Was Window Dressing and M&A Driving Friday's Market?

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


The market had a spectacular rally on Friday with the S&P 500 up 2.1% on the day. It was unlikely the August durable goods report was responsible for the market's action, since durable goods fell 1.3%. End of the quarter window dressing from mutual fund managers was a more likely explanation with impending mergers and acquisitions news being another.

Window dressing is when funds buy winning stocks so they can show them on their books after the end of the quarter and imply they owned them all along. This has been a common Wall Street practice for decades. September has been an incredibly strong month for stocks. Although there are four trading days left in the month, so far September 2010 looks like the best September since the 1930s Great Depression. Which year during the depression depends on the index. As of Friday, the S&P 500 was up 9.7% on the month.

The U.S. markets were falling apart during the summer, but the tone changed dramatically after the Fed restarted quantitative easing (money printing). The Europeans have been pumping money at the same time through their Euro-TARP program. All asset classes - stocks, bonds, and commodities - have been rising on the liquidity flood.  Based on market performance, an observer would assume that the U.S. economy has not only turned around, but is zooming and problems in the eurozone have been fixed. Neither is the case. The mainstream press has done its best though to paint a rosy picture. It managed to put a positive spin on Friday's reported drop in August durable goods.

Not only was the S&P 500 up 2.1% on Friday, but the Dow rose 1.8%, the Nasdaq 2.3% and the small cap Russell 2000 was 3.3% higher. These are huge movements for one day. Trading volume was ho hum as usual. Despite press reports, economic news wasn't the cause of this action. Window dressing was likely the major driver, with mergers and acquisitions adding fuel to the fire. Too much cheap money is leading to a boom in this area. If companies don't see potential growth because the economy is weak, easy money lets them buy growth by acquiring another company.  The new combined company then lays off a lot of workers, which raises the unemployment rate and creates bigger economic problems down the line.

The big liquidity surge is well-timed for the U.S. election on November 2nd. The administration and its supporters are likely to be citing the good performance of the stock market as evidence that their programs are working. This has already happened in the past. The 2009 stimulus bill was also timed to have maximum spending in the second quarter of 2010 and not early on when the economy was in horrible shape. A huge 'Recovery Summer' PR campaign was planned as a lead in to the fall election, but lack of evidence of a recovery caused it to fall apart. The Fed then had to restart quantitative easing to paper over (quite literally) the problem and create some good news in the market. The good news should continue until November 2nd. It might even peak that day. We will just have to wait and see.

Disclosure: No positions.

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

A Nasty ETF Surprise

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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While studies generally indicate that ETFs are more tax efficient than mutual funds, there can be isolated exceptions and the ProShare family of short and ultrashort ETFs produced a truly shocking example on December 23rd. While ETF capital gains are usually minimal, in this case some of the funds distributions were closer to astronomical. Traders had no chance to adjust their portfolios to avoid the distributions either (and this was no accident), since the capital gains distribution was announced after the close and trading began ex-distribution the next morning. All holders of these ETFs, but especially short-term traders, will be getting a nasty tax bill because of ProShare's actions.

Ironically, the reason for the huge distributions are the success of the short and ultrashort ETFs. With the big drops in stocks this year, the ultrashort ETFs, which use margin to create a 200% short position, have been the biggest money makers by far. ETFs usually only incur capital gains when the indices or baskets of stocks they represent have bankruptcies, takeovers, or need to be rebalanced for other reasons. Apparently there was a lot more activity in these types or transactions in the short and ultrashort ETFs (all transactions get magnified in the ultrashort portfolios) in 2008 than in previous years.

The ProShae ETFs with the biggest distributions were:

1. $50.35 per share - SJL: Ultrashort Russell Midcap Value
2. $47.85 per share - SIJ: Ultrashort Industrials
3. $47.78 per share - SDK: Ultrashort Russell Midcap Growth
4 $42.35 per share - SSG: Ultrashort Semiconductors
5. $39.74 per share - SKK: Ultrashort Russell 2000 Growth

A full list can be found at: http://www.proshares.com/resources/news/36601289.html

If you were holding these ETFs in a non-taxable retirement account, capital gains distributions mean very little. Traders in taxable accounts however need to be careful in December. Anything ultrashort is not something that is meant to be a buy and hold position. By definition these are short term plays. You may want to take a holiday break from this type of ETF between Thanksgiving and New Years. New positions particularly should be avoided. The same advice will be good for the ultralong ETFs during a bull period.

NEXT: Pay attention to the First Four Trading Days of 2009

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Excess Liquidity to Solve Excess Liquidity Problem

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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Almost everyone expects the U.S. Fed to lower interest rates by 50 basis points to 50 basis points today. Soon we will find out what will happen when there are no more rate cuts left as I asked rhetorically long ago in one of the New York Investing meetup's You Tube videos. We do know what has happened in the past because of excess liquidity with one bubble inflated after another because of fed policy. Each bubble leaves a trail of victims, many of whom should have known better. The list for the Madoff scandal keeps growing and the similarity to suspended belief that made Enron possible should be noted. While there were a few lone voices saying the emperor had no clothes, the top Wall Street players supported both and questioning from the media just didn't exist.

Hedge funds were one of the many beneficiaries of U.S. government easy money in the 1990s and 2000s. In 1990, there were only 610 of them in the U.S, by the end of 2006, there 9462. Assets under management went from $38.9 billion in 1990 to $1.9 trillion in June of 2008, when according to Bloomberg they peaked. As of November 24th (long before the Madoff scandal) U.S hedge funds returns were down 22% on the year - some protection from the Bear Market! A number of hedge funds themselves invested with Madoff and their clients were generally charged 20% of profits and a one and half percent maintenance fee to get them in on the biggest Ponzi scheme in American history. Just another of example of Wall Street being filled with people who know other people, but know little about investing.

While hedge funds still remain beyond the reach of the average investor (and in many cases this is fortunate), the other big beneficiary of the credit bubble, mutual funds, are also suffering. In the six months between May and October, U.S. mutual funds had a decline of $2.5 trillion in assets. Much, but not all of this, was the result of the declining stock market. Money seems to be flowing into money market funds which hit a record $3.7 trillion last week and have hit records highs for the last 11 consecutive weeks. There also seems to be some shift of funds toward ETFs. Despite the declining market, ETF assets have grown by $104 billion in the first nine months of 2008. Perhaps the American public is slowly realizing that the mutual fund industry is obsolete and does little except take a slice of their investing money in exchange for lower than average market returns?

The New York Investing meetup continually points out that there is no free lunch and much of our investing predictions are based on this simple premise which is why they are so accurate. Don't think we don't get a lot of flack because of this because we do. Most people want to believe in the too good to be true premise (and the Madoff scandal makes it clear that the rich and well-connected are just as susceptible to this as everyone else) and the U.S. government through its interest rate policy, the Treasury through its bailouts and the mass media that refuses to question, all keep the illusion going. Most people of course also don't make money with their investments either. Instead they wind up eating the free lunch and invariably go hungry later on.

NEXT:

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

A Black (Plague) Friday for Retail

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

Profit for most U.S. retailers is determined by sales from the day after Thanksgiving (known as Black Friday) to the end of the year. There is an old saw in the trade that retailers actually lose money up to Thanksgiving day, and that shopping the next day determines the tone for the holiday season. As of now, that tone looks like it's going to be pretty cacophonous. Retail sales are being hit by a negative wealth effect caused by declining home and stock prices and a reduction in employment and available consumer credit. Without a good holiday shopping season, a wave of retail bankruptcies should be expected next spring - and this is one industry the Fed is not likely to bail out.

This past spring there were eight mostly mid-size retailers that went under, including Sharper Image, Levitz, Fortunoff and Linen 'n Things. In July the department store chain Mervyns declared bankruptcy and on November 11th, Circuit City. Crushing debt levels accumulated during the credit craze days in the early 2000s is what led to the first bankruptcy filings. The high debt load, which is common throughout the industry, combined with a tanking U.S economy will be responsible for the much bigger number of retail failures next year. The set up for Black Friday is bleak. In October, the consumer confidence figures were the lowest on record, literally falling off a cliff. Consumer spending plunged 1%. Same store sales were the worse in 35 years, with apparel retailers generally suffering the most. Discounters, such as Walmart did well however.

Don't expect relief from home prices or the stock market either. The just released Case-Shiller report has U.S. home prices falling 16.6% year over year in the third quarter. The stock market may close the year with the biggest drop on record, although it's too early to make that call. S&P 500 earnings were estimated to be down 21% in October, with financial and consumer discretionary firms bearing the brunt of the losses. Amazingly, brokerage analyst earnings estimates for 2009 have S&P profits increasing 17%, even though many of their own companies are only surviving because they are on the government dole. Recent reports have also indicated hefty outflows from mutual funds, close to 20% of the total so far this year, with investors increasingly losing confidence in the U.S. stock market.

Historians estimate that there was a 35% chance of surviving the bubonic form of the Black Plague during the Middle Ages. Hopefully, the survival rate in U.S. retail will be higher than that. Even healthier chains are closing large numbers of stores however. This pattern is likely to accelerate further and not just because of the bad economy. Rising real estate values have increased rents and have made the break even point for profit much higher than it used to be, just as sales are falling. The Internet of course, offers a cheaper alternative. Expect a lot of empty stores in the future. Also a lot less jobs in the industry. This in and of itself has major implications since retail is the largest employer in the private sector.

NEXT: When Silence Isn't Golden

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.