Stocktake

Compiled by PRONSIAS O'MAHONY

Buying Apple dips proves profitable

BUY THE rumour, sell the news. Apple shares have fallen by 12 per cent since the iPhone 5 hit US shelves on September 21st.

A double-digit percentage fall – from $705 to $623 – marks an official correction for the world’s biggest company, which also fell below its 50-day moving average for the first time in 49 days.

The longer-term uptrend remains intact, however. Bespoke Investment Research notes that buying the dips has proven profitable over the past decade. It looked at how the stock has reacted after breaking below its 50-day average when it had been above it for at least a month. On average, it gained 9.29 per cent over the following three months.

Irony of criticism is lost on Welch

FORMER General Electric CEO Jack Welch was widely panned after recently suggesting the US government was manipulating jobs numbers.

The irony is GE under Welch had a “long-standing reputation for ‘managing’ its earnings, by taking money from one pocket and putting it into another”, as The Economist commented in 2002. A 2005 Barron’s article suggested the near doubling of earnings during Welch’s last five years in charge was due to GE under-reserving at its reinsurance unit.

Last week, strategist Barry Ritholtz said accusing civil servants of manipulation is “unintentionally ironic” given the “nice smooth line” of earnings under Welch resembled “the sort of line the folks who prepare China’s GDP data aspire to.”

Election boost for US markets

HISTORY indicates that US markets should enjoy a trading bounce immediately before and after the presidential election.

CXO Advisory Group looked at equity returns from 21 trading days before through 21 days after elections across 1950-2010. “The most consistent feature is a tendency to rally from about one week before election through one day after election”, CXO said.

Markets gain roughly 2 per cent during this period, perhaps expressing investor relief that political uncertainty is winding down.

Decent long-term returns indicated

HISTORY also indicates decent long-term US returns, renowned quantitative strategist James O’Shaughnessy has suggested.

O’Shaughnessy noted the SP 500 is down 11 per cent in real terms from 2000 to April 2012. Even during the markets’ worst ever 20-year cycle – 1929 to 1949 – stocks saw cumulative real returns of 6 per cent.

To match that dire performance, stocks would have to rise a cumulative 19 per cent in relative terms by 2020, or 30-50 per cent in nominal terms. Shaughnessy reckons today’s problems are less “impactful”, so those returns are the minimum that should be expected.

Perhaps, although markets were far more overvalued in 2000 than in 1929 (a cyclically adjusted price-earnings ratio of 44 compared to 32).

Beware, history can mislead . . .

WHILE market history can be meaningful, it can also mislead. Market commentator Mark Hulbert notes the 2002-07 bull market began on October 9th, 2002, and ended on the same date in 2007.

The odds of such flukes are higher than one might think, he adds. Take the so-called birthday paradox; few people realise that in a room of just 23 people, there is a 50-50 chance of two people sharing the same birthday.

Similarly, Ned Davis Research notes that the 1949-53 and 1957-60 bull markets ended on January 5th; the 1942-46 bull market began on April 28th, while the 1970-71 bear market ended on the same date; the 1974-76 bull market ended on September 21st, just as the 2001-02 bull market began on the same date.

“Our minds love to find patterns,” Hulbert says, “even when none exists.”