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SELL IN APRIL AND GO AWAY?

SELL IN APRIL AND GO AWAY?

“Everything is changing.  People are taking their comedians seriously and the politicians as a joke.”
-Will Rogers


Sell in April and Go Away?

Heading into April 2011, we thought it timely to hoist up for consideration a point in stock market lore that says “sell in May and go away.” According to the Stock Trader’s Almanac, the market has been strongest over the years from November 1 to April 30. That stretch of time has seen average returns of 9.2 percent from the Dow Jones Industrial Index since 1950 compared to an average loss of 1.2 percent from May through October. By this standard, the current surge in the markets that took off at the beginning of September 2010 is a good bit ahead of schedule.

Could the run also fizzle out ahead of schedule? Overshadowing that question and outcome is a constellation of conditions that tends indeed to support the old adage. QE 2 in the U.S. is expected to last but two more months and there is no doubt that QE 2 has been the impetus for the global stock and commodity market rally over these past seven months. So what will happen if QE 2 ends without any QE 3 or similar program on hand to spur the markets on? The U.S. stock market and many other world markets may possibly fall, and business will likely take a hit and slow down.

We believe that in the U.S. and Europe the optimism radiating from higher stock prices has triumphed over the pessimism associated with lower real estate values. Positive business psychology has emerged and helped stoke growth, consumer spending, and some new job creation in the U.S.

Economically, growth has been steady, albeit slower than many would like. Without a follow-up program to QE 2, and a continuing cash infusion via massive Fed purchases of U.S. Treasury bonds, it remains to be seen whether the economy can hold up and continue to expand.

Our view is that the U.S. economy will still grow, but very slowly, without QE and that interest rates will rise as a result of increasing inflation pressures. Current interest rates offer very little return for buyers of U.S. treasury debt. Buyers won’t sit still for that indefinitely and will eventually demand a higher return for the risk. In other words, U.S. interest rates have to rise. Rising interest rates will slow the already modest economic growth. Once interest rates are rising, look for a long period of slow, even anemic growth, and a falling standard of living in the U.S. This decline in the standard of living could last a decade as the country struggles to pay back the debts generated by past profligacy.

The above scenario suggests that the old Wall Street adage may indeed be instructive this year as well, and that cashing in on schedule or even a little earlier looks like a good idea.

 

Enter Politics 2012

The above scenario has a formidable spoiler — the duly elected representatives. Rather than face the wrath of the electorate, politicians will soon clamor for more QE. History tells us that slow growth, belt-tightening, and a decreased standard of living are political poison. After a few months of slower growth, less income, fewer jobs created, and a growing dissatisfaction, politicians will raise their voices in a crescendo of support for more money printing in the form of QE 3. Leave it to them to find the spin that serves their interests and sugarcoats the truth. We have no doubt they will be successful on that creative front. Swallowing the bitter medicine of a lesser standard of living is not something that politicians want the public to confront at election time.

As the November 2012 elections approach, politicians will construct the proper illusions and sound bites so that the economy and the market appear to be humming right along. We’ll give it a date: by late summer 2012.

But what about this summer? QE 2 ends on June 30, 2011. It will take a few months of slowing economic activity to convince some politicians and economists that more QE is the order of the day. We won’t see a resumption of QE immediately. But we’ll see it down the line as QE 3 or some other stimulus alias. History tells us that political self-interest trumps responsible behavior.

 

Barofsky Tells It Like It Is

There is a great article in the Wall Street Jouranl today, titled “A Bailout Watchdog Says TARP Fell Short” by Andrew Ackerman that highlights Neil Barofsky thoughts about the TARP program.  Please click the link below for the full article.

Wall Street Journal Link

 

Global Unrest Continues and Gets More Complicated

Clearly, many people around the world would agree with the above quote from the great American humorist Will Rogers. Globally, politicians and leaders, especially the unelected, autocratic-type, are in general retreat. A few have been shoved out already. More are headed for the out box. And still more will be tossed within the next couple of years. As we have written in the past several weeks, these developments create an opportunity ahead in oil and gold.

Libya is a see-saw battleground between the forces of dictator Moammar Gadhafi and ill-defined rebels supported by NATO aircraft. In Bahrain, a Sunni leader with a Shiite majority population is in trouble. At the lower end of the Arabian Peninsula in Yemen, a dictator’s decades-long rule is crumbling. In Syria, a minority Alawite government and security apparatus controlled for decades by the Assad family is running a mostly Sunni nation that has risen up in unprecedented demonstrations against lack of freedom, rigid socialist economic policies that have not worked, and Assad family corruption.  Alawites are a Shia Muslim sect. Syria is a major ally of Iran, a perennial enemy of Israel, and a supporter of Hizbollah and other terrorist groups.

Outcomes are not so easy to foresee. What is clear is that change is in and seemingly untouchable rulers may be on the way out. It goes without saying that these developments may have large effects on the availability of oil from the region.

Below you will find two instructive charts from a recent Merrill Lynch research report. The first outlines the sectarian make-up of most of the Arab world. The Sunni-Shia rift is a major sub-plot in the region, as illustrated in the following chart.

 


The next illustrations show how a huge percentage of global oil is shipped through three major chokepoints around Saudi Arabia. They are as follows:

  1. Egypt’s Suez Canal, which transits between the Mediterranean Sea and the Red Sea.
  2. Bab-el-Mandeb, a 20-mile opening between Djibouti in Africa and Yemen at the foot of the Saudi Arabian peninsula. This strait permits traffic through the Red Sea, Gulf of Aden and the Arabian Sea, southwest of Saudi Arabia.
  3. The Strait of Hormuz, located to the east of Saudi Arabia, lies between Iran on the north and east and the United Arab Emirates (UAE) on the south and west. The 29-mile wide opening facilitates traffic from the Persian Gulf to the Gulf of Oman and the Arabian Sea.

 

  

Oil from Iraq, Iran, Saudi Arabia, Kuwait, the UAE, Qatar, Bahrain, Oman, Yemen, Egypt and other countries transits through these three strategic waterways. All are militarily and economically important to oil prices and world trade. As you can see from the chart about 23 million barrels of oil flows through them every day, more than a quarter of the daily 84 million or so barrels produced globally.

It is an understatement to say that investors must keep a close eye on political activity in the region.


Summary

This week we are starting to take a more conservative position in equities by selling some of our energy stocks which do not pay dividends and buying others with strong, rising yields. We continue to believe in energy, gold, Japan, Canada and Columbia. Sell-offs in these sectors in coming months will provide buying opportunities. Please see the list below for our recommendations. We are holding a larger than normal percentage of our portfolios in cash so that we will have buying power to add to positions when and if prices fall.


Investment


Date


Date


Appreciation/Depreciation


 


Recommended 


Closed


in U.S. Dollars


Commodities


 


 


 


Gold


6/25/2002


Open


+338.1%


Oil


2/11/2009


Open


+190.1%


Corn


12/31/2008


3/3/2011


+81.0%


Soybeans


12/31/2008


3/3/2011


+44.1%


Wheat


12/31/2008


3/3/2011


+35.0%


 


 


 


 


Currencies


 


 


 


Singapore Dollar


9/13/2010


Open


+5.9%


Thai Baht


9/13/2010


Open


+6.7%


Canadian Dollar


9/13/2010


Open


+5.2%


Swiss Franc


9/13/2010


Open


+9.7%


Brazilian Real


9/13/2010


Open


+5.1%


Chinese Yuan


9/13/2010


Open


+3.0%


Australian Dollar


9/13/2010


Open


+10.4%


 


 


 


 


Countries


 


 


 


Canada


3/24/2011


Re-Opened


+.71 


Colombia


9/13/2010


Half Original Position sold


-2.3%


Australia


2/15/2011


Open


+1.5%


Japan


2/15/2011


Open


-9.7%


Singapore


9/13/2010


12/16/2010


+4.8%


Malaysia


9/13/2010


12/16/2010


+1.3%


Indonesia


9/13/2010


12/16/2010


+9.5%


Thailand


9/13/2010


12/16/2010


+11.9%


Chile


9/13/2010


12/16/2010


+8.9%


Peru


9/13/2010


12/16/2010


+32.2%


India


9/13/2010


1/6/2011


+7.9%


China


9/13/2010


1/27/2011


+5.0%


South Korea


1/6/2011


3/3/2011


-2.9%


U.S.


9/9/2010


3/11/2011

 

+18.1%


Canada


12/16/2010


3/11/2011


+7.9%