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Tax Policy Causes Volatility

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October 21, 2008 – Comments (0) | RELATED TICKERS: XOM , TOT , CVX

Or "move your losses".

Suppose you are a long term believer in the "oil story" and have been accumulating CVX. You have built a full position, but you like TOT, XOM and CVX equally well. You already owned CVX so you decided last summer you would start to add XOM. You have started a position around $85.00 in July 2007 and added each time it fell back to that level. You made the decision to start buying XOM in June 2007 and purchased 2000 shares. Each time it fell back to $85.00 you added 2000 more and have now accumulated 10,000 shares. Unfortunately after the last time it fell to $85.00 it continued to fall after your purchase, to  $75.00 one month later. Two months later it had shown no signs of recovery and suddenly fell off a cliff dropping down to around $60.00. Congratulations, you have now lost $250,000. Your CVX shares, purchased in 2005 and 2006 have fallen to break even. You however are not panicking, and plan to stay invested in oil because the price of oil is going up in the springtime, at which time your losses on XOM will be reduced and your CVX profits will return. Because you believe equally in the TOT and XOM storys, you sell your XOM shares and buy TOT. You get the tax right off on future gains, and don't risk missing an oil move upward. You pay a $15.00 trading fee, you get a $250,000 capital gains write off essentially for free as you stay fully invested while riding out the markets up ands downs.

Now suppose "I" am 1000 hedge funds, and investment banks trading 100,000's of shares to take advantage of the tax benefit, while staying fully invested. I expect that might cause large irrational seeming market swings as one fund trades its XOM for TOT, while another trades its TOT for CVX, etc.

I am a small investor. I subscribe to Motley Fools Hidden Gems newsletter. I believe in many of the companys recommended in the newsletter, despite the fact that my purchases on most are in the red. There are other companys that I like equally well, but have not purchased yet. I am intending to sell my losses, and set lowball limit offers on other companys that I like equally well. Hopefully I can take advantage of the tax write-off while not missing any market move upward.

I was also substantially in cash thanks to the Fools on this board who warned of impending doom. I have been and continue to be a buyer these last two weeks.

Deflation has happened. It appears that the Fed will reinflate, and it seems that we are rolling over right now.

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