Investing the Christmas Carol Way

by Susan C. Walker

Christmas carols make spirits bright, and they can also give some pointers about the economy and personal finance. Let’s do some investing the Christmas carol way.

Oh, Come, All Ye Faithful – That’s what your stockbroker says to you every year. And every year, you go and turn over more of your money. Will you still be one of the faithful in 2007?

I Wonder as I Wander – If you wonder as you wander through the myriads of investment possibilities, try to remember this: In the world of investing, no one has all the answers about how to make money. You must find them for yourself. But you can be sure that if everybody is doing one thing or going in one direction – such as buying, selling, taking on more credit – it’s time to go against the herd. With a strong gut and some fortitude, you can be a contrarian. That’s the way to make money. In fact, Richard Russell just wrote in his Dow Theory Letter this week that “being debt-free is probably the single biggest contrary stance in America today.”

Away in a Manger – This is where lots of people wish they had socked their retirement money.

Santa Claus is Coming to Town with lots of IPO toys and M&A goodies for all the investment bankers in New York City. (IPO, as in initial public offerings, and M&A, as in mergers and acquisitions.) With the value of total U.S. mergers pushing through $3.5 trillion this year, which broke the record set in 2000, the Wall Street Journal wrote: “Unlike the stock-driven, tech-merger boom of the 1990s, this one is wide-ranging.” The analysts at Elliott Wave International see a different picture: “Levels of IPO and M&A activity are manifestations of investor optimism and pessimism. Record deal-making reflects an extreme in optimism, which is a precursor to a record reversal.” Let’s hope Santa remembers who’s been naughty and who’s been nice when that reversal comes.

Grandma Got Run Over by a Reindeer – That’s how those who lost their pensions this year feel.

Hark, the Herald Angels Sing – That would be the bevy of Fed presidents who sing loudly and clearly what the archangel Bernanke wants them to sing: “Hark, we see inflation rising. Ever rising, be afraid.”

Do You Hear What I Hear? – I hear the sound of the bond market bucking the trend of the Dow. It says bad times ahead, while the Dow says Happy Days Are Here Again. I also hear the housing market’s bubble going pfffttt! – much louder than I thought possible.

I Saw Three Ships Come Sailing In – Is that our ship that’s coming in to save us from stagnant wages and overstretched finances? Or is it three ships coming from China, India, and Russia, waiting to sail off with our dollar, our credibility and our economic strength?

Deck the Halls with swags of back-dated stock options. First, it was just a way for CEOs to get richer with less effort. Now, we learn it was also a great way to avoid taxes. The Wall Street Journal reported this week that not only have CEOs made extra money by backdating their stock options to a day when the stock was at a low, they have also saved on their taxes by backdating when they exercised their grants.

As the story explains, an SEC economist researched a pattern of CEOs claiming to have exercised their stock options on a date when the stock was at its lowest point in a month and then holding them to sell when the stock was at a higher point. Where’s the tax break? If the options are exercised and sold on the same day, which is the most typical behavior, the whole transaction is taxed at the highest federal marginal income tax rate of 35%. But if the stock option grants are exercised on a low day for the stock, this lower amount is taxed at the 35% rate, while the sale of the stock options at least one year later and at a higher amount is taxed at the lower capital gains rate of 15%.

This is an old trick that some CEOs played before Sarbanes-Oxley rules kicked in four years ago. But with SOX, corporate executives must report their exercise date within two days, giving them little time to manipulate the exercise dates. So, poof!, there went the fa-la-la-la-la tax benefits. It might make the majority of us who are not CEOs question why corporate CEOs, Wall Street, and our new Treasury Secretary are calling for Sarbanes-Oxley to be weakened.

I’ll Be Home for Christmas … so long as I still have a home, sing some of our unhappier citizens. With foreclosure activity doubling compared with last year in Massachusetts and other states, those who can’t pay the monthly mortgage once their ARMs adjust upwards may not be home for Christmas, or perhaps they may, but only in their dreams.

Let It Snow – Look around and notice that everyone, from market-makers to shareholders, is so complacent about the financial markets that they might as well be singing Let It Go, Let It Go, Let It Go. The volatility index, called the VIX, has dipped to a new 12-year low below 10, which signifies that nobody is worried about the markets becoming more volatile. But even as we all lay ourselves down for a long winter’s nap, odds are that Santa Claus will rouse Prancer and VIX-en. And then we will see some volatility back in the markets again.

God Rest Ye Merry, Gentlemen – The original meaning of this old carol was along the lines of God keep you strong, gentlemen, or God keep you in good spirits. ‘Rest’ meant ‘keep,’ and ‘merry’ could mean ‘powerful or strong’ as well as ‘jolly.’ This year, it was investment bankers on Wall Street who were incredibly strong and powerful, getting rich on the largest mergers and acquisition activity ever. Witness Goldman Sachs’ fourth-quarter earnings that rose 93%. So, the Wall Street suits have taken all the money they could get, in addition to nailing down huge Christmas bonuses, and now they’re ready to take a break. In today’s vernacular, we would say, God give ye rest, merry gentlemen.

Silent Night – That’s what we would like for our soldiers in the Middle East. A silent night followed by silent days with no roadside bombs exploding and no car bombs going off in busy marketplaces.

Editor’s Note: Susan C. Walker writes for Elliott Wave International, a market forecasting and technical analysis company. A graduate of Stanford University, she has been an associate editor with Inc. magazine, a newspaper writer and editor, an investor relations executive and a speechwriter at the Federal Reserve Bank of Atlanta. For more from Ms. Walker, see here: