Tuesday, November 20, 2007


A regular reader has noted that based on seasonal patterns we are in the "good times". The past 10 days or so have been no fun but I agree with the premise of the reader. The old "Santa Claus Rally" is almost upon us. During the fifty-one years from 1954 through 2004 the market went up 54.9% of the time three days before the Thanksgiving Day Holiday. The following list is of the percentage of gains starting with 3 days before Thanksgiving and ending the last trading day of the year.

54.9, 58.8 , 64.7, 60.8, 68.6, 58.8, 54.9, 49 (last day of November) (average of 58.81% last 8 trading days of November)
49, 51, 60.8, 56.9, 41.2, 49, 54.9, 47.1, 47.1, 43.1, 47.1, 56.9, 47.1, 45.1, 47.1, 58.8, Christmas Day, 72.6 , 54.9, 66.7, 68.6.

The average number of gains for the month of December was 53.25%. Note the big Santa Claus Rally at the end of the year. The last four trading days the market goes up an average of 65.7% of the time!

Throw in the first two days in January and Santa brings an average rally of 1.5%, not bad for 6 days work. The Santa Claus Rally in the NASDAQ is even more impressive. Here are the numbers for the last 4 trading days of December and the first 4 trading days of January. 72.7, 51.5, 72.7, 84.9, 51.5, 78.8, 60.6, 66.7. The average for the 8 days is 67.4%!

The coming year will be the 8th year of the decade. The historical average return over the past 120 years has been 18.5% with 10 years up and 2 down. Next year will also be a presidential election year in which the average return has been 6.7%. Because the gains do not include dividends, they look smaller than they are.

One point that must be made is that there are hundreds of seasonal patterns. Those who try to take advantage of too many of them become speculators rather than investors. Investors have a history of success and speculators win some and lose some. One of the problems is that the more you dice the time frames, the more powerful the more volatile the numbers and the less reliable the market signal. The facts before and after "Black Monday", October 19, 1987 show some of the problems of relying too heavily on seasonality. The Dow Jones Average dropped over 26%, as best as I recall, the NASDAQ fell even more. If you average NASDAQ returns by day of the week from 1971 to 1989, you find the following percentages of up days, 41.1, 51.1, 62.7, 64.2, 67.3. In other words, the NASDAQ was down 58.9% of the time on Mondays while being up 67.3% of the time on Fridays. After 1987 something changed. The average weekday returns starting in 1990 have been 52.8, 52.5, 57.6, 55.2, 55.2. In the old days, the market did well toward the end of the week and in the new days the best day was Wednesday. One take away is that seasonal factors tend to work well until they become widely known. If lots of traders know that the NASDAQ does especially well during the 8 days surrounding New Years, then some of them will buy a day early, causing the pattern to increase to a 9 day rally. One reason the Santa Claus rally had staying power for many years was because investors with tax losses to take used to have to sell at least 5 days prior to year end for trades to be recorded. Nowadays, trades are cleared in two days. The January buying was once a function of pension money going to work but nowadays the deposit of money to pensions is less concentrated. Santa Claus will likely come because the sentiment numbers are currently as bad as they have been since 2002. The best time to load the boat with stocks in recent years was in the summer and fall of 2002, when the market was very "washed out". All sorts of high probability indicators, such as insider buying percentages, say that we are faced with a great buying opportunity. I have been wrong about how quickly the "turn" would be here but it is still on its way.


The signs of a big turn are showing up around the globe. The hint of a slowdown in Canada caused the Looney to fall, piles of copper inventories has caused the price of copper to fall, Goldman Sachs is talking up the potential for recession, features of the Energy Policy Act of 2005 are starting to "kick-in" and many more.


Three clean coal power plants were recently canceled in Florida. During the last 18 months, the list of US plant rejections or cancellations has grown to 20. For those who did not already know, politicians are pushing for the energy solutions that will benefit their local people the most. The clean coal plants cut CO2 emissions by 90% but if the energy "crisis" were solved, the subsidies desired for "special projects" would go out the window. A US company just won a contract to build a couple of clean coal power plants in India and a Norwegian company just committed to invest 4.2 Billion Dollars in a Singapore solar Energy development project. Thailand, Indonesia, and Vietnam have each agreed to build nuclear power plants. At an Asian conference, a number of announcements were made in regard to energy alternatives and matched by commitments to reforest 10 million hectares ( 24.7 million acres of trees will use natures hand to sequester trillions of tones of carbon).

There is no need to subsidize solar, wind, clean coal, bio-fuels or any other energy alternatives. The market will do what it needs to do such that supply will meet demand. Companies do not invest $4.2 Billion without expecting substantial returns. The current price of oil is high enough to promote all the alternatives we need. Politicians need to adjust a few rules and then get out of the way. The biggest adjustment needed is for the price of externalities to be paid by the various methods. If coal pollutes the most, it should be taxed the most but a commission needs to establish a fair system of energy taxation and the congress should get an up or down vote. This process has worked to solve divisive issues in the past. The American people have wasted dollars and the environment as a result of the failure of politicians to act on behalf of the whole.


Jobs and lives have been lost in America due to the failure of our politicians. For example, year after year there have been deaths in coal mines and deaths from breathing polluted air. On the other hand, there have been no deaths in the construction or operation of US nuclear plants (I cannot site my source but if you don't believe I encourage you to research). One can argue that wars have been fought as a result of failed energy policy.


By the way, the profits made by airlines continue to surprise on the upside. One German and one British carrier announced big numbers this morning. Gordon Bethune, the highly respected retired chair of Continental is talking up the problems in the business but you have to remember that he is being paid to try to put merger deals together. Once again, Goldman is negative on the economy and on the airlines. Goldman makes more trading stocks than probably any other firm in the world. They buy when others are selling as good as anyone can. Their "research" is as bad as the rest of the sell side crowd but they make money on their trades. Airlines go up and they say buy, airlines go down and the say hold or sell. Right now they are talking about recession and suggesting airlines be held or sold. I say, BUY, BUY, BUY. I expect to make high returns off shares I purchased at much higher prices. SANTA CLAUS IS COMING!