11/9/2014 Boehner has a red nose, but he's not from the North Pole

Sector Model	XLF	1.30%
Large Portfolio	Date	Return	Days
SR	6/2/2014	-2.98%	159
ESI	8/4/2014	-29.14%	96
BSET	8/11/2014	22.18%	89
STRA	8/18/2014	34.19%	82
PBI	8/25/2014	-6.40%	75
CLF	9/2/2014	-25.88%	67
KFY	9/29/2014	7.13%	40
IQNT	10/6/2014	38.11%	33
EDU	10/27/2014	0.00%	12
PLT	11/6/2014	-0.11%	2
(Since 5/31/2011)
S&P	Annualized	12.73%
Sector Model	Annualized	26.07%
Large Portfolio	Annualized	24.39%

 

Rotation: selling BSET; buying BKE.

PLT NOTE: on all trades I exchange stocks for an equivalent (or better) gap from the previous close.  The Thursday exchange of CFI for PLT occurred when both were +0.68% for the day.  For tracking purposes, however, I track from the previous day’s close as long as the trade is equivalent or better. 

The Sector Model continues to perform well year to date:

 

The Full Model has also recovered nicely as I move away from a disastrous experiment in fundamentals that brought me both ESI and CLF.

Starting from the 9/29/2014 trade, the new fundamental parameters use Benjamin Graham style ratios of long term growth in (price & debt) / (earnings, profit margin, book value, and cash flow).  By long term I mean over the course of five years or better.  In some cases I may select a stock younger than five years old, but only if the total ratios are equally impressive.  For those familiar with Shiller, this is finding low debt stocks with a good CAPE ratio.  For those familiar with www.validea.com, this is very close to the metrics defined in “The Guru Investor” for their Graham model.

ESI prompted me to stop experimenting and to go back and look at all fundamental experiments that I made over the past 3 ½ years.  The best outperformance period was during the June through October 2012 Graham selections.  Time to stop experimenting so much and to go with that works.

Now for politics.

We just had an election.  Democrats are in terror and Republicans are supremely hopeful.  To both sides I’d like to remind everyone that nothing much has changed.  We still have a divided government and two sides that haven’t learned how to pass laws that they agree on.

For those with historical interests, the economy does best when we have a Democrat President and a Republican congress – which is coincidentally what we have now.  I have a hypothesis for why this may be so:

Consider what Republicans and Democrats like to spend money on.  Republicans like to spend money on national defense and Democrats like to spend money on social programs.

Next, consider what the President and Congress each have more control over.  The President has more control over foreign policy and Congress has more control over domestic policy.

Now think about these combinations.  Who is more likely to spend money on foreign affairs, a Republican President or a Democrat President?  Right, a Republican President.  And who is more likely to spend money on domestic affairs, a Republican Congress or a Democrat Congress?  Right, a Democrat Congress.

So then, here are the combinations:

Republican President and Republican Congress: overspend on foreign affairs (think Iraq war).

Democrat President and Democrat Congress: overspend on domestic affairs (think Obamacare).

Republican President and Democrat Congress: negotiated overspending on both sides (think 1980s).

Democrat President and Republican Congress: gridlock, since neither side is motivated to spend in the areas they have control over (think 1990s balanced budget).

For the economy, gridlock is your friend.

For the market, not so much.  If the market has a nice rally now, it will more likely be from holiday expectations than hopes for a Republican miracle.  Santa may give miracles, but he doesn’t live in Washington D.C.

Tim