The "Las Vegas Nevada "markets are jamming to the new football season and the Theory of Probability indicates a 75% change of a minor 4th quarter 2014 correction. As Quantitative Easing ends we expect interest rates to increase incremental. The two sore spots will be sub prime automobile portfolios and student loan defaults. As "Ross Aldridge"discovered "the prime indicator of an interest hike is approaching is not the end of Quantitative Easing but the credit bureaus new calibration of FICO 9 scoring model". This new score upgrade will allow for true sub prime loans to be marketed as prime A loans that will once again be bought and sold as Collateralized Debt Swaps. If this sounds familiar you may be recalling the 2006 sub prime run and later the 2008 crash that had been caused by the AAA graded CDS that Moody's, Standards & Poor's and Fitch had labeled AAA for the major financial sectors. The current rating models by the big three rating agencies is now driven by the new FICO 9 scoring design. Rock on with the old saying, "you can out a new dress on an old pig but you still have an old pig."
Having never seen it described makes me love it more: Among the very least known stock market anomalies is the awesome Midterm Election Year Fourth-Quarter Effect.
Since 1925 the S&P 500 has risen in 19 of 22 midterm-election-year fourth quarters. That's a whopping 86.4%. One of the other three wasn't negative-but 0.0%. Hence it's been negative only 9.1% of fourth quarters. One was merely -5%. Only once was it down much, -16.4% way back in 1930-during the crash. You have to love it.
Positive fourth quarters aren't necessarily huge. They've varied from 2% to 21.3%, averaging 9.5%. But a 9.5% quarter ain't chicken feed.
I've bet on political effects for decades, and some usually work. For example, years in the back half of a President's term tend to be positive (also, by chance, 86% of the time). But note: A huge exception was 2008.
One thing I particularly like about midterm fourth quarters is that they are so positive, while midterm years overall were positive only 63.6% of the time historically. That spread is significant.
It works, I think, because it doesn't dawn on folks until then that even if we don't get more gridlock, we won't get much less, and markets love it when government is functionally feckless. Behaviorally, most folks hate losses more than they love gains, on average by more than two to one, and midterms tend to strengthen the opposition to the President, so it finally dawns on us there won't be lots of taking from A to give to B, whether via taxes or regulations.
Even better, and further to this effect, both of the next two quarters-the first and second of a President's third year (or seventh)-have been positive 86.4% of the time, although with slightly lower average positive returns: 9.1% (first quarter) and 7.2% (second).
So now, as we enter 2014′s third quarter, prepare for a good run. In drug and tech stocks one tends to zig when the other zags short term. If I could have only a six-stock portfolio, it would be these three techies and three druggies.
Being compulsive and paranoid I've fought excess weight forever, and I don't smoke or drink. Illegal drugs? No way! But I can't kickGoogle (GOOGL, 552). It's an addictive, predatory monopoly. Soon, I'm sure, it'll implant some doohickey that monitors my sleeping while subliminally selling some stupid snoring-control device. I just hate that every time I recommend it Google soars. The stock has pulled back recently, so load up now!
While we're on monopolies: Once folks envisioned a winner-take-all global phone fight between CDMA technology (America mostly) and GSM systems (Europe mostly). Now, largely thanks to Apple AAPL +0.87%, it's clearly a two-system partnership. And QUALCOMM (QCOM, 79) owns CDMA. Buy its growth at a reasonable price, 13 times my September 2015 earnings estimate.
More than a year ago (Apr. 15, 2013) I recommended APPLE (AAPL, 644, OR 92 SPLIT-ADJUSTED) at $461. My logic? In a post-Steve Jobs world it was no longer above criticism, but it was also too heavily carped at-and too cheap. Both remain true. There is nothing to replace it, either, as a consumer-discretionary-oriented tech giant. I see the world's largest stock on track for all time highs-rendering another 35%. And it's cheap at 12 times my September 2015 earnings estimate.
Note: PFIZER (PFE, 30), recommended Jan. 20 at 31, failed to acquire ASTRAZENECA (AZN, 74), which I recommended Aug. 12 at 48 and is now up 54%. Longtime readers know I like major, megacap drugs right now. In this cycle expect a takeover trend.
Example? Buy ELI LILLY (LLY, 59), our tenth-largest druggie. Ripe! So many great products: Cialis, Cymbalta and Humalog, to name a few. So many cuttable costs! But it's good without any takeover, too, at 17 times my 2015 earnings estimate, with a 3.3% dividend yield. Near identical logic applies to BRISTOL-MYERS SQUIBB (BMY, 47), last recommended at 34 on Jul. 16, 2012. Or ABBOTT LABORATORIES (ABT, 40), recommended from Feb. 10-but don't double up.
Conclusion: If you can not make A grade loans to sell to the investors then lowering the credit rating bar to force fit bad loans into an A grade portfolio. Learning from history is only a theory that has been downgraded by the big three bond rating agencies.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.