The Simple Accountant

Long/short equity, short-term horizon, large-cap, independent trader
The Simple Accountant
Long/short equity, short-term horizon, large-cap, independent trader
Contributor since: 2010
Morningstar asserts that the relative outperformance of equal weighting the S&P 500 is due to the higher weighting given to mid cap stocks. I haven't done the in-depth research to satisfy myself whether that is in fact the case, or it is due to the "buy high/sell low" bias of cap weighting, or something else.
As a real world example, however, we can look at the RSP equal weighted ETF. Since inception it has out-performed the cap weighted SPY, but under-performed the mid-cap 400 ETF MDY. That tends to support the Morningstar thesis.
The author's strategy looks to me like a type of "barbell" approach: allocating half to higher beta (RSP has a beta of 1.11 vs the S&P 500, MDY beta is 1.15), and half to lower beta blue chip dividend payers (DVY beta is 0.69). That doesn't seem like a bad strategy on the face of it, and could be the basis for some tweaking to optimize performance.
That's an interesting take. The seasonality effect is well documented in both the professional and academic literature (see for example If an observed phenomenon is statistically significant, then by definition it is not random, or coincidence.
In any event, what I was getting at with my question is, having provided such an edge over the past three years, I wonder whether traders might be getting too complacent with that seasonal pattern. That is when the market often gives a "head fake" and goes the other way. We'll see what happens.
Thanks for sharing your outlook chaser; I agree on most counts. What's your sense on the sell (or sell short) in May trade. It has worked three years in a row - are traders expecting it again this year?
Editorial correction: the last sentence should have read "the rest of March." My apologies for the oversight.
Thank you for the comments everyone. That breakdown in the CAD has me a little concerned. I just put up a post on my instablog here at SA with a chart that has the CAD and SPX plotted together. It shows the divergence pretty clearly. To me this is something that bears watching.
Thank you for the comments gang. Sometimes muddling through isn't the worst thing. Still seeing a good bit of bearish commentary out there, but that's what makes a market.
Thanks but...I was looking for something richer in, you know, economic data. Numbers, charts & stuff like that.
Thanks for the comments everyone. It's interesting that we have a sort of skeptical consensus developing here. I have to admit that my own gut-level view has been somewhat skeptical as well. But at the end of the day I believe you have to "manage by the data," and the market data is bullish on balance.
My approach to this kind of environment is to go long, but stay alert for signs of trouble. If the evidence dictates, I will change my outlook accordingly.
Hi Donnie,
You pose a good question, and I would be interested in seeing some of the literature - maybe just the abstracts to start - on the subject.
Marc, what is so radical in your essay is that you are giving voice to something that has become taboo in public discourse, and practically unheard of on a investment focused website. But you are right that it is a survey of some old ideas that formerly had currency.
As a grad student in the days when serious discussion of Karl Marx was still a going concern on university campuses, I recognize a few basic premises here. Now, I understand that the mere mention of Marx (you did mention his colleague Engels) imperils any dialogue at all, but I'm hoping we can have a grown up discussion here.
One of the central premises of Marx's analysis of emerging capitalism (which still retains a great deal of value) was that, left to its own devices, capitalism tends to concentrate capital, which leads to a couple of other central premises of Marxian economics: the inherently crisis prone nature of market driven economies, and the tendency of the rate of profit to fall.
The genius (in my opinion) of 20th century western liberal governments was the emergence of activist policy, which has been able to blunt some of these tendencies and lend stability to western economies. Whether it was a response to Leninist revolutionary pressure is a matter of some debate, but that centrist liberal paradigm - social democratic in Europe - has come under considerable pressure. The tiger is very powerful, and always straining to break his cage.
Some interesting points, and fairly radical implications here.
Than you Raul!
Thanks Sal. I was not comparing the two as direct substitutes, but making the point that Google got the pricing right on their offering, while Microsoft whiffed on theirs.
My impression of the Chromebook is that it's a better iteration of the netbook for that particular use case. Clearly the price point is attractive and Google got that right - as opposed to Microsoft who missed it with the Surface. An even better alternative for cheap mobile computing, to me at least, would be a $200 used Thinkpad or Dell with your favorite flavor of Linux. Battery life may be shorter, but those laptops are powerful and built to last, and some of the Linux distributions are very usable and have a good variety of quality apps these days.
Thanks for the article Mr. Porter, and to the participants in a very interesting discussion. As a simple guy who tends to be fond of simple strategies, I have always found the Dogs of the Dow interesting but don't actually employ it.
There is a general principle behind the Dogs, and Cranky's VIG based approach (I am a big fan of VIG and VDAIX myself), and any number of other similar approaches. They concentrate a portfolio in a handful of high quality, highly liquid value stocks. That is not a bad foundation, but it's not quite enough.
Where I think an investor can actually gain an edge is by coupling this type of simple approach with a strict sell discipline. For example, buy the ten or five stocks indicated by the rule, but sell any stock that falls, say, 5% below cost basis. That way if any of the dogs get really sick - and they are dogs for a reason, after all - you don't hold them all the way down.
This approach would create alpha on the downside (which is where alpha is easiest to find). Notice that in Cranky's example, the outperformance of his VIG based model was due to the much smaller drawdown in 2008 vs. the dogs. That is your proof of the principle. As I always tell folks who want to play in the market, making money is dead simple: just make sure you don't lose money. The rest will mostly take care of itself.
This is a developing global phenomenon I have noted in my own articles. Look at charts of Deutsche Bank (DB), HSBC (HBC), Credit Suisse (CS), Mitsubishi UFJ (MTU) as well as the U.S. based regionals and money centers. A lot of breakouts, broken downtrends, and just about everything above its 40 week EMA.
Even Regions Financial, fresh off another set of allegations, has failed to break down so far. We have a lot of bearishness out there, but it's hard to see a big downside move with the banks (and small caps, and emerging markets) acting well.
Disclosure - long BAC
Thanks Change,
Regarding your earlier point about the Nikkei going parabolic and not recovering (to date), it seems to me we had that moment with the NASDAQ in 2000.
As to the more general thesis that Japan is the model for the U.S. going forward, the argument has been made by more astute analysts than myself, and in fact I have made reference to it on occasion since the 2008 crash. But the more I think about it, the less convincing it seems, and I really am looking for someone to make the case coherently and comprehensively. Taking several points:
1. Bank solvency: the Japanese property boom dwarfed the one in the U.S., and while my impression is that the U.S. banks have still not come clean, I don't think they are holding nearly as much rubbish on their books. In Japan multi-generational loan terms are not uncommon; they had a much larger can and a much longer road down which to kick it.
I also tend to think (another view not widely shared) that, unlike the BOJ and Japanese government, the Bernanke Fed and Geithner Treasury have done a fairly good job under very difficult circumstances. Not perfect, but they are steadily leading us back from the nastiest collapse in any of our memories - and without much help from congressional fiscal action.
Japanese policy makers now seemed determined to break the grip of deflation once and for all. We'll see how it works out, but look at a long term chart of the yen and Nikkei now - yen has broken long term support and the Nikkei has broken long term resistance. 2013 just may be the year to start allocating some funds to Japanese equities.
2. Manufacturing is alive and well. The output of the U.S. manufacturing sector has been steadily increasing all along, even as manufacturing employment has been declining. We hear about the tech fueled productivity boom, but the manufacturing "productivity miracle" has been every bit as impressive. We just have to figure out what to do with all the folks we no longer need on the shop floor.
3. Global competition is a problem for everyone but that is something I see as a potential positive as well as a negative. It drives efficiencies and lowers costs, but again, there is that little employment problem.
4. Demographics is where I see one of the greatest divergences between Japan and the U.S., one that heavily favors the U.S. We do need a sensible immigration policy, and my suspicion is that we will get one - not optimal, but reasonably sensible (that seems to be how we do things here). In the unlikely event that we fumble it, and give in to the nativist and xenophobic streaks that have been common in the U.S. since the 19th century, then we could have a problem.
That's about all I can come up with absent some more thought and study.
Thank you for your comments. @skiman, triple top or head & shoulders top, it doesn't look very comforting either way. But I am not bearish, just cautious.
@Ari, I realize that my long term view on the dollar is probably not widely shared, particularly here at Seeking Alpha. Turning the question around, I see dollar bears as exceedingly sanguine on the world ex-U.S. We have issues, but I wouldn't trade ours for anyone else's.
@change, you seem to be asking me to defend a counter-factual. I would instead ask you to flesh out your implicit assertion - why is the U.S. today so much like Japan in 1990?
This ongoing debate between dividend investing and capital appreciation investing has been interesting, to say the least. The various participants on both sides have on occasion argued with a sort of theological intensity, which I have found odd - and at times amusing.
My take on this is that any sort of absolutism when playing in the markets is your enemy, because nothing works all the time. I cut my teeth as a serious investor in the 1990s, when the very notion of dividend growth vs capital appreciation would generally have been regarded as having been settled for all time in favor of the latter. We saw how that worked out.
The current macro cycle does seem to favor dividend stocks, at least empirically, as Chuck has so well demonstrated, and Tom Armistead apparently also found in his own study. I have my own ideas about this, but my suspicion is that it too shall eventually pass. I remain an agnostic, or perhaps better, a mercenary. No allegiances here, I will go with what works as long as it's working.
Good observation chartdawg. There is a fair amount of the fear trade still showing in the treasury market. COY isn't a highly liquid security, so I'm not sure big moves are a good signal. However if you have noticed a correlation with equity markets, that does have some value.
Do you think the pullback in COY and similar funds has anything to do with re-positioning in anticipation of tax rate changes going forward? We saw similar, but less dramatic, moves in more liquid funds such as HYG and JNK
Disclosure - we are long HYG
Thank you for the correction on the ticker. My mistake.
When looking at enterprise IT companies, I always talk to my senior IT guys. Years ago they preferred HP in the data center, even if they were buying Dell for the desktop and laptops. The last few years they have been saying what rubbish the HP server products had become, and how useless support was.
That kind of feedback from the front lines, as well as the instability at the top and the acquisition disasters, have kept me away from this stock. I have bought names like Ford and even B of A at firesale prices because I saw they were going concerns that the market was pricing for extinction. I have never felt that way about HP.
The Surface is going to face at least one major obstacle to widespread adoption: the “rent is too damn high.” I think MSFT seriously missed on the price point.
Perhaps I am being overly optimistic, but at some point ("after the funeral" as you say) the Greeks will decide they have had enough, and will begin to get on with the restoration work. What other choice is there really?
On a darker note, I do know of some (mostly older) Greeks who privately hope for another military junta to sieze control and restore order and discipline. Apart from the question of whether such a thing is even possible, it is an interesting indicator of how far things have gone.
Agreed that Greece is, as you put it, "done." Utterly and completely insolvent. Exiting the currency union has appeared, to me at least, all but inevitable for some three years now.
What we see playing out currently is the political process of sorting out who will take the losses, and when - and most importantly, how it can be done without having to re-capitalize many of the European banks. Unfortunately this is a matter in which the Greeks themselves become largely irrelevant once they reject the austerity measures.
Ending it quickly a couple of years ago would have been much better than the delays that have been permitted, but if it were easy, it would have already been done. That is the nature of political processes. The only hope I can see for Greece is a re-issue of the Drachma, devaluation and re-denomination of the debt, and some orderly plan to convert it to long term debentures. Which, as Mr. Spencer detailed, brings us to this little problem of the banking system.
Fine job Mr. Spencer. As a Greek expat with family and friends with business interests still in the country, I think you are spot on in nearly every regard. And predictably accompanied by the usual nonsensical comments about the U.S. being the next Greece.
Of course PCs aren't dead. From a growth investor perspective, however, they may as well be dead. That is because there is no clear driver of growth for the PC industry. Now you have dividend income investors sniffing around Microsoft and Intel, and companies like Dell trying to reinvent themselves outside the PC space.
The shares of the 90s tech giants are unlikely to return to their glory days, barring some game-changing innovation. That doesn't necessarily make them bad investments, it just makes them more appropriate for a different class of investors.
So it's not patriotism any more?
Reaching for yield is like having drinks at a joint in a bad neighborhood. You might be OK, heck you might even have a good time, but you had better be keeping an eye on everyone in the room.
Thanks for the support kolpin. It's tough to make a call on anything in the midst of a correction, so you may be better off where you are - on the sidelines - for now. My read on the Dow utilities is that the index is currently at the lower bound of the 3+ year trend line, and looking like it may want to roll over. We need to see a move higher soon.
Looking at a couple of names in the sector that I follow, ConEd (ED) has been flirting with support at the 200 day for about a month now. I would want to see a convincing move off that support as a buy signal. Southern Co (SO) is a little steadier, and would be my personal choice at this point. However, I am not buying until the overall market steadies.
The fundamental thesis for MSFT is kind of murky. It is generally agreed that Ballmer is a hindrance, and that the corporate culture is dreadful. There is less agreement on the product strategy - this is a company that has a number of hits and misses on its record.
My own view of MSFT, like Matthew Dow, is primarily as an enterprise software company that has an opportunity to reinvent itself in the consumer space. The big bet on the new UI in Win8 (and the accompanying hardware) represents a risky but necessary and belated acknowledgement of the end of the PC era. However I have a hard time seeing them taking significant market share in mobile. To me the more interesting question is what they do with Skype, and how they monetize it.
Fundamentals aside, over the last ten years one of the easier ways to make money in the market has been to buy MSFT under $25 and to sell around $30. We were stopped out a couple of weeks ago.
Correction: the ticker for the Petrochina ADR was incorrectly listed in the article as PTC; it is actually PTR. Mea culpa, please accept my apology for the error.
As a general rule, when investing in unfamiliar areas for the longer term it is a good idea to hire experienced managers who know the local market. Two that are generally held in high regard are Templeton and the Matthews Asia funds (disclosure - we hold a position in MAPIX).
For trading positions get yourself a list of the major Chinese ADRs trading in the U.S. (assuming you are a U.S. based investor), and do a little digging. NYSE listed ADRs of companies whose financials are attested by a major auditing firm are a safer bet. As stated below, I tend to avoid Chinese banks.
Finally, anyone who is interested in Chinese investment absolutely should be reading Michael Pettis' blog at