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God Bless America’s Founders

God Bless America’s Founders

God Bless America’s Founders as they were brilliant God fearing men married to amazing women. They took it upon themselves vast sacrifice to found the greatest country ever to exists on the face of this earth. Thousands have fought and many have died defending this country. A country based on a constitution that respects the individual and one that has helped spread liberty and prosperity to every corner of the world.

Having witnessed many great speeches over my lifetime from Margret Thatcher, President Reagan, both Bush’s, and Obama, I was stunned to witnessed another just yesterday. It is truly amazing what President Trump has accomplished in just 3 years. If you have not done so, please watch the dramatic accomplishments and incredible impact that has already manifested. According to his words, we now must prepare for the expansion of growth in specific sectors of the economy that is coming.

Our algorithm delivered a significant slingshot cycle prediction of the US Markets more than 10 months ago and now, the day before President Trump delivered this amazing speech, I published that the slingshot had started and for members to watch their Wealth Preserver and Wealth Maximizer Trade Signals and to read the Members Blog for precise entry and exits. It’s Coming!

As the child of two amazing immigrant parents, I have been fortunate to have been born, raised, and educated in the USA. I am blessed and just completed a prayer of thanks to God for allowing me to live at a time of rapidly expanding global freedom and prosperity. More importantly, I am thankful to be able to share our algorithmic trade signals with our friends around the world.

God Bless America

The Distressed Company Trading System & Strategy

The Distressed Company Trading System & Strategy

The Distressed Company Trading System & Strategy involves a bet that a company experiencing severe financial difficulties is essentially not as distressed as the market believes. When a company undergoes severe hardship and becomes distressed, many investors react by selling shares and this can drive the stock price below fundamental levels.

Distressed companies can therefore be attractive to opportunistic traders looking for a bargain.

Furthermore, there are different forms of bankruptcy which can help the distressed investor.

Chapter 7 bankruptcy will involve liquidation of assets which means investors could still get a payout.

Meanwhile, under a Chapter 11 bankruptcy, the company is given permission to continue trading and reorganise which could lead to significant improvement down the road.

The following chart from Barclay Hedge shows how the Edhec Distressed Securities Index has outperformed the S&P 500 since 2000:

The Distressed Company Trading Strategy
Out-performance from funds specializing in distressed securities. src: barclayhedge.com

The Distressed Company Trading System & Strategy:

The distressed securities anomaly holds that some distressed securities become undervalued through forced selling and investor psychology.

To really succeed you need to understand balance sheets and the logistics of distressed companies.

Ideally, you should have experience of picking companies that could offer a return after liquidation of assets or after a company reorganization.

The Distressed Company Trading System & Strategy

The IPO Trading System & Strategy

The The IPO Trading System & Strategy has baffled academics for several decades and is the result of three unusual price patterns that are typically associated with new public stock offerings:

  1. The first day of trading for new IPOs sees abnormal returns
  2. IPOs typically under perform over the longer term
  3. IPO under performance moves in cycles

According to Mahjoub, by the end of the first day of trading, US IPOs between 1990-2007 traded on average 18.9% above their offer price at which the company sold them.

This pattern of under-pricing also held strongly in the 1960s (21.2%), 70s (9%) and 80s (8.2%).

But it reached its peak in the Internet bubble of 1999-2000 where an estimated $66.63 billion was left on the table based on the starting price of US IPOs in that time period.

Meanwhile, separate research from Jenkinson and Ritter seems to illustrate that this anomaly is a global phenomenon:

The IPO Trading Strategy

The abnormal returns for IPOs on the first day of trading is another rejection of the efficient market hypothesis and a number of explanations have been put forward for its existence.

Some authors argue that issuers voluntarily leave money on the table in order to create a nice start and good feeling among new investors in the stock and therefore allowing issuers to have more successful Seasoned Equity Offerings in the future.

Others argue that IPO under-pricing can act as risk compensation for the underwriter. One other study found that banks can lose IPO market share if they under-price or overprice too much (Dunbar).

To go alongside this anomaly, there is also evidence that IPOs go on to perform worse than the market overall. So it seems IPOs typically return above average returns on the first day of trading but then go on to under-perform.

In analysis of US IPOs between 1970-2010 Ritter found that equal weighted returns for IPOs were -4.8% in the first year, -8.1% in the second year and -3.3% over five years. This is well under benchmark returns.

Whatever the explanations, there do seem to be anomalies persistent in IPOs that could be available for the average investor to take advantage of.

The The IPO Trading System & Strategy:

More research may be needed but the general strategy is to go long IPO stocks on their first trading day. You can also short IPO stocks to capture under performance in subsequent years.

The Distressed Company Trading System & Strategy

Post Earnings Announcement Drift Trading System & Strategy

Post Earnings Announcement Drift Trading System & Strategy (PEAD) is another one of the most significant stock market anomalies to have been discovered. The idea is that when a stock releases earnings that are a big surprise to the market, the stock tends to drift in the direction of that surprise  for up to 60 days after the announcement.

Since the efficient market hypothesis postulates that new information is almost instantaneously incorporated into a stock price, the observance of Post Earnings Announcement Drift Trading Strategy suggests that the market is not perfectly efficient.

According to a paper by Brandt and Kishore, PEAD is capable of abnormal returns (in excess of the market) of about 12.5% annually.

Explanation

The most popular explanation for Post Earnings Announcement Drift Trading System & Strategy is that investors typically under-react to earnings surprises and it takes time for the new information to filter through and get priced into the market.

The following chart from Mr. Damodaran shows the effect very clearly:

Post Earnings Announcement Drift Trading Strategy
Trading System & Strategy:

The way to trade PEAD is to buy stocks with the strongest positive earnings surprises and short stocks with the strongest negative earnings surprises. Trades can be held from 1 to 60 days after the announcement to capture the drift.

The Distressed Company Trading System & Strategy

P/E Ratio Trading System & Strategy

P/E Ratio Trading System & Strategy illustrates that low P/E stocks produce higher risk-adjusted returns than high P/E stocks. This is another classic value investing anomaly that has been supported by value investors such as Warren Buffett, Joel Greenblatt and Howard Marks and written about by researchers including Basu and Shiller.

A key insight concerning the P/E ratio is how it encapsulates investor sentiment.

If a stock has a high P/E ratio, its price is high relative to recent earnings. Investors are therefore expecting that stock to grow quicker and produce higher earnings in the future.

A stock with a low P/E ratio, meanwhile, is less expensive relative to recent earnings and investors are therefore less optimistic on growth.

Low expectations are more easily overcome and this is why a low P/E ratio can indicate an undervalued company and a good investment opportunity.

The P/E ratio is a noisy signal but there has been lots of research into its effectiveness.

Professor Shiller produced one of the most well known studies into the P/E ratio and showed a clear correlation between low P/E and forward returns. In the following chart you can clearly see the relationship:Low P/E Trading Strategy

P/E Ratio Trading System & Strategy:

According to this anomaly Trading Strategy, you should prefer low P/E stocks when constructing your portfolio in order to benefit from this value premium.

The Distressed Company Trading System & Strategy

Book-to-Market Value Trading System & Strategy

Book-to-Market Value Trading System & Strategy is commonly referred to as the book-to-market effect and dates back to famed value investor Benjamin Graham and showed a difference of 7.6% average returns between high and low book-to-market stocks and that value stocks outperformed growth stocks in 12 out of 13 major indices.

What is book-to-market?

The book-to-market anomaly compares the book value of a company to its market price. Therefore, the larger the book-to-market ratio, the cheaper the company is on a pure fundamental basis.

For example, if a stock has $100 million in real assets but is valued with a market cap of only $80 million, the B/M ratio is 1.25 (100 / 80).

You can therefore say that the stock is trading below its book value and is fundamentally cheap.

If you were to strip the company and liquidate all the assets you would end up with more cash than the current market value (that is assuming the assets are valued correctly).

The book-to-market effect is one of those anomalies that makes logical sense and has a good history of out-performance which contradicts the efficient market hypothesis.

Book To Market Value Trading System & Strategy Explanation

Explanations of this anomaly are mostly behavioral based.

For example, one explanation is that investors overpay for growth stocks with compelling narratives and so value stocks get overlooked and undervalued. Investors overweight past performance into their investing decisions.

Another explanation is that high book-to-market stocks are often distressed companies and therefore entail higher investment risk.

An obvious drawback of the book-to-market anomaly is that it only takes into account one variable.

Famed value investors such as Warren Buffett would say that it’s best to look at the book-to-market ratio as simply one piece of a much larger puzzle.

The following chart from Slide-hare (apparently with data from Ken French) shows an illustration of the book-to-market effect with data from 1927 – 2007:Book-to-Market Value Trading Strategy

Book-to-Market Value Trading System & Strategy:

You can calculate the book-to-market ratio using the total book value of the stock divided by the market capitalization of the shares. You can then scan for stocks with high book-to-market values and use these as a basis for further investigation.

Interest Rates Will Now Rise Sharply – Part II

Interest Rates Will Now Rise Sharply – Part II

Interest Rates Will Now Rise Sharply – Part I

Interest Rates Will Now Rise SharplyThe rise in the stock market will eventually force the Federal Reserve to abandon its attempt to appease international central bankers who are still locked into negative interest rates.

This is actually the exact pattern that took place after the first real G4 meeting, as I call it when the US Fed lowered rates in 1927 to try to deflect the capital flows back to help Europe. It is ironic that history is repeating this same way once again…

Kansas City Federal Reserve President Esther George stated today that the Fed may need to “reverse” the three rate cuts implemented in 2019 that brought rates down to 1.5% to 1.75%… “We will need to asses whether the 2019 rate cuts prove to be ‘insurance cuts’ that will need to be reversed if headwinds fade.”

The Fed will once again turn to its domestic policy objectives and stop trying to help Europe which is trapped into its negative rate policy. Even Sweden has abandoned negative rates stating they have failed to provide what they were claimed to have accomplished.

I want to remind you that rising interest rates are bullish, not bearish. When the time comes to let you know when and what to buy and sell, we will provide those signals to our members. As money continues to move out of Europe to the USA we will let you know here.

The Distressed Company Trading System & Strategy

Financials Trading System & Strategy: Size Effect

Financials Trading System & Strategy: Size Effect

Financials Trading Strategy Size Effect is also known as the small firm effect and is simply the tendency for small cap stocks to outperform large cap stocks over time

Here, smaller cap stocks are typically referred to as companies trading for less than $2 billion in market cap. The small firm effect is one of the three factors in the Three Factor Model by Eugene Fama and Kenneth French. (The two others are CAPM and value).

Financials Trading Strategy Size Effect Explanation

One explanation for the size effect is that small cap stocks are simply more risky than large cap stocks. They must therefore command a higher rate of return.

Another explanation is that small cap stocks have the ability to grow faster and harder than larger companies which can be constrained by their own level of success.

However, the size effect has been called into question by some researchers who say the anomaly is inconsistent, concentrated among microcaps, and strongest in the month of January.

The following graphic from Aswath Damodaran with data from Ken French calls the small firm effect into question and illustrates how most of the returns have come in January:

Financials Trading Strategy Size Effect

Trading System & Strategy:

There is evidence that the small firm effect has weakened. However, investors may still outperform by selecting small caps with higher quality earnings (as discussed in this paper by AQR).

Also, the small firm effect is clearly more prominent in January. You can buy baskets of small cap stocks and simultaneously short large cap stocks if looking for a market neutral approach.

Members Blog – Critical Market Juncture

Members Blog – Critical Market Juncture

Critical Market Juncture

We are at an important cyclical time as we mentioned in our blog posts last couple of months.

We will see the Trump Senate Impeachment trial begin and about 6 Republicans are lining up against Trump. They are claiming they want witnesses and this can upset markets in a very large way.

The House is supposed to present the case but here the Democrats want new evidence on which Trump was not impeached. This is presenting a serious constitutional question with a Panic Cycles starting. This has never been attempted!

Here is what to expect and do with your investments.

 

The Distressed Company Trading System & Strategy

Reversals And Mean Reversion Trading System & Strategy

Studies have shown that using Reversals And Mean Reversion Trading Strategy works best over a time horizon of around 3 to 18 months. Less than that, or longer than that, and you are more likely to see a reversal which can also be described as mean reversion or regression to the mean.

One study, from De Bondt and Thaler (1985), found that the biggest losers over a period of three to five years earned higher average returns over the next three to five years. Meanwhile, the biggest winners earned lower average returns.

In other words, they found persistent mean reversion over a period of three to five years.

Additional research has shown mean reversion can also occur on much shorter time frames.

In a study by Dunis et al, the authors found that reversals typically occur overnight after large price falls. Other studies have shown price reversal over a one month period.

There is also documented mean reversion in fundamental data like earnings and accruals, intraday data, volatility and in the aftermath of short selling.

Like momentum, numerous research has been done into the subject of reversals and mean reversion. Also, a number of mean reversion strategies have been detailed on this blog and in our research program.

The following equity curve shows a typical mean reversion system that we detailed on this website:

Reversals And Mean Reversion Trading Strategy:

Strategy:

Mean reversion strategies involve looking for extreme price movements that are unusual and likely to revert back to more normal levels.

They can be explored on various time-frames and in various settings. The Reversals And Mean Reversion Trading Strategy is continually optimized within the InterAnalyst algorithm and plays a significant role in helping issue our Green and Red trade signals.

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