Tuesday, January 5, 2016

Investing & politics

You may ask why politics is discussed in this investing book. Politics has been proven to affect the market. For example, the market had reacted to the different stages of Quantitative Easing whose dates had been preset. The following is a more recent example.

I predicted 2015 would be a year with small profit and insisted on so even during the fierce correction in August. Why I was so sure? Very seldom the market is down in a year before an election year including 2007. The last occurrence was 1939, the year when WW2 started. Investing is a multi-discipline venture including statistics and politics. It may not always happen, but the probability is high for these years.

How to profit

2015 was a sideward market. The market reacted to good news and bad news. The strategy for sideway market is: Buy at temporary downs and sell at temporary peaks. Define ‘temporary’ according to your risk tolerance.

For the ‘temporary market down’, personally I used 5% down from the last market peak. To me the ‘temporary market peak’ is 10% up from the last market down. The percentages can apply to the percentage changes in the stocks in your watch list. In another words, I buy the stock when the market is 5% down from the last peak and sell it when it gains 10% or the market gains 10%. Be reminded that this strategy is opposite to market plunges, where you should exit the market totally - again depending on your risk tolerance.

The following are my purchases on 08/26/2015. I should have bought more stocks and one day earlier if I were not blinded by fears (a human nature) during this correction. Here is my proof for my purchase orders as I was asked to. The four stocks were described as value stocks in a SA article and I did a simple evaluation.  As of 12/31/2015, I sold all the four stocks except Gilead Sciences.  The annualized returns are more impressive such as GNW’s 10% gain in one day.

Buy Price
Buy Date
Sold date
Apple (AAPL)
Gilead Sciences (GILD)

General Motors (GM)
Genwealth Financial (GNW)

There were similar examples in 2013 and 2014.

2016: Politics and the market

No one including all the Federal Reserve chairmen / chairwomen and all the Nobel-Prize winners in economics can predict market plunges. One chairman predicted a smooth market and a few months later the housing market crashed! Many predicted correctly market crashes by pure luck. One even received a Nobel Prize and became famous. However, you are glad to ignore his later market predictions.

There are at least two best sellers asking us to exit the market in 2009. If you followed them, you would miss all the big gains from 2009 to 2014. They did have a point though. However, you cannot fight the Fed. The market had been saved by the excessive printing of money and hence created a non-correlation between the market and the economy. I bet these authors (famous economists and gurus) may have not made a buck in the stock market except selling their books or teaching where his students should request refunds. It is a classic case of the blind leading the blind or diversion of theory and reality.

From their articles, they do not know the basic technical indicator. You only want react to the market when the market is plunging and not too early. That’s why most fund managers cannot beat the market as most are not allowed to time the market. Buffett had mediocre returns in the last five years – I had warned my readers three years ago in my blogs/books. To me, the ‘buy-and-hold’ strategy is dead since 2000. The average loss from the peak for the last two market plunges is about 45%. Most charts depend on falling prices, so you will not save 45% and 25% loss is my objective.  

Fundamentally speaking

The market in 2016 is risky due to the proposed interest rate hike (as of 4/15 the Fed indicated only .5% so it would not be a factor), our record-high margin, strong U.S. dollar (as of 4/15, it is weaker) and the high expenses of the wars to start. Each reason could be a good-size article. Personally I try to maintain 50% in cash and would flee the market if my technical indicator tells me so.

Politically (and statistically) speaking

The election year is the second best for the market, but it may not be this year. We seldom have three terms from the same political party. For that, I predict a win by the Republicans. Republicans are usually pro-business, but ironically the democratic presidency has better track record for better market performance.

The market has more than recovered since the day when Obama took office. The S&P500 performance under Republicans vs. Democrats since 1926 to 2014 is approximately:

   Annualized return under Democratic presidenci­es: 13%
   Annualized return under Republican presidenci­es:   6%

The market is riskier based on the above statistics. In addition, there is a good chance that we will have either a non-politician president or a lady president for the first time (more materialized in 4/16). The market usually does not favor to this kind of change. Statistics do not mean it will happen but history repeats itself more often in investing.

Critical political issue for 2016

On our way back at about 4 pm on a Saturday, the bus was full of Spanish-speaking workers. I bet most are illegal workers working in my suburb such as our malls, the hospital and many restaurants. Why illegals? I bet most legal folks would get welfare instead of working in that shift. If they work, the state would take away the freebies such as health care in Mass. The illegals do not have this option. I do not think the politicians understand this. There is no need to build a border wall but punishing the employers who hire illegals. Before we do this, we need folks to take the jobs taken by the illegals today.

What will happen if the politicians turn the illegals to be legal? There will be nobody doing these low-level jobs I predict. No one in the right mind wants these jobs when it is far easier to collect welfare. Why would politicians make this stupid decision? They want to buy Hispanic votes as evidenced in the last two elections.

In addition, most politicians side with the welfare recipients. Since 40% of the population does not pay Federal taxes, the politicians have to satisfy their needs in order to buy votes.

We should encourage folks to work, not the other way round. Representation without taxation is worse than taxation without representation.

Our high taxes, increasing minimum wage, regulations and strong US dollar dampen our competitive edge.

Some political decisions/regulations that affect the stocks

Beside the presidency and the interest rate hike(s), there are many political decisions and regulations that affect the stocks. Just name a few here:

·         The never-ending wars postpone our secular bull market beyond 2020.
·         Solar City (SCTY) and this sector depend on government energy credit.
·         My Chinese solar panel stock evaporated when the US banned them from importing to the US.
·         Any gun control measurement will affect gun stocks (initially positive).
·         Restrictions on cigarettes if China and Russia follow our bans.
·         Our immigration policy and great colleges attract the best all over the world to come to the U.S. At the same time, we need to limit economical refugees from burdening our entitlement systems.
·         France imposes extra taxes to foreign investors.
·         Government bailouts on ‘too big to fall’ companies.
·         High corporate taxes boost the exodus of corporation headquarters to tax heavens for the US.
·          Infrastructure projects.
·         Taking out the ban to export oil would increase the profits for oil companies.
·         After the annexation of Crimea, the Congress restricted using Russia’s rocket engines and gave new opportunity to the US companies in this area. Besides political consideration, Chinese rockets are the most cost effective and more reliable.
·         China’s suppressing corruption affected Macau’s casinos. Actually every major change in Chinese policy affects the world and global investors.
Currently the policy of forcing Chinese banks to take stocks in failing companies makes me stay away from investing in all Chinese banks.

Politics affects the market. I predict a risky market in 2016.

Economy and religion also affect the market. Statistically speaking, the market is ahead of the economy by about 6 months. However, the current market is an exception due to the excessive money supply. The correlation will return to normal.

Religions cause wars as the ones in the Middle East today. These huge expenses are consumption, not investing. It will not be good for most sectors of the economy especially in the long run.

Written in 1/1/2016.


For more of my reasoning, check out the book described next. It has 800 pages (6*9) for $9.99. It could be the best $10 you ever spend.

The above is an abstract from my book "Complete the Art of Investing" which is available from Amazon.

I challenged to have the best-performed article in Seeking Alpha history, an investing site, for recommending 5 or more stocks in one year after the publish date. The concepts for that article are discussed in this book.

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