ACTIONABLE ADVICE FOR FINANCIAL ADVISORS: Newsletters and Commentaries Focused on Investment Strategy

Follow us on
 Facebook  Twitter  LinkedIn  RSS Feed

    Last 14 days

Most Popular Articles

Most Popular Commentaries

    Last 12 Months

Most Popular Articles

Most Popular Commentaries

More by the Same Author

Alternative Investments
   Capital Growth
Capital Growth
   Capital Growth

When is the Turkey Supposed to Arrive?
Flexible Plan Investments
By Jerry Wagner
November 20, 2012

Display as PDF     Print    Email Article    Remind Me Later

Bookmark and Share

I know what my calendar is saying. “Thanksgiving Day is this Thursday,” the day set aside to give thanks for the bounty with which God graced this country. In our home, like in many others, the kids referred to it as “Turkey Day.”

In modern vernacular, “turkey” has taken on a whole separate meaning from the ungainly bird of Pilgrim lore. A “turkey” in today’s film industry is a failure. (By the way, I saw “Lincoln” this weekend and it is definitely not a “turkey.” I highly recommend it and hope that it starts a new wave of American historical dramas. Just this once, could they copy cat something worth copying!)

This Thanksgiving week historically has not been a turkey in the markets. Since 1950, stocks have advanced the day before and after the holiday 76% of the time.

Yet, this year the turkey in the financial markets seems to have arrived early. Stocks as measured by the S&P 500 Index have fallen 5.1% since the Tuesday Election Day close.

As the chart below demonstrates, no sector of the market has been spared the losses:

President Obama now has the distinction of being the only two-term president to have his re-election greeted with back-to-back 5%-plus declines, and even among single-term Presidents, he’s one of only three to see the market lose 5%-plus in the week and a half since their election (Truman and Harding are the other two). But don’t despair; on average, after each of these declines the market has rallied through the rest of the year.

Last week, however, was mostly one of decline… until Friday when the market rallied 100 Dow points from its inter-day low to come roaring back. Still, the week saw all the stock averages down almost 2%.

The reason most often being advanced is the approaching fiscal cliff facing the nation. It seems that the uncertainty created by the upcoming election has now been replaced with the uncertainty given rise to by the unchanged political environment. You know, bringing back mostly unchanged the same cast of characters that gave us last year’s debt ceiling debacle and the longest lasting recession since the Great Depression.

If you have been sitting out the election in a media-free fallout shelter in the middle of Antarctica, the fiscal cliff is the nose dive the economy is likely to face when confronted by the year-end combination of the tax increases scheduled to occur and the cutback in spending on entitlements and defense occasioned by this gang’s failure to settle the debt ceiling crisis a year ago.

This arrives contemporaneously with Washington’s report on the first month of the 2013 budget year (I know, we’re still waiting for a budget for 2010!). October’s $120 billion deficit puts us right on track for our fifth straight $1 trillion-plus budget deficit as we seek to move from $16 trillion in the hole to $20 trillion in four more years, if Congressional Budget Office estimates are to be believed.

What’s the reason for October’s $120 billion budgetary shortfall? You figure it out: Tax revenues were up $184.3 billion (13%) over the same month last year, while spending rose $304.3 billion (16.4%), this in an economy growing at a less than 2% rate!

Obviously, the solution to this imbalance is to raise taxes – 13% more tax revenues than last year is not enough to feed the leviathan in Washington. It must have more, and at year end it can get its wish as the following is scheduled to occur according to the NY Times: “The top rate on dividends, for example, could climb to 39.6 percent from 15 percent if no action is taken.

Capital gains taxes, which now top out at 15 percent, could rise above 20 percent, many financial advisers say. Most investment income will also be subject to a 3.8 percent charge to help pay for President Obama’s health care law.” “Investors Rush to Beat Threat of Higher Taxes”, 18 Nov 2012.

In anticipation of these increases, dividend-paying stocks and those with substantial gains since the market bottom in 2009 have been on the pre-Thanksgiving, ummm, chopping block. As a result, these investments have suffered the most since the election.

With a 23.8% increase slated for capital gain taxes, a number of company owners have moved up the sale of their businesses into 2012. Many seniors are worried. Having already suffered through the reductions in income occasioned by the low interest rates on savings, they now face a near tripling of the tax rate on dividends to 43.4% from 15%, according to John O. McManus, CEO of McManus & Associates, a trust estates law firm. CNBC, “Why Seniors Face Retirement 'Perfect Storm' in 2013”, 16 Nov 2012, Mark Koba.

In the face of all these numbers, one commentator characterized the fiscal cliff as: “…on January 1st the United States of America will transform overnight from being the most indebted country in the history of the planet to being the most indebted country in the history of the planet but with sharply higher tax rates and a sharply reduced national defense.” “Don't Worry About That Fiscal Cliiiiiiiiiiiiiiiiiiiiiifffffffffff........”, 15 Nov 2012, Jay Kaeppel

As a result, investors have been confused and pessimistic, even in the face of better-than-expected earnings and economic reports over the last month (although I should note that eleven of fifteen economic reports last week, like this one, disappointed.)

As we have been writing, even pre-election the stock market was receding in the face of the election uncertainty. Today I read that it was a very bad month for trend followers. It was a Red October with every major trend following hedge fund posting losses. They averaged a decline of 5.21%.

While we pride ourselves on being one of the early adherents to trend following investing, we had some gains in October and where we had losses they were, for the most part, less than 2% after fees, the major exceptions were STF and VAN, our most aggressive strategies. But in the case of these two strategies, they are up double digits for 2012, while the average trend following hedge fund was down 6.07% year to date at the end of October. Obviously, we are doing something different, even when it comes to trend following.

In this same regard, I began Flexible Plan in 1981 as a market timing firm. Market timing as an investment strategy is characterized as a strategy that moves tactically from 100% invested to 100% in cash. We still offer many fine market timing strategies – for example, the original Classic, Political Seasonality (which went to cash at the close on Election Day), and Strategic High Yield Bond (which went to cash on Friday.) We also use tactical overlays in our Market Leaders strategies. Our Market Environmental Indicator narrowly avoided a sell signal this weekend, as did STF.

On Friday we learned that one of our market timing competitors had moved 100% into cash last week. This occasioned many calls to our office inquiring about our market position. Obviously, we remain big fans of market timing, but the rally Friday and today evidence why we don’t believe your portfolio should be allocated solely to one strategy. Instead, a portfolio that is diversified by asset class and strategy is our recommendation. It helps on days like today, just as our hedging positions in other strategies helped during the declining days that preceded them.

In periods of uncertainty, like this one, not only does the market tend to decline, but the tension often drives us to indulge in comfort foods. Fortunately, turkey and dressing is a great comfort food. But if that doesn’t work, have yourself a Twinkie…oh… never mind.

All the best,


PS Thanks to Mike Hurley and David Varadi for filling in for me while I was out of town. They did a great job, didn’t they?!!!


(c) Flexible Plan Investments


Display as PDF     Print    Email Article    Remind Me Later
Remember, if you have a question or comment, send it to .
Website by the Boston Web Company