Sell Your Stocks in May?

A Milestone: 

This is the 100^th posting of Model T Stock Trends blog.  I never would have imaged writing that when the blog debuted in September 2009.  The blog continues to gain readers with over 2,100 hits in over 30 countries in December. This includes a strong following in the United Kingdom, which I greatly appreciate. Ironically this 100th post is the most important one so far.  So enough celebrating, there is some serious work to do!

 

 

A History: 

The Model T (short for Model Transportation) is designed to forecast major peaks (and timing) in the S&P 500 index based on various data from the commercial transportation industry.  It is similar to Dow Theory (in theory) but more precise.  I began building the model in 2000.  I started sharing the forecasts with investment professionals in the transportation industry in 2007.   The Model T gained some “Wall-Street Cred” when it was surprisingly accurate in predicting the market peak in October 2007.  For a more complete description of the Model T, please see: What is theModel T and How Does it Work. 

I started writing the blog to test and refine the model publicly.  Anyone can say they “predicted it” after the fact.  And because I’m not an economist, I’m a marketing analyst; I do not have to worry about harming my professional reputation. 

There have not been any major peaks for the Model T to predict since I started writing this blog, until now.  The peak and correction in 2011 were caused by issues in the financial markets and the Model T does not directly consider financial data. 

The Forecast: 

The Model T forecasts the S & P 500 Index will peak at 1550 this year.  Last May the Model T predicted a peak of 1480 occurring in January 2014.  Of course the economy has been weaker than expected and the stock market stronger than expected, so the model has recalibrated. 

The Model T was 2% too high is predicting the 2011 peak and 2% too low in 2012, so a 2% range equals 1520 to 1580 this year.  How does this compare to the “experts” predictions for 2013?

Source	S&P 2013 High
Barclays PLC	1525
Credit Suisse	1550
S&P Capital IQ	1550
Model T	1550
Barron’s Survey Ave.	1562
Goldman Sachs	1575
BMO Cap. Mgmt.	1575

Okay, I like the neighborhood and it looks like the Model T is consistent with some of the much more sophisticated models. 

The Timing 

But the Model T is designed to also forecast the timing of the peaks, so the forecast for 2013 goes like this: 

▶ The S & P 500 Index will peak at around 1550 in May or June.  Often the market is strong for the first half of the years, and then slides the last half.  This forecast would be very consistent with that trend. 

▶ The index will then bottom out between 1320 and 1350 (please note that the Model T has not been as accurate at forecasting market bottoms) 

▶ The stock market will then begin a slow recovery and will finish the year around 1425 (vs.1426 at the beginning)   

Therefore 2013 will basically be a simple rollercoaster ride.  It will go higher, dip lower, but you will exit just about the place where you started. 

Due to the important implications of this forecast, I will issue updates as needed and as addendums when the blog posts are on other economic subjects.  Please bookmark the blog or subscribe (free) using the box at the upper right of the page so you can follow along. 

It is now time to buckle up and enjoy the ride!

Do You Have (Economic) Bowl Fever?

While you are relaxing watching the Russell Athletic Jock Strap Bowl and the Located Some Bad Teams Compass Bowl, don’t forget about watching the economy and your investments in 2013.  To help you along, I am again making my “Economic Bowl Picks” versus my economic expert panel (the average of my seven favorite economists whose forecasts are published by the Wall Street Journal). Here is how I did against the panel for 2012 (the actual numbers are current estimates, but should not affect the final results):

	Don	Panel	Actual	Winner
GDP	3.0%	2.3%	2.2%	Panel
CPI (Inflation)	2.3%	1.8%	2.2%	Don
Unemployment	8.2%	8.6%	7.8%	Don
Housing Starts	720K	674K	780K	Don
Crude Oil Price	$101	$95	$89	Panel

I'm closer on CPI, Unemployment and Housing Starts, so I’m doing a little victory dance celebrating my second straight 3 to 2 win!  Take note of how close the panels’ GDP forecast was.  You won’t get accuracy like that from those other economic blogs!  My GDP forecast was much too high for the second straight year.  I expected the government to “pull out all stops” to stimulate the economy in an election year because no incumbent president could ever be elected with economic growth so weak and unemployment so high. Uh, well it seems like the political indicators are malfunction as much as the economic ones. 

The 2013 forecast differences between the panel and I are much closer than normal this year which means I must be getting better or they are playing way to much golf!  For the record, I do make my forecasts before calculating the panel average: 

Here are the 2013 Economic Bowl Picks: 

The GDP Bowl: 

Minnesota Moderates vs. Rutgers Recession 

Line: Moderates by 2.2%  Range: 1.3% to 2.9% (The Line is the average of the expert panel.  The Range is the lowest and highest individual forecasts of the panel) 

The economy will start off at a very low rate of growth and then improve modestly all year.  We should be running at 3% by year’s end.  My Pick: Moderates by 2.3%  

The CPI Bowl (Consumer Price Index Bowl) 

Pittsburgh Pricers vs. Duke Discounters 

Line: Discounters by 2.1%  Range: 1.8% to 2.3% 

CPI was 2.2% last year.  There are few factors that should push this much in either direction.  This is why the FED can keep interest rates in check for another year.  I will move it up slightly just because I have GDP going up the same. My Pick: Discounters by 2.3% 

The Unemployment Bowl

Louisiana Laborers vs. Fresno Food Stampers 

Line: Stampers by 7.8%  Range 7.7% to 7.9% 

This statistic has been highly questionable for a year.  Just how many people are leaving the workforce and why?  The retiring baby boomers are a factor, but how much?  And then you have the underemployed and part-time worker/full-time seeker factor.  An economy growing at 2% should not generate enough jobs to reduce the current rate and that is why the panel is forecasting no change.  I am only slightly more optimistic. My Pick: Stampers by 7.6% 

Housing Starts Bowl

 

Arizona Allotments vs. Virginia Vacants 

Line: Allotments by 980,000  Range: 810,000 to 1,080,000 

The housing market is coming back and gaining momentum on a more consistent basis.  I (and the panel) am forecasting 25% growth in 2013.

My Pick: Allotments by 975,000 

Price of Crude Bowl 

Keystone Pipeliners vs. California Hippies 

Line: Pipeliners by $88 (year-end) Range: $80 to $94 

The price of crude (and gas prices) has dropped sharply in December and some experts say it could fall to $80 a barrel.  I think this is based on a weak U.S. and world economy.  By the end of 2013 I expect the U.S. economy to be rolling forward and hopefully the world economy is in better shape also.  My Pick: Pipeliners by $95.

Bet Big on the Pipeline!

Stock Market Prediction: 

The Model T predicted an S&P 500 Index high of 1435 in 2012 and the index peaked at 1474.  Being 2.7% low is not that bad; however in 2011 the forecast was 2.2% high.   

The Model T 2013 forecast is for a high of 1550, however for the first time since I have been writing this blog the Model T is signaling a definite peak to be followed by a correction.  I will present the details in the next post. 

I hope you made some good investments in 2012 and wish you a very prosperous 2013!

A Very Ugly Freight Market

In preparation for my year-end economic forecasts and Model T 2013 stock market predictions, I thought it would be a good time to check the current status of the freight markets.  

Because the economy has been slow and needs some motivation, I have enlisted the cheerleaders from Good Shepherd High School to assist me in this endeavor. Excuse me, there has been a change.  These cheerleaders are actually from German Shepherd High School. 

  German Shepherd High Cheerleaders

Here’s what is happening in the freight world:

Truck Freight 

FTR (Freight Transportation Research) FTR Truck Loading Index

 

Latest Report: Declining 

Trend: Declining.  Index was growing nicely until hitting the wall in Q4. Expected to be at near 0% (year-over-year) at year end. 

Forecast: Skidding at 0% in Q1 before improving.

ATA Trucking Index 

Latestst Report:  Down 3.8%, at the lowest level since May 2011. 

Trend: Decreasing 

Forecast: Modest improvement in Q1

“Okay Cheerleaders, do your thing!”

U-G-L-Y

You ain’t got no alibi. 

You ugly, oh yeah, You ugly 

Rail Freight 

Latest Report:  Carloads – Down 6.1% in October (y-o-y). It’s flat when you factor out declining coal shipments. Intermodal – Up 1.5% (y-o-y)  

Trend: Decreasing 

Forecast: Flat in Q1, before increasing the rest of the year. 

“What do you say Cheerleaders?”

Rickety Rick, Rickety Rack

Your train done run off that track,
You’re Grounded
Yo Mama says Your Grounded!

 

Port Freight Activity

 

Latest Report:  Inbound Freight – Up 5% (y-o-y) in October on the West Coast (Chinese imports), flat at most other ports.  Outbound Freight – Up slightly on the West Coast, down or flat for the rest. 

Trend: Declining 

Forecast: Flat in Q1 

“Cheerleaders?”

You ain’t got nuthin’ to see

Cause you ain’t got no GDP,
You stagnant, oh yeah, you stagnant

Air Freight 

Latest Report:  Down around 0.4% from last year, year to date. 

Trend: Flat/Declining 

Forecast: Very bad Q4, 2013 to be much better 

 

 

Baltic Dry Index (measures world-wide shipping freight activity)

Latest Report:  Down 50% (y-o-y) 

Trend: Declining 

Forecast: Short-term, a modest improvement. Long-term, a 50% increase at the end of 2013. 

“Cheerleaders, help me!”

Two, Four, Six, Eight

You is in an awful state

 

Analysis

 

The freight data is consistent with my forecast that the economy is bouncing between 0-2% GDP with no upward momentum.  It appears that we are falling to around 0% (the bottom of this cycle) at the end of the year.  I still don’t believe there we be a recession because the economy is moving so slowly.  It is the difference between hitting a wall at 5 mph versus 40 mph.  You hit the same wall, but the impact is much different. There just isn’t enough downward momentum to cause a significant recession.  

The freight forecasts suggest that this economic malaise will last through Q1.  The good news is that the rest of 2013 is forecast to be much stronger.  Wouldn’t it be great if we were talking about a new plan for economic growth instead of trying to keep from falling off a self-made cliff?  And just a reminder, while raising taxes is an economic plan; it is not an economic growth plan.

“Cheerleaders, do you have any final thoughts about this blog post?”  

U-G-L-Y

You ain’t got no alibi. 

You ugly, oh yeah, You ugly

“You are talking about the economy, right? Well…..? (sigh) Suddenly I feel like I’m back in high school!”

Breaking Up (with your stock) Is Hard To Do

Don't take your love away from me
Don't you leave my heart in misery
If you sell then I'll be blue
'Cause breaking up his hard to do

Two years ago I bought this great stock because I thought it was an outstanding investment at a fantastic bargain price.  But now it is a terrible stock and is down 22%. 

So it looks like I was wrrr … 

I was wroooo…. 

I was wrong. 

And here lies a serious problem for large investors and small investors alike.  When it comes to investing money, we all become like Arthur Fonzarelli (the Fonz), we hate to admit we are wrong.  This denial causes us to hang on to “bad” stocks for way too long. 

Psychologists tell us that it causes great emotional distress to admit that we have made an investment mistake.  Investing mistakes are more agonizing because the loss is financial and quantifiable.  This tendency is much more prevalent in men than women due to the “male ego” effect.  Women dump losers more quickly (just like in single bars) and this is why women investors (both professional and individual) tend to outperform men in studies evaluating gender and investing. 

 

To admit you made a mistake, you must try to resolve the fact that out of the thousands of stocks, mutual funds, EFTs and commodities available, you actually made the conscience decision to buy this one.  And boy did you screw up this time! 

But you couldn’t really be that stupid, could you?  So you begin to lie to yourself.  It really isn’t a bad stock, it’s just that some bad things have happened to it.  Good things are going to happen soon.  If I just wait, the stock will recover and will even make money just like I expected.  Then I won’t be stupid, no I will be an investing genius, just like Warren Buffet. Oh yeah!   

But it doesn’t usually work that way.  Typically the stock continues to slide until it hits a bottom and then stays down there for a long time.  You hope it comes back, but this hope is not based on reality. Sadly, the Easter Bunny never shows up with any “recovery” candy. 

I am writing this because I just sold off one of my losers.  About two years ago I bought this highly-recommended, popular, utility stock.  It offered solid growth potential with a great dividend.  I got it at a “bargain” because some temporary factors had knocked down the price.  The stock was so good that I bought more than usual (I now have a personal limit on how much I invest in any one stock). 

Initially the stock performed as I expected.  The price went up and I almost bought more when it bounced back a little.  But then the economy slowed and demand for electricity waned.  Natural gas prices dropped which made this particular utility’s cost of production less competitive.  Finally, some  negative internal information about the company leaked out which involved politics.  Of course this bad publicity received much attention in the middle of an election campaign. 

Then stock of course began to slide.  It never dropped much at one time.  But the negative pressures listed above resulted in a slow leak over time.  Of course I told myself that this was just temporary, that the slide was illogical and would stop very soon.  And the dividend, the dividend was still strong so I could afford to wait for the stock to return to profitability. Then the viability of the dividend came under question due to the weaker company balance sheet.  And then I asked myself why major investors weren’t buying large chunks of the stock considering the dividend was even better due to the lower price?

Remember when you held me tight
And you kissed me all through the night
Think of all that we've been through
Breaking Up Is Hard To Do 

So I sold the stock.  And even though I believe everything I have written in the post, it still hurt to sell the stock.  It still was distressing to admit I had made this mistake.  The brain says “yes”, but the heart still says no.  But if you are going to become a good investor, you got to know when to “fold ‘em.

Breaking up with your stock is indeed, hard to do: 

Investario: I’m sorry Stockeeta.  It’s over between us, I’m leaving you. 

Stockeeta:  Please, no.  I know my returns are down, but it’s just a cycle I’m going through.  I’ll change and you will be happy with me once more. 

Investario: Look Stockeeta, I was first attracted to you by your high yields, but your returns are sagging and there are other choices available with very attractive profits. 

Stockeeta: But the dividends! I have always provided you with very satisfying dividends!  

Investario: Yes, but word on the street is that your dividends will be much less satisfying in the future. I’m sorry, this is goodbye. 

I beg of you, don't say goodbye
Can't we give our love another try
Come on baby, let's start a new
'Cause breaking up is hard to do

Train Wrecks and Washing Off the Slime

You say "Goodbye" (or in my case, “Bye, Bye”) and I say "Hello, hello, hello".
I don't know why you say "Goodbye", I say "Hello, hello, hello".
I don't know why you say goodbye, I say hello

(Since we started with the Beatles, an alternative song could have been “Help” and some people would have even gone with “Back In the U.S.S.R”!)

Well, Hello Mr. President

American has spoken and apparently we are satisfied with economic growth of less than 2% percent.  The good news is that at some point we will exceed expectations, the bad news is the bar has been lowered.

This blog has gotten more political than I want it to be this year, but this was the result of having a presidential election during difficult economic times between two candidates with starkly different economic philosophies.  With that said, here are my final economic/political observations for this cycle:

Economic Growth: Just because Mitt Romney had a five-step plan, it wasn’t guaranteed to work and would have taken some time to implement.  In addition, his tax plan sounded like something designed to get votes instead of solid tax reform.  If President Obama (it hurt some to type that) leaves the economy alone and does not clamp down on the domestic energy boom, there is hope for an eventual stronger recovery.  The U.S. economy has a tremendous ability to heal itself.  Once the “Fiscal Cliff” gets resolved I expect GDP to make it over 2% (woo, woo).

Job Growth:  Romney planned to “create” 12 million jobs in four years.  However presidents can’t actually create jobs, they can only create an environment that is conducive for job growth.  Unfortunately President Obama (ouch again), had problems grasping this concept in his first term, let’s hope for a change in term two.   Even if job growth remains at its current slow rate for the next four years, the economy would still add around 8 million jobs.  This is “only” 4 million less than Romney’s plan, which is still significant if you are currently looking for work.  However, job growth should start to increase (again through self-healing) soon and continue to grow over the next few years.  I would not be surprised if the economy adds the 12 million jobs (without Mitt’s help) over the next four years.

Obamacare:  This is a huge mess.  The system was destined to fail because it costs too much and couldn’t be paid for (without huge additional tax increases).  But now we learn that while many were crying over the Supreme Court ruling on the individual mandate, the court also ruled that states do not have to implement the expansion of Medicaid provision.  The states also can opt out of creating the insurance exchanges.  The federal government is then supposed to set up the exchanges, but there is no money allocated to do this. 

In addition, the economic law of unintended consequences is starting to kick in big time.  Restaurants, hotels and other industries that use many part-time workers plan to cut workers hours to avoid the added cost of Obamacare.  It is also expected that small businesses will stop growing when they reach 49 workers to prevent paying higher healthcare costs.  Businesses (and individuals) will continue to make decisions that circumvent provisions of the law to save money.

Unfortunately, this is a train wreck that we get to watch from inside the train.

Rejecting a Business Mogul as President:  In June I wrote two posts advocating electing a business person as president.  While I still believe we needed someone who understands business running the economy, a business mogul has liabilities as a candidate.  Americans want their president to have core convictions, even if they don’t agree with all of them.

A business mogul only has one core conviction: What makes me money? It is what makes the tycoon successful and requires that he changes direction as conditions change.  Romney tried to use this strategy for political success but in politics this is labeled “flip-flopping”.

President Obama displayed more core values than Romney and core convictions beat no convictions every time.  Sometimes an election comes down to the question of “Who will screw me less?” and many voters decided they couldn’t trust the rich guy.

An Apology:  I apologize to any of my readers who may have been offended by anything that I wrote over the last few months that they perceived as too politically biased. I promise that I will not write anything politically oriented ever again, unless of course somebody does something economically stupid. 

Excuse me, I am now going to take a shower and wash off all this slime.