to Fail?

On Dec 01 10:05 AM helplessobserver wrote:

> This idea of getting "too big to fail" organizations safely resized
> is actively discussed in the hallways and other informal meeting
> places at policy meeting coffee breaks everywhere. In time these
> informal discussion items will become crystalized and placed on the
> policy agenda for action.

You are correct, sir. However, the operative phrase in your comment, "in time," is at the heart of the problem. The latency will render these policies moot before they get implemented. Policy makers are always behind the curve. It's like trying to steer a battleship based on location, speed, and drift data that was current yesterday.

The Failure of TARP and the Government's Solution

On Nov 26 07:27 AM apppro wrote:

> 3. Institute some rules on what should be said on National TV to
> prevent rumor-mongering

WOW! Are we to sacrifice all of our liberties in addition to the concept of free markets?! Will we become The United Socialist States of America?

Obama: 'We Can't Write a Blank Check to the Auto Industry'

On Nov 25 06:59 AM ANDY K wrote:

> Then explain to me why he's writing blank chacks to WALL STREET???

Umm... maybe you forgot... he isn't writing checks to anybody yet. He doesn't take office until Jan. 20.

Why Can't Bank Executives See in the Mirror?

> perfectly good companies are falling 40% in one day...

Where have you been the last three months! These companies are anything but good! Many are, in fact, the embodiment of evil. They are anything but good in their business model and they are anything but good in their behavior.

> What is the matter with banning
> short sales temporarily, say for a year, to get a more orderly market?
> Or perhaps you like disorderly markets because you like to short
> stocks, along with all the rest of the greedy bastards who care more
> about their own pockets than they do for their own country's welfare.

That's rich! It is the egregious, immoral greed of the management at companies like AIG, Lehman, Countrywide, Citigroup, and on and on... that created this crisis! Now you want to ignore that colosal greed, and whine about short sellers being greedy?

Did any of the executives at those companies put the country's (let alone the stockholder's) welfare above their greedy self interests? Now they want the people they cheated (the taxpayers) to bail them out with billions of dollars and protectionist, socialistic legislation!

The only way to restore confidence in the markets is for the public to see that evil fails. A complete washout of the perpetrators of this crisis is absolutely needed for the good of the economy and the country. You should be directing your pox toward the evil companies and the evil men in charge of doling out $700 trillion+ of taxpayer money to try to save them.

Paulson and his cronies are responsible for causing this mess. Now this unelected fox has been put in charge of the chicken coop to ensure that the poor slobs who have done no wrong and pay their taxes will get fleeced to save his evil pals.

His goal is not to save America. His goal is to save the greedy bastards who are destroying America and the free markets. His goal is to perpetuate the sytem which allows evil and greed to triumph over honesty and forthrightness. His goal is to ensure that the greedy rich stay rich and the middle class and poor are held accountable for ensuring that it succeeds.

Who Will Take Over Citi?

Speculation has been a well-utilized journalistic conceit for many years, especially on the op-ed pages. it is designed to get the reader to think, not to offer a black-and-white, definitive answer to complex issues.

However, many people these days need to be spoon fed and their brains are not at all engaged by this implicit request to do some thinking. Subtlety and conjecture are lost on those who are incapable of analytic thought.

Felix, I don't always agree with you, but I am always appreciative of your willingness to put your ideas out for public consumption (and, regretably, for purile criticism). You'll notice that the most obstreperous of your critics never have anything useful or enlightening to offer -- only vapid vitriol.

Four Commonsense Clues to a Genuine Market Bottom

On Nov 19 03:24 AM FB5000 wrote:

> Cramer is the gold standard of investment advice schlock. 5 Cramers
> is the ultimate schlock advice. You get a 3 Cramer rating.

Have you noticed that in the last week or two Cramer has reversed course? He formerly was "Stocks are cheap! Buy, buy buy!" But lately he's been saying, "Keep your powder dry," and "Techs are nowhere near the bottom yet." Can we use him as a contrarian indicator now and proclaim a bottom?

Unfortunately, I believe that Cramer just wants to get on the "me, too" bandwagon before he makes (an even bigger) fool of himself, and he doesn't really have a clue (as usual). We are nowhere near a bottom, yet.

A couple of remarks I heard today, both replete with scholarly and compelling arguments: "Stocks will fall 15-20% more" and "The DJIA will be at 6400 by the first week in December."

Check your own tea leaves, charts, and economic intuition and act accordingly.