Today the market took another beating, with the Dow losing another 445 points to close at 7,552. So what if it’s lost over 1,600 since Election Day? At this point I’ve stopped looking at the 401(k) on a daily basis. I just assume the worst with all further contributions parked in cash for the foreseeable future. If we’re in for some old-timey deflation, then Cash is King.
But perhaps it’s not all whistling through the graveyard. It’s the year-end, after all, and Andy Kessler says ‘stick wax in your ears and don’t listen to the market until February.’ According to Kessler, there are fairly reasonable reasons for the ongoing sell off. From today’s Wall Street Journal:
Don’t get me wrong. The freezing of the credit markets is wreaking havoc on the world economy. Corporate profits are dropping. Central banks are fighting off deflation and may not turn off the spigots fast enough — which could ignite runaway inflation. But because of the credit mess, I am convinced the stock market is at its least efficient today. Don’t read too much into any move. Here are the five biggest dislocations taking place:
- Tax-loss selling: Whenever you have a loss in a stock — and who doesn’t — it’s always tax smart to sell it, take a tax loss and either buy something similar or wait 30 days and buy the original one back. December can be an ugly month of indiscriminate selling. The December effect will be huge this year.
- Mutual-fund redemptions: Mutual funds are also dumped for tax losses. When the stock market is down in the morning, it’s usually because of mutual-fund redemptions.
- Mutual fund cap-gain distributions: To make matters worse, in December mutual funds do capital-gains distributions. In a down year like 2008, you would think there are no taxes to pay. Think again. Legg Mason’s Value Trust, run by Bill Miller, outperformed the market for 15 years by buying many “unvalue” names like Amazon. As investors redeem, he is forced to sell many of these stocks originally purchased at very low prices, triggering huge capital gains in a year his fund is down 62%. You can almost guarantee investors also will sell more of these funds to pay their unexpected tax bill.
- Hedge-fund redemptions: Instead of overnight selling like mutual funds, hedge funds typically require 45 days’ notice for investors to get out of a fund. They’ve been furiously selling since September to raise cash to pay investors. This usually shows up as a set of stocks that just go down and down and down with no obvious explanation.
- Margin calls: Whenever stocks go down sharply, you quickly find who owns them with debt. We have seen spectacular margin calls, a requirement for more capital to cover share losses. Chesapeake Energy CEO Aubrey McClendon unloaded 33 million shares to cover losses. Viacom CEO Sumner Redstone had a forced sale of $400 million in Viacom and CBS shares because of a margin call on other stocks. You can bet many not-so-public margin calls are behind many huge price drops. These usually take place in the last 30 minutes of trading.
So, after a wretched year, when all losing fund managers have been let go, we should – according to Kessler – see a nice January bounce.
But if it’s bouncing from 6,000, how high can it go?
What Me Worry? Alfred E. Neuman is my fund manager.
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