09/02/2012 selling education and buying cartoons

Small Portfolio	XLF & IAU	15.37%
Position	Date	Return	Days
BT	1/4/2012	13.45%	241
XEC	6/5/2012	14.19%	88
DECK	6/15/2012	3.19%	78
CVX	7/5/2012	5.29%	58
RIMM	7/16/2012	-7.72%	47
UEIC	7/30/2012	17.46%	33
QSII	8/6/2012	3.58%	26
CECO	8/9/2012	-14.86%	23
SWM	8/23/2012	-0.28%	9
FCX	8/27/2012	-0.06%	5
S&P	Annualized	3.63%
Small Portfolio	Annualized	12.23%
Large Portfolio	Annualized	13.70%

 

Rotation: selling CECO (Career Education); buying DWA (Dream Works Animation).

Last week we heard evangelism for one Messiah, and this week we’ll hear evangelism for another.  Romney, Obama.  There’s really no good guidance for how this will go.  In the last secular bear market of 1966-1982, we had a string of Presidents who weren’t able to serve two full terms.  The closest we got was Nixon, and even he couldn’t last the full 8.

But in the 1929-1942 secular bear market we had one President who got elected four times in a row – Roosevelt.

My problem with Obama isn’t that he can’t solve the secular bear market; my problem is that he has the wrong goal.  No one can “solve” a secular bear in a democratic and free society.  The goal isn’t to solve it, but to survive it.  Roosevelt got that.  Oh, he tried a little solving, but most of what he did was to try to keep people from starving to death.

Johnson tried to end poverty.  Nixon tried wage and price controls.  Ford tried to whip inflation now with “W.I.N.” (er… “whip inflation now”) buttons.

Carter started poorly, but finally began listening to Volker, when that Fed chief realized that the Philips Curve was broken, and that they couldn’t inflate their way to low unemployment.  Unfortunately for Carter, by the time he “got it”, it was too late for him.  He had already ticked off the opposition with poor leadership, and no one wanted to follow him any more.  Interestingly, the GDP took off on a tear by the end of Carter’s Presidency, but it didn’t translate into jobs.  The rich got richer, and the poor stayed poor.  The tax rates were a joke, too.  They were too high to actually be enforced, and they had too many loopholes.

So, along comes Reagan.  The GDP is already on a tear, but Volker comes to him with a plan.  The good news is that he really can kill off inflation.  The bad news is that he practically has to shut down the economy to do it.  Reagan puts his leadership skills fully in support of Volker, the economy stalls under incredibly high interest rates that Volker unleashes.  In 1982 it looks like Reagan will be history as soon as a new election comes around.

And then… the secular bear ends.  The inflation problem ends.  The unemployment problem ends.  Reagan and Volker did what Carter and Volker couldn’t do: reboot the economy.  It also helped that Reagan lowered tax rates and closed loopholes.  You can collect more money that way and waste less of it on accountants.  (Yes, I said “more money”… the high tax rates with loopholes are a joke the Democrats play on us by raising so called rates in ways they don’t actually have to pay; and the tax cuts the Republicans call for are another fake claim, because closing the loopholes actually collects more money.  In other words, the Democrats collect less money and make the rich richer, and the Republicans actually benefit the middle class even though they sound like they are for the rich.  This is all posturing on both sides; don’t believe what anyone says, look at what they actually do).

Back to Carter: even if Carter had wanted to follow Volker down the Reagan path, he had already squandered his leadership, and he could have never pulled a Reagan.  So Reagan gets credit and Carter goes from being a merely bad President to being the worst ex-President in history with an unfortunate legacy of open anti-Semitism.

What of Hoover and Roosevelt?  A little appreciated aspect of those two Presidencies is that Hoover started the types of public programs that Roosevelt made popular.  Yes, Roosevelt made the Social Security safety net, but the first rush of Keynesian spending happened under Hoover.  Hoover’s mistakes were that he wasn’t an enthusiastic promoter of such programs, and that he was too slow to get off of the gold standard.

Of all the leaders in the Great Depression, the only ones who could “solve” the problem were the Dictators: Stalin and Hitler.

In Soviet Russia the GDP slowly but steadily increased the entire time.  In Nazi Germany, Hitler pulled off what even Churchill thought was an economic miracle, going from impossibly high unemployment, to full employment in just a few years (that is, if you weren’t Jewish).  A lot can be done when you don’t care how many people you kill in the process.

So, to answer our two Messianic candidates: no, you cannot “solve” a secular bear market.  But you can certainly make it worse if you aren’t careful.  And for goodness sake, if you do get a trillion dollars to throw around, don’t throw it away in premature projects like solar power, and don’t waste your time inventing a way to drive doctors out of business (I’m married to a doctor; so I know).

The good news is that a secular bear is caused by demographic forces, and there is a known way to survive it as a nation: shift to a commodity economy as much as possible.  Canada and Australia will find themselves richer than they were, and that is not accidental.  In a secular bull market you invest in people; in a secular bear you invest in things.

And we in this country have a lot of things to invest in – particularly in the energy industry.

If the election goes for Romney, I hope that he does keep his campaign promise to pump enough money out of the ground to tide us through.  If the election goes for Obama, I hope that he does not keep his campaign promises to waste more money on his political cronies.  I don’t know if Romney will actually keep his promises, but I’m terrified of the possibility of Obama keeping his.

As I said in the previous blog, there may be good reasons to vote for Obama – unfortunately most of those can only be tried in a secular bull market. 

It will be interesting to see how this plays out.  For us investors there is a great deal of uncertainty and rotation going on.  How do we survive this tightrope between hope and disaster?

Some of it will be more Fed following, of course.  But Bernanke has no competent partner in the White House, and it doesn’t look like he will either way: Obama isn’t competent, and Romney doesn’t want to be his partner. 

The money-flow is a mess.  These are the top ten industries on my model:

ELECFGN

SHOE

GASDIVRS

NWSPAPER

BANKMID

RAILROAD

ENTECH

ENTERTN

TELUTIL

HLTHSYS

 

Foreign electronics makes sense.  Europe has been hammered, and there are some values there.  But shoes?  Gas?  These are things, I suppose… secular bearish.  Newspapers?  My guess is a value trap, but I made money last year in GCI, so I can’t complain.  Banks and railroads?  Now, that’s bullish.

What of the worst industries?

RECREATE

INSTRMNT

FUNL SVC

UTILCENT

SOFTWARE

UTILWEST

B2B

UTILEAST

SEMICOND

PIPEMLP

 

Three of these are utilities.  You want utilities to be the worst if you are hoping for a bull market.

I would say, therefore, that the market is still looking for reasons to go up.  In the extreme short term it looks like it will pull back a bit, but I would buy these dips.

And what of the election?

Well, what of it?  We don’t know who will be elected, so we can’t invest accordingly, even if we had a clue of which would be better.  We also have to keep in mind that what is best long term is not always best short term.  Romney wants sound money and to pump wealth out of the ground.  Long term that’s bullish, but short term bearish.  Obama wants to confiscate another 4% from 2% of the population.  Uh, yeah, like that’s anything but fake populism – short term that’s bullish only because it does absolutely nothing at all, while he leaves Bernanke left to his own devices. 

If your holding period is 4 years, buy Romney.  If your holding period is 4 months, buy Obama.

Right now the model is selling CECO and buying DWA.  To put that into perspective it’s selling education and buying cartoons.

Seems about right.

Tim