Dialogue from “Being There” (1979)
President “Bobby”: “Mr. Gardener, do you agree with Ben, or do you thinking we can stimulate growth through temporary incentives?”
(Long Pause)
Chauncey Gardener: “As long as the roots are not severed, all is well. And all will be well in the garden.”
President: “In the garden.”
Chauncey:”Yes, In the garden, growth has its seasons. First, comes spring and summer, but then we have fall and winter. And then we get spring and summer again.”
President: “Spring and summer.”
Chauncey: “Yes”
President: “Then fall and winter.”
Chauncey: “Yes”
Benjamin Rand: “I think what our insightful young friend is saying is we welcome the inevitable seasons of nature, but we’re upset by the seasons of our economy.”
Chauncey: “Yes! There will be growth in the Spring!”
Benjamin Rand: “Hmmmm.”
Chauncey: “Hmmmm.”
President: “Hm. Well, Mr. Gardner, I must admit that is one of the most refreshing and optimistic statements I’ve heard in a very, very long time. I admire your good solid sense. Thats precisely what we lack on Capitol Hill.”
I must admit I’ve waited a long time to find an appropriate time to add that dialogue from Being There into our blog. Stock Market seasonality is a very real phenomenon and despite the market strength over the past six months we’re soon to be entering the strong season for stocks once again.
I recently came upon a paper by Jacobson and Zhang from Massey University in New Zealand: Are Monthly Seasonals Real? A Three Century Perspective. Jacobsen and Zhang examine an extremely long record of 300+ years of UK stock returns for evidence of monthly patterns.
Jacobsen defined Winter as the six months from November to April and Summer from May thru September. While the primary subject of the study was the UK markets they noted that the US stock market had a similar seasonal pattern as well, in fact most developed countries exhibited the pattern.
In a second study by Mateo Blumer in Seeking Alpha (May 17, 2012) titled “Market Seasonality: Capitalizing Upon Summer Decline”. In this study Blumer demonstrates that investing $10,000 in the Dow Jones Index (DJIA) on May 1 and selling it on October 31 each year since 1950, you would have actually lost money as of 2011. On the other hand you would have had a 7.1% per annum return by investing on November 1st and selling April 30th. Importantly, there were only three cases where the DJIA fell by greater than 10% during the Winter months (1969, 1973, 2008 and in all three cases the US economy was in recession).
A quick check with E-Forecasting clearly shows we’re not presently in a recession.
So how should investors understand how to use this data? First off we can never dismiss the possibility of a one-off event which cannot be anticipated for. But more importantly, if you’re an investor worried about the strength of our current bull and trying to anticipate a good pullback in order to buy in you might want to reconsider that thought. The best window of time for a pullback is passing as we ease into November. Rather than look for a grand pull back consider short term pullbacks that last in the order of a week or even less.
Be careful out there
Brad Pappas
Year to date returns as of 9/30/2013 are available now. Please email Brad@greeninvestment.com for the data. We will no longer be publicly publishing performance data, it will only be available upon request.
Performance data, holdings etc can always been seen with the link below at Collective2.com
Returns on our C2 accounts include all trading expenses but do not include management expenses.
FAB Universal symbol FU has acted like a Chinese bottle rocket since our purchases but in the last few days several articles have warned of an impending large dilution of shares. The story of FAB on Seeking Alpha has taken the firm to task for allegedly misrepresenting the capitalization is not $160mm as listed but more than double that figure once the conversion of preferred shares is taken into consideration.
Despite the stock’s high ranking in our various systems it’s never worth the risk of owning shares of any company where there is risk of a misleading balance sheet. Better to sell the shares and take our profit rather than risk losing the profit of our remaining shares.
If you follow this blog you’ll see that we sold a large percentage of shares above $8 a share when the shares were trading in a parabolic frenzy. Since then, new information has come to light that should make anyone question why they should be involved in such an issue.
In another light this issue sheds a different light on Socially Responsible Investing, being responsible to yourself and clients in avoiding potential mistakes that could be hazardous to your portfolio’s well being. Consider it a proactive step in the direction of “portfolio wellness” 🙂
So we bid adieu to FAB Universal
No position as of publication of this blog article
Be careful out there
Brad Pappas
If you read my blog long enough you’ll see a trend in my distrust for any security that goes parabolic. Parabolic moves are terrific with the resulting capital gains that can be quite large but they also present unusual volatility. No parabolic move is sustainable, eventually profit taking will begin and it can be dramatic and in many cases the security never recovers, check out the chart of AAPL from 2012.
In recent days I’ve noticed that the bid price for Fab Universal to be quite soft at times. This means that despite trading 2 or 3 million shares a day the bid price was not firm even for small orders of 10,000 shares.
Hence, despite FAB Universal retaining a very high ranking in our model I’ve sold off a substantial percentage of the shares so that most of the original principal invested in the shares has been extracted and we’ll let the stock run and sell the remaining shares when the model gives the order.
In addition to selling off a chunk of FU we’ve sold all of our YONG or Yongye Intl. YONG received a buyout offer at a modest premium to our purchase price.
Long FAB Universal
Below is a chart of our primary portfolio for accounts in excess of $100,000. This trading system has been verified by Collective2.com where it has been given a score of 9.96 out of a possible 10.
Year to date rate of return 42.7% versus 21.64% for the S&P 500 as of 9/21/2013. Returns do not include RMHI management fees (which are negotiable and vary from client to client) but do include all trading expenses including an allocation for slippage.
This portfolio uses our most effective quantitative systems for socially responsible investing and is ideal for long term investors. The portfolio automatically filters out industry groups such as Energy, Biotechnology, Pharmaceuticals and Tobacco. In addition it is screened on a personal level by myself for companies that are likely to be offensive to any of our clients. In addition, this portfolio also fulfills the requirement for a Vegan investor. Contents of the portfolio can be seen by clicking the Collective2 link above.
Please note that in many of our examples we use hypothetical backtesting for investment examples. While this account at C2 is in a sense hypothetical since we’re not actually buying or selling any shares directly through C2 it is meant to be used as a real time mirror of the changes and results being made in our client portfolios. The hypothetical buys and sells made in the C2 portfolio are also being made at the same time in live client portfolios.
Brad Pappas
Bull Market corrections are common with an annual regularity but sifting through the data this morning we found a distinction between the -16% correction in 2010 and the -19.4% correction in in 2011. In both cases the “Superindex” created by Recessionalert.com had rolled over and assumed a negative slope.
In other words the average market correction since 2009 occurring without a negative slope by RA.com “Superindex” was a mild 6.77%. The two corrections that did occur with a negative slope had an average pullback of 17.7%.
The chart below is a graph representing RA.com’s 3 month probability of a recession along with trigger lines where recession is essentially assured. Notice at the 3 month probability line flirts with the trigger in both 2010 and 2011. Rising probability patterns must be respected by a reduction in risk assets such as stocks. Even though in both cases a recession did not materialize the impact on the stock markets was beyond a shallow pullback.
Not all market corrections are the same nor should they be treated as so. If we were to sustain market weakness in the near term it would likely be the shallow 6.77% variety since there is no uptick in recession odds at present.
