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THE NOVEMBER EFFECT

"October is the most dangerous month to own stocks. The others are November, December, January, etc. etc."
Mark Twain

Every October the financial markets get spooked by volatility and sharp declines that affect many vulnerable stocks and mutual funds. Investors who keep a cool head (while everyone else is losing theirs) can avoid the tricks and get the treats.

This issue's Fallen Angels selections may provide you with a few new "best of breed" ideas. But first, some background into what seems to create this annual October and November Effect.

"Buy stocks that go up. If they don't go up, don't buy them."
Mark Twain

Unlike the rest of us who can wait until December 31st, the nations mutual funds must do their annual tax-loss selling by October 31st. By dumping the shares of companies in their portfolios that have fallen, mutual funds attempt to help their investors avoid phantom taxes.

People hate to pay taxes on a mutual fund's capital gains that they didn't have the benefit of receiving. Historically, the stocks that get sold to establish losses are the very same stocks the funds buy back after 30 days! As a result, a number of high quality companies are now going on sale. We'll cover several that look timely.

"If Housing Slumps, How Safe Are You?
Amey Stone, BusinessWeek Online 10-3-05

Estimates are that these days, almost half of current economic growth is the by product of real estate. "Will it end badly?" asks Business Week. Their research suggests that the entire market is hitched to housing.

Forbes Magazine 10-10-05 reports that a "democratization of wealth has come in the past five years from the boom in house prices. If you own a home, you almost certainly have a larger percentage of your net worth invested in that home than Bill Gates does in his. So, you're gaining on him."

We know that the Commerce Department's 18 year real estate cycle has over 100 years of data where home prices rise for 9 years and then corrected for 9 more.

2005 is the beginning of a new 9 year corrective cycle, and homebuilding stocks are breaking down, telling us to get out of the sector. At some point, probably several years from now, these stocks will be at dirt cheap valuations again...like they were in 2000.

SOS Stocks on Sale?

Consider Seagate Technology www.seagate.com (STX on the NYSE). It's down by half this year from $30. Revenue is growing, return on equity is above 30%, it generates over $300 million in additional "free cash flow," and I think it's worth $30.

Consider American Eagle Outfitters www.ae.com (AEOS on Nasdaq). Consumer anxiety has taken the shares down 30%. This popular casual clothing company has purchased 3.5 million of it's own stock in the open market recently, and just announced it intends to buy another 2.5 million shares. I agree with them...the stock is on sale and could reach $40 by next year.

Consider Diana Shipping www.dianashippinginc.com (DSX on the NYSE) with a 12.40% current dividend yield. This Athens based cargo ship hauler went public in April at $17, and due to a lack of interest it now looks priced to move. No debt and impressive year over year earnings growth suggest you could begin nibbling.

These may get even cheaper as the month comes to an end, so consider buying some now and more later. Stay diversified, and enjoy the seasonal ride ahead. More about that in the next Bulletin. By the way, Mark Twain's track record as an investor was miserable. He lost the bulk of his considerable fortune speculating in real estate...

Gabriel Wisdom
gwisdom@amminvest.com

The opinions expressed are those of Mr. Wisdom and do not necessarily reflect the opinions of American Money Management LLC (AMM) an SEC registered investment advisor www.amminvest.com Clients and employees/members of AMM may buy or sell securities mentioned without prior notice. The opinions expressed do not constitute a recommendation to buy or sell securities and should not be considered investment advise. Investing involves risks, and you should consult your own investment advisor, attorney, or accountant before investing.

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