Tuesday, December 18, 2007

TAX SELLING: A WORD OF CAUTION

After a tough year in which more stocks are down than up, there is a lot of tax selling taking place. While It does often make sense to harvest tax benefits one must be very careful not to make big mistakes by tax selling right at a turn in the market.

The temptation to sell the biggest loser can result in selling a stock that is going to bounce big just when the bounce is about to take place. Under tax selling rules, you create a wash sell violation if you buy a stock back within 30 days of selling it.


At the turn, the stocks that have suffered the most are likely to be the ones that bounce the most. Here again, caution should be employed. Some of the sectors that did very well during the recovery phase will be the dogs of the second half of the business cycle. A stock that has dropped 40% in recent weeks may have already started its second half days of under performance. Keep in mind that at the start of the second half, most stocks will do at least OK for a time, however, the further we go into the second half, the smaller the breath of the market will be. In other words, toward the end of the business cycle, it will be primarily big companies that are doing best.

The good news for now is that Congress has largely at least temporarily given up on passing a long series of tax increases. The battle between the administration and congress is coming to a close without major damage. The central bankers have started force feeding money into the system. With the treat of fiscal policy problems out of the way, the central bankers face a less onerous task. The talk will continue about the threat of inflation, but inflation, which is a lagging indicator, will continue to grow at a slower and slower pace. The big "ethanol" food crunch will take a smaller bite out of food production in the coming months. Countries such as China have recognized the mistake of turning food into fuel. The Chinese government is now giving incentives to increase fuel production in other ways. The energy bill just passed by the congress does mandate the use of bio fuels but the big increase is mandated to come from non corn crop sources.

Lower inflation will allow the FOMC to supply ample money to the system. For the first time in a long time, we have a GO! from psychology, a GO! from valuation and a GO! from monetary policy. "Huston, all systems are GO! 10, 9, 8, 7, 6, 5, 4 ........"

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