How December Stacks Up in the Market

How December Stacks Up in the Market

The Debate Over China’s Government

A Strong Stock from Brazil

According to the 2009 edition of the Stock Trader’s Almanac, December has historically been the second best-performing month of the year, with an average gain of 1.7% in both the Dow Jones Industrial Average and the S&P 500 Index since 1950.  It’s also the third-best performing month for the Nasdaq for that same period. Personally, I wouldn’t change a dime of my own investment holdings based on this kind of analysis, but I think it’s interesting.

Still, even though the month has an admirable historical record, the end of the calendar year can put some interesting wrinkles in the December performance of some stocks.  Here are a couple.

Window Dressing

My wife and I spent most of the Saturday following Thanksgiving walking around Manhattan looking at store windows.  (All we did was look, but there were plenty of shopping bags in evidence, too.)  New York has lots of great store windows and the holiday season gives window dressers a chance to shine.

But the windows also got me to thinking of the way some pension fund and mutual fund managers will sell losers and buy chunks of winning stocks in order to have them in the portfolio at the end of the year.  This allows them to showcase some great names in their annual reports, even if they only owned them for a week or two at the end of the year.

Institutional investors may also sell all or part of some of their winners to book profits and bring their holdings of stocks that have appreciated back into compliance with portfolio guidelines.

Tax Selling

The end of the year brings both profit taking in big winners but also tax selling of some losers.  The desire to book a loss to offset gains can push some depressed stocks even lower.

Bottom Feeding

While window dressing and tax selling can produce unexplained movement in some stocks, they can also create opportunities for value-minded investors.  For people with a taste for low P/E ratios, a declining price in a favored stock is like a holiday gift card.  

There isn’t much to be done about any of these December phenomena except to remind yourself that unexplained movements in stocks of interest are par for the course at year-end.  The important thing, as always, is to watch your charts and keep your sell disciplines sharp.  And if you’re a bargain hunter, keep an eye out for good stocks at advantageous buy points.

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What kind of government does China actually have?

It’s not an idle question.  The country is governed by the Chinese Communist Party, but the constitution of the People’s Republic of China doesn’t actually mention The Party.  And while the 1982 State Constitution–along with the laws passed by the National People’s Congress–is technically the highest authority in the land, many of the rights guaranteed in both Constitution and laws are subject to interpretation and policy, and are routinely ignored.

In practice, The Party rules China because it controls the entire apparatus of power in China.  There is no national legislative body; that role is played by the National People’s Congress.  There is no supreme court that acts as a check on executive power or reviews the constitutionality of laws.

Changes in laws and policies are promulgated by the national leadership and are customarily ratified at one of the National People’s Congresses that are held every five years.  

The 1982 State Constitution guarantees the Chinese people the right to freedom of speech, freedom of the press, freedom of assembly and the rights to free association, procession and demonstration.  (It’s worth noting that the so-called Four Big Rights guaranteed in the 1978 constitution–speaking out freely, full airing of views, great debates and writing big-character posters–have disappeared from the new charter along with the right to strike.)

The right to private property is probably the best protected of the Chinese rights.  And I don’t think it’s being cynical to speculate that its protection springs from the increasing influence of the emerging middle and upper classes who have more than ever to protect.  It wouldn’t be a big surprise to find that the Chinese Communist Party’s 70 million members (a little over 5% of the total Chinese population) are well above the mean in income and assets.

But I’m not asking what kind of government China has as an excuse to bash the government.  Unlike some “Communist” governments of the past, China’s rulers have made enormous strides in lowering the poverty rate, upgrading infrastructure, improving health care and generally making life better for the Chinese people.  And if the Party’s efforts to eliminate corruption and reduce pollution haven’t succeeded totally (yet), I give them credit for trying.  

And personally, I think the ruling party calling itself “Communist” is a trifle ridiculous.  It’s like a full-grown frog calling itself a tadpole.  Or maybe it’s like the question Abraham Lincoln used to ask about how many legs a horse has if you call its tail a leg.  If anyone answered “five,” Abe would just laugh and say “No, it’s still four. Calling a tail a leg doesn’t make it one.”

I know that there are some people who won’t even consider investing in China because of its government in general, and because it calls itself Communist in particular.

I don’t know how to answer that, except to say that a true capitalist is one who puts money to work in places where it can grow.  And money is growing in China and the emerging markets.  There’s no arguing with that.  

And finally, just to try to get an argument started, I’ll say that the answer to the question about what kind of government China has is:  (drum roll) an authoritarian oligarchy.  So chew on that for a while.

Emerging markets are hot, but volatile, as the end of the year approaches, and most of us have better things to do than ride herd on a flock of growth stocks that are acting like a box of puppies.  It’s a good time to look for a strong stock with some good defensive characteristics that won’t spring an unpleasant surprise on you while you’re shopping for a Christmas tree.

And Itaú Unibanco (ITUB) definitely qualifies.  This Brazilian banking giant is hugely liquid (trades over 12 million shares a day on average), pays a dividend (forward annual dividend yield of 0.30%) and has an estimated forward P/E ratio of just 15.

The bank has a number of breezes at its back, including Brazil’s scheduled hosting of both the Olympics in 2016 and (perhaps even a bigger deal for futbol-mad Brazilians) the World Cup in 2012.  The anticipated influx of global capital is expected to keep Brazil’s economy ticking over nicely, and Itaú Unibanco’s size (market cap of $108 billion) and the strength of the Brazilian real make the bank a great partner for international developers.

ITUB has come a long way since it bottomed at 8 in March and it has just cleared its all-time highs.  All in all, it’s an attractive package.

Sincerely,

Paul Goodwin
For Cabot Wealth Advisory

Editor’s Note: Cabot China & Emerging Markets Report had Itaú Unibanco’s competitor Banco Bradesco in its portfolio back in March 2008, just in time to get caught by the Big Bear of 2008.  But subscribers had the benefit of the Report’s market timing indicator, the Cabot China-Timer that got the portfolio out of the market and into 100% cash for much of the market’s collapse.  If you’d like the benefit of the Report’s expert stock picking and market timing, try a trial subscription today.  The link below will get your subscription started on a no-risk basis.

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