Seasonal Patterns Are Favorable for the Market

Last time I promised to say more about seasonal patterns, as pointed out by further articles from Alpha Investment Management.

I've written about seasonal tendencies before, for instance here. At that time we were headed into the historically worst part of the 4-year election cycle for stocks, on average. Well, now the situation is reversed.

As explained in the Experts and Human Nature article, we're in the best six months of the year (November through May). Combine that with political considerations, and it turns out we're in the early stages of the best 15 months of the 4-year election cycle. That favorable period consists of the 4th quarter of last year, and all this year, as discussed in The Next 10 Years.

Again, all seasonal patterns are "on average," and any year can vary. (In particular, indications are likely that over the last 3 days, we have already started a correction, of unknown duration.) Seasonality is not a guarantee the market will go up for the entire year, but it makes it more likely. Any given cycle can vary, but over time, this is the pattern.

Current Market Outlook from Mike Burk

There's a free weekly newsletter I like from Mike Burk at Alpha Investment Management. Here's a short excerpt from the latest edition, which basically agrees with my own opinion:

The good news is: The small and mid cap indices as well as the NASDAQ composite (OTC) closed at multi year highs Friday.

The small caps hitting multi year highs is an intermediate term positive implying higher highs for all of the major indices in the next few months. [However,] most of the breadth indicators did not confirm Friday's highs and that, along with the seasonal pattern, suggests short term weakness.

The newsletter also has charts showing you the technical indicators he's talking about.

Next time, more about those seasonal patterns. Meanwhile, you can subscribe to the newsletter free.

Ben Franklin the Entrepreneur

Money Magazine ran an article entitled "6 Best money memoirs". As they put it, "How would you rather learn about finance: from a dusty textbook, or a tale of towering egos and high-stakes gambling? Money Magazine picked out six of the best real-life stories."

All the books are interesting, but I took particular notice of their pick for "Best book about entrepreneurialism" which was The Autobiography of Benjamin Franklin. That's not a title I would have expected in that category!

Some time afterward, I encountered a web site called LearnOutLoud.com, which distributes audio books (nonfiction only). I'm really busy, and don't have much time to actually read books. But I do have a commute to work, so I can download audio books and podcasts onto my MP3 player, and play it in the car. LearnOutLoud is a great source for material to expand your mind.

Furthermore, every month they feature a different free download. At least some of these are available for free elsewhere, but perhaps not all of them. Anyway, when I discovered the site, that month they were offering Franklin's very same Autobiography. I downloaded it and found it fascinating. Just the tale of his delay-prone and at times rather hazardous journey from New York to Philadelphia at the age of 17 is so memorable you'll be glad you got the book just for that. We think nothing of this trip today, but back then it turned into quite an adventure for him.

That trip even started in an unorthodox manner, because he was running away from his home in Boston. There was some question whether the ship captain would suspect this, and return him to his family, so to gain the captain's sympathy he concocted a story that he was leaving because he had gotten a girl pregnant!

The entrepreneurial aspects of the book occur in Philadelphia when Franklin was developing his career in the printing business. He was a pretty sharp businessman and employed some fairly aggressive tactics to advance his enterprise.

Later, as a member of the Colonial legislature, you'll laugh at the ingenious contingency plan he developed to get approval for the purchase of cannon to defend the city, over the objections of the pacifist Quakers.

All in all, a very entertaining book and one I highly recommend, no matter if you prefer the print version or the audio version.

How Canada Balanced Their Budget

The big economic (also political) news item today was the release of the draft proposal of the federal deficit commission, which immediately drew sharp reactions from nearly all quarters.

It reminded me of a recent article by Bill Ragsdale, who runs the excellent investment newsletter Good Fortune. He passes along an edited review by David Hay of "The Canadian Century, Moving Out of America's Shadow."

Before reading it, remember that economic situations are seldom if ever 100% analogous; in particular, the recent global economic crisis qualifies as an order of magnitide worse than simply the "extended recession" of which he speaks, and we know now that 1995 was in the early stages of an economic boom which of course greatly helped the Canadian cause. Right now the U.S. economy is still pretty much on life support, and despite recent campaign rhetoric, we can't switch from stimulus to austerity too fast or the shock would be extemely detrimental (we tried something like that in 1937 which caused a new recession while we were still trying to climb out of the Great Depression). Still, the new Congress would do well to study this plan and move toward something like it.

Here is the article:

A Fresh Re-Start For The US?

Fifteen years ago Canada had many of the US's current problems: an extended recession, unfunded pension costs, spending way out of proportion to their economy and an increasing question on the ability to pay future debts. Their leadership used vastly different solutions than the US.

One-third of Canadian government revenues were being devoured by interest costs on rapidly escalating debt then 130% of GDP. Canada had become one of the developed world's most socialized economies, with the government accounting for 53% of the country's GDP. Growth was stagnating, while debt levels were dangerously mounting. Canada's AAA credit rating was lost, and it was treated as an unreliable borrower.

Then Canada achieved stunning progress in a mere three years at both federal and provincial levels.

1. Finance Minister Paul Martin unveiled a shocking budget in early 1995 reducing spending by 8.8% over two years.


2. Federal government employment was reduced by 14%.


3. Federal grants to the provinces were reduced by 14%, but they were given greater local control.


4. Some taxes were raised, but spending cuts were four times tax hikes.


5. Canada's welfare system was dramatically modified, with incentives to better use the funds.


6. Corporate tax rates were cut by nearly a third, taxes on corporate capital were abolished, and personal income and capital gains taxes were reduced.


7. A consumption tax was instituted to pay for the tax cuts. Initially very unpopular, it was a key part of the rehab plan.


8. The Canada Pension Plan moved scheduled payroll taxes increases forward but reduced the limit from 14% to 10%. This produced immediate surpluses that were invested in higher-returning corporate securities. The plan is well-funded today and actuarially sound.

The federal budget was balanced within three years. Despite accusations the poor would suffer, the percentage of welfare recipients fell in just a few short years from 10.7% of the population to 6.8% by 2000; the percentage of Canadians classified as low-income plunged by over 30%. Canada went on to produce eleven straight budget surpluses while reducing their federal debt from 80% of GDP to 45%. Further demonstrating how quickly good policy can turn things around, the provinces enacted similar measures. Canada's economy grew at 3.3% per year versus the developed-world average of 2.7%.

Canada's experience demonstrates replacing bad policies with good ones leads to dramatic and rapid improvement, with the shift to financial soundness restoring confidence and actually boosting long-term growth.