Posted by: Ben Steverman on April 27, 2010
Some stock traders live by the maxim, "Sell in May and go away." As the calendar ticks toward May Day, should we be getting ready to sell?
Historically, the worst six months for the stock market are the stretch from May to October. According to the Stock Trader's Almanac, from 1950 to 2008, the Dow Jones industrial average rose an average of 0.1% in the May-October time period, versus an average of 7.3% from November through April.
This definitely did not work last year. In 2009, the Dow gained 18.3% from May through September.
Last year the stock market's natural tendencies were masked by the recession and recovery, says Stock Trader's Almanac editor-in-chief Jeffrey Hirsch. But this year, he warns, could be a return to the market's usual seasonal ebb-and-flow.
The Almanac calls this "an eye-popping strategy." Indeed, it would have netted great returns in the past 60 years. One reason the strategy would have been so successful is because market crashes or corrections have tended to occur in September or October, including in 1929, 1974, 1987, 2001, 2002 and 2008.
But there are some practical problems with selling in May and going away. First, there is no guarantee that the trends of the last 60 years will continue in the next 60. It's possible the stock market's supposed "seasonality" is just us finding patterns in random events.
Another problem with "sell in May and go away": Go where? If you move your holdings into cash, you miss out on any May-to-October gains, which have occurred for 12 of the last 20 years.
There might be good reasons to lighten up exposure to stocks right now, but I don’t think the calendar is one of them.
Posted by: Howard Silverblatt on April 27, 2010
Global Sales - Initial numbers show foreign sales are running 46.97% of full sales, slightly down from the 47.94% of 2008. Foreign income taxes paid are again ahead of U.S. Federal income taxes but at a lower rate: Foreign is 52.4%, down from 55.8% in 2008. Preliminary stats sometime in May, with the full report in June/July.
Buybacks – Expect buyback base (covering employee options) to be tied to market, with 2010 buybacks topping cash dividends. Share count reduction is bold, either issues will need to be true believers (XOM is the poster child – 38 consecutive quarters of share count reduction) or in a ‘situation’ in which they wish to support their stock. So far few SCR issues. Initial numbers in May, final, with release in June.
Cash – Q4,'09 set another new record, but still expect companies to start spending more on M&A;, CapX, even a little more on dividends - buybacks are a wait and see (more announcements, but waiting for the trades). Initial cash values coming in lower than record setting Q4,’09. Regardless, current levels are near 10% of market value, and represent 74 weeks of estimated 2010 operating income.
CapEx - All signs point to an improvement, after a 2009 preliminary 22% decline, but no stats to report as of yet. An accelerated depreciation schedule would help, but only if it had much higher limits. Stimulus funds have expiration dates, so use it or loose it may push some spending.
Dividends – Great start, with IBM increasing 18% today, as it became the third major issue of the four I was watching to increase this month (JNJ * PG increased earlier this month, and XOM is still open). MTD there has been 18 increases and no decreases; YTD it is 96 increases with just 2 decreases, vs. 70 increases and 59 decreases for the four months ending April 2009. Even more dramatic is the dollar change -> $7.6 billion has been added to dividend investors pocket YTD, compared to $40 billion that was removed last year. Expect full year to show a 5.6% increase, BUT if strong increases continue, the estimate will go up. Also, left unchanged by Congress, qualified dividends will be taxed at 38.5% starting in 2011, compared to the current 15% rate. If past tax changes are any indications, companies could change their Q4 payments to qualify for the lower rate - it's not what you make, but what you keep. The 5 quarters of 2010 vs. the 3 of 2011 would also set-up for some difficult screens.
Pensions & OPEB - Another year older, another 2 years further away from retirement. Initial reports show S&P; 500 assets are up 15%, but obligations are up 10%, partially due to lower discount rates. Last year's $308 billion record shortfall is now coming in at $256 billion. Recognition of past losses limits paper gains. Companies again have to add additional cash to pensions (as they lobby Washington for a postponement); infusions appear to be due more to ERISA than GAAP. OPEB slight improvement, but remains massively underfunded. Improvement may be due to fewer covered workers and continued conversion to Part D. Telecom the most underfunded (T, VZ), as well companies with represented workers (GE, BA,...). So far JPM is the only issue to be over funded in both pensions & OPEB. Plan full report in June. The Q1 tax accounting charge reversal under the Health Care bill for T, BA, CAT, DE, MMM,…appears to me to be fair -> prior treatment was double-dipping (max $4,750 @ 28% = $1,330 tax free subsidy, but full $4,750 deductable; $1330 remains tax free under the bill). If the government (companies, labor -> OPEB is not as popular outside of represented workers) wants to give higher subsides then they could change the limits. Note the charge is to the posted value of future benefits (non-cash), which reverses the prior impact of incorporating the benefit.
Posted by: Howard Silverblatt on April 27, 2010
IBM just became the third major issue of the four we were watching to increase this month (JNJ and PG already increased this month), which still leaves XOM open. MTD there has been 17 increases and no decreases; YTD it is 95 increases with just 2 decreases, vs. 70 increases and 59 decreases for the four months ending April 2009. Even more dramatic is the dollar change -> $7.6 billion has been added to dividend investors pocket YTD, compared to $40 billion that was removed last year.
Also - left unchanged by Congress, qualified dividends will be taxed at 38.5% starting in 2011, compared to the current 15% rate. If past tax changes are any indications, companies could change their Q4 payments to qualify for the lower rate - it's not what you make, but what you keep.
Posted by: Ben Steverman on April 13, 2010
If you're a U.S. taxpayer, you don't need to be reminded your filing deadline is April 15. Here are some pieces of advice while you scramble to get your return in order:
1. Avoid simple mishaps
A misplaced decimal point or a missing form can turn into a huge hassle if you're not careful. Ernst & Young offers a few tips on avoiding mistakes. Among the suggestions:
• Check your math. Double check the numbers even if you're using software.
• Write your Social Security number on every page of your return. If you write a check to the U.S. Treasury, write your SS number on the face of the check, along with your form number and the tax year.
[UPDATE: A spokeswoman points out these tips come from the Ernst & Young Tax Guide 2010.]
2. If you're running out of time…
You can file for an extension by April 15, which will allow you to delay your return until Oct. 15. Former BusinessWeek colleague Lauren Young, writing for TurboTax, offers some good tips, notably:
• An extension doesn't mean you can delay your tax payment. You need to estimate your 2009 tax bill and pay up. If you're wrong and underpay by more than 10%, the IRS will penalize you.
• Don't forget that a federal tax extension doesn't necessarily give you a state extension.
Lauren answers several other common questions -- including about various tax credits and other ways to lower your tax bill -- here.
3. Think about this year's taxes.
You might be exhausted from 2009 taxes, but this is also a great time to find ways to lower your tax bill in 2010 or future years.
One way to do so is through Roth Conversions. In 2010, for the first time, taxpayers with incomes over $100,000 will be able to convert holdings from a traditional individual retirement account to a Roth IRA. This requires a higher tax bill in the short term, but for many investors it could lower their lifetime tax burden.
Remember: You pay no taxes on money that goes into a traditional IRA. However, you do pay taxes on money that's withdrawn from an IRA. A Roth IRA is the opposite. You pay taxes on whatever income goes into a Roth IRA, but the money that comes out of it -- after you retire and after the holdings have (hopefully) appreciated -- is tax free.
Wealth advisors at Robert W. Baird offer helpful information on 2010 Roth conversions here and here.
Posted by: Ben Steverman on April 9, 2010
Is greed good for the movie business? If regulators give their OK, within months movies could be trading on financial markets, with investors placing bets on which films will be the next summer blockbuster.
Hollywood has its doubts, with the Motion Picture Association of America and others fighting the proposals, now being reviewed by the U.S. Commodity Futures Trading Commission, or CFTC.
One proposal comes from Cantor Exchange, which says its first contract will be based on Wall Street: Money Never Sleeps, (pictured above) the sequel to Oliver Stone's 1987 movie.
Up to six months before a movie's scheduled release, traders would start buying and selling a futures contract linked to the film's expected early box-office receipts.
Cantor Exchange says the market could give those in the movie industry financial flexibility. The firm says on its web site:
These features should make it easier for a new class of film investor to enter the market. [snip] …contracts will make it possible to estimate the future box office potential of a film project many months in advance, [so] film financiers will no longer need to rely on conservative internal estimates of box office potential.
Another proposal, offered by Media Derivatives, would be limited to institutional investors. But Cantor Exchange's contracts could be traded 24 hours a day by both institutions and individuals. And the product appears aimed at the movie-loving public. Andrew Wing, the chief executive of Cantor Entertainment, said in a statement:
The number of people who visit movie theaters each year and form opinions about a film's success is in the tens of millions. We believe that's the reason the public response to this product has been very positive and we look forward to the start of trading.
It raises the possibility of movie buffs turning into day traders.
The MPAA and other groups sent a letter Apr. 8 to the CFTC warning that the futures contracts would be "harmful and burdensome" to motion pictures. The letter raises some important points.
First, there is no way of knowing that futures trading will be a good predictor of box office success. The letter calls the prediction method "false, unreliable and non-economic."
In any case, trading could become a self-fulfilling prophecy, with negative market activity tarnishing a film before it is even released, either by souring the public or by hurting distribution and financing.
Finally, for Hollywood, trading could create conflicts of interest. The movie industry already runs on rumor and gossip. Once trading starts, much of that becomes a form of insider information.
The Futures Industry Association is sticking up for the proposal. In an Apr. 8 statement, the trade organization says there is a need for more effective risk management tools in movie financing, and points out the futures markets are well regulated.
The FIA has no view on whether or not the proposed movie futures contracts will succeed. We encourage the CFTC to evaluate these applications on their merits and let the marketplace decide.
Hollywood's biggest concern is that these financial products will be successful. Well-connected people in Tinseltown -- and there are many, from the assistant in the editing booth to the friend of the gaffer who gets a ticket to a preview screening -- will have access to potentially lucrative inside information. Whatever the financial effects of box-office futures, this could easily distort the creative process necessary to make great movies.
UPDATE: The CFTC was slated to decide on the Media Derivatives proposal on Apr. 9, but the company now says in a statement that "at the request of the chairman of the CFTC and after individual meetings with commissioners," it agreed to extend the deadline until Apr. 16.
