THE FREE LUNCH CYCLE
"There is no such thing as a free lunch." Economist Milton Friedman's famous observation goes on holiday every year at this time. Eventually we all pay, but from November thru May provides a seasonal lift for Wall Street's bargains. This issue's Fallen Angel candidates are in three different industry groups but have something in common. They're profitable, unpopular, and they're very beaten down for now! I'll get to them shortly, but first some thoughts about where we currently are and where we're likely headed in the stock market and economic cycle.
Making Money & Cycle Theory
In 1931 the Commerce Department began a long-term study of cycles hoping to determine why a great and prosperous nation had so quickly been reduced to soup lines with former executives selling apples on street corners. What they discovered over the years under the direction of Edward Dewey has important implications for investors. Thousands of seemingly unrelated cycles were isolated. Everything from the 9.6 year cycle in Atlantic Salmon production to the 22.2 year cycle of international battles dating as far back as the year 1415. Several economic patterns including the 18.3 year real estate cycle and the 9.2 year stock market cycle appear to still be valid.
For example, sunspot activity has occurred every 11.11 years since it was first observed in 1527. Sunspots are those mysterious dark firestorms on the surface of our sun that wreak havoc with radio transmission. Apparently these plumes of atomic fire send waves of radiation and other forms of energy our way, causing all forms of life including humans to behave in different and predictable ways...every 11.11 years! After 40 years of research, Dewey's conclusion was that everything moves in cycles based on external influences that human beings have little control over.
Cold Weather and Stocks
Does the weather effect stock prices? Since share prices are in part, a reflection of the moods and attitudes of people, it's logical to assume that as seasons change so do stock prices. The Stock Trader's Almanac and Yale Hirsch studied the seasonal tendencies of the stock market and found that a theoretical $10,000. invested in the S&P 500 in 1950 made virtually all of it's gains from November to May. Had an investor only put money to work for those lucrative 6 months (bought November 1 and sold May 1)$10,000. is now supposedly worth over $500,000. If you were unfortunate enough to only be invested the other half of the calendar year (bought on May 1 and sold October 31) your $10,000. is barely worth more than you started with. Adjusted for inflation, the results are even more startling. Obviously, the next five months have great promise...
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