Trade the Congressional Effect

An innovative investment approach that takes the actions of the U.S. Congress into consideration

Historical research indicates that, more often than not, when Congress is in session there is a negative effect on equities markets (the "Congressional Effect") due possibly to investor uncertainty surrounding government action or inaction as well as the unintended consequences of Congressional legislative initiatives on the stock market. Author Eric Singer, a financial professional with over twenty-five years of experience, is an expert on this phenomenon, and with this new book he shares his extensive insights with you.

Trade the Congressional Effect skillfully details how you can profit from Congress's impact on the stock market. Along the way, it puts this approach in perspective and gives you all the tools you'll need to profitably incorporate it into your investing endeavors. Singer walks you through the process of trading the Congressional Effect and provides practical guidance regarding the possible pitfalls and opportunities you'll face each step of the way.

• Addresses why it is better to invest while Congress isn't in session
• Reveals exactly what the Congressional Effect encompasses and why it occurs
• Written by Eric Singer, one of the first people to publicly document the general effect of Congress on daily stock prices

Supported by over forty-five years of real world data, the Congressional Effect has proven profitable to those who know how to use it. This timely guide will show you exactly what it takes to make this phenomenon work for you.

Acknowledgments xi

Introduction 1

Our Damaged Economy 2

Congress’s Role in Wealth Destruction 8

Summary 9

Notes 10

CHAPTER 1 What Is the Congressional Effect? 13

How Was the Congressional Effect Discovered? 14

Early Returns Showing the Congressional Effect 19

The Smoot-Hawley Act: The Mother of All Congressional Effects 23

The Congressional Effect Data and Launching a Mutual Fund 24

Summary 26

Notes 26

CHAPTER 2 The Congressional Effect and the Limits of Modern Portfolio Theory 27

How MPT Has Been Used by Financial Advisers 30

Formulas Distort Valuation if Inputs Are Not Free Market Inputs 33

What Caused the Crash of 1987? 36

The Magnitude of the Crash of 1987 Refutes MPT 38

MPT Assumes All Daily Pricing Is Random, but the Congressional Effect Shows It Is Not 39

Summary 41

Notes 42

CHAPTER 3 Congressmen as Issues Entrepreneurs 43

The Time-Money-Vote Continuum: Congress as a Business 44

Congressmen as Traders and Real Estate Entrepreneurs: Making Money Outside Their Day Gig 54

Summary 57

Notes 58

CHAPTER 4 Behavioral Finance, the Stock Market, and Congressional Dysfunction 59

Overview of Behavioral Finance Concepts 60

Survey of Behavioral Finance Concepts 61

Congress’s Approach to Behavioral Finance 67

Summary 78

Notes 78

CHAPTER 5 If Congress Is Malfunction Junction, What’s Its Function? 81

Economic Lifeblood: Investment Capital Formation, the Stock Market, and Congress 81

Dodd-Frank Overview 90

Health Care Reform 95

Burning Coal and Other Energy Investors 103

Summary 110

Notes 110

CHAPTER 6 Where Will Washington Strike Next? 113

Where You Can Find Information 114

How to Leverage This Glut of Information 123

Summary 124

Notes 125

CHAPTER 7 Sidestepping Congress’s Wealth Destruction with a Macro Approach 127

11,832 Data Points Support the Congressional Effect Theory 128

Congress and the Tragedy of the Commons 130

Adam Smith, Call Your Office! 131

Summary 136

Notes 136

CHAPTER 8 Are Democrats or Republicans Better for Your Portfolio? 139

Who Gets the Credit for the Bull Market in 1980? 140

Unified Government Favors Nominal Returns 142

Split Government Favors Real Returns 145

Republican Congress vs. Democratic Congress 146

Filibuster-Proof Majorities Hurt Returns 147

Summary 148

Notes 149

CHAPTER 9 Leverging the Election Cycle 151

The Presidential Cycle and Real Returns 152

The 2012 Election and Beyond 156

Notes 157

CHAPTER 10 Are Lame Ducks, Impeachments, Resignations, Vetoes, and Litigated Elections

Good for the Market? 159

President Bill Clinton 161

President Andrew Johnson 165

Resignations 167

Lame Duck Sessions 167

Litigated Elections 168

Vetoes 170

Summary 171

Notes 171

CHAPTER 11 More Ways to Dodge Congress’s Stray Bullets 173

Value Funds: Longer Time Horizons than Congress or the Somali Pirates 174

Gold Funds: Avoiding Congressional Debasement 177

Beyond Congress: International Funds 179

Reducing Global Security Risk 181

Summary 182

Notes 183

CHAPTER 12 ‘‘That Government Is Best that Governs Least’’ 185

Prognosis: Increasingly Partisan Politics Is Not Good for the Market 185

Conflicting Government Mandates Promote Market Instability 189

The Cumulative Effect of Unintended Consequences Is Congressional Wealth Destruction 191

Congress’s Dysfunctionality and the 2012 Election 193

What Happens When Congress Does Not Know the Price? 195

Congress Needs to Attract the Best Talent 197

In Conclusion 198

Notes 199

About the Author 201

Index 203

ERIC T. SINGER manages the Congressional Effect Fund, traded under the symbol CEFFX (CEFIX for institutional investors), a public mutual fund launched in 2008 through his registered investment advisor, Congressional Effect Management, LLC (www.congressionaleffect.com). He was the first to document the general effect of Congress on daily stock prices in an article published in Barron's in 1992. His opinion pieces have appeared in Investor's Business Daily as well as Forbes, the American Spectator, American Thinker, Townhall, Seeking Alpha, and Newsmax, and he has been featured on national TV and radio, including Fox Business News and Bloomberg TV.

"From 1965 through 2011, measuring each of the 11,832 trading days during that period, the price of the S&P 500 Index rose at an annualized rate of less than 1% on days Congress was in session, but over 16% on days they were out of session."
—From Chapter One

The Congressional Effect—when Congress is in session, there is a negative effect on equities markets—is based on solid historical research. While the statistics prove the validity of the Congressional Effect, the reasoning behind it is most probably due to investor uncertainty concerning government action or inaction as well as the unintended consequences of Congressional legislative initiatives on the stock market. In Trade the Congressional Effect, Eric T. Singer—a financial professional with over twenty-five years of experience and an expert on this phenomenon—offers guidance on how you can put this effect to work for you.

Throughout the book, Singer offers an in-depth examination of the Congressional Effect and recommends several strategies for how to optimize your portfolio. Once you understand the nature of the incentives that each politician proposes (which collectively result in Congress relentlessly working against your portfolio), you can better use their efforts to your advantage. Step by step, Singer walks you through the process and provides practical guidance regarding the possible pitfalls and opportunities you'll face when using this technique.

Supported by more than forty-five years of real-world data, the Congressional Effect has proven profitable to those who know how to use it. This timely guide will show you exactly what it takes to make this phenomenon work for you.

Praise for Trade the Congressional Effect

"Once in a while, an idea, a small gem, comes along that reflects the whole world. Singer's book is it, a thesis to live from, learn from, and make money from. Singer provides that which we all long for: a way to make money from political insight."
—Amity Shlaes, author, The Forgotten Man

"Thanks to Mark Twain, we know that nobody's 'life, liberty, or property is safe while the legislature is in session.' Now, thanks to Eric Singer, we know why, and what to do about it. In these pages, he admirably succeeds in the important task he has set for himself. To wit: how to protect yourself, and your net worth, from the depredations of Congress. "
—James Grant, Editor of Grant's Interest Rate Observer

"The author's straightforward idea—that Congress harms wealth creation—provides many insights into politics, the economy, and investing. Trade the Congressional Effect will appeal to serious investors, as well as policy wonks and libertarians ... but it should be taken to heed by the 535 men and women who pass some of their days on Capitol Hill. Some surprising insights—a devastating attack on Modern Portfolio Theory ... a look at what caused the Great Depression ... Congressmen as traders and speculators ... the effect of split governments, lame ducks, and litigated elections on the stock market ... Reading Trade the Congressional Effect will provide much guidance about Congress's 'unintended consequences' that are so persistent, casually dangerous, and impoverishing."
—Adrian Day, President, Adrian Day Asset Management