The Futurist

Energy vs. Financials, FINAL RESULTS

Many of you may be familiar with this sectoral strategy that I have presented, which was due to the unusually wide extreme to which these two sectors had diverged from each other as of April 22, 2008. To review :

On April 22, 2008, I decided to go short on Energy (XLE) and long on Financials (XLF).

Then, on May 20, 2009, I decided to cover the Energy short, and use the proceeds to double down on Financials.  Up till that point, the trade had earned a loss of -5.36%, vs. a loss of -32.20% for the S&P500.

Now, it is time to sell the Financials position, and assess the final performance over the entire 18-month period, against the S&P 500.

The purple line indicates the May 20, 2009 transition from being short XLE to covering that short and using the full proceeds to double down on XLF.  Note that the short of XLE was profitable, so that the amount that was redeployed to XLF was more than the existing value of the XLF position. 

Therefore, the final results are (with all dividends reinvested) :

 
This strategy yielded a gain of 21.92% vs. a loss of -17.19% for the S&P500.  This is a huge gap of almost 40 points, and means that $10,000 deployed to this strategy would have yielded $12,192, vs. just $8,281 if placed in the S&P500 over this period.  Also note how the gap widened from what it was on May 20, 2009. 

This continues our track record here at The Futurist of collectively beating the market by a wide margin, with portfolios that beat the market greatly exceeding the deficit of those that do not.  Of course, these trades are for entertainment purposes only, and should not be taken as professional advice. 

Related :

A History of Stock Market Bottoms   

Energy vs. Financials, RESULTS

On April 22, 2008, I wrote about how the Energy and Financial sectors had diverged from each other, up to that point, to a degree that rarely happens between any two major sectors of the market.  I proceeded to suggest a trade of shorting Energy while going long on Financials. 

Let us see how that trade turned out, about 1 year after it was suggested. 

 

Both sectors did worse than the S&P500, but as we were short on Energy, this is favorable.  With dividends reinvested (which for Financials, were substantial), we come to total returns of :

 

So this trade earned a return of -5.36%, vs. -32.20% for the S&P500.  This is a dramatic outperformance relative to the index, even though staying in cash would have been even better.

For a next step, I would cover the short on Energy, and double down on my long position in Financials, given the low current price of Financials. 

The Futurist's Stock Portfolio for 2008 - RESULTS

On November 11, 2007, I created an investment portfolio to be frozen at that time, and evaluated on December 31, 2008, against the S&P500 over the same period.  The portfolio incorporated principles, economic trends, and technologies discussed in other articles here on The Futurist.  Dividends were reinvested, and so the price paid reflects dividend-adjusted cost-basis.  Yahoo and Google Finance do tend to miss recording some dividends, so one must go to a more reliable site like Morningstar to account for the exact dividends. 

So how did the portfolio do?  Well, the portfolio declined by 37.1% while the S&P500 declined by 36.0%.  So we lagged the benchmark by 1.1%.  Of course, this was a year when keeping money in cash would have been superior to almost any long equity portfolio. 

As always, weightage matters just as much as selection, and the largest component, IWN, outperformed the S&P500.  However, this was dragged down by IIF and GOOG.  Had I simply followed my advice on shorting energy stocks, I would have done better, but that was not a trade in this portfolio. 

At least the 2007 Futurist portfolio outperformed the S&P500 by a greater margin than the 2008 portfolio lagged by, so we are still ahead on aggregate.  Let us see what 2009 holds. 

 

Related :

A History of Stock Market Bottoms

A History of Stock Market Bottoms

Recent market turmoil has many wondering when the freefall will cease, and whether we are on the brink of a new Great Depression, which is supposed to happen every 70-80 years according to Kondratieff Wave theory.  I don't believe we are on the brink of a depression, even though the present recession is already in its 10th month.  But it would be instructive to compare the current situation with prior market corrections, and judge the present situation in a historical context. 

We can first start with a chart of the S&P500, from 1950 to today.  We can see that the deepest deviations from the trendline appear to be in 1950, 1970, 1974, 1982, 1987, 1990, and 2002.  We shall term these instances as historical 'bottoms' for the stock market.  All but the 1987 bottom were in the midst of economic recessions. 

  

From this chart, we can see that the time period between bottoms can be irregular, with over a decade passing between them, in some cases.  1974 and 1982 appear to be the deepest corrections.  These bottoms coincide with recessions, but interestingly do not coincide with other major crises.  The Cuban Missile Crisis, Kennedy assassination, and 9/11/01 did not induce major market crashes beyond the first few days.  Now, we can take the datapoints of each of these bottoms, and chart the exponential trendline that connects them.  This is purely a chart of index valuation, with dividends not included. 

 

From this chart. we can see that the equivalent value of the S&P500 in 2008, as designated by the red circle, would be around the 1000 level.  As of October 10, 2008, the S&P500 is at 899, or 10% below the level of the bottoms trendline.  However, we can see that both the 1974 and 1982 bottoms are substantially below the trendline. 

The S&P500, since 1950, has delivered an 11.4% average return, with 7.7% of that in the form of a rise in the index itself, and 3.7% of the return being in the form of dividends.  If the long-term underlying growth rate of the index is 7.7%, we can chart a 7.7% compounded projection trend from each of these bottoms as another method to compare them to an approximate 2008 equivalent.  We shall start this chart from 1970. 

It is apparent that 4 of the 6 bottoms cluster around a 2009 projection of 1100-1200, but the two deepest bottoms of 1974 and 1982 project to a 2009 equivalent of only 700-750.  These should be considered the two 'mega-bottoms' that happen a couple times per half-century, with the other 4 being only smaller bottoms that happen every 7-10 years, whenever there is a recession. 

Since we are presently at 900 for the S&P500, we are about half-way between a smaller bottom and a mega-bottom.  Therefore, do not be surprised if the S&P500 does, in fact, dip into the low 700s in 2009, merely to match this correction to 1974/1982 levels.  This would be a further 20% correction from the 900 close of October 10, 2008.  It may not happen, but it certainly could in terms of historical precedent.  This also means that the Dow Jones Industrial Average would simultaneously decline to as low as 6500.  Indeed, there is no guarantee that it could not go even lower, but that would he historically unprecedented.  Even the 1932 bottom in the Great Depression was not deeper than the 1974 and 1982 bottoms, by these measures.       

The Good News :

If the thought of a further 20% decline in the S&P500 or DJIA is depressing, also consider the following :

1) After both the 1974 and 1982 mega-bottoms, the stock market promptly returned at least 60% in the next 9 months.  This also happened after the 1932 bottom within the Great Depression. 

2) Never forget about dividend reinvestment.  Dividend yields are highest when the stock market is at the depths of a bottom, and reinvestment ensures that new shares are purchased at the lower prices.  This enables the investor to enhance his returns when the recovery finally commences.  Even in the 1970s, the major indices were stuck within a flat range for a decade, but dividend yields as high as 5% enabled total returns that were substantially better. 

Considering points 1) and 2), make sure that you are in a position to capture the recovery, and are not forced to sell at the unfavorable prices of the bottom.  This means that you must a) never hold any substantial margin debt, b) be positioned across a diversifed set of securities, preferably ETFs ahead of individual stocks, and c) watch as little financial news as possible, thereby reducing your chances of panic that could lead you to take ill-considered actions.   

Tremendous profits will be made by those who can steel themselves through this purging of the weak, and are subsequently prepared for the post-bottom recovery.  Put daily volatility aside, and enjoy the historical times that we are experiencing first-hand. 

Related :

Economic Growth is Exponential and Accelerating

The Housing Bubble - 20-year Gains May Never be Repeated

(crossposted on TechSector)

The Futurist's Stock Portfolio for 2009

Today, September 15, 2008, represented just about a perfect day for buying new equity positons.  I am going to present my 2009 portfolio, that will be tracked over the next 15.5 months between now and the end of 2009, in relation to the S&P500 index.  My 2008 portfolio is still current, and will be evaluated at the end of 2008, so the start of this 2009 portfolio will overlap with the end of the 2008 portfolio.  To assess my track record, my 2007 portfolio delivered a superb 13.3% return, relative to just 4.3% for the S&P500 over the same period. 

For 2009, the portfolio is quite simple.  I believe that small-cap value and financial stocks are at historically compelling valuations, and have no choice but to rise.  A few major technology stocks are also at attractive valuations. 

So the portfolio will be :

  

This captures the following trends from previous articles on The Futurist :

The Next Big Thing in Entertainment, Part I and Part 2

The Impact of Computing

The Stock Market is Exponentially Accelerating too

I hereby sign and seal this portfolio, bought that the closing prices on September 15, 2008, to be evaluated on the last trading day before December 31, 2009.     

(crossposted on TechSector)

The Solar Revolution is Near

I have long been optimistic about Solar Energy (whether photovoltaic or thermal) becoming our largest energy source within a few decades.  Earlier articles on the subject include :

A Future Timeline for Energy

Solar Energy Cost Curve

Several recent events and developments have led me to reinforce this view.  First of all, consider this article from Scientific American, detailing a Solar timeline to 2050. The article is not even Singularity-aware, yet details many steps that will enable Solar energy to expand by orders of magnitude above the level that it is today.  Secondly, two of the most uniquely brilliant people alive today, Ray Kurzweil and Elon Musk (who I recently chatted with), have both provided compelling cases on why Solar will be our largest energy source by 2030.  Both Kurzweil and Musk reside in significantly different spheres, yet have arrived at the same prediction.

However, the third point is the one that I find to be the most compelling. There are a number of publicly traded companies selling solar energy products, many of which had IPOs in just the last three years.  Some of these companies, and their market capitalizations, are :

Now consider that the companies on this list alone amount to about $50 Billion in capitalization.  There are, additionally, many smaller companies not included on this list, many companies like Applied Materials (AMAT) and Cypress Semiconductor (CY) for which solar products comprise only a portion of their business, and large private companies like NanoSolar (which I have heavily profiled here) and SolFocus that may have valuations in the billions.  Thus, the market cap of the 'solar sector' is already between $60B and $100B, depending on what you include within the total.  This immense valuation has accumulated at a pace that has taken many casual observers by surprise.  A 2-year chart of some of the stocks listed above tells the story. 

While FirstSolar (FSLR) has been the brightest star, all the others have trounced the S&P500 to a degree that would put even Google or Apple to shame over this period.  Clearly, a dramatic ramp in Solar energy is about to make mainstream headlines very soon, even if the present valuations are too high. 

Is this a dot-com-like bubble?  Yes, in the near-term, it is.  However, after a sharp correction, the long term growth will resume for the companies that emerge as leaders.  I won't recommend a specific stock among this cluster just yet, as there are a wave of private companies with new technologies that could render any of these incumbents obsolete.  Specific company profiles will follow soon, but in the meantime, for more detail on the long-term trends in favor of Solar, refer to these additional articles of mine :

Why I Want Oil to Hit $120 per Barrel

Terrorism, Oil, Globalization, and the Impact of Computing

(crossposted on TechSector)

Energy vs. Financials, A Divergence of Historical Extremes

Energy and Financials are both large sectoral components of the S&P500.  Yet the two have diverged immensely over the last 2 years.  Not since the technology bust at the start of the decade have any two sectors diverged so much from each other, and from the composite S&P500 index. 

XLE is an exchanged-traded fund for the Energy sector, while XLF is the equivalent for the Financial sector.  First, let us view a two-year chart : 

Energy has outperformed the S&P500 by an equal margin that Financials have lagged the S&P500 by.  Next, we can view a five-year chart :

While Financials only began to fall away in 2007, Energy has gone so high above the composite market that it reminds one of the technology bubble of the late 1990s. 

It seems quite obvious here that while it is impossible to identify the exact top of the Energy run, or the exact bottom of the Financials correction, it would be very prudent to sell any existing holdings in Energy (or even short Energy if you have the appetite) and rotate the proceeds into Financials.  The gap could widen in the short term, but rarely do two sectors reach such extreme disparities that make a profitable trade so obvious. 

(crossposted on TechSector).

The Futurist's Stock Portfolio for 2007 - RESULTS

On January 23, 2007, I created an investment portfolio to be frozen at that time, and evaluated on December 31, 2007 against the benchmark of the S&P500 index.  The portfolio incorporated principles, economic trends, and technologies discussed in other articles here on The Futurist.  Dividends were reinvested, and so the price paid reflects dividend-adjusted cost-basis.  Yahoo and Google Finance do tend to miss recording some dividends, so one must go to a more reliable site like Morningstar to account for the exact dividends. 

So how did the portfolio do?  I achieved a return of 13.3%, vs. just 4.3% for the S&P500, from January 23 to December 31.  Most fund managers are unable to beat the S&P500 index despite the advanced tools at their disposal.  The fraction of those that can beat the index by a margin 9.0 percentage points is even more exclusive, putting this portfolio in the top 10% of all mutual fund results for this period. 

 

As always, weightage matters just as much as stock-picking.  The first two securities, amounting to 50% of my portfolio, were a total disaster.  In fact, when I first created the portfolio, I listed FXI as a security that was strongly considered but left out.  FXI returned an eye-popping 83% over the same period, so if I had included FXI instead of ICF, the portfolio's total return would have exceeded 25%.  But it was not included, so 'what ifs' do not count. 

The India Investment Fund (IIF) was a star, more than compensating for the failure of the first two securities.  But the real home runs came from the video game stocks.  Three of the four outperformed the S&P500, and two of those, Activision and GameStop, surged into the stratosphere.  My selection and detailed analysis of this sector way back on April 17, 2006 yielded a spectacular payoff.  As a quartet, these 4 gaming stocks returned a combined 49% over this period. 

So there you have it.  Futurism is not impossible after all.  I have already started my 2008 portfolio, and we shall see how that goes on December 21, 2008.  The same principles covered in the articles below, are being applied.  Let us see if the success can be repeated or exceeded. 

The Next Big Thing in Entertainment, Part I, Part 2, and especially Part 3

The Culture of Success and Stock Market Capitalization in Developing Countries

The Stock Market is Exponentially Accelerating too

(cross-posted at TechSector)

The Futurist's Stock Portfolio for 2008.

Early this year, I presented my 2007 portfolio, which will be evaluated on December 31, 2007, in relation to the performance of the S&P500 index. 

I am now going to present my 2008 portfolio, which is to be tracked over the remaining 13+ months between now and the end of 2008, again in relation to the S&P500 index.  The hypothetical portfolio of $100,000 will be invested in exchange-traded securities and mutual funds that reflect what I believe to be an optimal portfolio construction for 2007.  We will, at the end of the period, see how the portfolio tracks the broader market.  Dividends will be re-invested. 

So the portfolio is :

 

This is a simpler portfolio, with less emphasis on gaming, and more on fundamental value-based principles.  The selections represent general principles and specific predictions outlined in the previously written articles :

The Next Big Thing in Entertainment, Part I, Part 2, and especially Part 3

The Culture of Success and Stock Market Capitalization in Developing Countries

The Stock Market is Exponentially Accelerating too

I hereby sign and seal this portfolio, bought at the prices on November 9, 2007, to be evaluated on the last trading day before December 31, 2008. 

The Futurist's Stock Portfolio for 2007

I am going to present an investment portfolio to be tracked over the remaining 11 months and 7 days of 2007 (I should have done this on Jan 1, but the idea of doing a post didn't arrive at a convenient time).  The hypothetical portfolio of $100,000 will be invested in exchange-traded securities and mutual funds that reflect what I believe to be an optimal portfolio construction for 2007.  We will, at the end of the period, see how the portfolio tracks the broader market.  Dividends will be re-invested. 

So the portfolio is :

 

Near misses (securities I did not add, but strongly considered) : FXI, GGP, PXN

The selections represent general principles and specific predictions outlined in the previously written articles :

The Next Big Thing in Entertainment, Part I, Part 2, and especially Part 3

The Culture of Success and Stock Market Capitalization in Developing Countries

The Stock Market is Exponentially Accelerating too

The World Wealth Report 2005

I herely sign and seal this portfolio on January 23, 2007, bought at the prices today, to be examined on December 31, 2007, in relation to broader market indices.

Let's see how it turns out. 

The Next Big Thing in Entertainment - Part III

Here is a follow up to the two-part article, the Next Big Thing in Entertainment, where a prediction is made that the video game industry will give rise to something much larger, that transforms many dimensions of entertainment entirely.

I feel one additional detail worth discussing is the performance of stocks that may do well from this phenomenon.  A 5-year chart of four game development companies, Electronic Arts (ERTS), Activision (ATVI), Take-Two Interactive Software (TTWO), and THQ Inc. (THQI), plus retailer Gamestop (GME) provides an interesting picture. 

   

All 5 companies appear to have greatly outperformed the S&P500 over the last 5 years, despite this being a poor period for technology stocks.  Past performance is no indication of future returns, and it is difficult to predict with competitors will prevail over others, but a basket of stocks in this sector will be very interesting to watch for the next 6 years.