November 7th, 2012

The Market and the Quadrennial Election Cycle

Nate Silver has really made a name for himself by accurately predicting the outcome of the past two Presidential Elections through statistical analysis techniques. I’m clearly not a statistician but several people did asked me, both before and since Tuesday, what I thought the elections would mean for the stock market. Which would be (have been) better for the market, a Romney or an Obama victory.  We don’t have to wonder any more because the market responded today with a 2.36% decline, the worst one-day drop in around six months.

Rather than guessing or predicting as to what the future might hold, I decide instead to look at the historical records, the precedents, to see what actually did happen in the years following each of the quadrennial elections since WWII.  It’s the approach I used in developing the market timing techniques underlying the Market Momentum Meter, a tool that has guided the amount of money I should pull out of the market to avoid the risks of a significant market downturn.  Without divulging proprietary information available exclusively to Instant Alerts Members, the Meter is on the verge of changing again from extremely bullish to significantly bearish.

Perhaps the following statistical analysis of the Market’s performance in the 12 months following the quadrennial elections will provide similar guidance:

  • Before yesterday, there were 16 quadrennial elections beginning in 1948
    • The market is not totally agnostic when it comes to political affiliation
      • Nine were won by the Republican candidate, seven by the Democrat
      • Of the 9 Republican wins, the market finished higher the following September 3 times and lower six times
      • Of the 7 Democrat wins, the market finished higher the following September 5 times and lower twice
    • The average changes in the market, as measured by the Dow Industrial Average, has been
      • an average 1.5% gain in the two months to year-end
      • a give back to break-even by the end of the following March
      • an average net gain of 2.0% by the end of the June following the Election
      • a marginal improvement to an average 2.3% by September, or 10 months after the election
  • There has been a wide range of changes during those time intervals:
    • in the 2 months to year-end, the maximum gain was 8.0% and the maximum decline -6.6%
    • in the period to March, the maximum gain was 13.2% and the maximum decline was -8.4%
    • to the following June, the maximum gain was 27.0% (during the Tech Bubble in 1997) and the maximum decline was -11.8% in 1948
    • to the following September, or 11 months, following the election the maximum gain was 31.5% in 2007 and the maximum loss was -19.4% in the Tech Bubble Crash of 2001.

Putting it all together, here’s a picture of the market’s action following each of the quadrennial elections. (click on image to enlarge)

Today’s -2.36% decline is at the outer limits of the total amount of decline that’s usually taking place between the Election and year end.  This one-day drop is more than 14 of the past 16 cycles; the only two that were greater took place in 1948 (-6.6%) and in 2008 when it declined -6.8% at the beginning of the Financial Crisis Crash.

Hopefully, today’s horrible reaction represents about half of the total we’ll see to the end of the year. Unfortunately, if the market isn’t able to recover this loss then there’s a strong possibility that there will be a follow through of the downside at the beginning of next year.

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October 23rd, 2012

Important Stock Market Supports

I must confess that I’m disappointed by both Romney’s lack of fire in his belly during last night’s debate and in the market’s negative reaction to that performance.  I’m one of the crowd who was looking for a bounce rather than a swoon as we moved on to the election and for several weeks after a Romney victory.  My market optimism was based on the belief that a Republican victory in both the White House and Congress would a big risk factor overhanging the market (whether fairly or not) as far as economic growth and would also reduce the risk associated with the country’s falling over the fiscal cliff at year end.

This morning’s reaction forces me to go reevaluate the game plan.  Perhaps the market will slip over the edge before the economy does.  But then again, there are many potential support levels to stop the fall …. albeit after some major damage to stock prices and portfolios (click on image to enlarge):

 

Those supports are indicated on the chart:

  • The lower boundary of an ascending channel that begin in late-2011.  Perhaps, not coincidentally, that trendline actually stretches back to the 2009 Financial Crisis Crash low (see chart below) and should, therefore, be considered an extremely important and strong one.
  • Three slow moving averages that all happen to currently be ascending
  • A horizontal trendline at approximately the prior 2012 low for the year

Unfortunately, however, my proprietary Market Momentum Meter will turn red suggesting that a move into cash is advisable based on similar situations in the past.  If the decline continues at the current rate, it will be similar to the rapid decline in 2011.  The recovery from that correction was fairly quick and dramatic so many investors, including me, were whipsawed and are still trying to recover.

Some look at the long-term chart a see the market back at the top of its 12-year secular bear market tradition range and, consequently, see the beginning of another major market crash (i.e., decline of 30-50%):

One usually bearish pundit recently wrote the following typical view of an impending market top,

“Cyclical bulls follow cyclical bears, so from those panic ashes a new cyclical bull was indeed born.  And coming from excessive lows, it would more than double the stock markets again.  Over the 3.5-year span running to just last month, the SPX blasted 116.7% higher!  And that brings us to where we are today, what is almost certainly the third major bull-market topping witnessed in this secular bear.”

Rather than the proximity to the top of the secular bear market range, my focus will be on that ascending trendline from the 2011 and 2009 lows, currently at around 1400.  A cross below that line would be a clear indication of more declines to come.

 

August 21st, 2012

Stock Market Recover Sidetracked by European Sovereign Debt Crisis

I think one of my most prescient posts was entitled Housing and Finance: Two Superimposed Crises and Bear Markets of September 17, 2010, almost exactly two years ago and just before the last mid-term elections.  The market had already bottomed the previous March and were breaking above what I saw as an inverted head-and-shoulder interim bottom.  As noted in the post,  there appeared to be the beginnings of a bottom in the housing market due to once-in-a-lifetime affordability.

Specifically, I envisioned the market being victimized for the first time in history by two economic crises: financial crisis hitting banks and other financial enterprises plus the housing crisis hitting consumers.  I suggested that before the market can advance to new highs, both these industry groups would have to bottom and begin moving higher.  The keystone of that post was the following chart on which I attempted to visually superimpose the impact of those two crises on the stock market:

Here we are, two years later, with the market having ground 24.6% higher from 1126 to 1420 today.  I wrote then:

The reason the market appears to be bottoming again (the inverted head and shoulders) may perhaps be that housing is beginning to bottom and turn also. The number of foreclosures continues to rise (although at a lesser rate than last year) and the improved affordability index (historic low mortgage interest rates and closeout prices of houses) has not yet stimulated a pickup in the housing sales turnover. But a pickup may be around the corner [triggered by an up-tick in interest rates?]. Without a turnaround in housing, the stock market recovery will be short-lived.

Unfortunately, I didn’t have sufficient courage to invest in homebuilders and missed out on the Industry Group with one of the biggest moves over the past twelve months, Homebuilders, at 75%:

We thought our Financial Crisis had been contained by the Fed’s first round of Quantitative Easing and that banks would begin their recovery however the effort was sidetracked because of the European Sovereign Debt Crisis beginning towards the end of 2009.  The recovery in the stocks of the country’s larger banks began to falter towards the beginning of 2010 and only now has begun to show signs of renewed life:

The “herd’s” big money flow again beginning to be directed into financial stocks gives hope that, absent a new major crisis (although our own Federal debt and budget debate is still looming on the horizon), the market will be able finally to continue to the previous all-time highs and ultimately break the grips of the 12- going on 13-year secular bear market.  A cross of the XLF above 16 will trigger for me the another clear indication that financials will begin leading the market higher.

It’s been a long, frustrating two years.  We’re facing another national election, this one even more important than the last.  Continuing to look at all the negative news continues to make our investment lives feel dismal.  Seeing the possibilities of some positive news for a change opens the mind to a totally different stock market future than the one we have become accustomed to.  I may be nothing more than an incurable optimist but that’s the best way to remain committed to the stock market and, ultimately, long-term financial well-being.

August 16th, 2012

Scaling the Wall of Worry

Are we at a bullish or bearish pivot point?  If you’re looking for market advice from CNBC you’re looking at the wrong place.  The best way to get viewers is to create and stimulate controversy and that’s what CNBC does every single day.  You get a lot of different opinions but you can’t get just one straight opinion that you can act on.

A perfect example was how they juxtaposed, on two successive days earlier this week, Jeremy Segal of Wharton Business School articulating a bullish outlook followed the next day by Doug Kass of Seabreeze Partners pushing a bearish perspective today.  Interestingly, couched inside both opinions were opposing opinions on the impact of Romney’s selection of Ryan as his V.P. candidate:

  • First, they put on Jeremy Siegel who endorsed the Ryan selection because of Ryan’s budget-cutting efforts and suggested that, as a consequence, the market will advance to around 1500.
  • Kass came the next day suggesting than Ryan’s selection will lead to Obama’s reelection and driving the the market down to 1300 (interestingly, he started his pitch by using an invalid and inaccurate technical view  of the market) because of Ryan’s conservative history and his known hostility towards Bernanke.  Kass believes that the highs for the market have already been made.

So what is the average investor to do?  Which opinion should we embrace?  Or is watching merely a total waste of time.

If you’re obsessed with trying to guess the upcoming election’s impact on the market then you have to come up with answers to a series of difficult and highly subjective questions:

  • Is a Romney win looked on favorably or not? an Obama reelection?
  • Is the market already discounting the election of one or another candidate?
  • If there was a market bias towards one candidate vs. the other then would an upset create an adverse market reaction after the election?
  • How does control of Congress factor into the equation?
    • What if Congress is split?
    • What if Congress is controlled by the same party?
    • What if control of both houses goes to the opposing party?

And those are just the questions that easily roll off the top of my head.  Clearly spending much time trying to answer these questions is futile.  Making investment decisions today based on what you have figured out to be the correct answer to each of these questions is foolish.

There can only be four options that drive your investment decisions today based on your prediction of an event in a little more than 11 weeks.  Sell, buy, do nothing or ignore the  election and base your decision on what’s happening today.

My answer is always to “follow the herd” rather than make my own fundamental analysis.  I’m not proud; I want to do what the majority of the money sloshing around the market is doing today rather than trying to second guess whether they are right or wrong in going in the direction that they are.  I want to know how strong the market’s momentum is and the direction in which it’s driving.  As far as I’m concerned, there’s no doubt as to that answer.

For the first time since October 2009, the market next week as measured by an index of the 500 stocks comprising the S&P 500 Index will create a situation where the market’s current level will be above its average level over the prior 50 days  which will be higher than its level over the average of the prior 100 days which will be over the average of the prior 200 days.  Finally, they will all be higher than the market’s average level for the past 300 trading days.  The same will soon also be true for the index of stocks comprising the Dow Jones 30 Industrials and, for the Dow Theory followers, the DJ Transports.

On July 17, four weeks ago when the S&P 500 closed at 1357, I described the market’s consolidation flag and went out on a limb to say a cross above 1420-25 would lead to the market climbing to 1575.  Today, the market closed at 1415, or 4.27% above that July 17 close.  Hopefully, all the uncertainties and “Alerts” and “Breaking News” and “Earnings Season” jabbered about on CNBC didn’t scare you away from being in the market.  It didn’t scare the big money herd who have been accumulating stocks and, in the process, forcing prices higher.  They may reverse course but, I doubt it more ever day.

Come back often to check on the market’s progress.  Better yet, become a Member and see where I’m putting my money to take advantage of this advance … while it lasts …and the Industry Groups from which I select the stocks I buy.

March 21st, 2012

1912 = 2012; so many things change yet stay the same

These posts aren’t usually on subjects unrelated to stocks and the market but I just couldn’t resist this one.  I’m working my way through the last of Edmund Morris’ monumental biographical trilogy of Theodore Roosevelt called Colonel Roosevelt.  If you haven’t read much about our 36th president then you can’t possibly understand much about what made the world we live in today.  In many ways the two periods are nothing alike but when it came to the political, economic and international scene there are interesting similarities.

There probably aren’t many history professors and teachers assigning the following project to their pupils: “Compare the similarities and differences between 1912 and 2012″ but, if I taught such a course, I certainly would.

This morning’s NYTimes business section included and article entitled “Inequality Undermines Democracy” which stated:

The gap between the rich and the rest has been much wider in the United States than in other developed nationsfor decades….. Our tolerance for a widening income gap may be ebbing, however. Since Occupy Wall Street and kindred movements highlighted the issue, the chasm between the rich and ordinary workers has become a crucial talking point in the Democratic Party’s arsenal. In a speech in Osawatomie, Kan., last December, President Obama underscored how “the rungs of the ladder of opportunity had grown farther and farther apart, and the middle class has shrunk.”

…..a growing share of Americans have lost faith in their ability to get ahead. We have accepted income inequality in the past partly because of the belief that capitalism can’t work without it. If entrepreneurs invest and workers improve their skills to improve their lot in life, a government that heavily taxed the rich to give to the poor could destroy that incentive and stymie economic growth that benefits everybody…..Evidence is mounting, however, that inequality itself is obstructing Americans’ shot at a better life.

That was written today but it could just as easily have been written 100 years ago, in 1912, when the country was going through a similar argument about social and economic equality.  At the time, it was Theodore Roosevelt who, like the Tea Party of today, was disenchanted with the way the Republican Party led by his successor, Howard Taft, was pulling the country back from his Progressive programs.  During his eight years in office he had promised more progressive (read “liberal”) reforms to come.  A battle for the nomination of the Republican Party to run against the Democrat Woodrow Wilson ensued between Taft and the “progressive” Roosevelt.

Predating Obama’s trip this year, Roosevelt traveled to Osawatomie, KS in the summer of 1910 to set the stage for that nomination battle by delivering a historic speech.  He argued that one of the central issues of the government was protection of human welfare and property rights.  That 1910 Osawatomie speech later became the basis for his 1912 break from the Republican Party and formation of his Bull Moose Progressive Party.  In it he said that human welfare was more important than property rights and that only a powerful federal government could regulate the economy and guarantee social justice.  A President can only succeed in making his economic agenda successful, he believed, if he makes the protection of human welfare his highest priority.

[Interestingly, Osawatomie might also lay claim to being the "birthplace" of the Civil War since it was where John Brown led his first anti-slavery massacre in 1856 followed by his raid at Harper's Ferry in 1859 and the start of the Civil War in 1860.  Immediately before the Civil War, Kansas was the battleground of the effort to prevent the expansion of slavery and, in that battle, a main terminus of the underground railway for fugative slaves from the South.]

Key elements of Roosevelt’s New Democracy speech were (from Wikipedia).  It’s amazing how many of those issues are the ones still we debate today in one form or another:

  • A National Health Service to include all existing government medical agencies.
  • Social insurance to provide for the elderly, the unemployed, and the disabled.
  • Limited injunctions in strikes.
  • A minimum wage law for women.
  • An eight hour workday.
  • A federal securities commission.
  • Farm relief.
  • Workers’ compensation for work-related injuries.
  • An inheritance tax.
  • A Constitutional amendment to allow a Federal income tax.
  • Women’s suffrage.
  • Direct election of Senators.
  • Primary elections for state and federal nominations.
  • Strict limits and disclosure requirements on political campaign contributions.
  • Registration of lobbyists.
  • Recording and publication of Congressional committee proceedings.

We often incorrectly believe that the issues facing us are new and, at times, appear insurmountable.  But all we need do is, like in stock charting, to look at history and see that what is happening today follow from and follow patterns like events in the past.  If we understand that history and those patterns we are likely to make better decisions today.

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September 22nd, 2010

China is One Big Greenfield Project

For those of you unfamiliar with him, I recommend you read Thomas Friedman of the NY Times. In an OpEd piece today entitled “Too Many Hamburgers?” The passage that really caught my eye was:

“With enough cheap currency, labor and capital — and authoritarianism — you can build anything in nine months……But have no illusions. I am not praising China because I want to emulate their system. I am praising it because I am worried about my system. In deliberately spotlighting China’s impressive growth engine, I am hoping to light a spark under America.

For democracy to be effective and deliver the policies and infrastructure our societies need requires the political center to be focused, united and energized….. For democracies to address big problems — and that’s all we have these days — requires a lot of people pulling in the same direction, and that is precisely what we’re lacking.”

It reminds me of something from a while back, “Becoming A “Go-Ahead” Nation … Again” in which I had written:

“No wonder the stock market can’t move ahead. And it won’t until it finds new technologies, new industries, new growth vehicles, new catalyst to spark this century’s “go-ahead” enthusiasm. That’s where the country’s leaders should be focused…..Rather than punishing the majority, they should fund technological innovation, incentivize capital investment, reward risk taking and innovation, spur hiring.”

Ah, great minds thinking alike (with no disrespect meant nor intended, Mr. Friedman).

Graduate school was so long ago that there isn’t much I remember from it but one thing that has stuck was a class discussion comparing the US steel industry with those of Germany and Japan (without giving too much personal information away, let me say that the discussion could have taken place anytime between 1965 and 1975).

Those two economies were devastated by World War II and yet their steel production capacity was more efficient and profitable than ours. Our behemoths were US, Bethlehem and Inland Steels; theirs were both small specialty and large commodity producing mills. How did they do it? The answer was in the fact that they didn’t have any “legacy mills” to refurbish. Their whole economies started as greenfield projects, with their slates wipe clean because of the War, they had no legacy projects, they were building from the ground up.

The situation is true of China today. Not only do they have cheap labor and an authoritarian regime as Friedman points out, but they also are starting from the ground up, with greenfield projects, with little in the way of legacy plant and equipment that needs to be refurbished. That’s why they can build bullet trains, new train stations and new convention halls (see the Friedman article).

When’s the last time you heard of a new train station, airport, convention hall or rail line being built here. Have you heard of new bridges, dams, hospital centers or universities being built. About the only thing we build these days are sports stadiums.

Competing against the Chinese (and we have to think in terms of competing because not competing means stagnating, falling behind becoming second rate and withering away) begins by reallocating our Federal budget, cutting our defense spending (yes, perhaps ending the wars) and shrinking our global footprint so that more of our human and material resources can be redirected to those things that will help us compete in the 21st Century.

In the meanwhile, you investors keep one eye on FXI. By the way, the Chinese symbols read “The journey of a thousand miles starts with a single step”

August 19th, 2010

Becoming A "Go-Ahead" Nation … Again

Please pardon my getting political but since there’s nothing really very interesting or pleasant taking place in the stock market and because this is my blog, I want to get something off my chest.

I’m a history buff (what true chartist wouldn’t be?) because it provides context within which to better understand current events. I recently finished reading, for example, “The First Tycoon: The Epic Life of Cornelius Vanderbilt” by T. J. Stiles (I highly recommend the book to anyone interested in knowing how the United States evolved from a collection of disparate states into a linked nation of commercial interests).

Vanderbilt was an astute young man, unrecognized by the establishment in the 1830′s for his business acumen in applying steam power to river transportation (and later to railroads). The debate at the time was between progressives who saw a need for public investment in transportation and communication infrastructure in order to further territorial expansion and conservatives committed to the traditionally individualistic, independent and agrarian roots of the country.

As described in a PBS special about the Mexican-American War of 1846-48:

“People in the United States [in the 1830's and 40's] had a reputation that they were in awe of nothing and nothing could stand in their way. The word was boundlessness — there were no bounds, no limits to what an individual, society, and the nation itself could achieve. There was a reform spirit involved in the spirit of the age. It was a period of tremendous, exciting change.

The period was really the kind of coming of age of the United States, for the American people and their institutions. There were drastic changes in political ways, economic development, and the growth in industrial establishment in this country with technological advances that made individual lives easier than they had ever been before.

One example is the application of steam power to transportation. The United States often times was referred to as a “go-head nation” — a “go-ahead people” with the locomotive almost as a symbol. The railroad became a metaphor for American ingenuity and development.

In printing, the rotary press in 1846 made possible the mass production of newspapers more cheaply than ever before, enabling newspapers to produce for and circulate in the national market rather than just regional or local markets.

Some of the things that were happening bordered on the miraculous, such as the magnetic telegraph in 1844. The very thought of sending words over wires — it just couldn’t be. It was a wonder of the world, even surpassing the application of steam power to transportation on land and sea.

While railroads and communication were the technological sparks for the 19th century, the 20th Century, according to a recent survey of scientists, also had 20 top scientific and technological advances (see Wikipedia):

  1. Electrification
  2. Automobile
  3. Airplane
  4. Water supply and Distribution
  5. Electronics
  6. Radio and Television
  7. Mechanised agriculture
  8. Computers
  9. Telephone
  10. Air Conditioning and Refrigeration
  11. Highways
  12. Spacecraft
  13. Internet
  14. Imaging
  15. Household appliances
  16. Health Technologies
  17. Petroleum and Petrochemical Technologies
  18. Laser and Fiber Optics
  19. Nuclear technologies
  20. Materials science

Whether it was railroads, steel or oil in the 19th century or any of the above developments in the 20th, each represented sparks that drove industrial advancement and, indirectly, the stocks of companies in those industries that lead markets higher.

But what about the 21st Century? So far, there seems to be little leadership in any field, be it technology, business or politics. Since entering the new millennium, our country was attacked for the first time since Pearl Harbor, we’ve been stuck in two wars (the longest in our history), we’ve had two financial bubbles burst and, as a result of one, suffered the worst recession in nearly 70 years. Finally, at the risk of sounding political, the country has been without leadership and direction through two administrations.

No wonder the stock market can’t move ahead. And it won’t until it finds new technologies, new industries, new growth vehicles, new catalyst to spark this century’s “go-ahead” enthusiasm. That’s where the country’s leaders should be focused. Rather than looking out for the interests of minorities (those without health insurance, those who aren’t legal aliens, those who default or are underwater on their mortgages, those who are on unemployment insurance, those who haven’t saved up enough for retirement, those who want to build a mosque near WTC site) – they should focus on the rest of us.

Rather than punishing the majority, they should fund technological innovation, incentivize capital investment, reward risk taking and innovation, spur hiring. That’s what made the country great 1800′s and 1900′s and that’s what will help it not fall too far behind in this century.

August 13th, 2010

Breaking Into the Circle of Fear

When I was a kid in Sunday School, our teacher asked the class “How do you know if a prophet is good?” Hands shot up. “If the people listen to him” the first student answered. A second said “If his prediction comes true”, a most logical response. After shooting down similar answers from half the class, the teacher finally said “If his prophesy doesn’t come true.”

“Huh?”, the class said befuddled. “What’s he talking about?”

The teacher finally said “He’s a good prophet if the people hear his prophesy of doom and change so that it doesn’t happen. He fails as a prophet if the people don’t listen to him and they perish in the forewarned calamity.”

I can’t bear to hear any more from Nouriel Roubini, Robert Shiller, Peter Schiff or any of a handful of other prophets of financial gloom. Were they good prophets since they predicted way back when the housing bust, mortgage meltdown, or rush to gold and other safe haven investments? Actually, they weren’t good prophets because we either didn’t heard them or, if had, we didn’t believe them enough to act on their warnings. But yet they’re still around, still being given mics and still spewing their prophecies of gloom.

An on-going debate I have is whether this economy will ever get off its back and on its feet if the housing market doesn’t first hit bottom and start coming back. In other words, in this cycle of

  • foreclosed housing,
  • stubborn unemployment,
  • fear of deflation,
  • fear of inflation,
  • lack of business spending,
  • lack of bank lending,
  • ballooning Federal debt,
  • broken state and local budgets,
  • tax increases,
  • federal stimulus spending,
  • burgeoning consumer savings rates,
  • cash hoarding by businesses,
  • no-win wars,
  • shrinking $US and rising import prices,
  • economic anxiety,
  • economic uncertainty,
  • economic malaise

which is the cause and which is the effect. If we array all these problems in a circle, which link, if removed, starts the disintegration of the whole circle and begins the path to confidence and recovery. If we can’t deal with them all at once, which item needs to be tackled first, which item might be easiest to fix and offer a fairly certain and high payback.

Hear the voice of FDR in his stirring first inaugural address (the text and an audio excerpt is available by clicking here) and you might hear a good place to start. As you read the speech you’re struck by how often his words then could have been spoken by a leader today:

“This great Nation will endure as it has endured, will revive and will prosper. So, first of all, let me assert my firm belief that the only thing we have to fear is fear itself—nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance. In every dark hour of our national life a leadership of frankness and vigor has met with that understanding and support of the people themselves which is essential to victory. I am convinced that you will again give that support to leadership in these critical days.”

Without endorsing the Roosevelt’s political orientation (my political persuasion does leans the other way), I do endorse his optimistic and hopeful style of speech and leadership. We might be able to begin breaking the circle of our current malaise if we were better able to deal with our own anxieties and fears.

A good place to begin, CNBC and Bloomberg, might be to deny a mic to those doomsayers. It’s not like sticking our heads in the sand because we now do know what the problems are. We just need to begin focusing on the problems as manageable and solvable and believing that our future includes prospects of better days. And we could use an inspiring leader to keep us all moving together in the right direction.

January 21st, 2009

The Presidency as a Stock

My son sent me an interesting chart displaying the approval rates of each president since Truman and asked what it might look if one of the major market indexes were overlaid on it.

One of the most interesting and noteworthy aspects of the table is that the only President who left office with higher ratings than when he entered was Clinton. Go figure? With all that he went through during his second term!

Couldn’t overlay a market index but did convert the data into another chart. If the Presidency were a stock, we would have lost a lot of money on it over the half a century.

But the Presidency seems to be bottoming out over the past three presidencies (even after including Bush 43). So there’s hope …. hum, might make a good campaign slogan, “I’m the candidate of/from hope.” Has a familiar ring to it. Perhaps the Presidency (and the U.S.) might be a buy.

(To be fair, the chart isn’t exactly correct because I just put them end to end when one going out at 35% approval handed the baton to someone starting at 70%. But then it wouldn’t be as interesting.)

So let’s keep our fingers crossed that Obama can get this stock moving up. He’s starting with a very high approval rating so he’d have to be the equivalent of a messiah to be able to cause this chart to actually complete the turnaround process. Good luck, Barack.

January 17th, 2009

The Inauguration and the Market.

When most people see into the future they usually merely extrapolate recent experience. Some, however, move to the next step in projecting the future and try to identify when and why the extrapolated trend will change (sort of like taking a contrarian view).

Most projections you see or hear today see the damage that’s already been done to the economy last year, especially during the fourth quarter (remember, the recession was said to have begun in December, 2007). They extrapolate into 2008 and see major bankruptcies in retail (Sears, Gap, Macy’s), banking, home construction and, even, in state, city and local governments. They see oil as having declined from $140 to $35 per barrel and can only see the price dropping to the $20′s (remember when oil as $140 and most saw it going to $200?).

It’s easy measuring what’s happened over the near-term past and seeing what a continuation of that trend might lead to over the near term future. For example, it’s relatively easy to see China’s pause after the Olympics and the slow-down it’s experiencing due to the global economic recession lead to continued and deeper recession there leading to social conflict and strife.

But what’s not easy to do, and quite risky I might add, is to see these trends turning and even reversing. If you’re selling something (like a financial newsletter or a political platform) it’s an easier if you appeal to people’s fears than if you appeal to their hopes. More of the same is more believable than something that doesn’t yet exist, can’t be described and can’t be experienced.

Take, for example, a recent Bloomberg article in which both John Murphy chief technical analyst of StockCharts.com and Ralph Acampora, a true guru of technical analysis say that they hope that the October lows will hold but, if they don’t, the Dow will decline further to 6000 (and the S&P 500 to 600, by inference). That’s where we are today in the market.

But I’m going to go out on the limb and say that I think we did hit a bottom and it will hold. Furthermore, I believe sometime before the end of 2009, the S&P 500 will have hit 1100 and be struggling to move solidly into a bull market, mark-up stage. On what do I base this speculation?

On a long-term market view I reported on October 11 in “The Magic Number is Actually 7.5% per Year”, [Confession time: the title actually said "8.12%" - it was either a typo or purely a calculation error to be corrected now!] In that post I included the chart I’ve updated below (please click on it to enlarge):

Back in October, I wrote:

A band of 44% above and below the regression mean bounds the Index throughout the period and contains the Bull Market of the 1950-60′s, the secular Bear Market of the 1970′s and the Bull Market of the early 1990′s (except for the tech bubble leading up to Y2K). Interestingly, all the Bull and Bear Markets prior to the Tech Bubble, grew at either the upper, lower or midpoint at the 7.5% rate.

Here’s what I all this means for us today? The good news is that after last week’s collapse, the Index came within 6% of the bottom boundary (intra-day 839 low vs. 789) boundary); we should be very near the bottom. The bad news is that projecting forward to the end of 2009, the lower boundary increases to only 858, or still below Friday’s close.

There will be bounces but, in all likelihood, it will be a long time (several years) before the Index touches 1400 again. Unfortunately, the “buy-and-holders” are going to feel extremely frustrated. Market timing will be extremely important. You’ll have to trade gingerly taking advantage of recovery moves. You’ll have to be patient and not expect a robust Bull Market to return anytime soon. Shed poor performing stocks and, as market weakness appears, become defensive to conserve your capital.

Those of you who’ve enlarged that charge can see that the lower boundary has moved up from 789 in October to 803 last Friday. Since the chart is based on month-end data, November’s intra-month low close of 752 would have been marginally below the lower boundary. But the market bounced back and Friday’s close of 850 is not more than 5.8% above the lower boundary.

Can the market decline back to that lower boundary? Perhaps. Will it break through? I think not. The only times it fell below that line were:

Granted this is a bad recession; some even call it the beginnings of a depression. It’s not only here but it’s worldwide. Has the market fully baked in the economic distress? Has the market adequately reflected the $trillions that has been created to stave off further effects? Will the market deviate from the mean more than the 9.98% of 1982 (making today’s low at least approximately 725)?

Without getting political, I thing that investor psychology (as well as that of the general populous) see’s the Inauguration as a new beginning and psychology is the other half of the market (economics being the first). Ronald Reagan took office in January 20, 1981 and the country sighed a deep sigh of relieve as Jimmy Carter left office leaving behind the high oil prices and high interest rates; the hostages were released in Iran that same afternoon. Barack Obama is being inaugurated and perhaps we’ll be as lucky.

Extrapolation is easy and safe. The risks and rewards are in seeing when and how things will be different.