by Toby SmithEditor, ChangeWave InvestingMay 8, 2007
It's that time of year when the "sell in May and go away" crowd starts heading for the exits. They always bring out Hirsch's Stock Trader's Almanac and note that, for the good of our portfolio, we're supposed to sell our stocks now and buy them all back on Nov. 1.
Here's the deal: Historical theories such as this one only work when there have been no fundamental changes to the markets.
And we have had huge changes in how this market and the global economy work versus any time during the past 10 to 30 years. I can give you 10 reasons why I would not want to sell in May. (And I'm not even going to count the insanity of converting long-term capital gains into short-term capital gains—after taxes—that just seems ludicrous.)
Okay, so here are your 10 reasons.
1) $1 trillion in private equity money ready to buy stocks.
That money should take $800 million to $1 trillion worth of stocks out of the marketplace. Now, do you want to be in a marketplace where people are adding stocks or taking stocks out?
The answer: taking them out.
2) $600 billion of stock buybacks.
That's going to take another 4% to 5% of stock inventory out of the market.
When you consider the private equity money and stock buybacks combined, you're looking at more than $1 trillion being taken out of an $11 trillion market in the United States.
That's good for stocks, so why would you want to be out then?
3) Faster economic growth coming in Q3 and Q4.
Remember that the market looks forward, not backward. Clearly we hit a trough in the first quarter of 2007—it was the slowest quarter in four years.
But if you look at business inventory, very strong consumer spending and a housing market that has leveled, you realize that we are at the bottom of the trough.
As we start to grow in Q3 and Q4 of '07, the markets will respond accordingly. Inflation has been contained and wages are actually up 3.8% and going higher.
You want to own stocks during that rising period, not sell them.
4) Strong international economic growth.
Remember, the United States is not the only game in town.
We have stronger growth in Europe and amazing growth in Asia. The S&P 500 derives more than 30% of revenues from outside the United States—24% of profits—all up 30%-60% from decades ago.
5) Correcting dollar turning foreign sales into higher margins and profits.
With the dollar corrected, we have buying power at the international level and profit power at the S&P 500 level.
Bottom line: Margins are expanding and profit margins are expanding.
Do I want to be selling into that? I don't think so.
6) Housing depression turning into housing development expansion in 2008.
Now let's look at the housing depression—not recession—for a moment. When you have 17%-20% year-over-year reductions in new housing development, it is a massive—about 1%-1.2%—drag on our GDP.
But we're getting to the point in 2007 where the cure for the housing inventory is ... housing inventory. We're losing the ability to build new homes and that is going to correct us in time. And I want to be ahead of that curve, not behind it.
7) Japanese and Chinese central banks about to diversify portfolios to include equities.
We've got Chinese and Japanese pension portfolios that are now going to be able to buy equities in the later part of this year that they were never able to buy before. You want to own stocks now, before this happens.
8) Biggest tax refund kickers in history.
According to IRS statistics, we have the biggest tax refund kicker in American history. That is money that's getting sent out to the American taxpayers who are going to spend it.
9) iPhone release will kick off a hot summer for consumer electronics.
I think we're going to see people camped outside the Apple stores to get an iPhone. The buzz surrounding the iPhone is going to add a level of excitement to consumer electronics that will get people's juices flowing.
9.5) Institutional buyers will use the summer pullback as a buying opportunity to load up on equities.
If you look at the allocations on stocks vs. bonds vs. cash, the institutions are low on equities now, particularly U.S. equities.
The big money that's driving the market is going to be buying in. They'll build their equities up during the summer if we get some type of correction.
10) We're due for a correction—stocks go on sale!
We've had such a strong run here, we want a correction.
Last year we doubled our returns by being buyers in July and early August rather than selling and trying to buy them back in November.
Now I'm certainly not hoping for anything like the Israeli/Lebanese conflict, but the best buying opportunities have traditionally been in the summer. Summer is the time to buy because you tend to get stocks at lower prices, and with traders off at the beach, you're likely to see low volume.
After considering those 10—or 11, but who's counting—factors, why would you want to be selling in May?
You want to be BUYING now. Then you can sell your stocks to all the "geniuses" who will be ready to get back in the game in November.
The idea is to buy growth stocks in the right place at the right price and sell them back to those bozos in December or January when you're going to save on your taxes as well.
I'm telling you, "sell in May and go away" doesn't work. You want to be the buyer, not the seller.
