2011May16 - Sell in May & Go Away?

"There are three kinds of lies: lies, damned lies and statistics." ~ Mark Twain

MARKETS:

Sell in May and go away, some investors actually let this rule of thumb control their portfolio decisions. While historical evidence shows that stock market returns, over the last 60 years on average, have been significantly worse during the May through October time period than the November through April span, that doesn't necessarily make for a successful investing strategy. First, there have been years when the summer time period has been quite good, such as 2009 when we saw an 18%+ gain in the S&P 500. Second, there are transaction costs and tax consequences to consider when selling investments and third, it is important to know where cash received from stock sales will be sitting for that time period. With yields low on many fixed income products, and cash balances earning close to nothing, even low stock returns may outpace the alternatives. As always, we will listen to the markets and the wisdom of the crowds as they vote with their dollars.

THE FED:

The Fed continues full speed ahead. The Federal Reserve continues to try to stimulate demand, and therefore hiring, as they try to bring down the unemployment rate while keeping one eye on inflation. Part of the problem with both QE1 and QE2 has been that the money pumped into the economy by the Fed has largely just remained in the financial system, instead of moving through the economy via lending-known as the velocity of money.

Until that chart starts to turn up, substantial headway in improving the unemployment rate, and raising wages will continue to be difficult. However, there are some glimmers of hope on that front as we are seeing banks' willingness to lend expand. As banks lend more, and consumers and businesses put that money to work in the economy, we should see money rotating through the economy
 

Money is still not moving

EURO-ZONE :

He who borrows sells his freedom ~ German Proverb

Markets are forcing euro-zone nations to face debt problems earlier than in the United States, complicated by a common currency used across diverse economies that pursue independent national budgets.

We have repeatedly stated that "bailouts" for weak peripheral European countries are no bailouts, because lending more money to nations that are already over-levered and have weak growth prospects only results in higher future debt levels. Existing loans from the international community only postpone the inevitable, when solvency is addressed by restructuring debt, by either voluntary or involuntary means.

A forced restructuring would likely involve haircuts, or reduction of principal. While Greece needs a restructuring, a forced haircut could be very disruptive. In its early May downgrade, Standard & Poor's indicated Greece needs a 50% haircut, and some believe even more is needed. However, this could result in Greek banks wiping out more than 70% of their capital, and other European banks would suffer losses. This is because most sovereign debt is typically held on longer-term books, is not marked-to-market and is not provisioned for losses.

Alternatively, voluntary restructuring would involve extending maturity dates, but many believe adjustments and reforms needed are too large and would require more than 10 additional years, kicking the can further down the road. Policymakers are likely to delay swallowing the tough medicine of restructuring and instead provide additional money, hoping for progress on reforms, privatization of state-owned assets, economic recovery, and healthier fiscal situations.