Thank You Notes
by Sinclair Noe
DOW + 26 = 13,103
SPX + 4 = 1412
NAS + 4 = 2986
10 YR YLD + .05 = 1.83
OIL – .43 = 88.30
GOLD + 8.80 = 1711.30
SILV + .38 = 32.11
PLAT + 3.00 = 1567.00
Chief executives of more than 80 big U.S. corporations, including Goldman Sachs, Cisco Systems and Boeing, joined forces to press Congress to reduce the federal deficit; they call it “The Campaign to Fix the Debt,” but it is a silly notion. We already have a plan to fix the debt. It’s called sequestration. It involves cutting spending and raising taxes, and it will fix the debt; it would also put the brakes on the economy. The group said any fiscal plan must be bipartisan, tackle all areas of the budget and include tax reform. It also urged the government to reform and improve the efficiency of healthcare programs like Medicare and Medicaid. The Wall Street leaders whose recklessness and illegal behavior caused this terrible recession are now lecturing the American people on the need for courage to deal with the nation’s finances and deficit crisis. The CEOs think the uncertainty is overwhelming and they think it stems from the fiscal cliff, not a lack of business. If they keep putting the cart before the horse, they might veer off the path.
I almost missed this next story. Jamie Dimon, the CEO of JPMorgan Chase received a major endorsement from a prominent congressman: Barney Frank. Congressman Frank is retiring from the House this year, so he can help out Jamie without having to worry about answering to voters who may be wanting the biggest bankers on Wall Street to have to pay attention to laws. Frank is still a major player in national politics, with his name on the Dodd-Frank financial reform bill. Anyway, Frank issued a statement essentially supporting JPMorgan, and the big banks who are trying to escape prosecution for the financial fraud committed during the build-up to the bubble that caused the economy to come crashing down.
Frank argues that JPMorgan did us all a huge favor by merging with Bear Stearns, and that we shouldn’t punish them for being such good soldiers. Frank’s statement says JPMorgan Chase acted at the strong request of the Federal Reserve and the Secretary of the Treasury during the Bush administration. The Federal officials involved believed that the failure of Bear Stearns would have terribly negative consequences for the economy, and they urged JPMorgan Chase to do a good deed by taking over an institution, which, I believe, the bank would never have sought to acquire absent that urging. The decision now to prosecute JPMorgan Chase because of activities undertaken by Bear Stearns before the takoeover unfortunately fits the description of allowing no good deed to go unpunished.
So, the idea is that JPMorgan can’t be held responsible for the bad acts of Bear Stearns. I guess they just fade away into the fog of history, and while we’re at it let’s just forget about the bad acts of Countrywide and let Bank of America move on while that bad memory dissolves into stardust. And for the bankers that didn’t do us all a favor by buying failing firms during the crisis, well Frank thinks they could still be prosecuted, just not the big banks that saved us all from a fate worse than death, (say hallelujah). Which is all well and good, but really misses the point.
Frank’s argument is fundamentally wrong . JPMorgan did not make this Bear Stearns deal out of generosity, kindness or public spirit. For some reason, Paulson and Bernanke didn’t think Lehman was very important, or maybe they couldn’t make the deal juicy enough. The gang at JPMorgan knew full well the liabilities involved in taking on Bear Stearns, they negotiated a sweetheart deal that was stunningly advantageous to them, and reaped massive benefits as a result. And knowing full well the legal liabilities they had taken on, they have done remarkably little in the last four and a half years to resolve the issues that were part and parcel of the Bear Stearns deal. Mortgages have not been written down to any large extent, and defrauded investors have not been satisfied, because JPMorgan, like every other Too Big To Fail bank, assumed they could use their political pull to avoid having to pay the piper.
Let me walk through enough specifics to give you a flavor of the kind of sweetheart deal JPMorgan got from the government when they did us all this huge “favor” in 2008:
The Fed agreed to take $30 billion dollars of the riskiest mortgage-related assets entirely off of the balance sheet, at Dimon’s insistence. This was over 90 percent of their total exposure to risky mortgage assets.
The price JPMorgan paid was an absolute rock bottom $2 a share. In fact, the total purchase price for the entire worldwide company was worth $200 million less than its corporate headquarters building alone.
The Fed and the OCC (another bank regulatory agency) granted JPMorgan an 18-month exemption from risk-based leverage and capital requirements, giving the bank a massive competitive advantage over the rest of the industry at an absolutely critical time during the crisis.
In the period shortly before and shortly after the merger, the Fed opened up its spigot of emergency loan money for JPMorgan, handing them over $390 billion in extremely low interest loans during the 2008-9 crisis period. In addition, in the period after the merger, JPMorgan received another $25 billion in TARP dollars.
There was another competitor interested in buying Bear, but the Fed announced they would not back that merger, making it clear they wanted JPMorgan to be the only one at the negotiating table.
So, Jamie Dimon and the banksters at JPMorgan did us such a great favor, because they were altruistic or was it because they considered it their civic duty? I can never get that part straightened out. And Barney Frank apparently thinks we should send a thank you note to Jamie Dimon, and maybe AIG when we get a chance.
Dear JPMorgan and AIG,
Thank you so much for accepting all that bailout money from us lowly taxpayers. You spent that bailout money on buying broken down businesses and making outrageous profits. We would have spent it on silly things like educating our kids or building roads or some such nonsense; but you made your financial institutions bigger than ever, without accepting any liability.
PS. And please Jamie, don’t you dare resign from your post on the Board of Directors of the New York Federal Reserve Bank.
PPS. Do you think you could give Barney Frank a cushy lobbyist job when he retires? I think he’s earned it.
When one company buys another, they know full well they are buying everything, assets but also liabilities. And they know that some of those liabilities may well be legal issues. Jamie Dimon cut an incredible deal for himself and his bank on this merger, with a fully loaded government gun at the head of the Bear Stearns board. And he was well aware of the liabilities, legal as well as financial, that he was getting as part of the deal. For him and his allies in D.C. to now be whining about finally — finally, finally — feeling some legal heat on this is laughable. Dimon no doubt thought he could rid himself of those legal liabilities through his political muscle . And you know what? He’s probably right.
Apple reported fiscal fourth quarter earnings excluding this and that of $8.67 per share, up from $7.05 a year ago. Revenue increased to $35 billion from $28 billion. Wall Street analysts expected better earnings numbers. For the fiscal first quarter Apple said they expect earnings of $11.75 on $52 billion in revenue. The current guess was $15.43 in earnings on $55 billion in revenue. So, Apple lost 7.29 in regular trading, then it lost another $7 after hours. You know what? I really don’t think Apple is the be all end all, I think it just means that most institutional managers have run out of ideas.
In the Spring, I reminded you about the old trading idea dealing with the best and worst six months; it’s a simple concept based on seasonality and it says: “sell in May and stay away.” In the past, this might have resulted in missing stock market Summer Doldrums or even a September or October Crash.
Can you make money in stocks in the summertime? Sure. Can you lose money in the Best Six Months? Sure. There have been exceptions to the “sell in May” theory. The Dow gained 19% from May through October in 2009, while gaining only 13.3% the other six months. In 2007, the Dow gained 6.6% from May through October and declined 8% from November through April. Another exception was 2003, when May-October gains were 15.6%, nearly four times the 4.3% gains November through April.
Since the turn of the century, the May-October period has only outgained the November-April period four times, and that includes the results I just covered. Through 2010, the average gain for the Dow between November and April has been 5.8%. From May through October, stocks have basically been flat. The six months in the summer of 2011 saw a 7% loss. The six Best Months last winter saw a 16% gain.
The math is compelling, at least if you look at the averages. Since 1926, the S&P 500 rose an average 4.3 percent in the six months of May through October versus 7.1 percent in November through April. Since 1950 the Dow Jones Industrial Average has lost just under 800 points from May through October, while the S&P 500 has fallen 12.6 points. From November through April, the Dow has gained 13,395 points while the S&P has gained 1333 points.
Recent history supports the theory as well. Stocks fell off a cliff last summer, reaching their nadir on October 3. They then went on a furious four-and-a-half month rampage starting in late November and lasting through the end of April.
So, there is a bunch of historical data suggesting the plan works, but nothing is foolproof and maybe you’ve heard or read that Sell in May has been a terrible idea for 2012. So, how about the Sell in May plan for 2012? How has that been working out for you? Well, on April 30, 2012 the Dow Jones Industrial Average closed at 13,213; the S&P 500 closed at 1397. So, you would have avoided about a hundred point loss in the Dow and you would have missed a ten point gain in the S&P; of course we still have a few days left in the month.
In other words, the stock market has been very flat for the past six months. That’s not to say the market didn’t do anything. It did plenty. Back in May stocks dropped sharply. From May 1stto June 4th the Dow Industrials dropped more than 1,200 points; then from early summer to early October the Dow clawed its way back. You could have shorted on May first, and then reversed your position on June 6 and gone long; if you did that, slap a gold star on your forehead. More likely, you didn’t time the market to perfection; more likely you just stayed in the market so you could pick up a few pennies in front of a steamroller. More likely you pursued puny returns in the face of enormous risks to principal.
If you want to time the market more precisely and remain active all year long, you might consider a plan devised by technical analysts Sy Harding and Gerald Appel. Harding wrote the book “Riding the Bear” Appel created the technical indicator know as MACD, or moving average convergence divergence. The plan is really pretty simple. You use the Best Six Months and the Worst Six Months as a general guide, and then you use MACD for your specific entry and exit points. After October 1st, plot a MACD with 8-17-9 for the settings. Enter the long side of the market on a MACD buy signal. That’s the official start of the “Best 6 Months Of The Year”. Only use a signal that occurs after October 1st.After April 1st, plot a MACD with 12-25-9 for the settings. Sell or enter the short side of the market on a MACD sell signal. Such a signal marks the official start of the “Worst 6 Months Of The Year”. Don’t start looking for the MACD sell signal until after April 1st.
Over the past 10 years buy and hold has produced a 3.4% annualized return; the Best and Worst Six months has produced 4.3% annualized returns; Best and Worst six months combined with MACD has produced 6.1% annualized returns.
Are there better timing methods? Yep. Does this work every time? Nope. Is it pretty simple and surprisingly effective. Yes, yes it is. You’re welcome.