03/30/2014 End of Quarter report

End of quarter. Time to take a peek at the Sector Fund being managed by Gold Coast Advisors LLC.

The current return, year to date, on the Sector Fund is 11.32%.

The model it is based on shows an ideal return of 11.72%.

That’s a reasonable margin for error, and well above both the market and the benchmark (from the average return rate in the 15 year backtest).

The Sector Model is based on the observation that sectors take turns outperforming each other.  The sector rotation metrics are proprietary, but the logic is rather basic: breadth, volume, and price go together more often than not.  When they don’t, the model looks for the greatest disagreement between the three and invests in the sector most likely to mean revert.

On occasion it will whipsaw, but the average holding period is a month.

The Sector Fund follows the model in a timing window that allows for free trades, so whipsaws don’t cost investors anything in the exchange.

This offers small investors two advantages normally reserved for large institutional investors:

1)     Since there is no trading cost, a 300 dollar investment will get the same return rate as a 300,000 dollar investment.

2)     Since the model is defensive, it offers greater outperformance in bearish times than in bullish times, which serves as a kind of hedge.

I’m quite pleased that Gold Coast has found a way to give the same value to the little guy as to the big guy, and they’re off to a good start.

Tim

 

03/28/2014 Still Defensive

Slightly less defensive than the other day, but not yet out of the woods -- in spite of the bullishness in today's futures.

	Small Growth	Small Blend	Mid Growth	Small Value	Large Growth	Mid Blend	Mid Value	Large Blend	Large Value
Cyclicals
Technology
Industrial
Materials							Hold
Energy
Staples
Healthcare
Utilities				Hold			Buy		Hold
Finance

03/25/2014 The Brick Wall

So the market is suddenly bouncing off what seems like a brick wall.

Just what the heck is it hitting?

I’ve noted this a few times before, that the market was approaching its long term median regression line.

Well – it’s hit it.

In the past I’ve shown the regression line for the entire series.  Tonight I’d like to add the regression channels as they have developed over the last 64 years:

I know – it’s a busy chart.

The middle line in red is the median regression line.  Today the S&P closed at1865.62.  The 64 year median logarithmic regression is 1867.08.

A bunch of quants are bouncing off of it because the median regression normally serves as a secular boundary.  The S&P will spend a few decades below that line, then a few decades above that line, and now we’re in the 5^th year below that line again.

Typically we should bounce between the red Regression line and the Dn2 line at the bottom, weaving around the Dn1 line.

Dn1 is 1 standard deviation below the median regression – today at 1373.13.

Dn2 is 2 standard deviations below the median regression – today at 1009.85.

In other words, during a secular bear the market should average around that (rising) 1373.13 line.

If you’re rolling your eyes at that thought, you’re in good company.  I am too.  QE has thrown us wildly off track for a natural market, and so it’s anyone’s guess where it will be.  Those quants that keep selling off at the Regression line are acting as if this were a normal market.

Although I don’t think the market will skyrocket from here, I doubt it will crash.  More likely (and this is MY guess), the market’s 5 year trajectory will taper off a bit.  Instead of gaining 30% this year, we’ll probably end the year a little above 2000 on the S&P.

I expect us to ride that Regression line for a while, rather than crash off of it.

Since I don’t time, none of this affects my own trading.  But it’s always interesting to watch the quants try to game the system…

Tim

 

 

 

03/23/2014 Hurry Up and Wait

Style Model	Large Value
Sector Model	XLU	2.07%
Large Portfolio	Date	Return	Days
ABX	4/11/2013	-19.20%	346
NEM	9/30/2013	-10.95%	174
JOY	11/18/2013	0.12%	125
TM	2/3/2014	-6.44%	48
RS	2/10/2014	2.22%	41
CSCO	2/12/2014	-4.71%	39
CBI	2/20/2014	8.72%	31
BHP	3/3/2014	-4.37%	20
DUK	3/10/2014	-1.40%	13
HFC	3/17/2014	-1.39%	6
(Since 5/31/2011)
S&P	Annualized	12.35%
Sector Model	Annualized	25.67%
Large Portfolio	Annualized	26.07%

No rotation today. 

Not much to comment on either.  The market is defensive.  Seems waiting for something, but I have no clue what it could be.

ABX is officially beyond my boundary between a three month hold and a three year hold.  Both it and NEM are most likely bottomed out, and stand to experience a considerable gain in the next few years.  Although regression analysis isn’t foolproof, it’s normally a useful sanity check for a company that isn’t likely to be overcome by a technological revolution (like Kodak).  ABX digs things out of the ground.  They’ll be digging things out of the ground for a long time to come:

This is a standard deviation channel – set at two standard deviations on each boundary.  “Median value” on this stock is roughly double its current price.

Sometimes you just have to let the stock come to you.

Can’t force these things.  It’s like fishing.  Sit back, relax, wait for the fish to take the bait.

In this case, doing nothing IS doing something.

Tim

03/18/2014 The Bucket List

About once a month I plan to post a bucket list.

The premise is to hold the DOW 30 stocks that have the most likely long term appreciation potential -- and never sell.

The bucket list is intended for a long term trust to give to someone with the instructions of never selling.

Have I stressed this enough?  This list is for someone to leave a loved one forever, with the instructions of never trading, no matter what anyone advises them to do.  My grandfather left my grandmother with such a portfolio, and it beat the pants off of the broad market for a full 12 years before she passed away.

Here are the top ten of the DOW 30, in order:

WMT

MSFT

CSCO

V

HD

INTC

UNH

XOM

PFE

GE

These 10 should double the performance of the S&P over the course of the next 15 years.

You're welcome.

Tim

03/16/2014 The Unequal Answers to Inequality

 

Style Model	Mid Blend
Sector Model	XLU	3.28%
Large Portfolio	Date	Return	Days
ABX	4/11/2013	-12.91%	339
NEM	9/30/2013	-5.04%	167
JOY	11/18/2013	-1.22%	118
TM	2/3/2014	-5.23%	41
RS	2/10/2014	0.06%	34
CSCO	2/12/2014	-5.99%	32
CBI	2/20/2014	2.18%	24
BT	2/24/2014	-5.60%	20
BHP	3/3/2014	-5.12%	13
DUK	3/10/2014	0.91%	6
(Since 5/31/2011)
S&P	Annualized	11.89%
Sector Model	Annualized	25.92%
Large Portfolio	Annualized	26.51%

 

Rotation: selling BT; buying HFC in the Oil-Integ Industry

I’m reposting a video about monkeys and inequality, because inequality is all the rage again.

We can thank the President for raising the debate.  Paul Ryan has picked it up as well, with the usual race baiting being hurled against him.

The methods of argument on the right and the left are clumsy, but the subject is a real one:

Inequality Exists.

And it’s not just young being poor and old being rich.  This isn’t just a life cycle event.  Yes, the young ARE poorer than the old (which is as it should be, since the old have to save for retirement).  But there are plenty of old people who have nothing, and plenty of young people who have a lot.

Even those young folks who give all their inheritance away and pay their own way through college (like Mitt Romney), still manage to duplicate the wealth of their parents.

Is it genetic?

Perhaps.  Genes certainly play a role in our lives.  I can blame my fat stomach on bad genes if I want.  But I don’t HAVE to be overweight.  I CAN be thinner.

So it’s not just genes.

What about upbringing?

Well, our environment does play a role too.

All of these are perennial arguments. 

Regardless of which theory you favor, the fact remains that people who were born into poverty are far less likely to climb out of it than people who were born rich.  They get crappier food, with less quality family time, worse schools, less chance for advanced degrees, and no “connections” to rich kids who might help them get a good job opportunity in the future.

It’s not their fault they were born poor.

It is also true that wealth creates its own opportunities, and allows the greater ability to sustain risk without having your entire livelihood threatened.

Inequality is, then, an OBJECTIVE problem.  That is, inequality creates more inequality.

To make matters worse, it is also a SUBJECTIVE problem.  That is, if everyone were equally rich or everyone equally poor, they wouldn’t mind so much.  If you had a median income in a poorer country you would have greater peace of mind than if you had a low income in a rich country – EVEN THOUGH OBJECTIVELY YOU WOULD BE BETTER OFF IN THE RICH COUNTRY.

That is, the poor in rich countries are OBJECTIVELY better off than the middle class in poor countries, but they are SUBJECTIVELY less satisfied about it.

So, although conservatives are correct that the poor in a rich country are better off, the liberals are correct that the poor in rich countries aren’t happy about it.

And conservatives will say, “so what?”  So what if you aren’t HAPPY about the land of opportunity?  Don’t you HAVE more opportunities here than you would in a poor country?

Yes.

You have more opportunities here than in a poor country.

But something in human nature still makes us miss some of those opportunities.  Because even though ANYONE can become rich from scratch, the fact remains that MOST people don’t.

And that brings me to the point.

Conservatives will argue that the first monkey is no better or worse off.  If the second monkey gets a grape or a piece of coal, the first monkey STILL gets a cucumber, right?

Wrong.

Look at that video again.  The monkey does NOT get a cucumber, because he throws it away.

Now think of the inner cities.  Not only do people have less, but they end up tearing down what little they have.  The “cultural” problem that Paul Ryan complains about isn’t the cause of poverty, but an effect of it.

Oh, sure, it’s the cause of MORE poverty.  But it isn’t the sole cause of it.  Inequality creates a negative feedback loop where the monkey (or human) who gets a worse deal ends up throwing what little he has away.

It is precisely this feedback loop that leaves each side of the argument hanging with only half of the solution.  And until they come together to face the problem in a balanced way, we’ll never make any progress toward a better answer.

A pox on both their houses.

Paul Ryan, Barack Obama – try listening to each other for a change.

Tim