Yesterday, I made reference to the fact that almost all mutual funds end their fiscal year on October 31. But almost nobody knows why. In fact, I was very embarrassed by my ignorance when I had several people ask me yesterday why it was indeed the case that the October 31 date is as such with me not able to provide a coherent answer. The answer is actually not that simple. Basically, until the mid-1980's, most mutual funds were plain vanilla in nature in that they tended to be invested in stocks, bonds, and various money market conduits with few if any esoteric financial instruments implemented. Countless new financial vehicles were developed in the time preceding the Crash of '87 and with it, tax accounting became much more involved. And naturally, changes in the tax law magnified the difficulty a great deal. There was a major piece of legislation in 1986 entitled The Tax Reform Act of 1986 which of course was suppose to, um, reform taxes but in fact made things that much harder. Until this time, funds could and usually did wait until the calendar year following the end of their fiscal year to pay capital gains much less dividends from net investment income. By that, I mean distributions could be made in January even if the fiscal year ended in December. However, under the TRA, mutual funds must by December 31 each year distribute at least 98% of any capital gains (post-taxes) earned through October 31 as well as ordinary income earned through December 31 else they'd pay an additional 4% excise tax. Since most income earned by mutual funds is of course capital gains, the tax-planning schematic for most mutual funds has had to be placed on a calendar year basis and shrunk to two months so as to know how to pay out by December 31 else the 4% excise tax would have to be paid. So, as with a lot of things in professional life, the mystery of the Halloween fiscal year end for mutual funds down to money...and funky legislation.
Markets were lower throughout the world overnight. In Asia, Hong Kong was down 0.1% with Tokyo off 0.7%. The losses are a bit steeper in Europe with London down almost 1%. Not coincidentally, the dollar is a bit higher against both the yen and euro. Oil is slightly lower with gold down ½%. Futures are somewhat lower as well. Look for another very choppy session today with the dollar playing a dominant role in trading; if it catches a bid, the move in the stock market could get exacerbated. Case Shiller is out at 9AM (2% expected), with Consumer Confidence (49.0) and FHFA Home Price Index (no estimate) out at 10AM. The focus will be on the earnings plays with the fall-out from those playing a major part in today’s trading with sectors such as steels, techs, rare earths, and retailers the sectors to trade.
Reiterating-
If the whole story is not there -
If something is good, assume either a short thru unchanged or an A-B-A2 (preferably to the downside in a downside market and the upside in an upside market) based on direction of the market unless specified.
If something is bad, assume either a buy thru unchanged or an A-B-A2 (preferably to the downside in a downside market and the upside in an upside market) based on direction of the market unless specified-
Good- The following stocks have good news and/or a strong technical pattern
BIDU- closed near a high on follow through from Friday’s rally on good earnings
APSG- closed near a high after announcing a decision to explore strategic alternatives
ACTG- closed near a high on follow through from Friday’s rally on good earnings
RVBD- closed near a high on follow through from Friday’s rally on good earnings
CDTID- closed near a high after being awarded a contract for funding for a ferry emission reduction program
PEGA- closed near a high after launching a new CRM solution which will theoretically allow lenders to automatically eliminate errors in mortgage originations
BID- closed near a high
SOHU- closed near a high after posting good earnings
RIMM- closed near a high
DRIV- decent earnings, but doing convertible notes offering
MIPS- good earnings
SUPG- good earnings
NFLX- featured on “Mad Money” last night
CIT- decent earnings
COH- decent earnings
JAKK- decent earnings
Bad-The following stocks have bad news and/or a weak technical pattern
HRBN- closed near a low
CGA- closed near a low
TXN- lukewarm earnings guidance
ATHR- poor earnings
PLD- share offering
VECO- terrible earnings
PCL- poor earnings
VLTR- poor earnings
ZRAN- terrible earnings
ARIA- share offering
MAS- poor earnings
AIG- CEO diagnosed with aggressive cancer; says he will maintain normal schedule at this time
UCTT- closed near a low after posting poor earnings
WL- closed near a low amid speculation of a take-under
CMI- poor earnings
KMB- poor earnings
LXK- poor earnings
RF- poor earnings
X- poor earnings
F- poor earnings
CSR- poor earnings outlook
AMTD- poor earnings
TLAB- poor earnings
PCAR- poor earnings
Earnings:
TUES OCT 26 BEFORE
AGCO AKS AMED
AMTD ARG ASH
ATI BIIB BMY
CIT CMI COH
CSL DD ECL
EPD FE FIS
HL HSP JCI
KMB LXK MHP
MYL NOV ODP
PCAR PCR RF
SHW TLAB UA
VLO WAT X
TUES OCT 26 AFTER
AFL BRCM BXP
CENX CHRW CML
CNI DV DWA
EQIX FFIV FORM
ILMN JLL LIFE
MCK MEE NAL
NBR NTGR NVLS
OII PNRA PPDI
PXD SPF WBSN
WLT WU
Epiphany Trading, LLC
www.epiphanytrading.com
Erik R. Kolodny- Chief Markets Strategist
Brendan P. Byrne- President
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