11/23/2014 Five Million Immigrants Isn't Enough

Sector Model	XLF	1.55%
Large Portfolio	Date	Return	Days
SR	6/2/2014	-15.51%	173
ESI	8/4/2014	-38.23%	110
STRA	8/18/2014	28.55%	96
PBI	8/25/2014	-6.56%	89
KFY	9/29/2014	3.57%	54
IQNT	10/6/2014	42.08%	47
EDU	10/27/2014	-0.04%	26
PLT	11/6/2014	-1.31%	16
BKE	11/10/2014	2.12%	12
CPSI	11/17/2014	-4.50%	5
(Since 5/31/2011)
S&P	Annualized	13.08%
Sector Model	Annualized	25.84%
Large Portfolio	Annualized	22.91%

 

Rotation: selling PBI; buying AP.

After selling CLF last week, the steel industry took a nosedive and came back into the model’s buying window.  AP is losing money at the moment, but has low debt and low price to book value.

Once again we are looking at “value” in terms of “worth more dead than alive.”

Oh well.

The specific industries represented in the buy window continue to be a confusing mix:

EDUC

ELECEQ

ELECTRNX

FUNL SVC

HLTHSYS

HUMAN

INSLIFE

MARITIME

SEMI-EQP

STEEL

WIRELESS

 

Bull or Bear?

Maritime is an interesting choice – indicating a potential bottoming in commodities.  It gives some comfort to the selection of AP.  But the price action on CLF after the sale makes my head spin.  Even with the 13% spike on Friday, it’s down for the week.

The Sector Model is struggling to find a new high, trailing the broad market for the week:

 

Regular readers of the blog can see the back-test results for the Sector Model.  Those back-test numbers are the basis for the blue benchmark line on the graph.

Now – this benchmark is just a rolling average for all returns during the total period of back-tests and live trading added together.  It does not account for the variable advantage rates the model shows in different kinds of markets.

Using correlations from the back-tests, for instance, we can construct an expected advantage for the model given any set of hypothetical S&P yearly returns:

SPY%	Sector%	Advantage%
50%	57%	7%
40%	49%	9%
30%	40%	10%
20%	32%	12%
10%	24%	14%
0%	16%	16%
-10%	7%	17%
-20%	-1%	19%
-30%	-9%	21%
-40%	-17%	23%
-50%	-26%	24%

 

The take away here is that the worse the broad market does, the better the model looks.  Graphically this would be:

In a bear the model would still lose money – but not as much as the S&P. The worse the market gets, the greater advantage the model gains.

The hardest part, of course, is holding on during those market downturns.

The reason I’m saying this, of course, is to keep myself calm during a rather concerning sector ratio alignment:

In spite of the zero interest rate policy, we have to keep in mind that the far larger demographic trends are bearish, with another likely downturn starting next year.  These demographics don’t start to ease until after 2018.

The only short term solution would be… immigration.

Now don’t get excited.  We’ve killed off about 57 million babies since 1973.  Legalizing 5 million parents with American born babies isn’t enough to fix it.

Tim

 

 

11/18/2014 Back Tests for the Sector Model

I keep saying that the Sector Model is performing consistently with back tested returns, but I seem to have neglected the back tests.

Date	SPY	SPY%	Sector	Sector%		Advantage
12/31/2013	184.69	32.31%	1400.73	42.36%		10.05%
12/31/2012	139.59	15.99%	983.96	28.95%		12.96%
12/30/2011	120.35	1.90%	763.07	6.23%		4.33%
12/31/2010	118.11	15.06%	718.34	17.54%		2.48%
12/31/2009	102.65	26.35%	611.16	58.07%		31.72%
12/31/2008	81.24	-36.80%	386.64	-16.37%		20.43%
12/31/2007	128.54	5.15%	462.31	21.85%		16.70%
12/29/2006	122.25	15.84%	379.41	17.82%		1.97%
12/30/2005	105.53	4.83%	322.03	-0.49%		-5.32%
12/31/2004	100.67	10.70%	323.62	30.96%		20.26%
12/31/2003	90.94	28.17%	247.12	36.48%		8.30%
12/31/2002	70.95	-21.58%	181.07	-7.58%		14.00%
12/31/2001	90.47	-11.76%	195.91	25.68%		37.44%
12/29/2000	102.53	-9.78%	155.89	18.47%		28.25%
12/31/1999	113.64	20.37%	131.58	35.30%		14.93%
12/31/1998	94.41		97.25			0.00%

In summary:

	SPY	Sector	Advantage
Average%	6.45%	21.02%	14.57%
Median%	10.70%	21.85%	11.15%
Best%	32.31%	58.07%	25.76%
Worst%	-36.80%	-16.37%	20.43%

The only thing that counts are real returns, and it is encouraging that these are performing consistently with the back tests.

11/16/2014 A Time for Traps

Sector Model	XLF	0.92%
Large Portfolio	Date	Return	Days
SR	6/2/2014	-10.54%	166
ESI	8/4/2014	-27.46%	103
STRA	8/18/2014	33.97%	89
PBI	8/25/2014	-6.96%	82
CLF	9/2/2014	-28.06%	74
KFY	9/29/2014	4.49%	47
IQNT	10/6/2014	47.38%	40
EDU	10/27/2014	0.49%	19
PLT	11/6/2014	-0.71%	9
BKE	11/10/2014	0.44%	5
(Since 5/31/2011)
S&P	Annualized	12.78%
Sector Model	Annualized	25.77%
Large Portfolio	Annualized	24.17%

 

Rotation: selling CLF; buying CPSI.

Biting the bullet and taking the loss.

The Sector Model had a hard week, but is still well ahead of the S&P for the year:

So much for the models.

What of the market itself?

Now that the United States is taking QE off the table (or at least being outsourced), the behavior of the rest of the world is more pertinent to our own future.  Europe continues to struggle with deflation.  Japan is devaluing its currency.  OPEC is pumping oil.  Russia is swallowing neighbors.  ISIS remains a threat.  The United States is facing another two years of gridlock, with most Republican bills of the future meant to show what Obama will NOT pass, rather than finding something he will.

And the President will be practicing a political version of a scorched earth policy – daring Congress to impeach him for unilateral actions.

John Hussman is predicting doom – but that is normally bullish…

All joking aside, my Sector model is showing relative positions for a late bull and my Style model is showing an early bear.  The aggregate of the two together averages to a perfect market top configuration.  Demographics show the bottom trough of the secular bear to be 2015-2018.

A few weeks ago both Sector and Style models were configured for an early bull, and the changed configuration in both is quite a feat.  The market gyrations have not simply been that of all stocks going down and all going back up.  Behind the scenes the money has flowed out of bullish sectors and into bearish ones.

Industries are more optimistic:

BUILDSUP

EDUC

ELECEQ

ELECTRNX

FUNL SVC

HLTHSYS

HUMAN

INSLIFE

PACKAGE

SEMI-EQP

WIRELESS

 

Most of these are bullish (with the exception of Health and Funeral Services… two sides of the same bearish coin).

So, bull or bear?  There is no guidance in the tea leaves.  The “smart money” can’t seem to make up its mind.

Beware of bull and bear traps: false moves in either direction that lure you into taking loses on both short and long bets that reverse just as soon as you get into them.

Tim

 

 

 

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

 

11/6/2014 Real Time Trade

Apologies for the lack of notice.  On the full model I just sold the position in CFI and bought a position in PLT.