A Contrarian Indicator

Here's the theory behind the magazine cover indicator. By the time a something’s success or failure reaches the cover page of a major publication, it is so well known that it is fully known by everyone and those who want to capitalize financially have already done so. For example, once all the good news is out and a company makes the cover of business week, the stock is destined to underperform. The reverse holds for negative stories. It doesn’t have to just be about businesses, it can be about social themes too … remember the 2007-08 housing boom.

An academic study by three finance professors at the University of Richmond put the magazine cover story indicator to the test -- specifically as it focuses on coverage of individual companies. The professors culled headlines from stories in Business Week, Fortune, and Forbes for a 20-year period to examine whether positive cover stories are associated with superior future performance and negative stories are associated with inferior future performance. "Superior" and "inferior" were determined in comparison with an index or another company in the same industry and of the same size.

Here's what the professors found. The research supported the use of magazine cover stories as a contrarian indicator. The most negatively portrayed companies managed to beat the market by an average of 12.4%, whereas the outperformance of the media darlings fell to just 4.2%. The conclusion? Positive stories generally indicate that the stock's price performance has topped out. Negative stories often come right at the time of a turnaround.

The study confirms that it is better to bet against journalists than alongside them. It would be easy to jump to the self-congratulatory conclusion that journalists are incompetent. But that conclusion misses the point. Journalists aren't writing cover stories to make investors money. They are writing cover stories to sell magazines. And "hot topics" sell. But it also means that when a company or financial trend is featured on a magazine cover, the chances are that the trend is already widely known, and universally accepted.

With that in mind, this weeks Business Week cover should raise some eyebrows….

Just because the Government’s measured “version” of inflation, CPI, has been in stall speed for years, doesn’t meant it will always be. Additionally, and most importantly, not everything tracks the inflation rate. Health care is a great example as it has been rising almost 2x the annual “measured” inflation rate. For a what that means over time, take a look, and try not to laugh, at the hospital bill below for what it cost to have a baby in 1958. I think the total bill would be less than the cost than the charge of 2 ibuprofen in today’s medical reality (those that have had a recent surgery can attest to what I say)

Maybe This Year

On Jan 2, 2018 I walked into Melanie’s office and told her I had set a goal for myself to see if I could double my small, trading account IRA account in one year (achieve a 100% return).  An ambitious goal but something that is doable with good risk management, some leverage, active trading and of course must include a dash of luck and a cooperative market.

With 2018 now in the rearview mirror and a tally of the results I have to come clean, I did not achieve my goal. In fact, I was far below it. Disappointing no doubt as at one point in the year I was up more than 70% with about 40% of the year left to go I thought it was going to be a slam dunk. I had it all mapped out, I was going to sell everything once I hit that 100% mark and sit in cash and wait for December 31. But, alas, Q4 happened. I didn’t react fast enough to the rapid change in sentiment and so I fell hard with the market. Deal with it big boy, the market is talking and doesn’t care what I want or think. Oh yah, the “Woulda-Shoulda-Coulda” game is a waste of emotional and brain capital too so don’t do it. Its non-productive. If you don’t like the results, change your process.

My return for the year was 25.7%, not bad as I outperformed the SP500 by almost 32%. But those that know me understand “not bad” is not what drives me. So, being the uber competitive individual I am, I will, once again, set another goal to double my account for 2019. The odds are I will fail even worse than I did this year. Why? Because I am human. 2018 provided me the opportunity to fly under the radar with only one person knowing my goal. No external pressure or embarrassment if I failed, just my pride was at stake. You see the sad thing is as humans we have a tendency to act differently the more sets of eyes that are scrutinizing what we do, especially when money is involved. Even though I have the same set of trading rules, because of emotions that drive decisions, I am more than likely going deviate from them even though I know I should not***. Hopefully my genetic stubbornness, adjustments to my process and most importantly my real goal for doing this can keep my emotions in check. I want to make it clear, if I achieve the goal it’s not because I want to gloat or brag, or even because I want a bigger IRA (although I don’t mind this), instead I have something that is way more important to me. I want all clients and readers to know beating the market (and hopefully substantially) is doable in spite of Wall Street’s mantra it’s not possible. If Wall Street is too dumb (and this has nothing to do with intelligence) or lazy, that doesn’t mean it’s not possible. Peter Brandt taught me this and it changed my life. My goal is to do that same for some of you.

Let’s be real. Can beating the market be done every year?  Nope, not going to likely ever happen every year over a long run by anyone let alone me. All of my mentors and people I follow and compare methodologies and processes with do it regularly, but not every year. Each of them has experienced underperforming years, some terribly so. That is going to occur with random markets, it’s inevitable. And what is a common trait is that those individuals become better when they fail. They key-in on and learn from their mistakes/failures, something all of us should do if we want to get better at anything in life. They are also in a continuous loop, never staying idle or complacent but always improving. To be a successful investor all that is required is 1) have a process that provides positive expectancy 2) insure steadfast discipline following the process, 3) access to multiple markets to invest in (more than just stocks and bonds) and 4) an unwavering desire to outperform (a politically correct way of saying being an overly competitive pain-in-the-^%$.

Maybe this year.

Any doubters feel free to email me as I will be more than happy to provide a validation of trades and account values. And no, in case you were going to ask as others already have, I can’t do this for anyone else’s account.  Sorry. On the other hand, if you would like to learn how, please send me an email as I’d love to share with anyone what I have learned (what’s the old Chinese proverb about teaching a man to fish?).

***If you want to learn more about this human trait, there is a really interesting and true investment story you can read, just google the “turtle traders” or email me and I can send you an ebook.

37 years later ….

US bond returns are now negative over the past 2 years. The last time that happened was 1981. While there will likely be bumps along the way, I don’t think it will take another 37 years before we see another negative rolling 2 year return, do you? If not, it’s a good time to be thinking about how to immunize your portfolio.

Uncharted Territory

Almost every prior stock market crash was caused, or at least exacerbated, by market illiquidity.

As you can see in the chart below, the FED’s recent activity of unwinding their balance sheet by selling a small fraction of their QE accumulated holdings coincided with the most recent 12% stock market consolidation (not the sole reason for the correction mind you).  It is important stock investors understand the correlation between the FED removing liquidity and lower stock prices. When you combine this balance sheet activity with a simultaneous push higher in interest rates we are entering into uncharted territory knowing just how the market will react.  

Regardless, the current consolidation in the SP500 has a clearly defined upper and lower boundary, 2670 & 2530 respectively, making it a much easier task to manage whatever happens.  Above I add exposure, below I decrease.

What You Want vs. What You Need

“The best way to destroy the capitalist system is to debauch the currency. By a continuing process of inflation governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.” - John Maynard Keynes

 “Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair.” ― Sam Ewing

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We all understand the destructive effects of inflation has over time but what happens when inflation is as low as it has been over the past 20 years? What you say, inflation has not been low? Your personal experiences says otherwise? Our Government’s Bureau of Labor Statistics (BLS) begs to differ. Prices on average over the past 20 years has been 55.6% which works out to be an annualized rate of ~2.02%. One of the lowest 20 year periods …. Ever. So who’s right?

 The problem as we uncover when peeling back the onion, is how the BLS calculates its numbers. To avoid going down that rat hole into a hornets nest, it’s safe to say that inflation is the sum of the prices of things that are rising and the rest that are rising more. Unfortunately, as it works out, the things that you want are rising while the things you need are the things that are rising more. This has never been so apparent than in the most recent 20-year data presented in the chart below.

 One scrutinizing the chart may point out that food and beverage prices (a need) have been rising at an “average” rate. The devil is in the details here too. Looking under the hood you will see the things that are healthier (unprocessed and natural foods) are rising at a much faster rate than things like fast food. Oh and while I do have some millennial readers, no, cellphone service is NOT a thing you need.