THE S&A DIGEST: The Santa Claus Myth

Stansberry & Associates Top 10 Open Recommendations
(Top 10 highest-returning open positions across all S&A portfolios)

As of 07/05/2013

Sans wife at the Christmas party… Fortune gives Dykstra the "business"… Hedge fund performance review… Ian proves that Santa’s not real… Belgian subscribers respond to last week’s hoax…

Agora’s Christmas party was beautiful... and revealing.

Held at the Garrett-Jacobs mansion on the most beautiful square in the city, the party featured perfectly cooked lamb chops served alongside good local wines and fancy liquors. I got to see several old friends, like Justin Ford, who was my first boss in this business, and Michael Checkan, who I buy gold coins from.

But... my wife couldn’t come with me this year. And, strangely, most of the conversations I had were extremely short. They all went like this:

"Hi, Porter. Merry Christmas. Great year you’re having. Love the Digest. Where’s Andrea?"

"She couldn’t make it this year. She’s with her mom in New York."

"Oh, that’s too bad. We really wanted to see her. Tell her hello from us... Bye."

"Huh... okay. Bye."

I was home by 9:00 p.m.

Poor Lenny Dykstra. First TheStreet.com dropped him from his part-time stock-touting gig and now Fortune has profiled him... with less than flattering prose. "He looks like an unmade bed... He’s short, with a big belly, hunched over, his loose-fitting pants falling off his butt and bagging at his ankles..." Ouch. Lenny is, according to what he told Fortune, quite an investor. He claims to have gotten his start by reading newsletters, such as "Steve Sjuggerud’s Dow Theory forecasts."

The National Association of Home Builders and Wells Fargo will release their Housing Market Index later today. The index has been up for the past two months after hitting a 15-year low. Will Sjug continue to be right with his call for a rebound in housing stocks? Or will the vast majority of our subscribers (some of whom have complained bitterly that Sjug is too early) be proven correct? We’ll have to wait and see.

It’s a terrible gift... unless you own the stock. In fiscal year 2006, Best Buy reported $43 million in gains through gift cards that had not been used in two or more years. Each year, 11% of all gift cards go unclaimed. There is currently $82 billion outstanding on gift cards in the United States.

I left a six-pack in my mailbox today for Tommy, my mailman. I’m sure he’s in a drinking mood: Today is the busiest mailing day of the year.

I wrote it, did you buy it? "If you don’t own this stock, you’re not an investor. This is probably the best opportunity in the entire market now for safe, long-term gains..." I told readers about Verizon in the February 2006 issue of Porter Stansberry’s Investment Advisory. Today, Verizon signed a deal with five Asian telecom companies to build the first high-speed, underwater cable system to directly link the U.S. and China. This $500 million project will be able to handle 62 million simultaneous calls... PSIA subscribers are up 26% on Verizon this year.

Since it’s the end of the year, let’s check in on the hedge funds. Morgan Stanley’s fund returned 5.1%, while Goldman Sachs’s Global Tactical Trading gained 1.7% through October. And Goldman’s other large, "alpha" fund is down 12%. Prediction: Returns will get worse next year.

New highs in the Stansberry portfolios: Akamai (AKAM), Eni (E), Gabelli Dividend & Income Trust (GDV), Microsoft (MSFT), Posco (PKX), Raytheon (RTN), Sigma-Aldrich (SIAL), Telstra (TLS).

The mailbag has bordered on nice for the last few days. We must be at a market top. I haven’t gotten a death threat in weeks. Below, a fresh batch of letters...

PLEASE NOTE: Our office will be closed from Christmas through New Year’s Day. We think it’s important for our staff (more than 50 people now) to spend time with their families during the holidays. I hope you’ll understand. Give us a call on January 2, and you’ll find us hard at work again. ALSO, if there’s a golfer in your life, spend a few dollars buying Mike Palmer’s book, Secrets of the Irish Links. There’s no more honest, useful, and beautiful book available about golf... see for yourself.

"Steve, Why don’t you get somebody to start a rare coin fund... not everybody can afford a $28k coin set. Thanks." – Paid-up subscriber Scott Usedom

Porter Comment: Have you ever tried to buy $100 million of rare coins? We talked with Van Simmons about setting up such a fund three years ago. But it’s almost impossible because the market isn’t liquid enough, and the prices would move so fast against you on the way in and on the way out.

"Have you ever done a report on Swiss high-yield closed-end bank contracts? I have been offered a very high return rate from a law firm on a large investment in Swiss Bank Credit Derivative Closed End contracts. Fed site says no way! Friends who invested say absolutely! Monthly returns at 12% to 20%, depending on the trader. Cash in requires 50 million USD plus up to 100 million for 14 months. Do you have an archive on this in True Wealth?" – Paid-up subscriber Dr. Charles Geeslin

Porter Comment: What’s the rule about "if it sounds too good to be true"? I’ve never heard of credit derivative closed-end contracts, but those rates of return are impossible to achieve. Earning 20% per month would turn $50 million into $534 million in 14 months. By the end of year three, you’d have $3 billion. Unfortunately, there’s no Swiss bank that can turn you into a billionaire. I’ll never understand why even rich people fall for these kinds of Ponzi schemes... but it happens all the time.

"I have worked in this Co. for almost 17 yrs... most all career associates get awarded Wal-Mart stock to our 401K retirement program. The biggest problem that we have experienced was much of that stock was given to us at a value of $70, $80, $90, $100 several years ago, and now that same stock is now sitting there at around $45, $47. Many of us have seen our $100,000 401k go to $40,000 to $50,000 and not a hint of a recovery. I just can’t believe anyone would recommend Wal-Mart!!!!!" – Paid-up subscriber Walter Guise

Porter Comment: Buying your own company’s stock in your 401k is only a good idea if the stock is attractively priced. Most people never figure out that there’s a critical difference between a good company and a good stock. Right now, Wal-Mart’s stock seems very attractive. Five years ago, it was very expensive. Of course, try telling the guy who has seen his Wal-Mart stock decline for five years straight that now is the time to buy.

Regarding David Eifrig’s S&A Health Report: "The guy makes infinite sense, he’s humorous, competent, and he seems to take his work really seriously. And he doesn’t push product. I look forward to each piece and archive them." – Alliance subscriber Jim Pursley

Finally, a word from Belgium on last week’s news hoax. Apparently, it was those darn Frenchies. "It was not done by the Flemish side of Belgium. State television is divided by Flemish on one side of the building, the French on the other side. They do not know of each other... A lot of stand-up comedians will make fun out of it. Do not forget that our chocolates and beers are better!!!" – Paid-up, Belgian subscriber "Will"

Regards,

Porter Stansberry

Baltimore, Maryland

The Santa Claus Myth

By Ian Davis

Every time I’ve turned on CNBC lately, I’ve found people telling me that stocks will rally at the end of the year.

This year-end boost is popularly referred to as the Santa Claus Rally, and there are many very good reasons for it to exist. One reason is that most tax-loss selling (selling a stock that is in the red for tax purposes) has been completed by the last week in December. Once this selling pressure is removed, stocks tend to rebound. Other reasons include: psychology (people are happy around the holidays and thus more likely to be bullish), Christmas bonuses (they provide some additional investment capital to individuals), and many upbeat forecasts for the first week of January (the so-called January Effect).

The problem with seasonal trends is that as soon as they become widely publicized, they cease to exist. One way this happens is speculators, anticipating the seasonal trend, will invest before the last week in December. Then, people anticipate the anticipators’ actions, and so on. Before long, any sort of seasonal trend that used to exist has been removed.

RUNNING THE NUMBERS

I ran the numbers on the Santa Claus Rally between 1952 and today. My findings were almost exactly what I expected: the Santa Claus Rally is a thing of the past.

Prior to 1980, the S&P 500 Index rallied by an average of 1.1% between Christmas and New Year’s. Not a bad one-week return, but the really amazing thing was the S&P 500 produced a positive return in 25 of those 29 years. However, since 1980, the results have been mediocre at best. The S&P 500 only returned an average of 0.16% between Christmas and New Year’s and produced positive returns only 50% of the time. The last week in December no longer performs any better than a typical week.

In the following chart, the red line is the performance of the S&P 500 during the Santa Claus rally each year. As you can see, before 1980, the red line was almost exclusively positive. But after 1980, it spends about half its time above the 0% line and half its time below.

CONCLUSION

Don’t invest in stocks with the hope of making a quick buck on the Santa Claus Rally. I’m always suspicious of any market strategy that is easy to take advantage of and is widely publicized. Making money in the stock market is not easy. If someone hands you a surefire get-rich-quick scheme, I propose you proceed with a healthy dose of caution.

As an added note, while looking at the Santa Claus Rally, I also researched the January Effect. Although during the first week in January, the market performs slightly better than average, the difference is not very great. Since 1952, the S&P 500 has gone up by an average of 0.55% during the first week of January (the average for all weeks was about 0.16%) and it posted a profit 60.7% of the time. I’ve heard the January Effect is supposed to be more bullish for small stocks. But, even if that turns out to be true, I’m doubtful that a seasonal tendency such as this can continue to exist considering how widely it is followed by the media.

UPDATE ON PREVIOUS PICKS

On November 6, I recommended Toll Brothers (TOL) at $28.05. The stock closed this Friday at $32.40, up 15.5%. This is a very large six-week gain. The stock price has had a couple of modest corrections since my recommendation, leading me to believe that the rally is still healthy. Also, the supply of new homes – the contrarian indicator I referred to when writing about homebuilders – is still at a very high level. The most recently released figure put the supply at seven months, which is only slightly off the high of 7.2 months that occurred in July. In conclusion, Toll Brothers is off to a great start, and I still believe it is a good stock to own.

On November 13, I recommended Home Depot (HD) at $36.62. It has since risen to $39.89, up 8.9%. This is a large one-month gain. However, like Toll Brothers, I still believe that the rally is healthy and will continue. The National Association of Homebuilders housing sentiment index is still low and rising (currently up a few points from its bottom at 30). The reasons for buying and holding this stock still exist, and it’s going to remain a hold for the foreseeable future.

My most recent recommendation, made on December 4, was the Thai Fund (TTF) at $10.92. It closed on Friday at $11.84, up 8.4% in two weeks. However, it seems to have given back all of those gains this morning. As I’m writing this, the Thai Fund is trading at $10.90, down about 8% today. The reason for the fall is a change in Thailand’s regulations on foreign-exchange deposits. In an effort to stem the rise in the value of the Thai baht (Thailand’s currency), regulators made a number of very burdensome requirements on foreign investors.

I think the long-term outlook for Thailand is still very bullish, but there will probably be some continued weakness in the weeks ahead as many investors choose to stay on the sidelines. My recommendation for Thai Fund is now a HOLD. The intention of this trade had always been a multi-year investment in an undervalued and ignored region. Thailand still qualifies, and unless the 20% trailing stop is hit (the stock would need to fall to $9.60 to trigger the stop) or the reasons for the trade no longer exist, we will remain in the trade.

Good investing,

Ian Davis

December 18, 2006

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