November is a Bizarre Month

For a full transcript of this video, see beneath.

Hello, everybody. I am Andrew Zatlin.

Welcome to Moneyball Economics. And this Thanksgiving week, I might wish to say that I am grateful you’re right here to hearken to me — and hopefully make some cash from my ideas and concepts!

So, with that in thoughts, I might wish to share with you a secret that possibly you’ve got heard, or possibly you have not. It is that November is often the largest month — essentially the most bullish month — of the 12 months.

And but, should you take a step again, October was up 7%.

In the meantime, November, as we head into the final week, is up a piddly 2.5%.

Now “piddly” is clearly a relative evaluation. However why was October so sturdy? Why is November not as sturdy? And what will we count on to occur subsequent?

Keep tuned, as a result of that is what I need to share with you.

To begin with, what’s the inventory market?

Primarily it entails a bunch of patrons and a bunch of sellers. And what occurs is shares go up so long as somebody is shopping for.

So what is going on to dictate shopping for? Properly, for one factor, worth. If issues are getting extra priceless, that is one cause somebody’s going to return in with cash. That is actually an vital level: coming in with cash. So another excuse why shares go up is there’s more cash coming in. And that is the start line.

Switching gears for a second, have you ever ever considered what a pension fund does? Pension funds maintain $32 trillion around the globe. The U.S. fairness market, by comparability, is $40 trillion. The U.S. bond market is $46 trillion.

In different phrases, pension funds are the large swingers on this market. What occurs to them occurs to the inventory market.

And there is an occasion each November that occurs that I need to share with you so that you’re prepared — if not this 12 months, then subsequent 12 months.

Now, this 12 months, I’ve tried to get you prepared. I mentioned in September that you simply need to plan for a bull run as we finish the 12 months. I’ll offer you one cause why I mentioned that as we have a look at pension funds.

So pension funds have a mechanism, through which each month there are contributions. However in November, the contribution is the largest one in every of all. That is when the large annual contributions are achieved by firms. It is a huge deal.

Now keep in mind, most firms’ fiscal 12 months and calendar 12 months usually are not the identical. Most world firms finish the 12 months in October. November 1st is the beginning of their fiscal 12 months.

And in order that’s why, talking about pension fund mechanics, there’s this large contribution.

Properly, let’s speak about pension funds and what they do…

A pension fund is taking that cash and investing in bonds and shares. So it isn’t usually going to speculate completely within the inventory market as a result of a pension fund is trying long-term.

They’re making an attempt to get, you realize, a 5% return. And which means they’re taking a look at comparatively risk-free investing, which is — more often than not — some mixture of bonds and shares. That’s one factor to grasp.

The second factor to grasp is that pensions need to function inside sure parameters. They’ve outlined guidelines that stipulate, for example, how a lot they will maintain in sure fairness courses, how a lot they will maintain in bonds, and the final portfolio that they’ve.

This is similar, by the best way, with an Alternate Traded Fund (ETF), with a hedge fund — each firm on the market that is a “fund” — has to gather cash and make investments it in a predetermined mathematical method.

That arithmetic means, for instance, I can solely spend money on small caps or I can solely spend money on treasured metals. That is a sector-specific parameter or one primarily based on the scale of the corporate.

There’s additionally, on the whole, a query of how a lot shares I can personal relative to bonds. That is key. As a result of the mathematics comes into this image. This 12 months, particularly, is a pressured state of affairs whereby once they come to November, and this wave of cash is available in, pension funds need to do a look-back and have a look at their present holdings and say, “Hey, how a lot of my portfolio must be modified to ensure that me to remain inside the regulated, agreed-upon balancing that I’ve?”

Properly, this 12 months’s somewhat bit distinctive…

Bond costs are taking place as a result of charges are going up. So should you’re a pension fund, your share of your portfolio of bonds has shrunk, just because the worth has gone down.

So usually, what a pension fund must do could be to purchase extra bonds. Why? As an instance they’re purported to have 50/50 break up between shares to bond. Solely now, they’re at 60/40 as a result of the 50% of bonds has dropped in worth. So bonds characterize solely 40% of the whole portfolio.

Properly, you realize what they gotta do…

They gotta exit and promote inventory and purchase bonds. Properly on prime of the bond costs taking place, inventory costs have shot up. So they have a double whammy — a double cause to promote inventory.

Let me recap:

In November, some huge cash involves the desk, because of firms paying out their annual contributions. And unexpectedly, this 12 months, it isn’t a shopping for November, it is a promoting November.

And in order that’s why October was so big — as a result of everybody was positioning for November to be that typical bullish market. And certainly, 83% of firms have launched earnings that had been above expectations. So there was actually cause to be bullish.

However now that we’re right here in November, pension funds have an issue:

The market has raced up so excessive and now they have to purchase stuff. They usually do not need to purchase. They’re making an attempt to purchase bonds and promote inventory. And that is why November is beginning to type of be somewhat mushy.

December will likely be totally different, however November is not. Corporations have gotten to shove this cash someplace they usually’re being pressured to promote. Hedge funds, at the least the large ones, are in an analogous place, however they have a few different issues occurring.

With respect to hedge funds, numerous the large ones are additionally taking a look at their holdings quarterly — not weekly or month-to-month, however quarterly. They usually need to do the identical train.

They’ve the identical guidelines and rules that dictate how their cash is allotted. And they also’re having to verify they’re in compliance. And once more, shares have gone up.

Now, a few of hedge funds, numerous them, actually, usually are not going to be hit with this have to steadiness a portfolio that features each bonds and shares. Numerous them would possibly include pure inventory they usually’re okay.

However there’s one other layer of promoting strain.

And that’s year-end “window dressing,” or profit-management efforts.

Bear in mind, hedge funds need that bonus. The very last thing they need to do is sit right here as they get graded in November. (Primarily based on bonuses that get handled in December after which paid out in January, however are being decided now.)

And should you’re a dealer or fund supervisor, the very last thing you need to do is screw something up from right here. So you are going to be very cautious concerning the positions you are taking.

And so that you kind of have taken the positions you need. You need to protect your bonus. And, let’s face it, you need to window-dress somewhat bit and make it look good.

So the mixture of the 2, the pension funds and the hedge fund, is creating somewhat little bit of promoting strain. As a result of once more, inventory worth share of the portfolio has gotten too excessive.

So what I am saying is we had a large run-up in October. We’re type of dribbling into November as a result of, whereas the excellent news is there, there’s numerous cause to stay bullish.

It is smart to take some earnings off the desk and rebalance your portfolio somewhat bit.

And that is what we will expertise going into December.

However, I consider December and January, we’ll proceed this momentum. There’s another excuse why I consider this.

And that’ll be in Half 2 that I will share later this week, and it has to do with what’s occurring in China.

China is imploding. And when China’s economic system implodes, that is the nail — they usually’ve obtained a hammer, and that hammer is simple cash.

Within the meantime, you of us have a beautiful Turkey Day.

I hope you take pleasure in time with your mates, your loved ones, and your whole family members.

Zatlin out. Take care.

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