07/21/2014 Nope -- still risk on

Some gyrations, but still risk on:

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

If you want to be "technical" this is a late bear market rally -- short lived, but bullish.

That "technical" appraisal was made meaningless by QE, but that's another post.  For now, short term is bullish.

07/19/2014 Don't Be a Psychopath

Style Model	Small Value
Sector Model	XLU	0.00%
Large Portfolio	Date	Return	Days
BX	4/14/2014	19.72%	96
TIVO	4/23/2014	11.43%	87
SHOO	4/28/2014	-3.43%	82
PWR	5/12/2014	4.62%	68
PM	5/27/2014	0.41%	53
SR	6/2/2014	7.55%	47
CFI	6/9/2014	-0.45%	40
FRAN	6/16/2014	-5.37%	33
NUS	7/7/2014	-14.71%	12
BT	7/14/2014	-0.32%	5
(Since 5/31/2011)
S&P	Annualized	13.09%
Sector Model	Annualized	27.03%
Large Portfolio	Annualized	25.93%

 

Rotation: selling PWR; buying RRD in the publishing industry.

Both the market and the Sector Model recovered on Friday, only to switch to Utilities at the close:

 

One would think that nothing at all had happened on Thursday.

But this week has seen a horrific tragedy from a terror missile in the Ukraine, and a reluctant return into Gaza as Israel tries to stop hundreds of terror missiles being fired almost non-stop on her citizens.

Death rains from the sky: and the market… recovers the next day.

I think that’s the worst part of trading.  You watch unspeakable things happening to real people and see news about how this is supposed to affect your portfolio.

Aside from the moral sacrilege of such news, it’s also bad investing.

Forget the effect of wars and rumors of wars on your wallet.  It’s bad for your soul and bad for your wallet.

It’s bad for your soul because you try to look at how many dollars three hundred dead people have cost you.  I don’t care how much money you have – it’s not worth the price of a single life.  The death of one person destroys infinitely more value than the entire wealth of Warren Buffett.  Your puny portfolio is less than nothing in comparison.

It’s bad for your wallet because these things do not affect your returns beyond the extreme short term.  ANY reaction you have to them is guaranteed to be wrong.

Investing is a slow process of measuring earnings, profit margins, debt, demographics, and a host of other metrics that do not change from day to day.

What many market “news” articles are trying to get you to do is to think along the following lines:

“How much is the death of three hundred people going to affect the price of a cosmetics stock?”

LOOK AT THAT QUESTION.

The question itself is bankrupt in the extreme.  It’s the kind of question only a psychopath would even try to calculate.  Psychopaths belong in prison.

Too often they become CEOs.  But that’s another post.

THIS post is about avoiding psychopathic news that takes Fama’s efficient market hypothesis to such an extreme that the market will plunge on the day people are killed and get euphoric the very next day.

The market recovered on Friday.

The victims of flight MH17 did not.

Your wallet is safe.

The civilians in Israel who are constantly running back and forth to bomb shelters are not.

Forget Fama.  The market is not efficient; neither is it “right” to plunge on Thursday and recover on Friday.

And any news reporter who tries to help you to profit on tragic news should lose your business.  Just stop reading such “advice.”  Boycott it, and take the time you would have spent worrying about your trades to do something infinitely more profitable: hug your children; call a friend; find a charity to help the victims of terror; and worry about ways to make humanity more humane.

Tim

 

 

07/15/2014 Risk on

Small caps are back in play...

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

07/13/2014 Calculating the True CAPE Ratio

Just to add some detail to the logic of my earlier post: I’m using the M1 money supply as a deflator instead of CPI.  The difference shows a relative CAPE ratio shift from the Shiller calculation of 25.96, to a vastly different value of 16.55:

(Source http://www.econ.yale.edu/~shiller/data.htm)

 

The 25.96 value is the one that scares Hussman.

And he would be right to be scared.  But what Hussman isn’t taking into account is that QE skews the value of the CAPE ratio down to a lower value:

 

So far as an expected earnings yield for the next decade, Hussman is seeing 4% annualized returns for the next ten years.  Using M1 as a deflator, the earnings yield is closer to the average of about 6% -- still a little low, but not drastically so.

In other words, the market is not primed for a crash – but instead primed for boredom.

All of this raises the question of what QE was for.  Was it merely to raise prices?

In a word, yes.

But why was it needed?

The answer has to do with the deflationary pressures caused by the demographic pressure of baby boomers hitting retirement age.  In simplest terms, prices rise when demand rises against supply.  Conversely, prices fall when demand falls against supply.

Retiring baby boomers are doing what ALL retiring people do: reducing their demand so that their retirement savings don’t die off before they do.  They don’t want to eat dog food later, so they stop eating lobster now.

Bernanke fought deflation by devaluing the dollar faster than retirees could reduce their own spending.

The Shiller CAPE ratio is based on CPI, which has lagged behind the massive M1 hikes caused by QE.  Inflation WILL come, but not until around 2018 or so, when the demographic pressures bottom out and begin to rise again.

Shiller deserved his Nobel prize, and I don’t want to negate the value of his work.  I’m merely pointing out that his work was never based on the types of distortion created by QE, and when we take QE into account we find the market priced for boring returns, rather than catastrophic losses.

The market HAS risen in real value in the last few years, but not nearly as much as it would appear.  You have to divide the rise in “price” against the total supply of money to get a more realistic picture.

Tim

 

 

 

07/12/2014 Ready for a Genuine Bull Market?

Style Model	Large Value
Sector Model	XLF	0.00%
Large Portfolio	Date	Return	Days
BX	4/14/2014	8.22%	89
TIVO	4/23/2014	10.52%	80
SHOO	4/28/2014	-2.66%	75
PWR	5/12/2014	3.82%	61
PM	5/27/2014	-0.30%	46
SR	6/2/2014	2.78%	40
CFI	6/9/2014	-4.19%	33
FRAN	6/16/2014	-3.20%	26
ESI	6/30/2014	-4.93%	12
NUS	7/7/2014	-4.59%	5
(Since 5/31/2011)
S&P	Annualized	12.98%
Sector Model	Annualized	26.82%
Large Portfolio	Annualized	25.74%

 

Rotation: selling ESI; buying BT.

This trade reflects a preference for Large caps over Small caps on the style model.

The Sector Model switched from Financials, to Utilities, and then back to Financials again on Friday:

 

In terms of both sectors and styles, the market configuration is consistent with the end of a bear market – which has been hidden behind all of the Quantitative Easing.

I don’t show this graph that often, but the highest point on the blue line is the current position in a NORMAL market cycle.  A normal non-QE-market would be bottoming out about now (Bear 4), and the economy would be gearing up for some normal types of business investment (rather than the bubble investing we’ve seen over the past few years).

The curious thing for me going forward is what will happen when we achieve a true bull market configuration just as QE comes to an end. 

My guess is that the market will continue to rise until the Fed actually tries to reverse QE through rising interest rates.  I don’t see that happening yet.  So, the end of QE this year shouldn’t cause the market to fall.  If we truly are at the END of a seven year long bear market configuration, then this would in fact be the correct time to end QE and let natural economic forces do their work.

 In any case, those who focus on normal economic forces have missed most of the “bull market” we’ve experienced – Hussman being a notable example.  And those who focus on QE have been calling for an imminent bear to start at the end of QE this year.

My gut instincts are with both of those camps, and since my gut is almost always wrong, I’ll have to suggest that we won’t see an end to a bull market this year, but instead the beginning of one – that is, the beginning of an actual economically driven bull market instead of a fake QE band-aid market.

HOWEVER, even normal bull markets have to fight the demographic headwinds that underlie secular bears:

From: http://market-mousetrap.blogspot.com/2014/04/04132014-bursting-bernankes-bubble.html

Nothing is exact in secular trends.  They are more like a sledgehammer than a scalpel.  This chart shows a secular bear most likely from 2002-2018.  We all know that it started two years earlier than that.  If it were to also end two years early, that would still be 2016 before we were ready for another Reagan style economy.

Two years more, or four?

Either way, the secular bear isn’t over – which is precisely why we’ve had all that Quantitative Easing these past few years.

So then, if my sector and style models are correct, we are close to beginning a cyclical bull market, in a secular bear.

No reason to panic, but nothing to brag about either.

My suspicion is that we’ll have a boring year between now and next summer. 

Wish I could predict something fancy like a crash – but I’m not in the business of selling news articles.  I’m in the business of personal investing.

Tim