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THREE CHARTS TO START YOUR WEEK

Special to The Globe and Mail

Investing by the seasons

So are there any hot and cold sectors for stock investors in the final two months of the year? The historical averages suggest there are some, but you should be wary.

CIBC World Markets analysts Peter Gibson and Jeff Evans examined the question of whether investors can boost returns by shifting their portfolios toward "seasonal favourites."

Their answer: While there are sectors that exhibit distinctive average returns, there's enough variance in the numbers to make relying on those averages ill-advised.

"In practice, it would be necessary to diligently follow a seasonal strategy every year for several decades to capture seasonality," they write. "And even then, the underlying tendencies might change with time."

The two examined sector returns on the S&P/TSX and the U.S. S&P 500 for the November-December period from 1988 to 2009. Highlighted above are four of the sectors from the S&P/TSX with some of the widest variances.

The energy sector is particularly instructive. The average return for the 22-year period is essentially flat at negative 0.15 per cent. With a standard deviation of 9.63 percentage points, however, gains of up to 9.5 per cent are ordinary, as are losses of as much as 9.8 per cent.

"Avoiding the energy sector at the end of the year, based strictly on historic average returns, is an extremely risky strategy," write Mr. Gibson and Mr. Evans.

The China syndrome

One little surprise from Chinese central bankers can play havoc with international investing. And investors should keep in mind that there's plenty of room for more changes in the country's monetary policy.

The People's Bank of China raised its one-year lending rate on loans to 5.56 per cent this past Tuesday, the first increase since December, 2007, but well below the 7 per cent-plus rates in place in early 2008. The increase came, notes BMO Nesbitt Burns economist Benjamin Reitzes, "despite officials stressing that alternative tightening measures were having the desired effect."

China's unexpected attempts to slow its economy had an immediate effect on the outlook for nations such as Australia, South Africa and Brazil that depend on the Chinese growth machine.

Exchange-traded funds that track those countries' economies posted sharp declines in the wake of the Chinese announcement. On Tuesday, the iShares MSCI Brazil Index (EWZ) fell 3.0 per cent; the iShares MSCI South Africa Index (EZA) fell 4.5 per cent; and the iShares MSCI Australia Index (EWA) fell 3.4 per cent.

Gary Gordon, president of Pacific Park Financial Inc. in Aliso Viejo, Calif., says this past week demonstrates the challenge ahead for global investors. "If China's about to get exceptionally serious, if they decide to move very rapidly on curbing speculative activity and economic overheating, you'd have to be worried about the resource-rich-country ETFs," he wrote on his blog on the Seeking Alpha website.

The three ETFs hit Tuesday could be in line for more punishment, Mr. Gordon says. "If China curbs demand, these are the exact countries that get whacked the hardest."

Beware high-flying orders

Expect an eye-popping gain this week in orders for U.S. durable goods. Just don't expect it to mean much for the country's ability to avoid its current slowdown.

When the September numbers are released Wednesday by the U.S. Census Bureau, economist Paul Dales of Capital Economics in Toronto expects the overall "headline" number to be a 5 per cent sequential gain from August.

Nearly all of that, he says, will come because Boeing received a massive number of orders for aircraft in the month - 117, versus 10 in August.

To get a better read on the economy, Mr. Dales will be watching a more specialized statistic - orders for durable goods except transportation. This number strips out volatile factors such as aircraft and automobile orders. (In this regard, durable goods statistics have become like the consumer price index, which has a "headline" number and a "core" number that removes the volatile components of food and energy.)

Mr. Dales expects the figure for durable goods except transportation will rise at a tepid 1 per cent rate. "It isn't a disaster, but six months ago we were seeing changes of 6 per cent plus."

Durable goods orders and the industrial production numbers that came out last week "are both showing the same trend - the industrial economy, which has been the one shining light, has been fading so fast that there is a real chance it will go into reverse. Moreover, precious few areas of the economy look able to take up the baton of growth."

U.S. Durable Goods

New Order for durable goods, seasonally adjusted

August 2010 - $191.2-billion

Aug. -1.3%

© 2007 The Globe and Mail. All rights reserved.

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