07/31/2014 Matrix: Slightly Bullish... again again

Geeze what a wishy washy market!

	Small Value	Mid Value	Large Value	Mid Blend	Small Growth	Small Blend	Large Blend	Large Growth	Mid Growth
Finance	1	3	5	7	11	14	18	22	32
Utilities	2	4	6	8	12	15	19	23	33
Industrial	9	10	13	16	17	20	21	28	45
Staples	24	25	26	30	36	40	53	68	73
Healthcare	27	29	34	38	44	52	61	71	76
Cyclicals	31	35	37	43	49	56	64	72	78
Materials	39	42	47	54	58	63	67	74	79
Technology	41	46	50	57	59	65	69	75	80
Energy	48	51	55	60	62	66	70	77	81

Make up your mind, already.

Before the close the Sector Model switched back into Financials, and I bought BKU (a Small Value Financial stock) as well.

07/30/2014 Matrix: Slightly Bearish... again...

The Sector Model switched back to XLU before the close, returning to a slightly bearish stance.

	Small Value	Mid Value	Mid Blend	Large Value	Small Growth	Small Blend	Large Blend	Large Growth	Mid Growth
Utilities	1	3	5	7	10	14	19	23	27
Finance	2	4	6	8	11	15	20	24	29
Industrial	9	12	13	16	17	18	21	33	41
Staples	22	25	28	31	34	42	59	69	72
Healthcare	26	32	36	38	43	51	63	71	74
Cyclicals	30	35	39	40	47	53	65	73	76
Materials	37	45	49	50	54	61	67	75	78
Technology	44	48	55	56	60	64	68	77	80
Energy	46	52	57	58	62	66	70	79	81

This market is worse than a ping pong tournament...

07/28/2014 Matrix: Slightly Bullish

Financials strengthened today, giving the market a more bullish stance:

	Small Value	Mid Value	Large Value	Small Growth	Mid Blend	Small Blend	Large Blend	Large Growth	Mid Growth
Finance	1	2	3	5	6	8	17	22	24
Utilities	4	7	9	11	12	13	20	27	33
Industrial	10	14	15	16	18	19	21	41	48
Staples	23	26	30	34	35	38	60	70	72
Healthcare	25	28	31	36	37	42	62	71	74
Cyclicals	29	32	39	43	44	47	66	73	75
Materials	40	46	50	53	54	57	67	76	78
Technology	45	49	52	56	58	61	68	77	80
Energy	51	55	59	63	64	65	69	79	81

07/27/2014 Matrix: Mildly Bearish

For the moment, the combination of sectors and styles is "risk off."

	Small Value	Mid Value	Large Value	Small Growth	Mid Blend	Small Blend	Large Blend	Large Growth	Mid Growth
Utilities	1	3	5	7	9	12	19	23	28
Finance	2	4	6	8	10	13	20	24	30
Industrial	11	14	15	16	17	18	21	41	49
Staples	22	26	31	34	35	43	61	69	72
Healthcare	25	27	32	37	39	46	62	71	74
Cyclicals	29	33	40	45	47	51	65	73	76
Technology	36	42	48	52	54	58	67	75	78
Materials	38	44	50	55	56	59	68	77	79
Energy	53	57	60	63	64	66	70	80	81

Utilities and Value are both bearish, while the favoring of Small caps is bullish.

So, mildly bearish.

07/26/2014 Fama versus Shiller -- the TOO efficient market

Style Model	Small Value
Sector Model	XLU	0.00%
Large Portfolio	Date	Return	Days
BX	4/14/2014	17.40%	103
TIVO	4/23/2014	11.60%	94
SHOO	4/28/2014	-4.43%	89
PM	5/27/2014	-0.96%	60
SR	6/2/2014	11.33%	54
CFI	6/9/2014	-0.56%	47
FRAN	6/16/2014	-11.02%	40
NUS	7/7/2014	-14.33%	19
BT	7/14/2014	-1.45%	12
RRD	7/21/2014	-1.30%	5
(Since 5/31/2011)
S&P	Annualized	13.01%
Sector Model	Annualized	26.88%
Large Portfolio	Annualized	25.41%

 

Rotation: selling BX; buying CHFC.

The Sector Model continues to plod along, well ahead of both the S&P and the back-test baseline:

 

Before the close on Friday, the Sector Model switched from Financials to Utilities.

Financials remain a close second, however, and the Style Model’s call for Small Value tilts the next trade into a Small Value Financial rather than a (comparatively) Large Value Utility.

So, CHFC it is.

Large and Small are easy to parse.

But Value and Growth?

I’ve written before that “Value” looks at what the assets are worth if a company is going out of business, and “Growth” looks at the potential for expansion.  Value tries to minimize losses and Growth tries to maximize gains.

Each is trying to outperform, but in different ways.  Growth tries to go up more than the market, and Value tries to go down less than the market.

My models don’t care either way.

But the key to understanding Value and Growth is to look at the difference between Fama and Shiller.  Both earned the Nobel Prize, but Shiller argues that the market is inefficient and Fama argues that the market is efficient.

They argue the opposite; so which one is right?

Well, both, and neither.

Haugen (The Inefficient Stock Market, page 92; The New Finance, pages 17-24) understood how to thread the needle between the two, when he studied how Growth COMPANIES compared to Value COMPANIES.  Not “stocks”, mind you, but “companies.”

Over the course of 1-5 years Growth companies grow more than Value companies.

In other words, investors are remarkably efficient in picking which companies will grow more than other companies.

But they are TOO efficient.  Growth stocks are priced higher than Value stocks because the companies they represent will grow more than the value companies.  The problem is that investors over shoot.  It’s not that they are wrong, but that they are too right.  Even though a value company will grow less, its stock will grow more because it is priced too efficiently.

It’s as if you have a horse that has a sixty percent chance of winning, but you are offering two to one odds.  Over time, you’ll lose money because you are betting too much.  You’ll win more races, but still lose more money.

So the answer to the argument between Shiller and Fama is this: investors are efficient about company prospects, but inefficient in the size of their bets.

The prospects for the value companies I am selecting are indeed poor, but not AS poor as the stocks are priced.

Tim