Don’t Just Sit There

Sell something. It’s not evil, unpatriotic, irresponsible, or irrational. Even if some prominent talking heads maintain otherwise. It just makes sense.

Shares are up a lot since fall, at the high end of their short and long term range. Stocks are fairly priced on peak profit margins, and expensive on normalized earnings, expensive on sales, expensive on dividends and expensive on book value. They are cheap on non-gaap, crap accounting write-off ignoring operating forecasts. Just like they were in the summers of 2007, 2008, 2010 and 2011. And what did that “cheap” get you in the short run?

Now valuation is a stinky parameter for market timing, I will concede that. So expensive stocks can get even more expensive. This is not a reason to head for the hills or the mattress or the bunker in the back yard. There need to be other reasons to attempt the foolish goal of anticipating a market peak. There are.

Firstly, shares got very overbought. They rarely advance without a pullback. It’s even rarer for them to advance 35% and then add on another new leg of a bull market. At best the rally becomes grinding after such a large move. On this advance, insiders sold in droves, all the while corporate repurchases soared. Figure that. I will stick with the insiders.

And, on the rally, shareholder sentiment spiked to bullish levels not seen since this time last year. At the top.

Now with all of this positive market action, you would think market fundamentals were booming. They are not. The US macro has started to fade, with Citi’s very good economic surprise Index plunging lately. It had soared in the fall. Very recently, most of the economic releases have been slight misses. Not reason to panic, but not positive stuff either.

And while the US fades, Europe has rolled over into a recession. China has slowed, as have all of the other BRICs. European debt markets continue to signs of stress, as the bond vigilantes understand nothing was fixed with short term liquidity injections. Even of the talking heads contend otherwise. Euroland is still over levered and under managed as an economy/financial system and major debt restructurings/defaults are inevitable. As is an implosion in Japan, with its’s Koo-Koo policy of gorging on debt to “solve” every issue.

Here in the US we just put up the biggest deficit months in history for February and March at $430 billion dollars. Fiscal year to date since October, we have added as much debt as we have generated in taxes. Fy2012 looks like another $1.4 trillion deficit added to our legacy and a still unaddressed structural spending/entitlement problem.

And market commentators rejoice at the new high in corporate profits and recovery in share prices all the while ignoring the bull markets in unaddressed structural imbalances like political incompetence, overleverage, nationalized mortgage market, long term industrial competitiveness, and lack of coherent energy policy. Don’t worry, investors, Ben’s got your back!

Speaking of that energy thing, kudos for the Bernank. His currency debasement policies have given us $100+ oil and that has done more to incent increasing oil supply than anything “drill, baby, drill” sound bites from Republicans ever could.

So stocks are up, fairly priced or expensive on historical profit margins, insider selling is rampant and the QE disease is in remission for at least a few quarters. This quarter’s profits might give us another chance to release some shares into a market with a decent bid. Now seems as good a time to harvest some profits as any. This fall we have another debt ceiling violation, a rancorous presidential election campaign, and a stimulus cliff debate all happening. I can’t imagine investor psychology will remain unscathed through all that.

Now, this call isn’t about this week or this month. It’s about positioning your portfolio to handle the usual seasonal weakness in summer and fall and have some buying power to exploit that. Its about taking some chips off the table when the sun is shining so they can be reinvested when the weather is gloomy. The markets have not been friendly to the buy and hold strategy for a dozen years. With a global contraction in leverage, limited growth, and poisoning politics for another decade, it should remain a range bound market for years.

The talking heads irresponsibly dismissed the “sell in may” concept the last 2 years. Painfully. Certainly, they will do so again shortly. Maybe this year, that will be the right call. The odds favor otherwise in my opinion. If you can’t harvest profits when shares are up and things look good, when do you sell?