Highly Rated Stocks in Highly Rated Funds
October 29, 2007
I ran a screen to find stocks rated five stars by Morningstar, that are also owned by funds rated either four or five stars by Morningstar. The list was short:- Buckeye GP Holdings (BGH)
- Carnival PLC (CUK)
- St. Joe Corporation (JOE)
- White Mountain Insurance (WTM)
Of these, The Kelly Letter has been tracking only one, St. Joe, for a potential buy. It's a victim of the housing market's woes, but looks to have fantastic underlying asset value and has moved aggressively to limit its exposure to the risks that have hurt it so much in the downturn.
I'll let subscribers know if and when I buy it, along with another housing stock I like. It's still early for the sector, in my view, but the day will come.
The above four stocks closed last Friday at the following discounts:- BGH 21% below fair value
- CUK 35% below fair value
- JOE 66% below fair value
- WTM 36% below fair value
From this quick comparison, it's easy to see why I'm stalking shares of St. Joe Corporation.Labels: Long Ideas
One penny unlocks
The Kelly Letter
Back On Track
October 28, 2007
My continued bullish stance last weekend following a drop in the market was correct.
Last week, despite weak home sales data and high oil prices, stocks rose dramatically:
Dow ................ 13,807 +2.1%
Nasdaq ............. 2,804 +2.9%
Nasdaq 100 ......... 2,195 +3.0%
S&P 500 ............ 1,535 +2.3%
S&P Midcap 400 ..... 895 +1.9%
S&P Smallcap 600 ... 428 +3.0%
People are too worried about the market. Everybody is afraid of getting in at the top of the Dow. They're concerned that sky-high oil prices will sink stocks. They're convinced that housing is doomed and will take down the economy. We'll soon be in a recession.
We've seen these same fears before. Usually, when they're high, the market is poised for gains.
Right now, they're high. Get ready for more gains.Labels: Market Timing
One penny unlocks
The Kelly Letter
Here's Your Chance, Latecomers
October 21, 2007
Friday was the crowning moment of a bad week. Caterpillar came in with weak earnings and fell 5%. Such a stalwart collapsing was enough to fold weak hands on the anniversary of Black Monday 20 years prior. Forecasters of gloom raised their arms in victory as the Dow shed 2.6% for the day.
I wrote last month that we would not see another Black Monday, and we haven't. Some disingenuous pundits are using Friday's sell-off to claim prescience in warning us of an impending repeat of 1987. Please. Twenty years ago, the drop was 23% in a day. Friday's 2.6% drop is fairly routine. Anybody in this business knows that and should not exploit the coincidental timing to capitalize on fears.
Another idea I wrote last month was that any weakness this month would be the opportunity for latecomers to finally join the rally underway. I still feel that way. We have weakness, so now's the time to get into the market if you haven't already.
Look carefully at the reasons behind last week's drop: sub-prime, high oil prices, declining dollar, economic uncertainty, accusations of a befuddled Fed. Do you see anything new there? No. It's the same bear list we've seen for a long time. New fears -- unforeseen -- would be greater cause for concern because big drops are usually surprises. Last week was just a normal amount of market shakiness. It's weakness that should be bought. It'll probably persist a little longer, but is nothing cataclysmic.
Keep your perspective here. The market stepped down three rungs on a tall ladder that's gone almost vertical for two months. The dizzying heights have been reduced, but the ladder is still in place and the climbing will resume.Labels: Market Timing
One penny unlocks
The Kelly Letter
Getting Killed By Leverage
October 17, 2007
Yesterday's article on leverage sparked conversation. It's the conversation that's always sparked by leverage because you invariably have to say that "it works both ways." Andrew Tobias pointed that out in his inestimable The Only Investment Guide You'll Ever Need.
Wade asked:If the index falls 50% and you are leveraged 100%, don't you lose everything? With most investments, yes. With leveraged mutual funds and ETFs, however, no. The reason is that they maintain constant leverage by daily rebalancing of equity and debt, whereby they buy shares when the market rises and sell when it falls. Even though they are selling shares by the boatload as the market plummets, they'll always have some shares leftover.
The main point, though, is whether you can be severely damaged by a leveraged index investment in the event of a big bear market and the answer is: absolutely. This is their downside.
However, can't we say the same about any investment? If you bough Sharper Image for $13 last June, you'd be in bad shape now. It closed at $1.81 yesterday.
Tom wrote:If we start looking at your example from another date, the results would be very different. Let's say I had invested $10,000 on April 1998, at the start of a short bearish period:
04/98 to 08/98: -50%
08/98 to 08/00: +186%
08/00 to 03/03: -59%
03/03 to 04/06: +220%
04/06 to 07/06: -23%
07/06 to 10/07: +55%
This gives me a return of only 8.86% per year for the past 9.5 years, well below many actively managed funds. Am I calculating this right? Yes, Tom is calculating right. The unfortunate person who started their investment program in April 1998 is still waiting to see much success.
Is it really the fault of leverage, though?
The total return of the leverage in the period Tom specified was 124%. During that same period, the total return of the Dow was 53% and the Nasdaq 45%. That gives them respective average annual returns of 4.6% and 4.0%.
As for how 8.86% per year since April 1998 stacks up against mutual funds, according to Morningstar, it makes the top quartile. That's pretty good considering that Tom deliberately chose one of the worst times to have begun the investment program.
Both Wade and Tom make valid points. Any leveraging strategy has the downside of magnifying losses. It's possible to time it just wrong and do lousy. Any measure that can be taken to reduce the steep losses helps immensely. We can't count on that skill, however, so I leave it out of my calculations and always include full losses with full gains.
My own ability to time the market has proven to be pretty good, which is why I'll be launching a timing service around these leveraging strategies next year. My hope is to add value by reducing the impact of down markets by being in cash during a portion of them.
A simpler approach is to only use this leverage after the market has corrected at least 20%, or to double your regular contributions to the portfolio during such corrections. Setting a concrete percentage on the decline required to use leverage removes the need for intuition, which is unreliable.
I'll show the benefit of using set percentage levels to change your contribution in a future article.Labels: Market Timing, Perma Ports
One penny unlocks
The Kelly Letter
Putting Leverage To Work
October 16, 2007
I advocate the use of leveraged index vehicles in my stock book and newsletter, such as those offered by ProFunds, ProShares, and Rydex.
Since I first did so five years ago, the strategy has been under attack. The point of attack is always the volatility of the strategies. The inevitable conclusion of the skeptic is that a severe bear market will wipe out the entire investment.
Anything that magnifies performance on the up and down sides will by definition be more volatile than the underlying investment. If you own an ETF or fund that returns 200% of the Dow, then your portfolio will be twice as volatile as the Dow.
Some people equate volatility with risk. It is one kind of risk, but not the only kind and usually not the most important kind. Say you're 30 years away from retirement. A bank savings account will not fluctuate at all during those 30 years. It will return a few percentage points of interest each year and not for one moment will the balance drop below what you put into the account. It exhibits zero volatility and is therefore not risky at all by this measure.
However, you are guaranteed to miss your retirement goals in that account. The money will not grow enough to meaningfully outpace inflation. In that sense, the bank account is the riskiest choice of all because it comes with a 100% chance of failure to reach your retirement goals.
Volatility, the rise and fall of prices, is not inherently bad. If it ultimately takes your capital to heights not possible without the volatility, then it was worth the rollercoaster ride. Married to the right indexes, leverage and its attendant volatility is an excellent long-term path to wealth.
It works best when combined with dollar-cost averaging. That's simply sending more money on a regular basis, usually monthly or quarterly. That approach, which happens to be the way most people actually invest, works best with a strategy that is volatile. Why? Because the change in prices is what enables the periodic investments to buy more shares when the price is cheap and fewer when it's expensive. The automatic result is that the investor ends up with more cheap shares than expensive and benefits when the investment finally rises overall. Stated differently, the average cost of his or her shares is lower than the average cost of the fund or ETF during a given time period.
This can all go terribly wrong if the investment drops to zero and has therefore no chance of recovery, or just drops very low and does not recover. With carefully chosen indexes to leverage, however, these risks diminish. They don't disappear, but they diminish.
Let's look at one example. In the 2008 edition of my Neatest Little Guide to Stock Market Investing, I mention that I like the S&P Midcap 400 index because it tends to rise more than the Dow in good times and fall less in bad times. Look at this chart of the two indexes since August 1991 and you'll see what I mean.
The period from 1991 to today included one of the worst bear markets in history, that being the dot com bubble burst that took the Nasdaq down some 80%. That's key to this analysis because critics always point to an awful bear market as the reason that leveraged strategies are doomed to failure.
Even a buy and hold approach to leveraging the S&P Midcap 400 worked fine in this case, however. Let's take a big-picture look at how 200% leverage against the index worked over this time period:- 08/91 to 01/94: +88%
- 01/94 to 06/94: -23%
- 06/94 to 05/96: +96%
- 05/96 to 07/96: -25%
- 07/96 to 04/98: +157%
- 04/98 to 08/98: -50%
- 08/98 to 08/00: +186%
- 08/00 to 03/03: -59%
- 03/03 to 04/06: +220%
- 04/06 to 07/06: -23%
- 07/06 to 10/07: +55%
Had you invested $10,000 in the strategy back in August 1991, you would have $122,459 today. Had you invested in the S&P Midcap 400 index without any leverage, you would have only $71,339. While the strategy did not actually double the index, it did beat it by a wide margin.
Keep in mind that this is buy and hold at work through one of the worst bear markets in history. However, had you been smart enough to keep sending more money each month during those -23%, -25%, -50%, -59%, and -23% times, you would have done considerably better than buy-and-hold alone.
If you were just a tad smarter still and decided to double your monthly contributions whenever the strategy was down by more than 20%, you'd have done better still.
The point to remember is this: extreme volatility coupled with assured recovery is a potent combination. It's what gives you the confidence needed to send more money to something that is down 59%. You cannot have that confidence in an individual stock because there's a good chance that it won't recover or at least won't do so in a reasonable amount of time.
With an index, though, the situation is different. Indexes always recover. All 30 megacaps on the Dow, all 500 large caps on the S&P 500, all 400 midcaps on the S&P Midcap 400 are not going to go bankrupt at the same time. The indexes will have turbulent months and years, as the above history shows, but they will rise to new heights eventually. Confidence in that is what gives an investor the courage needed to pony up more capital during dark months.
To Kelly Letter subscribers, this is old hat. We monitor this approach and use it constantly. It's been very good to us.
Just recently the familiar saga played out again. During the sub-prime scare last summer, our Maximum Midcap strategy fell 23% from mid-July to mid-August. The predictable "I told you so" mail came pouring in as the headlines darkened around the credit crunch, systemic crisis, worst housing market in decades, and so on.
What did we do? Invested more money with full confidence that the index and our strategy would one day fully recover, as they always have.
Since the August lows, the strategy is already up 21%.Labels: Indexing, Perma Ports
One penny unlocks
The Kelly Letter
Now They Say We're
Climbing The Wall Of Worry
October 14, 2007
Inflexibility makes for bad forecasting. The best forecasters possess an ability to change their minds on a dime, the moment it looks like they've made a mistake, and to re-formulate their assumptions. The worst forecasters maintain their initial forecast even as its reasons disappear, thinking that the market should have done what they predicted and that, therefore, it will get in step any day now.
Five weeks ago, I changed from cautious to bullish. It was a controversial move, attacked on several fronts for its "carelessness" and "ignorance of systemic issues." I was told personally that I had no "regard for the hard-earned savings" of my subscribers. One person told me to "wake up."
As one week of solid returns became two, then four, and now five, the tone of criticism has changed. Instead of re-visiting the initial call, some competing forecasters are just re-forecasting from now as if we're starting fresh, slate clean, forget about what happened five weeks ago. "What's going to happen from here?" they ask, and then re-state their market fears as though they hadn't been wrong for more than month, or more than several years in some cases. It's a clever change of subject and comprises the modus operandi of most in the forecasting business for a simple reason: they're usually wrong.
Typical is the weekend note sent by EquiTrend's John McClure, which always ends with the sign-off "Working for your wealth." Last weekend, it was titled "We Are Climbing The Wall Of Worry" and contained these excerpts:It was back to a bad news, good action week for the most part as investors chose to look at the data through rose-colored glasses. . . . Dow Theory states that for a trend to be confirmed, both the Dow Transports and Dow Industrials must be trending in the same direction. Although the Industrials have recovered all the territory lost since the July melt, the Transports have struggled. This week the Transports lost ground while the Industrials ended slightly higher. Until they both are heading in the same direction, the trend is in question.
And after falling since September 14, the Market Volatility Index (VIX) jumped this week to 17.73 from 16.91 last week as volatility (and fear) crept back into the market. . .
There are clouds growing on the horizon.
Given that a number of indexes are at or above their 2 standard-deviation trend channel top lines, the next correction could come at any time. Volumes also remain low and there has yet to be the flood of new buyers entering the market that normally accompanies -- and confirms -- a sustained rally. Mr. McClure is hardly alone when it comes to this type of forecasting. Those who look for sustained rallies are by definition leaving themselves out of the early parts of the rally. That makes their eventual bullish calls risky because they come closer to the day of reckoning, when the market reverses course and heads lower. Then, such forecasters keep their readers invested as the market goes down, down, down until they can confirm that it's a "sustained" bear market.
I wrote about Marc Faber and Enzio von Pfeil on September 25. Mr. Faber said that the U.S. economy is heading toward recession and that the bull market will end. Mr. Von Pfeil wrote, "We are now on 'red alert' for the current month of October."
Mr. Faber has been bearish this entire year. He told Barron's in January, "This economy is in the greatest bubble ever." He then outlined various reasons that the bubble would burst.
In his Oct. 10 article, Mr. Von Pfeil wrote:Here are some more market chillers protruding from Wall Street:- This year, 10,000 guys lose their jobs on Wall Street.
- Industrial production rose by an annual 6% last September; this August, it rose by 1.7%, i.e. by less than one third. Adieu, turnover.
- Retail sales peaked at an annual growth rate of 9.2% in 5/06; by this August, they were limping along at 3.9% , i.e. by less than half. Adieu, turnover.
- Unit labour costs rose by an annual 2.4% in March, 2005; by this July, they were rising by 5.1% -- or by over twice that rate. Goodbye margins.
- Profits, unsurprisingly, are cooling. Having risen by an annual 6.6% in 1Q05, by 2Q07 they were sputtering at 4.7%, which represents a slow down of nearly 30%.
So how can profits rise if The Economic Time is worsening? We keep sensing that stagflation is on the way. It's not hard to see the wall of worry. It's also not hard to see who builds it brick by brick.
Nevertheless, the Dow is up 13% this year. Portfolios from The Kelly Letter are up much more than that, as usual:- +42% The Dow One
- +24% Double The Dow
- +22% Maximum Midcap
The cover of last weekend's Barron's read "Black Monday" and made comparisons with October 19, 1987 when the Dow lost 23% in a day. I already wrote about that in the October issue of The Kelly Letter, from which this is taken:Where 1987 and today differ is in the valuation of the market. Heading into October 1987, the S&P 500 had a P/E of 22. Today it's just 18.
More damning for 1987, though, were performances. In August 1987, the S&P 500 was up 45% year-to-date and Treasury yields went from 7% to 9%. Those were major warning flags. This year, the S&P 500 topped out at a gain of 10% and Treasury yields never moved beyond 5%. The market is not wildly overvalued.
Don't fear a calamity in October. If we get a sell-off, it'll be a good time for late-comers to join the party that will see stocks higher in the medium term.
That's all it will be. The solid returns of the past five weeks have not dulled my enthusiasm for stocks. I expect 3Q earnings growth and forecasts of good 4Q earnings to keep this rally going.
We have yet to see strong individual investor participation, which is usually what brings the blow-off top to a bull market. That top is where lots of gains are made. You need to be in ahead of it, not after it's gone on for a while and there's reason to believe it's sustainable.
The market will decline again someday. We can all agree on that. For the time being, though, it's better to own stocks than avoid them.Labels: Market Timing
One penny unlocks
The Kelly Letter
Will Chinese Capital Boost Global Stocks?
October 12, 2007
Don wrote:China plans to create a Wall Street equivalent financial center in Tianjin, as shown in this Forbes story.
The article says they intend to relax rules to allow individual Chinese to invest in the stock market, and that is no small thing. Personal Chinese wealth is booming. Automobile sales are increasing 25% a year, and the number of billionaires came close to tripling in the last year. Huge amounts of money are accumulating in the hands of individuals, who may soon gain access to stock market investing.
I think it could have a major impact on the overall investment game. If it opens the door for individual Chinese investment to world markets, it would seem that the number of investors and the amount of cash flowing into the stock market overall would climb dramatically over a relatively short period of time. The primary impact would be on the demand side of the equation: lots more buyers, and more money to buy with.
My perception (assuming this happens sooner rather than later) is that it would take a bull market that some think is close to peaked and kick it into a new dimension.
I'd be interested in your take on this one. I'm bullish on the U.S. stock market and the world market, but this isn't the reason.
Of course, it never hurts to have more investors and more money coming into the market. More demand drives prices higher. However, there's no lack of demand now. The global stock market has been well capitalized for decades. The impact of Chinese money coming into it is probably not enough by itself to drive the whole market. Now, properly magnified in the media, the impression of that capital being a rule-changing event could change things, but the actual impact on volume probably wouldn't be much to write home about.
The U.S. stock market has a market cap of $24 trillion. After that comes Tokyo ($4.5 tril), London ($3.9 tril), Shanghai ($2.4 tril), and Hong Kong ($2.3 tril). The top 15 exchanges have a combined market cap of $50 trillion. You can verify these figures in many places, including Wikipedia.
Even an injection of $1 trillion from China would represent less than 2% of the global market capitalization, enough for a short-term spike but probably not much beyond that. Besides, what rushes in rushes out, and very quickly the laws of all markets would dictate the outcome. It's doubtful that millions of wealthy Chinese would stampede into global markets, anyway, but even if they did we don't know what they would buy or how long they would hold.
Beyond that, most of what I've read shows that China's wealthy are more eager to re-invest in businesses in China -- their own -- than they are to send capital off to the stock market. This excerpt from notes on China's 2004 economic census is typical:The Rupert Hoogewerf 2004 China Top 100 Rich List was released on October 13, 2004. In pole position was 35-year-old Huang Guangyu, general manager of Gome Electronics. Huang, with a reported personal fortune of 10.5 billion yuan, disputes his "richest man in China" title: "There are so many wealthy private business owners in China, I can't be the richest."
It is hard to approximate the number of Chinese moneybags. That last part is key. The reason it's hard to know is that so much of China's wealth remains tied up in private ventures or is otherwise out of public view. Stock investments are not. Is China's closely held wealth really champing at the bit to get into global stocks?
Another important point is that the number of wealthy in China is increasing dramatically, but the country still has an abundance of non-wealthy citizens. From the latest report from Rupert Hoogewerf: "With 1.3 billion people, the average income in [China's] countryside in 2006 was still only about 3,600 yuan (US$480)." This fact is often lost on those who see the country's massive population, notice that the number of wealthy citizens is growing, and then mentally multiply the wealth figures by all 1.3 billion people to create the image of a tidal wave of wealth coming from China. There's a growing supply, but it's not a tidal wave yet.
Moreover, China's wealthy have been able to invest in their own Shanghai Stock Exchange for years. Recently, there has been a rush of capital into that market, as reported in the Aug. 22 issue of BusinessWeek:There is simply too much money sluicing through the [Chinese] economy, helping push the stock market to new highs day after day and adding to inflationary pressure. On Aug. 20, the State Administration for Foreign Exchange unveiled a landmark decision to allow Chinese citizens to invest directly in Hong Kong stocks. The move is widely regarded as an attempt to siphon off some of the liquidity that has been driving equities on the Shanghai and Shenzhen exchanges steadily higher. By some estimates, as much as $100 billion in additional money could flow into Hong Kong-listed stocks by Chinese retail investors in the next 12 months. China is supposedly going mad for stocks, yet the capitalization of the Shanghai Stock Exchange remains one-tenth the size of America's. Throw open the doors to global exchanges and that supposedly torrential $100 billion capital flow becomes two-tenths of one percent of the global market cap. Do you think 0.2% of the global market capitalization is enough to make a difference? I don't.
Also, wealthy people can get their money wherever they want it to go. You can be sure that wealthy Chinese who want to own foreign stocks already do. Yes, a local conduit making it easier to turn yuan into shares of any company on Earth would boost liquidity, but as you can see from the above analysis, it will not produce a needle-moving change in capital flows.
In the end, all the historical rules of stock markets will rule the day. It doesn't matter if market capitalization rises to $500 trillion. There will still be booms and busts, sector shuffling, competing forecasts, and the everlasting battle of bulls and bears.
All things considered, I don't believe China's gradual entrance into the global stock market is an actionable event.Labels: China
One penny unlocks
The Kelly Letter
Too Many End-Of-Year Bulls?
October 11, 2007
John wrote:I've been following the debate on whether the pessimists are correct or not, and so far the market is going our way after your bullish call [one month ago]. I have no idea what will happen next. However, my one comment is that I worry about the "sure thing." It is "common knowledge" that the market runs up at the end of the year. It "always happens."
It may well happen again, as it usually does. It's just that when we count on something to "always" happen, the market has a habit of doing what it likes, and sometimes the sure thing evaporates.
I get worried when everyone agrees. I do, too, but there's nothing near a bullish consensus now. In fact, the switch from cautious to bullish here was met with heavy resistance, even insults.
We're one month into solid returns, but frustrated bears are only nibbling at the idea that the market might rise after all. Read forecasts carefully and you'll see a lot of reference to downside risks remaining high, the October surprise lurking in the shadows, and such. We've decided to charge ahead in full bull regalia despite those fears -- which are always present, by the way -- and so far we've been right.
Even the Fed is hedging, though:St. Louis Fed President William Poole said Tuesday that the Labor Department's recent employment report implies the economy is not in as much danger as was feared, but conditions remain delicate. On the same day, San Francisco Fed President Janet Yellen said she is uncertain whether further rate cuts will be required to stabilize the economy. "Financial markets appear to be stabilizing, but they have not returned to normal and are still fragile," said Poole. He cautioned that housing will likely remain weak for several more quarters. Yellen believes the rate cut helped to contain downside risk, but she said it is too early to tell whether the economy "dodged a bullet." "I have a totally open mind about what, if anything, is going to be needed from here on in," she said. [Full Article] While it's true that there's a seasonality to the market, saying everybody is on to it overstates the case. In fact, that "everybody" is generally the Stock Trader's Almanac, which advocates a mechanical strategy that looks to be getting into the market about now for what it dubs the "best six months." I criticized the Almanac yesterday for its rough conclusions about the presidential election cycle, and its best six months strategy deserves equal disdain.
Creating skepticism around the strategy doesn't even take financial analysis. Just think about it. Don't you suppose that if winning in the market were as easy as putting your money in every fall and taking it out every spring, we'd all just create an automatic timer with our brokerage accounts? Sure we would.
Unfortunately, the strategy isn't all it's cracked up to be.
From 1995 to 2005, the Almanac's prized strategy of combining its "best six months" approach with MACD timing to get better seasonal entries and exits returned a cumulative 225%. Just owning the Nasdaq 100 returned 332%, and that's including the dot com crash. How much investment acumen does it take to just put your money in a Nasdaq 100 index fund or ETF? Not much, yet it was far better than the Almanac's seasonal timing strategy.
If you really want to see the lack of research going on at the Almanac, compare its performance to my permanent portfolios. My Maximum Midcap strategy returned 526% just as a lump sum. The extreme volatility of the strategy combined with regular monthly investments did far better, still. In fact, it's that pairing of extreme volatility with assured recovery that makes the strategy so perfect for the way most people invest: by sending additional funds each month or quarter.
One weakness of the Almanac is that its strategies are based and proven with data going back to 1950. That sounds good in theory because they're tried and true. Unfortunately, they appear to be a bit old and stodgy. They certainly don't stand up to the "what have you done for me lately?" rule that most investors employ, whether consciously or not.
For example, the Almanac is proud that its "best six months" with MACD has not had a losing year since 1983. Nice soundbite, but it doesn't mean much when looking at the bottom line. Volatility is your friend when it eventually moves upward. From 2000 to 2005, the Almanac generated these annual returns: +5%, +16%, +6%, +8%, +2%, +8%. Not a losing year, true, but not much in the way of winnings, either. Maximum Midcap speaks for itself.
So, I wouldn't worry about the impression that everybody is on board for an end-of-year recovery. First, they're not. Second, that impression is mostly from the Almanac's touting of such seasonality, which has not proven to be the most profitable approach to stocks.
This comes up every year, we get through it every year, and I'm sticking with my forecast of a strong medium term -- for reasons that have nothing to do with the Almanac's strategy.Labels: Market Timing, Strategies
One penny unlocks
The Kelly Letter
Presidential Election Cycle
October 10, 2007
Jesse wrote: "I found an interesting article on the effects of presidential elections on stock prices."
From the article Jesse cited:In The Stock Trader's Almanac, 2004, Yale Hirsch notes that based on his studies, "Presidential elections every four years have a profound impact on the economy and the stock market. Wars, recessions and bear markets tend to start or occur in the first half of the term, and bull markets in the latter half." The Stock Trader's Almanac is a very rudimentary tool, useful for big picture prognosticating and interesting historical tidbits, but nearly useless when it comes to actually making investment decisions.
Recently, for instance, the Almanac was out of the market for the powerful rally that began in summer 2006, and has missed out on the current rally that began more than a month ago, plus all of the heady gains back in May. Why? Because it uses a mechanical seasonal timing method called the "Best Six Months" with MACD analysis to try determining when to get in and out of the market in October or November and April or May. Some people swear by it; I swear at it.
So it comes as little surprise to me that Yale Hirsch concludes in typical wide-cut Almanac fashion that rallies tend to occur in the latter half of a president's term. How would you have felt back in Bill Clinton's second term in 1997 and 1998 when the market was supposed to do poorly but the Nasdaq gained 71%, or in 1999 and 2000 when the market was supposed to do well but the Nasdaq saw its peak and first half of the crash.
"Yes," they say, "but look how the cycle did with President Bush's first term."
Fine. The Nasdaq lost 46% during the first two years of President Bush's first term. However, that was the follow-on to the bear market that began in the last two years of President Clinton's second term. Moreover, the supposedly rough first two years of President Bush's second term were good. The predictor failed there.
Looking over the spottiness, you can see why I'm loath to call the presidential election cycle much of an actionable trend. Yes, there's something to it. It's worth factoring in, and I admit that this being the third year of President Bush's second term helped make my bullish call on this year back in January. However, by itself, it's not much to build a strategy around.
What there is worth building on is not best presented by the Almanac. For a more illuminating look at the facts in a concise article, stop by CXO Advisory Group. It concludes:There appears to be some connection between the presidential term cycle and stock market performance, with Year 3 the best and Year 1 the worst. CXO improved on the Almanac by narrowing down the best part of a presidency to a single year and the worst part to another single year. That's a helpful leap over the Almanac's sloppy half-and-half ballpark assessment.
Probably the best comment on all of this is from the article Jesse cited. It concludes:Even where patterns exist, there is enough variability that it is risky to try to anticipate specific turns in the market. That, ladies and gentlemen, is why I'm still in business.Labels: Strategies
One penny unlocks
The Kelly Letter
Stock Experts In Typical Disagreement
October 09, 2007
The following exclusive report is from Dave Van Knapp of Sensible Stocks, a frequent contributor to this site:It's not unusual for "the experts" to disagree on where the market is headed, but the mid-summer credit crunch seems to have sparked a special debate. Here are three expert points of view culled from last Friday's news (October 5, 2007).
From "Daily Trader's Alert" by Sam Collins and his accompanying article at ChangeWave:At times like these, the sentiment indicators are often referenced in order to give some idea as to where the "smart money" (i.e., hedge funds, institutional traders) is going and whether it is heading in the opposite direction of the "dumb money." (The latter is generally considered to be the investment advisers and the public.)
Recent reports from Investors Intelligence (which tracks the advisers) and the American Association of Individual Investors (AAII) (which follows the public) show that both advisers and the public are now strongly bullish -- and that's not good.
In fact, in July -- just three days after the failed market breakout -- both were at the most bullish levels in months. And in August, again just three days following the market low, both were very bearish.
Now, both are very bullish. And so, you may be wise to continue to hold some cash rather than taking a flyer on the latest tip from your barber. So Collins is bearish.
But consider John Waggoner's Friday column in USA Today.
Experts point to the fact that investors pulled more money from stock mutual funds in August than in any month since June 2006 as evidence that mutual fund investors (dumb money) have remarkably bad timing at pinpointing market bottoms.
Mr. Waggoner wrote: "Over the years, Wall Streeters have found different ways to watch what the smart money is doing. In theory. . .you'll make good money doing the opposite of what the public [dumb money] is doing. . . . Mutual fund flows are a classic contrary sentiment indicator, under the classic Wall Street belief that the public tends to buy high and sell low."
Stock funds had a net outflow this August (the last month for which data are available). The last time funds had a net outflow (June 2006), the S&P 500 gained 14% in the next 12 months. In August 1998, there was a net outflow, and the market gained 26% for the next 12 months.
Mr. Waggoner concludes, "Buying when most of the public is selling is usually a pretty profitable move. . . . In short, it's better to run to your fund than away from it when other investors are fleeing."
So, looking at virtually the same data as Collins (smart money versus dumb money), Waggoner reaches the opposite conclusion and is bullish.
Waggoner also points out that TrimTabs, which tracks flows of money into and out of the market, is bullish for a different reason: stock supply is shrinking because of all the buyback programs. "We have never seen a contraction like this," said Conrad Gann, TrimTabs's president.
By my count, that's one expert (Collins) who is bearish, one (Waggoner) who is bullish based on the same data, and one (TrimTabs) that is bullish for an unrelated reason.
Jason Kelly and I "put in the call" to enter the market at the end of August and in early September. Of course, we don't know what the next few months have in store, but so far, here are the results of my own stock purchases beginning in late August:- Apple - purchased 8/27 - up 20%
- Bank of America - purchased 8/20 - up 2%
- Berkshire Hathaway - purchased 8/31 - up 1%
- Chevron - purchased 9/20 - down 2%
- Cummins - purchased 8/27 - up 21%
- Diageo - purchased 8/31 - up 7%
- Diana Shipping - purchased 9/27 - up 8%
- GE - purchased 9/25 - up 3%
- Goldman Sachs - purchased 9/21 - up 10%
- Johnson & Johnson - purchased 8/20 - up 7%
- McDonald's - purchased 9/17 - up 2%
- Noble Corporation - purchased 9/24 - down 6%
- Pepsico - purchased 8/31 - up 8%
- Powershares QQQ Trust - purchased 9/21 - up 5%
- Raytheon - purchased 8/31 and 10/1 - up 1% (averaged)
- Spider BRIC (Brazil, Russia, India, China) ETF - purchased 9/20 - up 12%
- Synchronoss Technologies - purchased 9/25 - up 5%
- United Health - purchased 8/20 - down 5%
- Zoltek Companies - purchased 8/27 - up 11%
You can see that there are a variety of conservative and aggressive investments, large and small caps, and so on. The simple average of those purchases is up 6.4% in an average of about 4 weeks. Sixteen of the 19 positions are up, and their average gain is 7.7%.
Don't be deceived by the large number of purchases. I am not a short-term trader. (Several of these purchases were additions to positions I already held.) But I had some money to put to work, and when the time seemed right (and my evaluations of the companies and their valuations were encouraging), I put it to work. I am essentially "fully invested," as they say.
So far, the main bases of my bullish call -- the rate cuts, money infusions, and verbal signals of the Fed -- remain in place. I continue to believe the market will be higher in February (six months after the call) than it was in August.
Things are off to a great start. Indeed things are off to a great start in the past month. As I pointed out over the weekend, The Kelly Letter's permanent portfolios rose an astounding 29%, 14%, and 14% since I changed our stance from medium-term cautious to medium-term bullish.Labels: Market Timing
One penny unlocks
The Kelly Letter
Still Bullish After All These Gains
October 07, 2007
Sung to the tune of Paul Simon's "Still Crazy After All These Years," I am still bullish after all these gains.
Stephen writes:You reported over the weekend that your permanent portfolios are up 29%, 14%, and 14% since your bullish call a month ago (wow!). My question is, Am I too late to the rally? I'm afraid he's too late for the excellent start to the rally but, no, the market is not done yet.
If you're determined to get in a little cheaper than the levels we saw last Friday, then wait for a slight pullback, but not too much of one. If you wait for doubts to dissipate entirely, you'll wait forever.
For instance, I found this on The Capital Spectator:The Fed cut rates because it perceives the odds have risen for an economic slowdown, if not worse. If that's good for stocks, how does one explain the past few years, when the Fed raised interest rates in the face of a strengthening economy? . . . Some trouble makers are starting to use the phrase "sucker's rally" to describe the action of late. . . . If now's not a good time to cut back on equities, particularly U.S. equities, when might such a moment come? Call us crazy, but selling high and buying low is still the only game in town. Beyond that generalized view of money management, the devil remains firmly entrenched in the details. What a lot of folks missed, and won't admit, is that the time to have bought low was a month ago. The time to have sold high was early in summer, when I advised caution over the medium term.
I've analyzed my reasons for being medium-term bullish in recent articles and in The Kelly Letter. In this short installment, I'll just say that the reasons still apply, that you should ignore the bears, and that this is a time to be getting in -- not out -- of the market.Labels: Market Timing
One penny unlocks
The Kelly Letter
Don't Miss Any More Of This Bull Market
October 06, 2007
Are you missing out on the bull market?
Bespoke Investment Group wrote on Thursday:The current bull market is different than any other on record because there has actually been a large contraction in p/e ratios. At the start of this bull in October 2002, the p/e of the S&P stood at 29.06. It is currently at 17.84. There have only been two other bulls that saw contractions, but they were very small. This data bodes well for those arguing that this bull still has legs. Then, on Friday, "Today's run to new highs in the S&P 500 officially erases all the declines we saw during the summer credit crisis."
As expected here in The Kelly Letter, the credit implosion story has lost its fear factor. The market rose strongly last week against a backdrop of bad news from the credit and housing sectors, because the economy remains strong.
Warnings from financial companies came as a relief since they clarified the extent of losses from sub-prime. Citigroup, for instance, warned of a 60% drop in 3Q earnings because of a one-time write-down. One time. The problem won't last forever and had little effect on anybody except those in high finance. Few waste tears on their paper losses.
Those fearing a recession missed out on a big part of this fall's rally. There are still some calling for a crash of epic proportions this month. The market appears to not share those concerns yet.
It's now been one month since we changed from our medium-term cautious stance to a medium-term bullish stance. I am proud of that courageous call, and subscribers should be proud to have followed it.
In the past month since we went bullish, amid forecasts of recession, a global credit crisis, and a housing meltdown:
> The Dow gained 7.3% and the Nasdaq gained 9.8%
> Our Dow One strategy gained 29.3%
> Our Double The Dow strategy gained 14.4%
> Our Maximum Midcap strategy gained 14.0%
Less than two weeks ago, a reader named Brent attacked my bullish call. He pointed out warnings from Marc Faber and Enzio von Pfeil, the latter having just gone on "red alert" for the month of October. Brent told me to "wake up."
I concluded my response:While I welcome all viewpoints around here, the most important remains my own and I continue to believe that we're not entering a recession, that the housing "meltdown" just means a great time to be buying a housing stock, and that any weakness in October is another chance for those slow on the uptake to get their money into the market. You can see the article here.
The fact is we've been right, and that's making people who sat on the sidelines angry. They're looking for ways we got lucky, why the odds were against the market rising and how it was foolhardy for us to have bought in.
Don't pay attention. The best times to buy almost always look the way they did a month ago: scary, lots of emotion, a lengthening list of reasons the market couldn't possibly go up, threat of recession, inevitable systemic collapse, and so on.
Such times are often shrill with the warnings of eminent commentators, people with impeccable credentials who are nonetheless proven wrong.
We haven't seen the end of volatility. I'm sure any whisper to the downside will blare trumpets of "I told you so" from the cowering crowd, but you'll know the truth.
When it was time to buy, they didn't. My subscribers did, and they're richer for it. That makes them investors.
If you'd like to join the ranks of the knowing and have a penny to spare, try the letter's one-month trial. If you like it and continue, it'll only run you five bucks a month -- and you can stop that at any time, too. Odds are you won't, though. A full 85% of those who try the letter keep receiving it forever.
It's easy to see why. We're good.
Our permanent portfolios destroy almost every other service and are the very picture of relaxed investing. Just look at their performance since inception in 2002, and consider that as of last Friday they're up 27%, 23%, and 23% so far this year. They're so good that they're the subject of an upcoming book.
But the permanent portfolios are just part of the letter. Each weekly missive includes market commentary that cuts through the media fog that misleads people, as it did in the past month. It also includes our portfolio of individual positions that gooses performance beyond the core portfolios. We do well there, too.
If you join us today, you'll get the straight skinny on the housing market. We've been watching it for months now for a good entry point on beaten down homebuilder shares. Last week, Citigroup sent the whole sector flying nearly 20% higher as it called the bottom. We don't buy it for a second, partly because Citigroup issued the same call for a bottom last December -- and then watched the stocks lose another 60%. Be careful who you listen to.
Start by listening to me. I'll send you this weekend's note tonight, which includes the scoop on housing, a peek at Yahoo's pending recovery, and a look at whether gold is a good hedge against inflation.
As I mentioned, it's only a penny, you can cancel at any time, and you just might finally join the ranks of those who beat the market, without all the silly fretting that goes on elsewhere.
See you soon! Click here now to join.Labels: Market Timing, Perma Ports
One penny unlocks
The Kelly Letter
Alternative Energy
October 05, 2007
Jesse writes:It is my thought that if the Democratic party takes office, it may be of some value to hold alternative energy stocks, both in the short and long terms. There could be a short-term spike due to a renewed government investment in R&D in these areas. A Democratic administration would not necessarily be better than a Republican for alternative energy stocks. I'm currently researching them for The Kelly Letter's portfolio, where we already own one company making a big splash in the solar industry.
What I've found is that the price of oil and the performance of alternative energy stocks is closely correlated. When oil's expensive, the allure of other forms of energy goes up. Their prospects look brighter so, therefore, the prices of companies working on them rise on the increased interest in the sector.
The price of oil is a short-term factor. No president has much control over it, regardless of party affiliation. Also, when oil prices are rising and green energy investments are rising with it, oil investments still tend to be the better performing of the two sectors.
For instance, the proxy I use for green energy investments in the letter is PowerShares WilderHill Clean Energy (PBW).
PBW is up 19% so far this year. That's good, except that PowerShares Dynamic Oil & Gas Services (PXJ) is up 29%. If you're good at stock analysis and believe you can beat a general grouping of stocks in the sector, as we do here at The Kelly Letter, then you might have chosen the oilfield services company we bought, which is up 37% year-to-date and 56% since we invested.
That skill wasn't necessary to do better than the alternative energy companies, though. Index vs. index, oil came out better than green energies in an environment of rising oil prices.
Here's a list of green and alternative energy ETFs, and here's a ranking of natural resource sector ETFs by year-to-date return, which clearly shows the outperformance of the oil patch.
What to make of all this?
First, ignore who's president when deciding where to invest your energy dollars. Pay attention to the price of oil. The Kelly Letter's projection for oil prices is for strength in the near term, weakness in the medium term, and strength again in the long term.
Second, understand that the short-term performance of alternative energy stocks looks to be as dependent on the price of oil as oil stocks themselves.
Third, when alternative energy stocks do well, oil stocks tend to do even better.
Now, some will see this as the entirely wrong approach. Shouldn't we invest where we hope to see the world heading, not in an energy source that's destroying the planet?
Let me share a dirty little secret with you. We could already be living without gasoline. Talk long and seriously with anybody deep inside the oil business and you know what they'll mention? That electric cars have been possible for the past 100 years, and that the only reason we're still puffing around in oil-burning models is that powerful entities want to sell every last drop of oil -- and you can be sure they'll find that last drop.
Ever been inside a warehouse? Look at the vehicles there. Forklifts and other machinery are all electric, as they have been for decades. Some of the machines can go days or a week with no re-charge. Anybody who's ever operated one has wondered, couldn't this just take me home tonight? Ten years ago, it did take some people home. One day, such a car might do so again, and in style.
If you live long enough, watch what happens when the last barrel of crude is pumped, shipped, and refined. The next day, miraculously, there will be another form of energy available and, lo and behold, the cars that can use it are built and ready to go. Amazing timing!
What's more, guess who's going to be selling that new form of energy? It won't be GreenFuel Technologies, much as we all admire their algae aspirations. It will be a familiar roster of names: BP, ChevronTexaco, ExxonMobil, Shell, and the gang.
You didn't really think such established corporations were oblivious to the end of the oil age, did you? Each one of those companies has entire departments dedicated to future scenario building, and they're phenomenally good at it. They have contingencies for nuclear wars wiping out oil fields, political coups shutting down shipping lanes, meteor impacts, and most assuredly the end of a finite supply of oil. That last one is the easiest to foresee.
They are the ones spending the most amount of money on alternative energy sources, and they will buy any small company that creates the holy grail before they do. They are not oil companies, per se, they're energy companies. Oil just happens to be the world's current source of energy.
In the end, the very best way to make money off alternative energy might be through buying the firms that environmentalists see as the enemy: traditional oil and gas companies.
In any event, the end of oil is a long ways off and the likelihood of a viable alternative appearing in the short term is remote. Corn ethanol? Forget it. It takes 1 unit of fossil-fuel energy input to get 1.3 units of corn ethanol output. Prairie grass cellulosic ethanol has a 1:2 ratio, and biodiesel a 1:2.5 ratio. Cane ethanol is better at a ratio of 1:8, but it, too, has drawbacks.
"If alcohol is now considered a 'clean' fuel, the process of making it is very dirty," Sao Paulo Public Ministry prosecutor Marcelo Pedroso Goulart told National Geographic. "Especially the burning of cane and the exploitation of the cane workers." This from the country of Brazil where 85% of cars are flex models that can burn gasoline or alcohol. Recently, with alcohol running cheaper than gasoline, almost nobody in Brazil is running on gas.
Yet, it remains a petroleum economy. Magic bullets are hard to find. We're all rooting for the algae pump to end our dependence on oil, but that's not where to put your money yet.Labels: Oil
One penny unlocks
The Kelly Letter
Homebuilding Stocks
October 03, 2007
Along with everybody else, we've been watching the housing sector for many months here at The Kelly Letter. From the abundance of homebuilders beaten down, we chose one in particular that we'd like to own and have been watching for a bottom as it fell from $35 to $15.
Last weekend, I told subscribers that the letter would continue waiting as it looked like there's still plenty of bad news left in the housing sector.
Yesterday, Citigroup analyst Stephen Kim threw his hat in the ring, and it was painted bright bullish green. From his research note:The woes in the U.S. housing sector have been extensively documented, and we do not pretend that any near-term relief in industry fundamentals is in sight. However, it bears repeating that the home-building stocks have an established history of rallying well before industry fears have finished transitioning into fact.
We are not trying to suggest that trends in the home-building sector are about to get much better. . . they have never been worse. And in this sector, with its long history of feverish booms and catastrophic busts, it is precisely when things have gotten this bad that the stocks start looking good. He noted that the stocks are trading at the lowest price-to-book values they've seen in 30 years, and predicted a winter rally.
Naturally, shares across the sector leapt at the news. Beazer gained 12%, Meritage gained 10%, Hovnanian and Ryland each gained 8%, D.R. Horton gained 7%, Lennar gained 6%, and Pulte gained 5%.
There are a few things to bear in mind.
First, even after yesterday's spike upward, the stocks are still 50% to 80% off their highs.
Second, most of yesterday's spike was most likely caused by short covering at the first sign of life in the sector. All were heavily shorted.
Third, according to last week's S&P/Case-Shiller home-price index, prices in 20 of the biggest cities fell by a tiny 3.9% in the year to July. That's a far cry from the 20% to 30% corrections that the futures market predicts. Moreover, if that's as bad as this supposed housing crisis gets, why in the world are we using the word "crisis" at all?
With that much more downside available, and with as much fear around October as we've seen, I think it wise to wait longer before bottom fishing the housing sector.
Mind you, I agree with Mr. Kim about the good prospects for housing stocks, and my medium-term general market forecast is bullish. I'm simply holding out for as cheap a price as possible and don't think we've seen it yet.Labels: Housing
One penny unlocks
The Kelly Letter
Confessions Of An Economic Hit Man
October 02, 2007
I suggested in my recent series on the Iraq war (Geopolitics label) that readers pick up a copy of The Ugly American for its insights into why American foreign policy creates anger in so many countries.
Lyn wrote, "A more recent (and excellent) rendering of the Ugly American theme is a book by John Perkins titled Confessions of an Economic Hit Man -- highly suggested reading."
On my way back to Japan, I bought a copy in Los Angeles and read it cover to cover over the Pacific. The subject deserves more than just my general thumbs up or down on the book.
Today, I present excerpts that capture what I consider to be the theme of the book. I will not comment on them yet. Instead, I welcome reader feedback and will compose a discussion article from that feedback along with my own thoughts.
Here are the excerpts I chose from the book:We are an elite group of men and women who utilize international financial organizations to foment conditions that make other nations subservient to the corporatocracy running our biggest corporations, our government, and our banks. Like our counterparts in the Mafia, EHMs [economic hit men] provide favors. These take the form of loans to develop infrastructure -- electric generating plants, highways, ports, airports, or industrial parks. A condition of such loans is that engineering and construction companies from our own country must build all these projects. In essence, most of the money never leaves the United States; it is simply transferred from banking offices in Washington to engineering offices in New York, Houston, or San Francisco.
Despite the fact that the money is returned almost immediately to corporations that are members of the corporatocracy (the creditor), the recipient country is required to pay it all back, principal plus interest. If an EHM is completely successful, the loans are so large that the debtor is forced to default on its payments after a few years. When this happens, then like the Mafia we demand our pound of flesh. This often includes one or more of the following: control over United Nations votes, the installation of military bases, or access to precious resources such as oil or the Panama Canal. Of course, the debtor still owes us the money -- and another country is added to our global empire.
My job was to forecast the effects of investing billions of dollars in a country. Specifically, I would produce studies that projected economic growth twenty to twenty-five years into the future and that evaluated the impacts of a variety of projects. For example, if a decision was made to lend a country $1 billion to persuade its leaders not to align with the Soviet Union, I would compare the benefits of investing that money in power plants with the benefits of investing in a new national railroad network or a telecommunications system. Or I might be told that the country was being offered the opportunity to receive a modern electric utility system, and it would be up to me to demonstrate that such a system would result in sufficient economic growth to justify the loan. The critical factor, in every case, was gross national product. The project that resulted in the highest average annual growth of GNP won.
The unspoken aspect of every one of these projects was that they were intended to create large profits for the contractors, and to make a handful of weal |
