Debates, Fantasy Land And The Whipping Post

This article originally appeared on the Tim Melvin Deep Value Letter.

The debate had been over for about a hot minute last week when I the “Stocks to buy for a Clinton Presidency” started to hit my email inbox. I later got several “Stocks to buy for Trump Presidency” just to even things out. This election-centric stock picking been going on for some time now and I am sure most of you are getting similar emails and messages.

Please ignore them. If you rearrange your portfolio based on a guess about which candidate might win and what they might be able to accomplish in their first year you might actually to deserve to lose the money you will almost surely lose. Whoever the next president is they are going to face gridlock. The GOP will hold at least the house so Hillary will face substantial opposition in at least one House of Congress and Trump will have problems no matter who controls Congress. Ideas and plans are just cute stories if you can’t pass them and it looks like that will be the case as we begin 2017.

Web sites devoted to stock picking love these articles. Stocks to buy before Super Bowl Sunday. Stocks to buy for the Daytona 500. Stocks to buy for summer. Stocks to buy for winter. Buy these stocks for back to school. We need to ignore all that click-bait garbage. Buy stocks because they are cheap and have solid fundamentals. Trading your portfolio based on various sporting event and elections is not a robust approach to the markets!

Markets are up marginally over the past week, and there are no stunning new developments that would change my point of view. The mantra remains cash and community banks and it will stay that way until I see much better valuations. We are outperforming the market in spite of significant cash balances and there just are not many safe and cheap stocks right now.

David Tepper added his voice to the cautious chorus last week telling CNBC that "Depending on the outcome of the election, the market can move different ways. So, generally speaking, pretty cautious on the market, not outright bearish on the market." He said his funds are heavy on cash and light on stocks right now. Like me, he is hoping for gridlock in Washington next year so businesses can have some confidence that no moronic tax or regulatory laws can be passed. He told the network "But if you do get some sort of mixed government or something that's near what's going on right now, then you'll get some relief after this election's over. I think they have to anticipate business investment going up, especially if you have more or less of a status quo economically."

As I have mentioned in the past, I use Louis Navellier as a checkpoint when I am too cautious on markets. He is far smarter than I and is usually quite bullish on stocks and the market. Right now however while he sees some bright spots he is also very cautious right now.

He wrote a couple of weeks ago "Like the political world, the stock market sometimes lives in a fantasy world. The analyst community is almost always too optimistic, so I expect wave after wave of analyst earnings estimate cuts in the New Year. In the meantime, third-quarter earnings for the S&P 500 are expected to decline by -0.7%, which would be the sixth quarter in a row of negative earnings; but when energy and financials are excluded, the earnings environment is actually positive and gradually improving, thanks in large part to more favorable year-over-year comparisons from the negative growth rates in late 2015.”

My old friend The Voodoo Professor passed along a piece from Craig Lazzara the Global Head of Index Investment Strategy at S&P Dow Jones Indices that outlines the difficulty in making money right now in the stock market.

Mr. Lazzara noted that "Neither correlation nor dispersion tells us anything about a manager’s stock selection skill — but dispersion, in particular, has an important influence on the value of that skill. When dispersion is high, good stock pickers can outdistance their less-talented or less-lucky competitors. When dispersion is low, the gap between the best and worst managers narrows, and generating excess returns for clients becomes more difficult. Correlation helps us to understand the benefits of diversification, but as a gauge of stock selection strategies, it is less important than dispersion. Other things equal however, lower correlation is better for active managers than higher correlation , especially for a strategy with rapid turnover. In September, dispersion fell to below-average levels in every market we follow. Correlations, though not terribly elevated in absolute terms, were typically well above average. Neither of these developments is auspicious for active managers. Unless the dispersion-correlation map changes, active alpha should continue to be elusive.”

Our sit still, cash, and community bank approach IS providing Active alpha, so I will stick with my profitable cautious approach until we see the Ghost of Hetty Green strolling towards Wall and Broad.