11/30/2016 Sector Trade

The Sector Model flipped from XLB to XLU at the close.

If there is a favorable gap in the morning I'll make the trade, but if not I'll recalculate before today's close.

11/27/2016 Where we are, and where we're going

Mouse	XLB	3.56%
Rabbit	Date	Return	Days
NVR	12/16/2015	-3.48%	347
CASY	5/12/2016	7.47%	199
AVB	5/24/2016	-9.35%	187
AEM	6/7/2016	-18.51%	173
AMED	6/16/2016	-17.31%	164
FRO	6/27/2016	-2.57%	153
ASTE	7/12/2016	15.49%	138
BSET	8/3/2016	17.28%	116
MFC	9/1/2016	29.25%	87
CFFN	9/12/2016	15.15%	76
Turtle	Date	Return	Days
BT	8/11/2015	-34.94%	474
DY	10/30/2015	-0.76%	394
TMK	11/23/2015	18.58%	370
UPLMQ	12/1/2015	82.04%	362
CMP	2/19/2016	17.06%	282
NVR	2/22/2016	0.59%	279
ENOC	3/15/2016	-13.93%	257
AMWD	3/17/2016	13.39%	255
ESRX	6/13/2016	1.30%	167
SFM	9/8/2016	9.35%	80
	Since 5/31/2011	Annualized
S&P	64.54%	9.49%
Mouse	128.00%	16.18%
Rabbit	66.60%	9.73%
Turtle	120.87%	15.51%
	Previous	YTD
S&P	51.94%	8.29%
Mouse	77.79%	28.24%
Rabbit	57.21%	5.97%
Turtle	58.35%	39.48%

So where are we?

With about a month left to the year, the Turtle continues to outperform the Rabbit, which is set to be officially absorbed into the Turtle for 2017.  I’ll continue with the same 20 stocks but rotate and select on the time schedule and fundamentals the Turtle has been using:

Small cap stocks with room to grow, low current P/E driven more by rising earnings than falling prices, and good 3-5 year projected returns in an industry that looks bottomed out on its unique business cycle (no two industries are exactly alike in this respect).

The holding periods will average about five years as well – some longer and some shorter, with a typical trade about once a quarter for the best trade in the portfolio.

The Sector Model continues to function as expected:

The current deviation from the regression line is -0.11406489.  A standard deviation between 2 and -2 is entirely normal behavior.  This is barely more than a tenth below the regression line.  It can’t get more “normal” than that.

The post-election rally hasn’t yet shown up in the sector ratios, so we are still showing a bear market configuration:

And what of Trump?  He’s an unknown.  A real bull market COULD be sparked by a perfect combination of taxes and regulation, but it would require an INCREASE in both trade and immigration.  Trump is in favor of lowering taxes and regulations, but campaigned to renegotiate trade agreements and cut down on illegal immigration.  It’s not impossible for him to increase legal immigration and increase trade by no-tariff bi-lateral agreements.

But Trump is running into the same problem that Clinton (or anyone) would be facing in these next three years: the long term demographic trends pose a serious head-wind to the market, pointing to another major bear market taking the S&P back into the 1600 range by 2019 (going into the next election).

The current value of the S&P is 2213.35.  The projected value of the S&P should be 2228.43.  We are exactly on target.

Without some kind of massive inflationary stimulus, we shouldn’t pass our current levels again until 2023.

Demographics aren’t destiny, but they aren’t to be ignored either.

If I were President I’d ramp up both trade and targeted immigration, and cut taxes and regulations.  But I’m not President, and none of the candidates promised to do all four of those actions.

We may be in for a long rough ride.

Tim

11/13/2016 Hail to the CEO

Sector Model	XLB	0.64%
Full Model	Date	Return	Days
BT	8/11/2015	-34.05%	460
DY	10/30/2015	14.45%	380
TMK	11/23/2015	16.78%	356
UPLMQ	12/1/2015	18.95%	348
NVR	12/16/2015	-7.85%	333
CMP	2/19/2016	11.36%	268
NVR	2/22/2016	-3.97%	265
ENOC	3/15/2016	-15.98%	243
AMWD	3/17/2016	13.46%	241
CASY	5/12/2016	2.36%	185
AVB	5/24/2016	-5.54%	173
AEM	6/7/2016	-15.80%	159
ESRX	6/13/2016	-1.74%	153
AMED	6/16/2016	-18.38%	150
FRO	6/27/2016	-2.44%	139
ASTE	7/12/2016	9.35%	124
BSET	8/3/2016	13.31%	102
MFC	9/1/2016	21.32%	73
SFM	9/8/2016	10.47%	66
CFFN	9/12/2016	13.68%	62
(Since 5/31/2011)
S&P	Annualized	9.11%
Sector Model	Annualized	15.69%
Full Model	Annualized	11.80%
S&P	Total	60.90%
Sector Model	Total	121.51%
Full Model	Total	83.75%
Sector Model	Advantage	6.58%
Full Model	Advantage	2.69%
	Previous	2016
S&P	51.94%	5.90%
Sector Model	77.79%	24.59%
Full Model	57.78%	16.46%

The collapse of the futures on the night of the election was followed by a rally the next day – in different industries.

What happened was a simple rotation.  Those expecting a Clinton win were invested in industries they expected to outperform with her as President, and they sold off those stocks to buy others in industries favored by a Trump Presidency.  My sector model was in materials and did well.  The rotation during the week pulled the full model into an intriguing set of industries for the new buy zone:

BUILDING

FURNITUR

HOMEBILD

HUMAN

INDUSRV

MINING

NWSPAPER

PACKAGE

REIT

SEMI-EQP

SOFTWARE

Notice a commonality for the election of a real estate tycoon: Building, Furniture, Homebuild, Reit.  All related to real estate.  Mining, Indusrv, and Semi-Eqp are secondary beneficiaries.  And finally, it’s reasonable for Nwspaper to prosper during the Presidency of such a colorful figure.  Whatever Trump’s attributes, “boring” is not one that normally comes to mind.

A lot is being made about the stock market hitting all time highs.  In the short term Donald Trump and Paul Ryan agree on some bullish policies, such as tax and regulation reform.  In the long term they will have to fight over some catastrophically bad ideas that Trump has on protectionism and mass deportation.  He’s backed off on the latter, but still holds the protectionist threat out there.

Economically, Trump is a mercantilist – seeing government as having a role to increase exports and decrease imports as a means of bringing wealth to the country.  In a vacuum, such an idea looks good, but in history all that happens is that the other countries adopt similar policies in trade wars that slow down economic activity for everyone.  The threat of deporting undocumented workers and starting a trade war while baby boomers retire faster than they are being replaced could trigger a global recession, if not an outright depression.  I voiced these concerns two summers ago when Trump first announced his Presidential run.  Trump hasn’t changed his protectionist policies since then, so the threat still exists.  However, his backing off on the mass deportation idea greatly reduces the amount of immediate harm he is likely to do.

I cannot predict the effect on the market short term.  We are overdue for a recession anyway, and we should see a selloff on the S&P somewhere down into the 1600-1800 range between now and 2019 just as a matter of normal market behavior.  But guessing when is a fool’s errand.

The best stock in my buy zone for the past week has been CCO.TO in the Mining industry.  I don’t currently own it, but I’m watching it.

As for the stocks I hold, the only ones still in my buy zone are AMWD, BSET, AVB, and NVR.  The rest are holds.

Trump will be the new President – next year.  The first two years will likely focus on the pro-growth agenda Trump and Ryan agree on.  After that, it will be a contest between Trump’s bad ideas and Ryan’s good ones.  Who wins that contest remains to be seen – but Trump doesn’t like to lose.

Tim