July 2009 Back in the Black "Money is better than poverty, if only for financial reasons." -- Woody Allen (1935 - )   HAT A DIFFERENCE A QUARTER and 200+ points on the S&P 500 can make. On March 31 stocks were already well off the low established earlier in the month, but the S&P was still down 13.7% year-to-date. Contrast that with the end of the second quarter when the benchmark was in positive territory by 1.8%. What looked like the beginning of another horrid year was suddenly looking like it might turn out quite differently. Aggressive investors were rewarded on a number of fronts. The obvious benefit was being the first in at the bottom and enjoying the majority of the bounce. To be sure, it took guts to be a buyer back in the dark days of March, but as time went on, more and more investors were drawn in. The later the entry, the lesser the gain. Some who were the last to the party (after June 12) were actually in the red on June 30. Those willing dabble in low quality issues fared the best. This was by no means a defensive rally. Growth soundly defeated value. Using the Russell style indexes, consider the difference between large, mid, and small cap growth (+10.5%, +15.9%, and +10.9%) and value (-4.5%, +1.6%, and -6.4%, respectively). Financial shares' comeback had a lot to do with it, but technology stocks did too. That's a major reason the Nasdaq, heavy in tech, has been the top performing major domestic indexes so far this year (+16.4%). BETWEEN BARACK AND A HARD PLACE Data Source: S&P ComStock However, it's not all clear sailing as we enter the third quarter. The equity rally lost a great deal of momentum in June, particularly after peaking on June 12. Since then, trading has been choppy, but with a downward bias. Of the S&P 500's 250+ point gain since its low on March 9, only 42 points came in June. After the pre-holiday selling on July 2, the gain from June 1 was down to 19 points. One more day like that, and all of June will be wiped out. Not only that, the index's recent history is starting to look like what technicians refer to as a "head and shoulders" pattern that is generally negative. Economic and political factors are an ongoing concern, too. Economists are still divided over the strength of the recovery, some questioning if it's even started. The real estate market is still sick and the government's spending money like it's printing it. (Well, actually it is printing it, but all the spending is occurring with little or no regard for it's inflationary consequences.) A negative development in any of these areas can quickly erase even more of the spring rally. Actual corporate earnings are arguably the best gauge for the rest of the year. Actual improvement -- not just hope or forecasts -- can go a long way to sustaining the rally all the way to 2010. On the other hand, weak results coupled with misguided fiscal policy will pull stocks in the opposite direction. Regardless, it wouldn't be surprising for stocks to reamin in neutral through the summer months. At the very least, earnings need to start catching up to share prices, the typical consolidation. What happens after that is less obvious. MODEL AND BENCHMARK PERFORMANCE Through 6/30/2009 Cap Size Q2 2009 Year- to-Date 1 Year 3 Years 5 Years Portfolio 1 Large Cap 16.97% 5.34% -26.65% -10.08% -4.21% Portfolio 2 Small Cap 20.41% 2.85% 0.15% -4.01% 1.48% Portfolio 3 Large Cap 18.98% 26.41% -21.62% -5.41% -0.65% Portfolio 4 Large Cap 14.87% 3.21% -36.70% -8.80% -2.17% Portfolio 5 Cap Blend 19.35% 8.01% -28.16% -7.05% 0.23% Portfolio 6 Balanced 11.03% -3.75% -25.58% -10.22% -4.22% DJIA Large Cap 11.01% -3.75% -25.58% -8.84% -4.14% S & P 500 Large Cap 15.22% 1.78% -28.18% -10.22% -4.22% Nasdaq Cap Blend 20.05% 16.36% -19.97% -5.47% -2.17% S&P 400 Mid Cap 18.23% 7.41% -29.41% -8.91% -0.99% Russell 2000 Small Cap 20.23% 1.77% -26.30% -11.55% -2.99% Price Change Only, Dividends Excluded Returns over 1 year annualized As has been the case for the past few quarters, five of our six models are ahead of their unmanaged benchmark. It would have been six out of six if Portfolio 6 could have picked up and additional 0.03% All models finished the second quarter in the black for 2009. For the three months, all were up between 20.41% (Portfolio 2) and 11.03% (P6). Year-to-date gains range from 26.41 (Portfolio 3) to 1.17% (P6). Fundamentals, performance charts, and additional details for each model appear below. All data is from Wednesday, June 30, 2009 with fundamentals provided by Baseline. 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: 11 Prior Two Months' Transactions: Buys: None Sells: None Top Performer(s) Year-to-Date: Corning (GLW) +68.5% Pharmerica (PMC) +25.3% IBM (IBM) +24.1% Microsoft (MSFT) +22.3% Poorest Performer(s) Year-to-Date Citigroup (C) -55.7% Capital One Financial (COF) -31.4% Wells Fargo (WFC) -17.7% PORTFOLIO 1 Ratios and Returns As of 6/30/2009 Price to Earnings (P/E) 15.0 Price to Book 2.9 Cash Flow per Share $3.28 ROE 22.0% Debt to Capital 34% Market Cap ($mil.) 71,811 Beta 1.22 Price Change Quarter-to-Date 17.0% Price Change Year-to-Date 5.3% BUILDING THE LEAD P1 expanded its lead over the S&P 500 in the past two months.   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 China Bistro (PFCB) +53.1% OM Group (OMG) +37.5% Dionex (DNEX) +36.1% Poorest Performer(s) Year-to-Date Teledyne Technology (TDY) -26.5% El Paso Electric (EE) -22.8% ManTech International (MANT) -20.6% PORTFOLIO 2 Ratios and Returns As of 6/30/2009 Price to Earnings (P/E) 20.0 Price to Book 2.5 Cash Flow per Share $3.23 ROE 14.4% Debt to Capital 20% Market Cap ($mil.) 886 Beta 1.06 Price Change From Inception (7/1997) 45.0% Price Change Quarter-to-Date 20.4% Price Change Year-to-Date 2.9% TIGHT DUEL P2 and the Russell 2000 have gone back and forth, but the model finished the second quarter in the lead.   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: June 12, 2009 Next Reoptimization: Mid-August, 2009 PORTFOLIO 3 Ratios and Returns As of 6/30/2009 Price to Earnings (P/E) 65.1 Price to Book 8.1 Cash Flow per Share $2.78 ROE 18.8% Debt to Capital 35% Market Cap ($mil.) 71,510 Beta 1.30 Price Change From Inception (7/2000) -58.8% Price Change Quarter-to-Date 19.0% Price Change Year-to-Date 26.4% A WIDE MARGIN By the end of June, P3 was almost 25% ahead of its benchmark, 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 10 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: 64 Last Reoptimization: June 12, 2009 Next Reoptimization: Mid-December, 2009 PORTFOLIO 4 Ratios and Returns As of 6/30/2009 Price to Earnings (P/E) 43.7 Price to Book 3.3 Cash Flow per Share $2.72 ROE 17.2% Debt to Capital 34% Market Cap ($mil.) 15,364 Beta 1.23 Price Change From Inception (7/2000) -40.2% Price Change Quarter-to-Date 14.9% Price Change Year-to-Date 3.2% ADDING INCREMENTALLY Unlike P3 which is far ahead of the S&P 500, P4 has been slowly building a lead.   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: 8 Last Reoptimization: May 1, 2009 Next Reoptimization: Mid-July 2009 GROWTH BET PAYING OFF P5 is heavily weighted towards growth in all capitalizations -- a formula that's worked well in the past few months.   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. P6 has two different types of benchmarks. 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: May 1, 2009 Next Reoptimization: Mid-July 2009 COMPOSITION COMPARISON NECK AND NECK P6 and its two benchmarks have closely followed one another all year. At the end of the second quarter, P6 trailed by less than a tenth of a percent.   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