This past week my inbox was filled with a combination of OMG! emails that fell into two categories: 1. “OMG! The rain, the floods! Are you alright?” And, 2. “OMG! Holy shit are we really up _%!?”
We are drying out and I never imagined that I’d have a tear in my eye yesterday at the site of a train-length convoy of Army Corp. of Engineers rolling 30 mph on a 2-lane mountain highway that could have had the the soundtrack of the “Empire Strikes Back” in the background. And those guys are greeted here like the liberators of Paris for the task at hand of restoring the roads to our mountain passes.
But lets get back to “Too much of a good thing”. Rallies do have a lifespan and this present rally is showing its age but that doesn’t mean its about to roll over any time soon. Ignore the common “the market is due for a pause”, this market has been due for a pause almost all year long. In my opinion the rally will most likely end by either a change in Monetary Policy or dysfunction from Washington that creates the impression that our favorite politicians don’t have the ability to maintain positive growth policies.
Consider the chart below. You’ll notice that the # of new highs as shown by the gold bars is not keeping up with the ongoing market rally. This means that the present rally is becoming more selective and fewer stocks are moving higher. While we all would love to see the rally continue, that sentiment is pointless in the real world. There will be a pullback at an unknown date in the future that will likely be the pause that refreshes.
Does this mean that we should begin to reduce our exposure to stocks? IMO, no. Always respect the primary trend in the stock market otherwise your portfolio growth will be stunted by continual bouts of selling and buying based on emotion. Also, we could sustain another 1 or 2 bursts of growth before the correction begins. Odds are that the pullback will be shallow since we have no imminent signs of recession looming. Its quite possible that any pullback may only bring us back to where we are now and that’s not a bad thing at all.
Even Mae West needed a break once in a while.
Brad
We are a far cry from Wall Street as we’re located very close to the worst of the Colorado flooding damage. While our property sustained minimal damage our hearts and thoughts go those living just a few miles away in washed out downtown Lyons.
We’ve always thought that being located far away from Wall Street had its advantages but coping with a seasonal stream that’s six feet above normal isn’t what we had in mind.
Regardless of the weather, talking with clients and directing portfolios moves on.
Be careful out there.
Brad
Every once in a great while I’ll hear a song that will stop me in my tracks no matter what I’m doing, as time goes on that seems to becoming a rarer event but last night it was: Gnarls Barkley with “Who’s going to save my soul”. It could have been Motown back in the day but the slight hip-hop melody makes it a stunner.
One of the most common requests we receive from new investors is the Vegan investment portfolio. For more then two decades Socially Responsible Investing revolved around broad themes such as environmental and military issues. In the early 1990’s we introduced the concept of Humane Investing or avoiding companies with operations harmful to animals such as factory farming.
But now a new trend is emerging that we’re happy and capable of accommodating: The Vegan Investment Portfolio.
The Vegan Portfolio is built upon our standard humane investing concepts but with a closer and more discerning eye for details of a companies operations. While many investors employing socially responsible investing strategies may include owning Whole Foods Market or Chipotle Mexican Grill the Vegan criteria excludes such ownership. But in our experience its also not accurate to assume that the Vegan portfolio must exclude consumer staple or food stocks. In the past year we’ve owned stocks such as J. B. Sanfillippo and Sons symbol JBSS (nuts) or Calavo Growers symbol CVGW (avocados).
We like to think that owning individual securities with our proprietary quantitative investment strategies offers investors a very strong alternative to mutual funds. Investors must keep in mind some basics of mutual fund practices:
By our calculations mutual funds that classify themselves as “Large Cap” only have approximately 500 stocks to choose from.
Mid Cap mutual funds have approximately 840 stocks to choose from.
Once you consider that a Vegan screen combined with other social screens could eliminate at least 30% of the universe of stocks to choose from the remaining investment choices can be quite limited. If you’re a Large Cap fund that could mean less than 350 stocks to choose from which is a major reason why applying social screens to Large Cap mutual funds are quite difficult to implement and why you can be quite surprised when you see the contents of an SRI fund.
RMHI has the entire U.S. equity universe to choose from or approximately 6800 stocks which is quite an advantage. In addition, we can avoid the large multinationals that have hands in many businesses and focus on companies that are specific in their business operations which gives us confidence that their practices meet our social screening standards.
Since our universe of selection is relatively large compared to mid cap and large cap funds the implementation of a Vegan criteria is much easier to implement.
A Vegan criteria screen eliminates the following, but not limited to:
Factory Farming including all producers of non vegetarian foods.
Leather / Hunting retailers – including shoe retailers such as Brown Shoes or Cabellas.
Firearms manufacturers.
Animal Testing companies which includes biotechnology and pharmaceutical manufacturers.
Restaurants including fast food restaurants.
Specialty chemical companies that create compounds that could be used in support of other offending companies.
Extractive industries such as mining, gold, petroleum and needless to say fracking.
I’m sure there are other classes of companies to be excluded and we will usually address them as they come to the top of our rankings systems. But have no fear if you might think the list above is too restrictive, our 30 stock portfolio on Collective2.com is by most definitions a Vegan portfolio.
There are always companies that fall into gray areas where there is no right choice except the choice most comfortable to the investor. A recent example is Big 5 sporting goods which sell items like baseballs, baseball gloves and footballs all made with leather.
To summarize, while many non SRI investment planners and advisors may have little idea what a Vegan portfolio looks like they are always welcome at RMHI. In addition the realities of owning and managing large and mid sized mutual funds can make social screening impractical due to the limited size of the stock selection universe. This can be avoided by including smaller sized companies (under $500 million capitalization) .
RMHI owns no positions mentioned.
Background music: Ennophonic by Redlounge Orchestra
The most popular question I frequently hear is: “Your back test results look great, almost too good to be true but do your portfolio designs really working going forward?” Very fair question and if you don’t mind this is a great time to add some legalese “Past results don’t guarantee future results or even that a model devised by man and laptops will actually turn a profit in the future”. You know the drill, a back test can look great but will it work in the future or will it be a flop?
Late last year we took (what we thought) was a brave and potentially embarrassing step by placing three distinct trading models on the quantitative trading platform Collective2.com By doing this we could demonstrate the effectiveness of our systems in real time going forward, rather than relying on hypothetical back-testing. While there is no actual cash behind these C2 portfolios we trade them on the C2 platform as if there were like any other client portfolio.
In addition, if you’re intrigued and curious about our holdings, volatility or turnover C2 is a great place to check us out. You’ll see our winners and alas, our losers. In addition to our holdings, Cs provides a month by month return graph. You’ll also notice in the link below that C2 has given our portfolios a rank which is based on their proprietary ranking system and our rank as of August 24 is 9.95 and the highest possible rank is 10. According to C2 “In general a ranking above 5.0 is good. A rating above 7.0 is excellent.”
(Click on this image to be directed to our C2 accounts)
RMHI/OP III has approximately 30 holdings when fully invested and is designed for investors with over $100,000. It is by default the portfolio management system we employ for new accounts. Its also very scalable where at present we have accounts approaching $2 million in size using RMHI/OP III.
In terms of socially responsible investing, it would be very easy to alter one or two holdings so that the portfolio would meet a Vegan investing criteria.
Year to date 8/23 our C2 account III has returned 34% versus 18% for the S&P 500. Returns include commissions and accounting for slippage. Returns do no include management expenses.
You’ll also see that its possible to subscribe to our models on C2. We don’t encourage C2 subscription hence we keep the monthly cost prohibitive.
If you have any questions you can always call us. Meanwhile Dodgers / Red Sox are starting and it is a Sunday night after all.
Brad
Music in the background in consideration of the passing of JJ Cale this weekend: JJ Cale and Eric Clapton’s The Road to Escondido. A favorite memory of them was at the first Crossroads festival in 2004 where they appeared together on a side stage to play Cale’s “After Midnight”. They disagreed on stage who would sing with Clapton as far back from the front of the stage as possible forcing Cale to take the lead and sing the lyrics he made famous.
The primary RMHI/OP ranking system
Many times you’ll read references to our proprietary ranking system so I thought it was due time to take a few moments this Sunday to explain how it work and its effectiveness.
Our ranking systems are really the engine that drives performance in all of our client portfolios. In our case, our ranking system is the result of approximately 40 factors which range from valuation, technical and earnings growth measurement working together to identify the potentially strongest stocks on one end of the spectrum and the ability to identify the weakest performers on the opposite end. Like any engine, periodically we’ll test the present results of the ranking system against historical back-testing to see if the ranking system remains effective.
All portfolios are re-ranked weekly and client holdings are adjusted to reflect any changes in the ranks to ensure all the holdings reflect the best opportunity for growth.
RMHI/OP ranking system results 1/1/1999 to 7/23/2013
Obviously you want to own the stocks that fall into the best performing bars on the right of the chart and ignore the rest.
In our portfolios (with the exception of our 5-stock portfolios) we only own stocks falling into the top four bars to the right side of the chart. Once a stock falls out of the top ranked bars its sold and replaced with a new stock which is usually in the top bar (yellow). As the chart shows the best chances for investment success are owning the stocks in the top bars to the right.
Portfolio changes for the week of July 29th:
I’m a subscriber to Decisionpoint.com and periodically read what Carl Swenlin has to say and his present comments suggest that a short/intermediate top in the stock market may be forming. Carl is not prone to fear mongering pronouncements and market trading volume has been declining while the market averages rise which is not a good combination.
So with that in mind and after re-ranking our holdings we’re selling off the stocks that have fallen below our acceptable levels on the ranking system but are only making a partial effort to replace the sold stocks with new ones. Our smaller 5-stock model has actually given several sell recommendations but no buys whatsoever, so in these portfolios we’ll hold cash until further buy recommendations emerge.
Stocks to be sold due to rank
Tower International
Columbus McKinnon
First Interstate Bancsystem
Farmers Capital Bank Corp
Trico Bancshares
Buys
Chase Corp.
Heritage Financial
All the best,
Brad Pappas
Its late July and the slow season for markets may be settling in but so far its been an astonishing year. The stock market this year reminds me of The Terminator it just never stops moving higher and all sell offs so far have been very minor representing a brief chance to add to positions. Eventually the rally will end but anyone’s guess is as good as mine as for when it will be.
The two websites that we use for determining our equity exposure:
recessionalert.com and nospinforcast.com are both in agreement that no recession is in site for at least nine months from now. So, with that information we remain fully invested in stocks. Expanding economies are generally a negative for bonds and that has been the case for Treasuries as well as for gold. It appears markets are moving back to their normal pre-2008 levels and investors who’ve been under a rock the whole time are putting money back to work again.
Trading for us has slowed down as well which I’m grateful for. Our models are now set in stone and other than very minor tweaks I don’t envision any changes to them as they have been astonishingly effective.
We do have a few recent buys:
American Electric Technologies AETI
Penford Corp PENX
National Technical Systems NTSC
all three score at the top of our ranking system
sold from portfolios are
Mutual First Financial MFSF
Netsol Technologies
Brad Pappas
RMHI is long all positions
