Trade the Congressional Effect How To Profit from Congress's Impact on the Stock Market

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