The Frosty, Festive World Of Investing
The store windows are frosted with artificial snow, the eggnog is flowing, and frantic shoppers are crowding the malls - thats right, its Christmas time. In keeping with the yuletide spirit, lets take a look at the investing vocabulary that goes along with this credit card-shattering time of year.
Santa Claus Rally
Hes bearded, hes jolly and hes permanently associated with Coca-Cola - yep, thats Santa Claus. Santas origins are a matter of speculation, but according to popular belief, he is derived from a Dutch mythical character based on the historical figure Saint Nicholas, who supposedly gave presents to the poor. The modern-day Santa spends his time spreading cheer and promoting world peace by delivering gifts all over the globe.
In the investing world, Santa brings investors a gift in the form of a jump in the price of stocks, known as the Santa Claus rally. This rally usually occurs between Christmas and New Years day. There are many theories as to why this happens. Some people believe it is a result of year-end tax considerations, while others say its because all the market pessimists are away on holidays or because people are buying stock in anticipation of the January effect. Those of us who believe in the magic of Christmas think the rally may be due to seasonal cheer infecting the usually dour inhabitants of Wall Street - a true Christmas miracle.
Boston Snow Indicator
In 1942, Irving Berlin wrote a song called White Christmas, which Bing Crosby brought to life in an immensely popular recording. Since then, a snowy landscape is the ideal place to spend Christmas day.
The Boston snow indicator is a market theory that posits that a white Christmas in Boston will cause stock prices to climb. This is one of several dubious indicators that, while it may appear to be accurate, teaches us more about the fallibility of statistics than the behavior of the market. Other popular indicators of this sort include the skirt-length indicator and the attention paid to the ties worn by Alan Greenspan (the Federal Reserve Boards former chairman). The accuracy of the Boston snow indicator is perhaps best summed up by its nickname: BS indicator.
In contemporary tales of Santa Claus, the man in red uses an army of small, spry laborers to produce the incalculable amount of toys needed to supply all of the worlds children. Elves most recognizable features are the pointed tips of their ears and their sunny dispositions.
In the investing world, elves are the technical analysts who try to predict the direction of the market. More specifically, the term refers to the guests appearing on the PBS television show Wall Street Week. The elves of Wall Street are not exactly spry, nor do they have pointed ears, but they do seem to have an unfaltering sense of optimism. (To read more, see Elves And Gnomes: A Fairytale World Of Investing.)
The origin tales of the Christmas tree are as varied and conflicting as those of any of the other Christmas traditions. It is said that the Romans often cut down a fir tree to keep in their houses during the sparse winter months as a form of appeasement to the goddess Ceres (originally Demeter, Greek goddess of the hearth). In the 1500s, Germany became the first nation to associate evergreens, trees that stay green year-round, with the Christian celebration. Martin Luther, founder of the Lutheran branch of Christianity, is fabled to have set up the first Christmas tree lit by candles. Since the late-eighteenth century, Christmas trees have become part of the secular Christmas celebration, and millions of trees - both artificial and real - are purchased every year.
There are two types of evergreens in the business world. For those in the United Kingdom, the term refers to the gradual infusion of capital into a new or recapitalized enterprise. Evergreen funding, like its namesake, is a source of capital that is forever green, in that it is continually replenished. This can take many forms: for example, government assistance or even help from an angel investor. Evergreen funding is very rare in the world of business. For Americans, an evergreen loan is a short-term loan that is continually renewed rather than repaid. This allows people or businesses to defer repayment until they have the funds to do so. But beware: an evergreen loan is not always the gift that it appears to be. (For further reading, see When Companies Borrow Money and Debt Reckoning.)
For most people, January is a time of optimism regarding hastily formed resolutions. The fitness industry has an entirely separate type of January effect that sees a spike in sales of home exercise equipment, diet programs and gym memberships. This is followed by the spring slump, when membership cancellations and returned products cause a significant drop in profits.
The January effect is also a stock market phenomenon that occurs at the end of the year as investors begin to fret over taxes. Investors whose portfolios have been very successful may sell any stocks that are down. This locks in the loss and allows the investor to write it off against his or her capital gains. When enough investors do this simultaneously, it causes stocks to go down near the end of the year. However, the stocks are driven back up in January when investors buy back the stocks they sold. The January effect is said to affect small caps more than mid/large caps, but it has not happened in years because the markets have adjusted for the effects. Also, more people are using tax-sheltered retirement plans. The tax shelters remove any reason for selling in order to create a tax loss. Thus, in recent years, the January effect has become somewhat of a non-event - much like the tradition of making New Years resolutions. (For more insight, read Understanding Investor Behavior.)
Thats it for our look at all things frosty and festive on Wall Street. Now, grab yourself a cup of eggnog, relax in front of the fire and fall asleep with dreams of robust ROIs dancing in your head.