Monday, April 29, 2013

The Party’s Over – It’s Time To Leave Now!

Turn out the lights, the party's over
They say that, 'All good things must end'
Let's call it a night, the party's over
And tomorrow starts the same old thing again

In January I wrote that the Model T was predicting a major market correction in May or June.  Since then, the blog has experienced a record number of readers and I have received questions about the model, the blog, and other issues. So as May approaches, it is time for a review:

2000 – While doing an analysis of several factors in the commercial transportation industry, I notice a connection between the industry, the economy, and the stock market.  My analysis indicates I should sell my stocks immediately. I do not sell and soon afterwards the market tanks.

2001- 2006 – I isolate the factors in the commercial transportation industry that are key leading indicators to the direction of the stock market and construct the Model T.

2007 – I start sharing the forecasts of the Model T with a group of around 20 investment professionals and industry colleagues.   The Model T correctly forecasts the market peak in October, months in advance.

2009 (June) – I am downsized from my job after 16 years and cast into the worst job market since WWII. June 2009 was actually the very bottom of the job market.  It was a very frightening environment and can only truly be understood by those unfortunate enough to have experienced it.

2009 (September) – I decide I need to write a business blog as part of my networking and personal branding strategy to help find employment.  I decide to base the blog on The Model T because it is unique and would showcase my analysis, forecasting and writing skills to potential employers.

Therefore I am sharing this information with the world not because it has no value and not because I am so altruistic that I just want to help people. No, I made this decision because I saw it as my escape from unemployment.  Ironically, my three plus years of writing the blog have only produced one interview opportunity (albeit with a Wall Street investment firm).

2010 (April) – I start working in a new job, in a new field and a different function.  I assumed I would cease writing the blog, until my readers convinced me they wanted it to continue.

2013 (January) – The Model T indicates that the stock market will peak in May or June and I publish the forecast.
2013 (February – April) – The stock market continues to rise surpassing the 1550 (S & P) model prediction in March and the plus 2% (1581) upper range in April.  This movement is very consistent with the Model T forecast.

Today - Currently, the Model T is flashing bright red.  It says to sell now.  The acid test of the Model T has arrived.  I do realize that I am either going to look like a genius or a fool.  When I went public with the Model T I didn’t envision this post.  Maybe I thought only my 20 initial comrades would still be reading the blog at this point, but around 3,200 people (and counting) around the world have read the prediction.

Two weeks ago the stock market had a few days of losses and several analysts announced the correction had begun. I didn’t sell then because I trusted the Model T to get to May.  This was a “test” correction.  It is what my friend professional investor Jeff Kaufman would call a “head fake”.  Because that wasn’t really the start of the correction, it may cause you to keep your money in the market longer once the real correction starts.

It takes “stones” to pull your money out of the market when it is this hot, but my friend Kurt (one the original 20 and a close follower of the Model T) pulled a big chunk of his funds out of the market last Friday.  I will sell off around 45% of my holdings (this is my practical limit based on tax and other factors) on April 30.  I don’t recommend pulling all your money out of the market because the model could be wrong. As I mentioned last time, some analysts predict the market will continue to zoom to record heights.  If your money is in mutual funds, it is easier to move more money out if you desire.

And this is not “sell in May and go away”.  In is a coincidence that The Model T is advising to sell in May, but I sense that this makes a May correction more likely.  Regardless, the Model T says the market won’t begin to recover soon (see below).

People ask me how I am going to reinvest.  In the short-term, a good option is short-term bond funds.  However some analysts fear a stock market correction could trigger another shock to the financial system, so you may want to just sit on the cash until the smoke clears.

The Model T is predicting a correction down (eventually) to around 1350 (about 15%).  It says the market should stay depressed about a year before starting a modest recovery.  But it looks like we will have plenty of time to prepare for that.

Let the games begin!

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Tuesday, April 16, 2013

We're Dancing - Until the Music Stops

We can dance if we want to
We can leave your friends behind
Cause your friends don't dance
And if they don't dance
Well they're no friends of mine

There have been several recent articles complaining that the economy is not “in sync” with the stock market.  Of course these articles are rubbish and not worth even skimming.

The economy and the stock market are like a pair of flamenco dancers.  The man (the economy) usually takes the lead and the woman (the stock market) usually follows. But the woman can also lead, as the man watches admiringly.  At times (let’s say when the economy is very strong or very weak) the man and woman dance very close and in unison.  However there are many times when the dancers are physically distant and even though they share the same floor and music, the dances are not the same.

Let’s pretend our flamenco dancers were performing on a ship that encountered some horrific waves (the Great Recession).  The man was thrown off the floor to the right and injured his leg.  The woman was thrown off the floor to the left and broke a heel.  While the music continued to play, the man struggled to regain his bearings and limped back to the dance floor.  As he did, the woman repaired her shoe and still dazed, tried to resume the dance.  This dance is not going to appear very graceful for a long time.

I have written before about how many reliable economic indicators are still out of sync. So why would you would expect the economy and stock market to be more coordinated now? 

Yes, in the long run and in the big picture, the two have to be well connected, but at many times the correlation suffers.  If it didn’t, it would be much easier to predict the stock market.   The economy is basically the economy, but there is a big emotional and psychological aspect to the stock market.  Sometimes she dances as expected and other times she has a mind of her own.  But she is so sexy when she dances, that investors cannot resist her.  She creates such passion in her followers.  She rises, she swoons, she is memorizing.

The other strange thing about the articles is that you could argue the economy and stock market were actually dancing close together in Q1.   The economy grew 2.7 percentage points more than the previous quarter. (3.1% estimate Q1 minus 0.4% in Q4) and the stock market was on fire.  Of course the problem with this is Q1 is still just at 3.1% GDP and this is expected to be the strongest quarter of the year. 

And the employment report for March was just dog awful.  When almost a half million people are so discouraged they quit even looking for work, your job market reeks.  I’m so glad our government is laser focused on the economy and job market instead of spending time working on peripheral issues.

The latest Wall Street Journal Economists Survey GDP (total survey average):

Q1 = 3.1%
Q2 = 1.8%
Q3 = 2.4%
Q4 = 2.7%

If you would forecast the stock market from this data, the market would continue to increase at a slow to moderate rate the rest of the year.  However, virtually no one is predicting this scenario.  The two most common forecasts fall in one of two categories:

1.     The market is way undervalued.  The market will continue to go up, up, up, in anticipation of the economy growing even stronger.  Some proponents of this theory predict the market is about to explode into the stratosphere.

2.    The market is way overvalued.  The stocks have risen in anticipation of a stronger economy which hasn’t materialized.  Banks are weak, Europe’s weak and Obamacare is going to kill the recovery.  Some people on this side are not predicting a correction but a huge crash.

So that makes it very clear what to do, right?

Model T Update

The Model T prediction of an S&P peak of 1550 was surpassed on March 11 when it closed at 1556.  The plus 2% upper limit of 1583 was breached with a 1587 close on April 10.   This means the Model T was not able to predict the market peak within a 2% range this year. It does seem like the market is currently bouncing around in this range, which would indicate that we are near the top.

However the value of the market peak is not as important as the timing of this peak, and the Model T is still predicting a peak in the May/June period.  If the market is peaking in May, you would expect it to be humming in April.  I didn’t explicitly state this in my January (Sell your Stocks in May?) post , but of course it was implied. If you are not selling until May, you still expect to be making money in April!

Next Post: It’s Put Up Or Shut Up Time!

Monday, April 1, 2013

Diversifying Into Crap

Background: I manage what I call the GeoDon Fund, a portfolio of stocks that my grandfather George put together a long, long, time ago.  I inherited a portion of the “fund” from my mother in 2010.  The portfolio had been basically untouched for over 35 years and I have attempted to clean up, diversify and “modernize” the holdings based on the original investing principles George followed.

Scene: It’s Saturday morning and I’m reviewing the GeoDon Fund on my computer, when the ghost of George suddenly appears.

Don: George! What are you doing here?

George: I see you are reviewing our fund and I wanted to see how you are doing.

Don: The fund is going very well.  Look at these winners!

George: Are you following my rules?

Don: Of course I am.  Look at how I have diversified the fund and spread the risk.

George:  What about these stocks?

Don: Ah, these three were not good choices, but I diversified and didn’t put much money in any of them.

George: Diversification doesn’t work very well if you diversify into crap.  You just get three flavors of crap instead of one. And this dog, what does this company do?

Don: This is a commodity company.

George: Commodities?  That’s risky business, my boy. This doesn’t fit with the rest of the portfolio.

Don: I know it’s not exactly a blue chip, but it had potential.
George: No it’s not a blue chip. In fact it looks more like a cow chip! Why on earth did you buy stock in this company?

Don: Well it had a high dividend with significant growth potential.  It was a no brainer.

George: I can see how someone with no brain would buy this stock.  Son, chasing this type of stock is like chasing skirts; you may have some fun for a while but it never ends well.

Don: Hey, it’s not my fault!  The company lied and said the dividend was very safe and future sales looked strong.

George: Unfortunately it is totally your fault for believing that garbage.  That’s why you stick with the blue chips and quality firms.  Those companies have established integrity over time.  Why did the stock drop so fast?

Don: The company cut the dividend by 76% and then announced earnings were weak and would get worse.  All the big mutual funds dumped their holdings and the stock tanked.  I read that when a company deceives the market, mutual funds dump it because they can never trust the company again.

George: So did you do your own research on this company?

Don: No, we have this great thing called the Internet.  On the Internet, all these investment gurus said the stock was great, so I bought it.

George: Did any of these so called “experts” actually buy any of this stock?

Don: I don’t know.  I’m not sure that they are allowed to.

George: So these guys are not suffering a bit over this and you are left holding …..

Don:  A turd. The GeoDon Fund now has a turd.

George: How many turds?

My cat makes investments too!
Don: Three turds, I made the same mistake with three different companies. They all lied and I bought their stock.  The good news is that have some capital losses as a tax write off!

George:  Oh that’s nice.  I never had any capital loses to write off when I managed the fund.  So what have you learned from this experience?

Don: Don’t worry George, I have learned my lesson.  I am going to stick to the original principles of investing in strong, established, manufacturing firms with an emphasis in the healthcare, energy and transportation sectors.

George: That’s my boy.  Uh, what did this “lesson” cost you?

Unfortunately, you can't polish a turd
Don: The three turds are down about $6,500.

George: The classes in this school are very expensive, aren’t they?

Don: Yes, they are.  That’s why it won’t happen again soon.  I am going to stick to the original strategy for the fund and only buy stocks that fit with this philosophy.

(And with this George departs, his mission accomplished, for now)