Ignore the market until February, says expert
Posted
Nov 20 2008, 01:32 PM
by
Kim Peterson
Rating:
Great investors listen to the market, but what in the world is the market telling us these days? Don't even try to understand -- there are too many factors skewing any market message. Just ignore the market until Feburary, writes former hedge fund manager Andy Kessler in the WSJ.
When the market is at its most efficient, buyers and sellers neatly match up at the best price, Kessler writes. But the credit crunch has made the market as inefficient as it gets. Here's Kessler's list of the five biggest dislocations hitting the market now:
1. Taxes. People will soon start selling stocks for the tax loss. "December can be an ugly month of indiscriminate selling," Kessler writes. "The December effect will be huge this year."
2. Mutual fund redemptions. Look at Fidelity's Magellan Fund, down 56% for the year. Investors are dumping mutual funds for tax losses, Kessler writes, which forces the funds to unload shares to raise cash.
3. Mutual fund distributions. December is the month when mutual funds distribute capital gains. As those funds are forced to sell, they could trigger big capital gains.
4. Hedge-fund redemptions. Hedge funds have been furiously selling since September to pay off investors.
5. Margin calls. People have made some huge margin calls lately to cover share losses, and those calls usually take place in the last 30 minutes of trading. "You can bet many not-so-public margin calls are behind many huge price drops," Kessler writes.
So why ignore the market in January? Mainly because underperforming portfolio managers are fired at the end of the year, Kessler writes. Their replacements arrive in January, dump everything and start from scratch. That could lead to another month of instability.
