Hi All,
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.)
10 Reasons Not to 'Sell in May and Go Away'
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 is, 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.
Thanks and Regards
Supratik
