Congress is dangerous for your portfolio, but Eric Singer, author of “Trade the Congressional Effect: How To Profit from Congress’ Impact on the Stock Market,” has a plan.
John Nyaradi: Hi, everyone. I’m John Nyaradi, Publisher of Wall Street Sector Selector, a financial media site specializing in exchange traded funds and global markets. Today I am really pleased to welcome my special guest, Eric Singer. Eric, welcome to Wall Street Sector Selector.
Eric Singer: It’s nice to be here. Thank you.
John Nyaradi: Eric manages the Congressional Effect Fund which is placed under the symbol CEFFX. He’s also a registered investment adviser at Congressional Effect Management, LLC. And he’s the first to document the general effect that Congress has on daily stock prices. He started that back in 1992 with an article at Barrons. He’s widely published in the business press and now has a new book out from John Wiley & Sons that’s called Trade the Congressional Effect: How To Profit from Congress’ Impact on the Stock Market. So Eric, let’s start at the top, why did you write the book and what can people get out of it?
Eric Singer: I really wrote the book for a couple of different reasons. The first thing is that I want people to understand how much Congress hurts stocks. Over the last 47 years, on the 7,900 days Congress is in session the market goes up in price less than 1% annually and on the 4,100 days that they’re on vacation, it goes up in price 16% annually. And what’s even a little bit more startling is that those numbers go all the way back to 1897, day by day, the same way. Essentially all the gains in the market are attributable to days when Congress is on vacation.
John Nyaradi: So how can individuals or advisers like you take advantage of this and what different strategies do you cover in the book?
Eric Singer: Well, there are several different things that I cover in the book. Number one, each Congressman thinks his job is just to simply get reelected, and so, particularly in the House, they think on a very short-term basis. They have to. So they have a very short-term time horizon. One thing that an investor needs to have is a long-term time horizon and you can use value funds to do that. You have to understand that whatever short term damage they can do to an industry, you can see if there are ways to try to use that to your advantage.
Also, the way my mutual fund works, which is the Congressional Effect Fund, the symbol is CEFFX and for institutional investor, CEFIX, I only invest on days Congress is out of session. So on the days when they’re out of session, I’m long the S&P and on the days that they’re in session, I’m flat. I don’t take duration risk and I avoid legislative risk by not investing on those days that Congress is in session.
John Nyaradi: Tell us about your registered investment advisory practice.
Eric Singer: It’s called Congressional Effect Management. We have private accounts that take advantage of some of the different strategies that are associated with the Congressional Effect and I’m based in New York.
John Nyaradi: We’re talking in October, 2012, we have an election coming up in a couple of weeks and we’re hearing a lot about the so called fiscal cliff. Can you give us your view of that?
Eric Singer: We’re going over the cliff. And the market I think will start to discount that a lot, particularly at election time. I don’t think anything will get done during the lame duck session. Normally, in normal times, the lame duck session is good for the market. The market likes the idea that nothing has to get done. Lame duck sessions are like vacation days for Congress, with roughly the same 15-20% annualized return. However, in the last big lame duck session that we had in ‘08, the market fell at an annualized rate of 44%, just a giant number. And this lame duck session I think is going to have risk because of a combination of circumstances.
Obviously, the overall economy is an issue and we have what appears to be a slowing earnings season. I think that Europe is still a long drawn out process. The international economy has a lot more geo-political risks than it has had in awhile. And on top of that, with the election, I just think that there’s no outcome in the election that’s going to give people certainty. I think that the outcome in the election is going to give people a sense that we’re going to have a lot of continued uncertainty and continued procrastination by Congress. So that’s why I’m pessimistic and I am bullish on gold.
John Nyaradi: I always like to end these talks with an open ended question and that is, what’s at the top of your mind right now, what keeps you awake at night, what should retail investors and professionals be watching out for here as the election approaches and we head for the end of 2012?
Eric Singer: It’s actually quite simple. I think that ahead of the election there’s a lot of reason to go to cash. I think that investors should have some gold going in to the election because no matter who wins, I think gold will wind up outperforming. I think that if the Democrats get a decisive victory, there’ll be a sense that the dollar is going to go down further. I think if the Republicans win, that will expand the population of buyers for gold to include mutual funds. So I think that gold is unusually well-positioned to do well. So my advice is caution in the stock market, be defensive in the stock market, have some gold and pray for more clarity as we go forward.
John Nyaradi: Folks, we’ve been talking with Eric Singer. He’s the manager of the Congressional Effect Fund, a mutual fund traded under the symbol CEFFX and CEFIX for institutional investors. He’s also a registered investment advisor and his firm is Congressional Effect Management. And we’re talking today about his new book, Trade the Congressional Effect: How To Profit from Congress’ Impact on the Stock Market, just out in October. To learn more about Eric, his work and new book, just follow the links at the bottom of this interview. Eric, it has been great chatting with you today. I know we’re all looking forward to talking with you again soon.
Eric Singer: John, thank you so much. I appreciate it.
(recorded interview, edited for length and clarity)