07/29/2012 selling NLY, buying UEIC

Small Portfolio	XLF & IAU	9.68%
Position	Date	Return	Days
CSGS	10/3/2011	40.04%	300
NLY	10/25/2011	17.60%	278
KBR	10/27/2011	-6.48%	276
VG	10/27/2011	-49.85%	276
BT	1/4/2012	10.32%	207
SAI	5/30/2012	1.73%	60
XEC	6/5/2012	15.96%	54
DECK	6/15/2012	-7.02%	44
CVX	7/5/2012	1.76%	24
RIMM	7/16/2012	1.72%	13
S&P	Annualized	2.60%
Small Portfolio	Annualized	8.32%
Large Portfolio	Annualized	9.03%

On Monday the model will rotate, selling NLY and buying UEIC (Universal Electronics).

NLY has benefited from the actions of the American Fed, but with the baton being passed to European Treasury intervention, the industries tracked by the model are shifting rapidly.

It would be speculation to dig more into the news than that. 

Personally, I’m not optimistic.  I think last week’s surge was a fake-out.  The market should go down again for a while.  The Mousetrap is timing agnostic, but it’s only fair to say that I have some short positions out there.  On my sector model, XLK looks like a good short for the next move down.

Tim

07/24/2012 timing note

I'm not big on short term timing, but I do note that the sectors that were hit the hardest by breadth and volume were the defensive sectors (healthcare, utilities, consumer staples).

A bounce or a stall is more likely than a melt-down here.  While I DO expect another scary low in the near future, I don't think it's happening right now.  This is not a time to do aggressive shorting or panic selling.

07/21/2012 Waiting out stupidity

Small Portfolio	XLF & IAU	6.75%
Position	Date	Return	Days
CSGS	10/3/2011	40.19%	292
NLY	10/25/2011	14.90%	270
KBR	10/27/2011	-19.10%	268
VG	10/27/2011	-42.86%	268
BT	1/4/2012	12.47%	199
SAI	5/30/2012	1.37%	52
XEC	6/5/2012	13.63%	46
DECK	6/15/2012	-2.75%	36
CVX	7/5/2012	1.70%	16
RIMM	7/16/2012	-6.48%	5
S&P	Annualized	1.14%
Small Portfolio	Annualized	5.91%
Large Portfolio	Annualized	8.09%

As expected, RIMM is struggling out the gate.  Would love to find a way to avoid that kind of thing, but there is a reason that Value Stocks are cheap: no one in their right mind would want them!

Of course, whenever I use my “right mind” I lose money.

The problem is that our minds tend to work faster than the businesses we try to invest in.  We think in terms of days and weeks, while businesses operate in quarters and years.  We see a good earnings report and a low current P/E and we want to invest in the company.

But a “Value Stock” is the exact opposite.  The usual mark of a value stock is an earnings failure.

In fact… a few earnings failures.  After a couple of them we start expecting that trend to continue.

And then, the trend doesn’t continue.  We get a positive earnings surprise.  And that darling growth stock with astronomical earnings does the opposite with a surprise earnings failure.

After a while the growth stock becomes a value stock and the value stock becomes a growth stock, and the whole cycle continues.

Value Stocks are cheap because no one wants them.  They have bad prospects for the future, and things are horrible now.  But the present slowly fades away and new earnings reports come.

The optimal holding period for my own model is currently 154 days (i.e. one to two earnings reports in the future).  With ten stocks that leaves me rotating about once every two weeks.

The next scheduled rotation is August 2^nd.  Until then, there’s nothing to do but wait.  I have to force myself to wait, because my “right mind” gets bored waiting for the next few earning periods to bail me out of stupid stocks like RIMM.

Tim

PS… here are some articles about how our brilliant minds goof us up when we try to invest…

http://www.sciencedaily.com/releases/2012/07/120706184351.htm



http://www.ritholtz.com/blog/top-10-investor-errors/



http://www.fool.com/investing/general/2012/07/10/histories-of-things-that-never-happened.aspx

07/19/2012 timing note

The market internals are continuing to degrade.  Staying long in discretionary trades (not part of the model), but definitely taking leverage off the table.

07/18/2012 timing note

Bernanke was uninspiring yesterday, and the broad market technicals were weak.

What was more concerning was equal weakness even in defensive sectors.

Time to reduce leverage on long positions.

07/16/2012 intraday

Made the GCI to RIMM switch.

Technicals on the broad market are hinting at a melt up in the works.  Perhaps QE3 speculation.

07/15/2012 going off the deep end

Small Portfolio	XLF & IAU	8.19%
Position	Date	Return	Days
GCI	7/14/2011	10.25%	367
CSGS	10/3/2011	38.92%	286
NLY	10/25/2011	10.64%	264
KBR	10/27/2011	-18.93%	262
VG	10/27/2011	-42.25%	262
BT	1/4/2012	11.22%	193
SAI	5/30/2012	3.61%	46
XEC	6/5/2012	4.20%	40
DECK	6/15/2012	-2.10%	30
CVX	7/5/2012	-1.27%	10
S&P	Annualized	0.77%
Small Portfolio	Annualized	7.28%
Large Portfolio	Annualized	7.41%

Sell GCI; buy RIMM

Today the model goes off the deep end and sells a newspaper to buy a nearly doomed wireless company: RIMM.

We’ve all heard of RIMM: Blackberry, crushed between iPhone and Android.  I still use a Blackberry, but only because every time I think of getting an iPhone I hear a rumor that the next iPhone will be so much better that I should wait.

Of course, the next iPhone might not be so revolutionary and the next Blackberry might finally have a breakthrough – like the new camera feature that preserves the three seconds BEFORE each shot so you can scroll back to the instant before your nephew blinked in the family shot.

Right now the camera is the worst feature in Blackberry.  In a few months it will be the best.

All of this is speculation.

The model only knows that the company still has strong fundamentals and the industry has strong technical accumulation.

And that’s enough.

You can’t trade unknowns.

In any case, both models are holding a small annualized gain over the S&P.  Gold has been holding back the small portfolio (if I had just traded sectors it would be up 13.31%).  Fundamentals have been holding back the large portfolio – perhaps the most maddening part of all.

I’m looking forward to Value stocks actually showing some of their value for a change.

Tim

07/13/2012 timing note

Bounce.

07/08/2012 the long view

Small Portfolio	XLF & IAU	8.07%
Position	Date	Return	Days
GCI	7/14/2011	13.48%	360
CSGS	10/3/2011	40.43%	279
NLY	10/25/2011	11.23%	257
KBR	10/27/2011	-14.38%	255
VG	10/27/2011	-37.99%	255
BT	1/4/2012	7.34%	186
SAI	5/30/2012	4.96%	39
XEC	6/5/2012	6.91%	33
DECK	6/15/2012	-6.15%	23
CVX	7/5/2012	-2.14%	3
S&P	Annualized	0.64%
Small Portfolio	Annualized	7.29%
Large Portfolio	Annualized	8.38%

The small portfolio is having one of those weeks that waffles back and forth between the leading sectors (right now XLV and XLF, healthcare and financials).

The S&P is having one of those years that stumbles in May and might recover again for the end of the year.

And the globe is having one of those decades that goes nowhere.

Here’s the long view of where the S&P will likely go:

Stocks represent businesses, and businesses are created by people.  If you factor inflation into the birthrate 46 years ago you’ll get a graph like the one above.

I haven’t filled in the number for this year yet, but the average S&P price for the year will likely not exceed the demographic limit of 1346.55.

We probably won’t break out until 2017 or later.

To get an idea of how this works, imagine you owned a manufacturing plant that had three sets of machines.  One set is being built, the second set is making your product, and the third set is broken from too much use.  You only make money off of the machines that are working.  You lose money off of the ones being built, rebuilt, or hauled off.

Now think of those machines as people.  That’s where we are now.  People 0-22 and people 65-120 don’t usually have as many jobs as people 20-65.  The birthrate + 46 years is just a quick way to get the average of those 22-65 year olds.

Welcome to a secular bear market: that dip that happens when people didn’t have as many babies 46 years ago as they should have.  The Beatles weren’t romantic enough to get the job done.

The good news is that bonds are safe havens, right?  Right?  Well, no.  Interest rates are about as low as they can go, and at some point they’ll have to rise, and bonds will get slammed.

But the “supercycle” in gold will make us all rich if we invest there, right?  Right?  Well, no.  Interest rates are as low as they are because the Fed is desperately fighting deflation, and even a winning position in gold will basically leave you with the same “value” you had to begin with, while you’ll get taxed off of the inflation.  If gold is your only hold, you’ll still lose.

It’s either Carter or Hoover, and there’s no certain way to tell which way it will go.

It’s safe to bet on Carter for now, though.  Bernanke wants to keep his job, and all the Republican nominees promised to fire him if they got elected.  So, all Bernanke has to do to keep his job is to keep pumping money into the system to keep things from collapsing before the election.

That’s what I’d do if I were Bernanke.  In this economy, you try to keep your job…

This is a bear market that will wipe you out if you try to short it.  Even the cyclical bear we are in (and we ARE in a cyclical bear market, albeit a sideways one) refuses to go down in nominal value because every central bank on the planet is printing monopoly money faster than stocks can fall.

My guess is that this will continue for another year or two before something starts to gain traction.

Value stocks had a crappy year last year.  They’ll probably do better this year.  Won’t make you rich, but they won’t send you to the poor house either.

And gold will end the decade higher than now.  But in the mean time where it goes is anyone’s guess.

The key is to not get cocky with leverage.  Bear markets cannot be predicted because of the massive political forces and central bank intervention at play.  It’s not good enough to just be right.  You have to be disciplined with position sizes so that you won’t get wiped out BEFORE you are right.

Every time I’ve ever lost money was in a position that turned out to be right, but I wasn’t able to ride out the volatility.

The only thing to fear is greed.  Control your own position sizes, invest in sound companies, and you’ll survive.

Yes, a few people make wild bets and get rich.

We don’t hear about the vast majority of those who made similar bets and lost everything.

Tim