July 2010 A Quarter to Forget "Being prepared for loss is never the same as being ready for it." -- Randy K. Milholland   VER THE FIRST SIX MONTHS of 2010, stocks swung from double digit highs to almost double digit lows as investors' went from optimism to fear. Most major indexes peaked in late April following encouraging first quarter earnings and anticipation of stronger growth in the second half of the year. Then, following financial turmoil in the European Union and the Gulf Coast disaster, stocks lost their footing as investors began to doubt their rosy outlook. As the quarter came to a close, stocks were at their lows for the year. It was quite a round trip, with the highs and lows separated by a mere 47 trading days. The Dow Industrials covered the smallest territory (+7.45% to - 6.27%) while the broader S&P 500 experienced a wider swing (+9.16% to - 7.57%). Smaller stocks were even more volatile with the S&P Mid Cap 400 covering 21% (+16.95% to -4.70%) and the Small Cap 600 just under 25% (+18.63 to -6.22%). No wonder investors were skittish by the end of the quarter. Risky stocks (small caps, growth, tech) fared the best as the year got underway. The "risk trade" was back in vogue. That quickly faded after stocks peaked and investors were suddenly willing to buy Treasury Notes with yields under 2% rather than take the risk in stocks. Just as they had been too euphoric at the start of the year, they were equally too downbeat by the end. Amidst today's talk of a "double dip" recession and deflation, there may lurk a good long-term buying opportunity. GREEN TO RED Data Source: S&P ComStock With mid-term elections less than half a year away, it's a safe bet that Congress will try to do something to kick start the economy. At the recent G-20 summit, European nations dismissed the President's call to continue efforts at economic stimulus. Oddly enough, they were more willing to adopt austerity plans and encouraged the U.S. to follow. Again, with elections around the corner, don't count on it. A burst of hiring and home sales would be the best thing that could happen for the equity market. Although neither is too likely in the short term, any indication that one or both may be occurring could be just the catalyst to move stocks back into the black. Trading will be more volatile than usual this summer, particularly on days when monthly economic data is released. Arguably, the best current opportunities lie in stocks with good dividends, cash flows, and balance sheets. This, of course, is large cap value. Unlike in the past however, Financial shares aren't included in the mix given the uncertainty surrounding the pending legislation and regulation. Other dividend payers still offer some safety on the downside and good growth potential on the upside. Until the risk trade returns, they're probably the best place to hide out. MODEL AND BENCHMARK PERFORMANCE Through 6/30/2010 All three of our large cap models (Portfolio 1, Portfolio 3, Portfolio 4) are all ahead of their benchmark, the S&P 500. It's not because they're invested defensively as all of our model portfolios are required to be fully invested at all times. Holding cash is not an option. Perhaps more encouraging is the fact that P3 and P4 are growth-oriented yet still manage to maintain a lead on the index. Multicap Portfolio 5 has actually held up the best in absolute terms, "only" down 1.9%. This is good enough for a 5% lead on its broad equity benchmark, the S&P Super Composite 1500. As has often been the case, its emphasis on mid cap styles has a lot to do with it. The other equity models, small cap (Portfolio 2) and blend Portfolio 6 trail their benchmarks by roughly 4.0% and 1.2% respectively. As the market moved up and down, both had spent time on either side of their benchmarks, but ended up below at the end of June. If the future is like the past, there will be more than enough volatility in the remaining six months of the year to enable them to catch back up. It could happen by the end of July. Portfolios 3 and 4 were reoptimized on June 18, while P5 and P6 were reallocated on April 28. P3 will be revisited in mid-August, P5 and P6 in late July, and P4 in mid-December. Fundamentals, performance charts, and additional details for each model appear below. All data is from the close on Wednesday, June 30, 2010 with fundamentals provided by Yahoo Finance and Quantview Research. Weekly returns are updated each weekend at the bottom of the Home Page and long-term returns are updated and graphed monthly on the eponymous, Graphs page. E-mail your comments.   Portfolio 1 Inception Date: July 1, 1991 Model Design: Large Cap, Fundamental Bottom Up, Relative Value Benchmark: S&P 500 Number of Holdings: 10 Prior Two Months' Transactions: Buys: None Sells: None Top Performer(s) Year-to-Date: AmerisourceBergen (ABC) +21.8% Citigroup (C) +13.6% Capital One Financial (COF) +5.1% Poorest Performer(s) Year-to-Date Microsoft (MSFT) -24.5% Corning (GLX) -16.4% General Dynamics (GD) -14.1% PORTFOLIO 1 Ratios and Returns As of 6/30/2010 Price to Earnings (P/E) 13.2 Price to Book 4.1 Price to Sales 2.6 Est. Earnings Per Share $4.31 PEG Ratio 1.3 Market Cap ($bil.) 72.3 Beta 0.98 Price Change Quarter-to-Date -10.3% Price Change Year-to-Date -6.5% DOWN BUT UP Like it's benchmark the S&P 500, P1 fell sharply in Many and June, yet it's managed to stay ahead of the index by over 1%.   Portfolio 2 Inception Date: July 1, 1997 Model Design: Small Cap, Fundamental Bottom up, Relative Value Benchmark: Russell 2000 Number of Holdings: 10 Prior Two Months' Transactions: Buys: None Sells: None Top Performer(s) Year-to-Date: PF Changs Chinese Bistro (PFCB) +4.6% Dionex (DNEX) +0.8% Teledyne Technology (TDY) +0.6% Poorest Performer(s) Year-to-Date OM Group (OMG) -24.0% Meridian Bioscience (VIVO) -21.1% Netgear (NTGR) -17.8% PORTFOLIO 2 Ratios and Returns As of 6/30/2010 Price to Earnings (P/E) 15.0 Price to Book 6.5 Price to Sales 1.4 Est. Earnings Per Share $2.44 PEG Ratio 2.4 Market Cap ($bil.) 1.01 Beta 0.91 Price Change From Inception (7/1997) 65.2% Price Change Quarter-to-Date -10.6% Price Change Year-to-Date -6.5% ROUGH FIRST HALF After a good first month, P2 fell behind the Russell 2000 and so far hasn't been able to catch back up. Missing out on the early rally in small cap financials didn't help.   Portfolio 3 Inception Date: July 1, 2000 Model Design: Portfolio 3 is a purely quantitative large cap model that holds the top 30 stocks of the S&P 500 as rated by its underlying algorithm. There is no diversification requirement across sectors or industries. For a complete listing of all its current holdings and past transactions, see Stocks of P3. Benchmark: S&P 500 Number of Holdings: 30 Last Reoptimization: April 28, 2010 Next Reoptimization: Mid July, 2010 PORTFOLIO 3 Ratios and Returns As of 6/30/2010 Price to Earnings (P/E) 24.6 Price to Book 6.7 Price to Sales 4.3 Est. Earnings Per Share $3.31 PEG Ratio 1.2% Market Cap ($bil.) 22.3 Beta 1.12 Price Change From Inception (7/2000) -49.8% Price Change Quarter-to-Date -8.2% Price Change Year-to-Date -4.8% THREE PERCENT LEAD P3 is down for the year, but it's still almost three percent ahead of the S&P 500.   Portfolio 4 Inception Date: July 1, 2000 Model Design: P4 is a purely quantitative model that always has holdings in all ten S&P sectors. Its algorithm seeks the "best" stocks in each while matching the sector-weighting of the index. For a complete listing of all its current holdings and past transactions, see Stocks of P4. Benchmark: S&P 500 Number of Holdings: 49 Last Reoptimization: December 14, 2009 Next Reoptimization: Mid June, 2010 PORTFOLIO 4 Ratios and Returns As of 6/30/2010 Price to Earnings (P/E) 28.1 Price to Book 8.3 Price to Sales 3.8 Est. Earnings Per Share $2.26 PEG Ratio 1.6 Market Cap ($bil.) 11.9 Beta 0.99 Price Change From Inception (7/2000) -27.6% Price Change Quarter-to-Date -8.7% Price Change Year-to-Date -5.2% PLAYING DEFENSE P4 was struggling to keep up with the S&P 500 when stocks were moving up. Now that they're declining, P4 has moved ahead of the index by two percent.   Portfolio 5 Inception Date: January 1, 2002 Model Design: Portfolio 5 is a purely quantitative model that seeks to benefit from the top performing sectors and capitalizations of the domestic stock market. Inspired by Morningstar's "Style Box", P5 separates the domestic market into large, mid, and small cap stocks and then further divides each category into value, growth, and blend. Its algorithm seeks an optimal mix for the coming quarter. Holdings are limited to nine different exchange traded funds (ETFs) representing each of the nine style and capitalization categories. Benchmark: S&P 1500 Number of Holdings: 9 Last Reoptimization: April 28, 2010 Next Reoptimization: Late July 2010 BARELY NEGATIVE P5's heavy midcap weighting has kept it well ahead of its blended benchmark. They almost managed to keep it in the black, but succumbed to the falling market just before quarter end.   Portfolio 6 Inception Date: January 1, 2004 Model Design: P6 is a balanced portfolio that can hold large and small domestic stocks as well as domestic bonds and foreign stocks. Like P5, it's purely quantitative and relies solely on exchange traded funds (ETFs). There's no requirement that any specific category ever be represented, so it's conceivable that at any given time, P6 could be concentrated in one or two categories. As a blended portfolio, a pure equity or fixed income measure wouldn't be appropriate, so we created two different mixes that would be more representative. Based on 20 years' worth of data, we found that a combination of 25% government and corporate bonds, 48% domestic large cap stocks, 21% domestic small cap stocks, and 6% foreign stocks would have produced the best overall return, so we adopted that as the basis for the benchmarks. The first, simply uses this mix and is never rebalanced -- not unlike a typical "buy-and-hold" investor's portfolio. The second starts with the same mix, but rebalances back to the original targets on a quarterly basis whenever at least one category has strayed more than 5% from its target. The chart on the immediate right shows the current composition of the model as well as its benchmarks. Benchmark: (1) Buy-and-Hold Blend (see above), (2) Static Blend (see above) Number of Holdings: 5 Last Reoptimization: April 28, 2010 Next Reoptimization: Late July 2010 COMPOSITION COMPARISON NOT ENOUGH BONDS P6 got off to a strong start and was building its lead as long as the market was heading up. Both times it was reoptimized in 2010,it cut the bond allocation. That's not looking like such a good move now as stocks are falling and P6 has slipped behind both of its blended benchmarks.   E-mail your comments. Search this site! Just enter you key word or words:   Get current quotes or follow your own custom portfolio, courtesy of E-Line Financials:   Search:TickerName Company DataQuickQuote     Homepage Return to Top