Friday, November 16, 2012

Bear Market Odds and Ends

Bear Market Odds and Ends: A couple of odds and ends this morning.

In my opinion it is absolutely too early to call this a bear market. For now the SPX is below its 200 DMA and the behavior of the market has not been good. There is no reason that a week or two from now all could be right with the world but if things have not improved a month from now then that would probably indicate the next bear market had started.

We executed a small trade yesterday in large accounts by selling MSCI (MSCI). The name got crushed a little over a month ago when Vanguard announced it would be switching benchmark indexes for quite a few of its funds. When the news broke the stock plunged in what I described as a panic. As I said at the time panic declines often snapback some portion of the decline quickly. That happened to a point but it has back slid some since.

Selling the name does increase the cash and puts the portfolio in a more defensive position but I also think of this trade as a cleanup type of trade too, similar to the trade executed earlier in the week. Taxable accounts can take the loss and all accounts can move on from one that ended up not working out well.

We sold MSCI for RRGR in October because the year for the fund ended on October 31 and the fund needed the loss to help offset a realized gain. We bought Blackrock for RRGR when we sold MSCI and we sold Blackrock yesterday to be consistent with the MSCI sale.

A reader comment noted the recent drop in MLPs and wondered what accounted for the drop and then suggested that perhaps people were selling to get the current 15% capital gain rate before it possibly goes up in 2013.

There are two things to address here. This link suggests that MLPs are perceived losers of the presidential election. We will see whether or not they are actual losers but the kind of tax changes implied in that link do scare markets. The closest example I can think of is from October 2006 when the Canadian Royalty Trusts got decimated because the Canadian government announced taxation changes. I referred to this example before and have also been consistent in saying why 20-25% in MLPs, as some pundits suggest, is a bad idea. I have to believe the fear will be worse than the reality but we only have a 2-3% weighting in the space and being wrong about the consequence will not be problematic for client accounts or the fund we manage.

The other point from the reader comment is about selling now to get a lower capital gains tax rate. This is getting a lot of attention but what is being implied (and makes no sense to me) is that people are selling names they would not otherwise sell to pay 15% now versus paying nothing in the future. What I mean here is if you know you need to sell soon then yes 15% is the safe sale but if you own stocks or funds that you would not otherwise be selling anytime soon then it makes no sense to lock in a gain.



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