9/1/2013 Don't cry for me...

Sector Model	XLU & XLK	0.13%
Style Model	Small Value
Large Portfolio	Date	Return	Days
CAJ	9/25/2012	-13.08%	341
ABX	4/11/2013	-20.67%	143
TTM	5/6/2013	-15.58%	118
DLB	5/13/2013	-8.39%	111
OKE	6/17/2013	16.86%	76
BTI	7/1/2013	-0.06%	62
CLH	7/8/2013	9.33%	55
FAST	7/22/2013	-5.52%	41
VAR	8/2/2013	-3.76%	30
OUTR	8/19/2013	-0.54%	13
(Since 5/31/2011)
S&P	Annualized	8.97%
Sector Model	Annualized	21.48%
Large Portfolio	Annualized	27.07%

 

Rotation: selling DLB; buying QCOM.

This is the second trade in the revised version of the model, and so far as bullish vs. bearish industries is concerned, it’s relatively neutral.  The sector model is also neutral, poised between expansion and contraction.

And, finally, the cycle chart is hovering around a market top, but refusing to cross into a bearish pattern.

Short answer: the so-called “smart-money” is playing the “heck-if-I-know” trade (when you can’t alliterate, hyphenate…).

There are two major reasons for the indecision: 1) they really don’t know if we will continue a “bull” market or go into a bear, and 2) no one knows what a “bear” market would even look like with Larry Summers at the helm.  From what I’ve been reading, the man is just a political hack who will make Bernanke look positively frugal.

I can see Bernanke in an evening gown, with his long laced gloves stretched out toward the crowds adoring him as he sings to them from his balcony, “Don’t cry for me Argentina…”

http://en.wikipedia.org/wiki/Argentine_economic_crisis_(1999%E2%80%932002)

 We’ve been lucky so far.  Bernanke has merely been printing enough money to camouflage deflation.  Summers is another beast altogether.  He’ll print money for political purposes.  Everything the Republicans accused Bernanke of doing, Summers will actually do – causing the Republicans to be embarrassed about what they said of Bernanke even as their worst fears finally come true.

A bear market in such an environment may not show up in the nominal “values” at all, but will only show up in the ratio of the market to commodities.

If you are in cash, your cash will be worth less.

If you are in gold, you’ll hold your own in real “value” while being taxed on fake “profits” and still end up with less.

And if you are in the market, well… you’ll either go up, down, or sideways.

Hence the confusion with the smart money.

Regardless, I’ll try to own companies that will go down less, and up more.  And I’ll pop some Dramamine if the rollercoaster ride gets me sick to my stomach.

Oh, and Syria?  Just noise.  Terrible, tragic, horrifying, noise… as far as the markets are concerned.  Worry about the lives that are lost and the children butchered instead of your account.  Value investors don’t have to monitor their accounts day to day – which should give them time to worry about people with real problems.

Tim

 

 

08/29/2013 sector update

At the close the sectors are XLU & XLK.

XLB fell very slightly into third place, and may revert to second tomorrow.

08/27/2013 sector update

Current positions after today are XLU & XLB.

08/25/2013 "Risk" depends on what would hurt most to lose

Sector Model	XLU & XLP	-0.74%
Style Model	Small Value
Large Portfolio	Date	Return	Days
CAJ	9/25/2012	-11.05%	333
ABX	4/11/2013	-17.07%	135
TTM	5/6/2013	-10.70%	110
DLB	5/13/2013	-5.71%	103
OKE	6/17/2013	17.97%	68
BTI	7/1/2013	3.14%	54
CLH	7/8/2013	9.43%	47
FAST	7/22/2013	-2.99%	33
VAR	8/2/2013	-0.75%	22
OUTR	8/19/2013	1.12%	5
(Since 5/31/2011)
S&P	Annualized	9.97%
Sector Model	Annualized	23.39%
Large Portfolio	Annualized	28.84%

 

I mentioned the other day that OUTR was the first stock selected with a new screening process.  It’s something of a screen within a screen, and backtests on the sector model show a good bit of added value to the process:

 

The blue line is the S&P.  The red line is the Sector Model we’ve been tracking.  The green line is what the Sector Model would look like with the new process.

This is a fourteen year backtest; however, it’s important to note that the new process would have significantly UNDERPERFORMED over the past two and a half years.  There was a sharp drop right at the beginning of the testing period (just after the models were launched on 5/31/2011), and the revised model would have needed to run for well over a year just to get back to zero.

All of which brings me to the subject for today: no matter what your method, you’ll have periods of good and bad luck.  “Risk” depends on how luck would affect your own trading needs.  If you are putting money steadily into the market, the more volatility the better.  If you are steadily taking it out, the less volatility the better.  If you are rotating like the Mousetrap or letting it ride like Buffett, volatility is nothing but noise.

I know, I know, folks like to quote Fama about risk, but Fama’s theories only work if you are close to retirement age or already retired.  If you have at least 4 or 5 years until retirement, following Fama is one of the most destructive things you can do – second only to trying to time (without an extremely sophisticated model).

So let’s look at volatility.  If you are steadily putting 100 a week into your retirement account, a highly volatile vehicle will cause your 100 dollars to represent a higher percentage of your account when it dips than when it is doing well.  The wobbles will actually work to your advantage and you will make money faster.

The flip side is that if you are retired and you take out 1000 a week, that 1000 will be a greater percentage of your account when it is down than when it is doing well.  The wobbles will work against you and you will lose money faster.

In other words, volatility only increases the effect of whatever you are doing to your account.  If you are adding to your account then volatility adds value.  If you are taking money from your account then volatility takes value away.

So, if you are more than five to ten years away from retirement and someone mentions Fama and risk adjusted returns, you may want to get a second opinion.  Fama is great if you are ALREADY rich and don’t want to become poor.  For us working folks Fama is a disaster.

The rule of thumb is that there is no rule of thumb.  Risk is defined by what is most destructive to lose.  For the rich, it is most destructive to lose capital.  For those who are working, it is most destructive to lose opportunity.

My own model looks for sectors and industries that are experiencing extreme panic.  I won’t even look at a stock in a complacent sector.  So Fama is as far away from my own targets as possible, and his only use is in causing these good values to be even better buys for me when I get to them – because none of Fama’s followers are bothering to look.

Am I a fan of Fama?

Nope.

But I do appreciate his scaring away my competition from the bargains that are out there.

Tim

 

 

08/23/2013 Market Top Formation

Sector Model	XLU & XLP	-1.30%
Style Model	Small Value
Large Portfolio	Date	Return	Days
CAJ	9/25/2012	-11.22%	332
ABX	4/11/2013	-19.17%	134
TTM	5/6/2013	-13.54%	109
DLB	5/13/2013	-5.60%	102
OKE	6/17/2013	17.42%	67
BTI	7/1/2013	2.36%	53
CLH	7/8/2013	8.33%	46
FAST	7/22/2013	-2.84%	32
VAR	8/2/2013	-0.59%	21
OUTR	8/19/2013	-0.24%	4
(Since 5/31/2011)
S&P	Annualized	9.79%
Sector Model	Annualized	23.49%
Large Portfolio	Annualized	28.39%

 

As I pointed out yesterday on the blog, the sector model switched from XLU & XLB, to XLU & XLP.  In terms of market rotation, that is moving from a top combination to a bear combination.  However, I don’t just look at sectors, but also market cap and styles (chart below).

So, a quick note on the market.

The recent flash freeze in Nasdaq is a symptom of a bull market that is getting long in the tooth.  Also, the talk of tapering by the Fed has the market spooked to the point that large players are positioning themselves for a bear market.  Accordingly, the combination of sector, market cap, and style configurations are in line for a market top:

 

NORMALLY the market has the following relationship with the Fed…

BEAR

At a market top the Fed starts to lower interest rates.  During a bear market rally the Fed tries to allow interest rates to rise, and the market fails.  During the final throes of a bear, both interest rates and market prices plummet together.

BULL

At a market bottom the Fed holds rates down while the market begins to turn.  At a correction the Fed is tightening rates and the market stumbles, but recovers on its own.  At a market top both prices and rates are rising together.

In a NORMAL market we’d be looking for a correction here, rather than a bear market.

HOWEVER, if we are indeed in the midst of a secular bear market (my own opinion based on the demographic hole in working age vs. non-working age people), then such a “correction” would fail to recover.  A failed “correction” would be akin to 1937, when we had the depression within the depression.

I don’t have a crystal ball, and all this talk of tapering could just be a trial balloon.  The Fed knows about 1937, and would LIKE to avoid it if possible.  So, between the two options of a correction or a deflationary implosion, most large players seem to be positioning themselves for a normal to mild bear.

Since my model is long only, it does not time the market, but instead it rotates between industries and sectors.  In a market dip I will dip too, but will rotate out of stocks that dip less and into ones that have dipped more, so that when a recovery does happen, I will be positioned to recover faster.

If you are faint of heart, though, the next few months could be a good time to take up yoga and meditation…

Tim