MENU

WARNING. Read this BEFORE the Silly Season’s official start

Medibank Private (ASX: MPL) shares are now trading at $2.13, up from yesterday’s close of $2.10.

More good news.

That’s the last I’m writing about the Medibank share offer for today.

Overnight, U.S. markets hit yet another record high, the S&P 500 logging its 47th record high for the year.

No such joy here today.

Yesterday’s 61 point or 1.2% jump in the S&P/ASX 200 Index has quickly been confined to the history books, today’s only bright point on a flat day being the benchmark index breaching 5,400.

Small mercies I know, but heck, with the iron ore price down again, the oil price still slipping, and a flat market for the whole of 2014, beggars can’t be choosers.

Which is unlike our American friends, who are partying to the tune zero percent interest rates, helping propel the S&P 500 12% higher so far in 2014.

I say ‘so far’ because, as you’ll read below, next week marks the beginning of the period officially known in stock market circles as the Santa Claus Rally.

If history is any guide, there could be some real fireworks between now and the end of December!

But first, the Americans need to get the Thanksgiving holiday out of the way — U.S. markets are closed all day tomorrow, and half of Friday.

In case you didn’t know, Thanksgiving is a time for Americans to stuff themselves silly with turkey, and shop themselves silly on what is known as Black Friday, the biggest single shopping day on their calendar.

Yes, it’s officially the start of the silly season… and I’m not just talking about long lunches, office parties, inappropriate sexual advances, hangovers and Christmas shopping.

Historically speaking, the stock market has its own silly season, and come Monday, when those stuffed silly Americans come back to work, watch out for some real fireworks.

Yes, Foolish readers, prepare now for the traditional Santa Claus Rally, whereby the stock market often jumps higher between now and the end of the calendar year.

There are various theories as to why this is the case, including…

  • Window-dressing by fund managers. This is the practice of buying the stocks you think your investors will want to see in your portfolio, somewhat regardless of whether they may or may not be a good buy now. Ridiculous, I know, but true.
  • Tax season buying and selling — locking in profits, and losses, purely for tax reasons. Unlike Australia, the U.S. tax year follows the calendar year. Watch out for silly, indiscriminate selling. See also my first point above. Ridiculous.
  • Buying in advance of the January-effect. The new year sees investors re-set their goals for the coming 12 months, and in times when the market has been strong, that means buying stocks. By buying in December, investors hope to get in ahead of the party. Silly. Ridiculous. But all true.

According to Bloomberg, the S&P 500 has advanced each December for the past six years.

Given the ongoing U.S. economic recovery, ongoing zero percent interest rates, and ongoing strong corporate profitability, a seventh year of December gains is looking increasingly on the cards.

Seventh heaven, dare I say?

As for me, as ever, I’ll keep putting more money to work when I see opportunity, and taking money off the table when I see opportunities to book profits, particularly on stocks that I no longer have full confidence in.

As it so happens — and no, I’m not buying in November to get ahead of any Santa Claus Rally, which in turn would be getting in ahead of any January-effect — today I bought a brand new ASX stock.

Trading on a fully franked dividend yield of 5.3%, plus with the real chance of capital appreciation, I like my chances of outperforming the market.

Remember the good old days, when the ASX slavishly followed U.S. markets both higher, and lower?

This year has seen a disconnect. While the S&P 500 has jumped over 12% higher so far in 2014, by comparison the poor old S&P/ASX 200 Index has been moribund, trading essentially flat on the year. (Thank goodness for those juicy fully franked dividends!)

Obviously the mining bust has been the big difference between the two markets — BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) shares have both fallen 14% so far this year. Given their size, it has been a massive drag on the whole Australian share market.

For the optimists, the good news is much of the damage — in terms of the falling iron ore price — has already been done.

For the pessimists, it could still get worse from here for our big two miners.

Earlier this month, investment bank Citi took the hatchet to their iron ore forecast, saying they expect prices to drop into the $US50s.

Now THAT would put the cat amongst the pigeons… and I’m not just talking about BHP and Rio, our two lowest cost iron ore producers.

TS 27 Nov 14

Source: Flickr

The nation’s budget would be in (more) disarray.

Junior iron ore producers would be in danger of going bust.

If you thought the 50% fall in the share price of Fortescue Metals Group Limited (ASX: FMG) so far in 2014 was bad, if iron ore did fall to US$50 a tonne, what’s gone before would be a walk in the park.

You can rack up my colleague and Motley Fool Share Advisor ace stock picker Scott Phillips in the mining-pessimists camp.

He’s publicly on the record as saying he’d only be interested in buying BHP shares below $25 — and he said that when iron ore was still trading at the heady heights of $US100 a tonne, a far cry from today’s sub $US70 price.

To be fair to Scott, his advice to steer clear of mining stocks, and especially mining services companies, has saved me, and likely many other Motley Fool Share Advisor members, a small fortune.

The sector is littered with casualties, the year to date falls in BHP and Rio being modest in comparison with the 88% plunge in the share price of BC Iron Limited (ASX: BCI), the 51% shellacking of the Cardno Limited (ASX: CDD) share price and the 48% smack-down to the share price of former mining services darling Monadelphous Group Limited (ASX: MND).

I trust you’ve followed out advice and avoided the carnage.

As for me, unlike Scott, my family is already a holder of BHP Billiton shares. Yes, the 14% fall so far in 2014 isn’t fun, but I’m not overly bothered, or indeed worried.

If the iron ore price did slump to $US50 a tonne, you can put me in the queue to top up my holding in BHP. Any slump to those depths would likely to be temporary, and associated with panic selling, the ideal environment to be buying shares, not selling.

If not, I’m content with pocketing BHP’s dividend — at around $32, that translates into a trailing fully franked dividend yield of 4% — something that in this low interest rate environment, should definitely NOT be sneezed at.

As usual, in the context of a diversified portfolio and a decent cash balance, I’m looking at the prospect as a win-win situation.

As for Scott, who knows? Would he really recommend Motley Fool Share Advisor subscribers buy BHP Billiton if the shares slumped to $25? I guess we’ll have to wait and see.

What there’s NO waiting for, however, is Scott’s latest ‘best of the best’ ASX stock recommendation, hitting the in-box of Motley Fool Share Advisor members later this afternoon.

I’ve had a sneak preview… and nearly fell off my chair. The stock is UP more than 20% in recent times, yet Scott’s not perturbed in the slightest.

On the contrary, as Motley Fool Share Advisor members will soon find out, recent positive news from the company only confirmed Scott’s view that the company’s growth story is well and truly intact.

Many investors baulk at paying up for growth stocks. They baulk at paying a higher price than they could have paid just a few weeks before. They baulk at averaging up — adding to an existing holding, but doing so at a higher price than they first bought the stock.

Not Scott.

And that’s one of the reasons why he’s been able to pick some truly massive winners for Motley Fool Share Advisor members.

Human nature being what it is, we look backwards at what has recently happened in the share market and presume that state of affairs will go on well into the future.

As far as Scott Phillips is concerned, it’s like trying to drive by looking through the rear-view mirror.

Jack Bogle, founder of The Vanguard Group, calls it the rowboat syndrome…

“You are always looking back where you know where you’ve been but have no idea where you are going.”

Three of the most dangerous words in investing are I missed it.’

High profile U.S. value investor Whitney Tilson puts it as such…

“It shouldn’t matter whether the stock has been down 50% or up 100% in the past 12 months. You should wipe your mind clear of what happened in the past, and just simply analyse a stock, analyse a business at today’s price and decide whether it’s cheap.”

I’m sure Scott’s coming at today’s brand new ASX stock recommendation from the same angle. At today’s price, regardless of where the stock was trading a few weeks ago, it’s either cheap, or not. Stating the obvious, Scott thinks it’s the former, and that’s why he’s pulling the trigger for Motley Fool Share Advisor members right now.

And finally…

For those readers eagerly awaiting the name of the small-cap stock I own that’s recently been unfairly and unjustly beaten down to bargain basement levels, I’ve got bad news.

Between yesterday and today, it has made its way onto our internal list of ‘restricted stocks’ — meaning one of our subscription-only services is likely to recommend it as a BUY to members of that service.

Such is the life of a Foolish investor.

But, never fear, I have another trick up my sleeve, maybe two… watch this space.

DID YOU KNOW... The Motley Fool's top analysts have just completed a brand-new free report on their top pick for 2015. Be among the first to get the name and code right now. (Hint: It's a sexy ASX tech company!) Simply click here for your FREE copy... BEFORE the investing crowd gets wind of this!

Of the companies mentioned above, Bruce Jackson has an interest in BHP Billiton.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.