Eye On The Market

The November Syndrome 2019... R U Ready?

Amid the tumult of trade-wars, impeachment and the interest-rate bouncing ball… the market hits an all time high

by Steve Selengut

Mr. Selengut is a private investor and a contributing editor to LIFE&Health Advisor. He is the author of the book ‘The Brainwashing of the American Investor: The book that Wall Street does not want you to read.’ He can be reached at [email protected]

Every fall, especially in volatile markets, like we’ve been experiencing recently, I encourage investors to think about some year-end strategies that can make the final calendar quarter a special time for all of us. Several forces are at work, all of which have links to conventional Wall Street wisdom; none of which promote good long-term investment decision-making.

This year, we have the added excitement of trade wars, Brexit, congressional impeachment hearings, and lower (or will it be higher) interest rates. The markets are in an unprecedented state of “uncertainty” and yet, here we are at a new all time high in the S & P 500! What’s an investor to do— or not to do?

Typically, the “November Syndrome” has features that impact in both directions. It causes weak prices to fall even further and strong prices to climb higher. This year, both categories could be well represented. Money Market funds are a bad joke (when compared with same institution margin and credit card rates) and Treasury securities may be proposed as the low risk (and unnecessarily low yielding) depositories of choice. Would you ever buy a security with a negative interest rate?

We’re talking about: tax loss transactions, letting profits run, bond swaps, and institutional year end window dressing.

The Mad Dash To Lose Money…

At the individual investor level, the mad dash to lose money on securities may begin soon. The idea that loss taking on high quality and/or income productive securities is somehow a good thing is an anomaly created by a counterproductive tax code and an industry that has a vested interest in perpetuating the absurdities it (the IRC) creates.

Assuming that we are dealing with investment grade securities, lower prices should more logically be seen as an opportunity to add to positions cheaply… not as an opportunity to reduce one’s tax liability on investment earnings. There is, and never will be, a good loss or a bad profit, unless you can predict the future with absolute certainty.

Naturally, both you and your CPA feel better with lower tax bills, but why sell a perfectly good security at a loss to produce pennies on the dollar in tax relief? Speculations, sure; valueless securities, why not? But when large numbers of people and institutions are taking losses for the wrong reasons, adding to the frenzy should be the last thing on your mind.

Most high quality, dividend paying, NYSE companies (Investment Grade Value Stocks) remain profitable regardless of where we are in the market cycle. Even in recent recessions, few have cut dividends and nearly all have survived to enjoy the next recovery.

  • If your CPA is recommending tax loss transactions on perfectly sound companies, ETFs or CEFs , just ask if he or she would accept half their fee to save on their own taxes?
  • When’s the last time you barged into your boss’s office to demand a tax saving pay cut?

Having Your Tax-Break Cake…

In the old days, when markets moved slowly and buy-and-hold was the investment strategy of choice, the 30-day, buy-it-back, tactic was an effective way of having your tax break cake and maintaining your portfolio as well. But with 1,000-point weekly swings, there are no guarantees that the markets will tread water for your personal tax convenience.

In fact, more often than not, directionally confusing markets such as this one produce a “January effect” that is far more profitable for November-low buyers than for tax motivated sellers. Similarly, “letting your profits run” to push the dreaded taxes into next year is foolishness. Talk to the geniuses that didn’t take profits in 1999, in the summer of 1987, or more recently, in the summer of 2007.

The primary objective of the equity investing exercise is to make money by taking profits… the more quickly and more frequently, the better. This year’s volatility has produced hundreds of profit taking opportunities while the markets themselves are near a new all time high. just a few percentage points better than the one achieved in September 2018.

And Then There Are Bond-Swaps…

Another popular year-end shell game is the “bond swap”, which preys on the fear most income investors experience when their fixed income securities have the audacity to fall in market value. This is the same absurdity that allowed “mark-to-market” accounting rules to crack the foundations of financial institutions around the world just a dozen years ago. (One of the causes of the “great recession” was regulatory insistence that the market value of a fixed income investment (i.e., mortgages) is more important than either the actual income it produces, or the payment record of the mortgagees.)

  • Bond swaps allow an advisor to pick your pocket twice by exchanging them at a “nice tax loss” for another bond with “about the same yield”. He gets a double dip (invisible to you) commission and you get a bond of either shorter duration (less chance of volatility is the sales pitch) or lower quality.

A contract (from a quality borrower) to pay a fixed rate of interest, and full principal at maturity will vary in price throughout its existence. It’s nothing to be particularly anxious about. And when your bonds are held in closed end funds, lower market values are the opportunities of a lifetime, or at least, of a market cycle… and, if you really, really, really need to do something to offset those terrible profits:

Typically, the "November Syndrome" has features that impact in both directions. It causes weak prices to fall even further and strong prices to climb higher. This year, both categories could be well represented...

  • You can immediately replace a CEF sold for a loss with an equally high (or higher) yielding CEF without any markups at all. Right now, most of you who own tax free CEFs (only about 30 of which yield as much as 4.5%) could consider swapping them out for the taxable variety, where there are at least 50 yielding at least 7.5%. Yes, kill those taxes and increase your spending money at the same time… and for free.
  • While we’re on the income CEF page, consider this “all time high” strategy at any time during the year: Within your positions, look for old “lots” that were purchased at unfortunately high prices. Shed one or two of those to increase overall portfolio yield, and improve the chance for profit on the selected positions.

The Emporer’s New Clothes

Similarly, the idea of exchanging a steady, much-higher-than-normal-yield, closed-end-fund (CEF) cash flow for an overpriced T-Bill yielding less than 1% is above Emperor’s New Clothes absurdity levels.

There is one more year-end game that may be add to your November decision making dilemma: Wall Street is just about ready to gang up on us with a self-serving strategy blithely referred to by the media as “Institutional Year End Window Dressing”— a euphemism for fraud and deception.

In this annual ritual, mutual fund and other institutional money managers unload stocks (ETFs and CEFs as well) that have been weak and (usually) load up on those that are at their highest prices of the year. It is unlikely that this year will be any different… these birds always need to show their largest clients just how smart they have been this year. “No major losers in our brilliantly feathered portfolios!”, they boast.

Always keep in mind that Wall Street has no respect for your intelligence and that the media’s “talking heads” are entertainers more than they are “hands on” investors. Institutions must paint a picture of prescience in their annual glossies… and this is normally done through this annual selling low, buying high portfolio rebalancing act.

It would be an understatement to say that these year-end tax and face saving activities are misguided, unnecessary, and possibly illegal. It is likely that this year’s “November Syndrome” bargain selections will be less numerous than they would be during a correction of any magnitude, but there certainly will be opportunities that could produce warmer (profit taking) smiles next winter.

Buy High In November Lows

Simply put, think about getting out there to buy some of the (high quality) November lows, both equity and fixed income, CEFs and ETFs included. Establish new positions for diversity, and add to old ones to increase yield and reduce cost basis. Keep appendages crossed for a therapeutic dose of “January Effect” elixir, as you reaffirm your understanding of shorter term cyclical market value changes.

The media will talk about this new year phenomenon with wide-eyed amazement. Most of those terrible losers (yes, the ones you may have been advised to sell) start to rise from the ashes, as the professional window dressers repurchase the solid companies they just sold for losses… fascinating place, Wall Street.

One last thought, as you relish the chest thumping green glow emanating from your portfolio statement: No one has ever become poor by realizing their profits, even after sharing a portion of it with Uncle.