March 2010 Difficult Beginning "All things are difficult before they are easy." -- Dr. Thomas Fuller (1654 - 1734)   AST YEAR'S NINE MONTH rally hit a speed bump in mid-January. After a quick start, stocks fell sharply and even though there was a mild recovery in February, the major indexes finished the month lower than they were on December 31, 2009. There were a number of explanations ranging form Greece to Washington to the simple need for a healthy correction. None of these issues were resolved by the end of February and none are likely to be before yearend. Evidence is mounting that the recent recession is finally ending, but stocks won't really get an upside jolt until there's movement on the jobs front. Although that won't happen with any force until late in the year, investors are always out ahead of the actual news so stocks could start to perk up sooner, perhaps even as soon as April if first quarter earnings are encouraging. As has often been the case over the past decade, midcaps were the favored domestic capitalization, followed by small caps and finally large caps. Growth and value fought it out with growth getting off to a fast start only to be eclipsed by value when February came to an end. A strengthening dollar began to work against foreign stocks. LOTS OF SMOKE BUT NO FIRE Data Source: S&P ComStock As the economy continues to recover, stocks should follow suit. The growing deficit and its effect on interest rates and the dollar is the wildcard. All else being equal, it would be reasonable to assume interest rates would be headed up as the year progresses, not only because of the growing pool of government red ink but simply because they're near their historical low points. Rising rates will help stabilize the dollar and make U.S. investments more attractive overseas. On the downside, tighter credit will work against the developing recovery. Analysts' predictions are all over the board. Some see a strong snap-back recovery while others still fear a double dip from the government debt overload. Conflicting forecasts are quite common when the economy and market move from recession to expansion. Investors still need to decide when to invest and where. Given the changing leadership between capitalizations and styles, the slowly rising tide isn't lifting all ships equally. Pundits like to call this a "stock picker's market", but then what market isn't? MODEL AND BENCHMARK PERFORMANCE Through 2/28/20109 Cap Size Q1 2009 Year- to-Date 1 Year 3 Years 5 Years Portfolio 1 Large Cap -0.33% -0.33% 52.41% -5.81% -0.51% Portfolio 2 Small Cap 1.18% 1.18% 52.99% -0.25% 1.22% Portfolio 3 Large Cap -1.82% -1.82% 69.72% -1.51% 4.28% Portfolio 4 Large Cap -2.28% -2.28% 46.73% -3.80% 1.77% Portfolio 5 Cap Blend 0.50% 0.50% 60.20% -3.45% 2.68% Portfolio 6 Balanced -0.77% -0.77% 34.28% -1.28% 1.72% DJIA Large Cap -0.99% -0.99% 46.19% -5.59% -0.83% S & P 500 Large Cap -0.95% -0.99% 50.25% -7.75% -1.70% Nasdaq Cap Blend -1.36% -1.36% 62.45% -2.52% 1.76% S&P 400 Mid Cap 1.61% 1.61% 64.28% -4.14% 2.06% Russell 2000 Small Cap 0.51% 0.51% 61.58% -7.47% -0.17% Price Change Only, Dividends Excluded Returns over 1 year annualized Our model portfolios tracked the market's ups and downs. By the end of the period, three were ahead of their benchmark indexes (Portfolio 1, Portfolio 2, and Portfolio 5) and the other three trailed. So far there haven't been any big winners or losers as all are plus or minus two percent or less from the benchmark. At the extremes, small cap fundamental Portfolio 2 has posted the largest gain, up 1.2 percent for 2010. Large cap quantitative Portfolio 4 dropped 2.3 percent from its December 31 close. Hopefully this isn't a bad sign for its new algorithm which was put in place in mid-December (for details click here). Portfolio 3 also was revamped in December, but so far it's managed to stick closer to the S&P 500. Portfolio 3 was reoptimized on February 12, Portfolios 5 and 6 were reoptimized on January 29, and Portfolio 4 was last reoptimized on December 11. Unlike the other quantitative models, P4 is only reoptimized on a semi-annual basis in June and December. Fundamentals, performance charts, and additional details for each model appear below. All data is from the close on Friday, February 26, 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: Pharmerica (PMC) +8.0% AmerisourceBergen (ABC) +7.6% General Dynamics (GD) +6.4% Poorest Performer(s) Year-to-Date Corning (GLX) -8.7% Microsoft (MSFT) -5.9% PORTFOLIO 1 Ratios and Returns As of2/28/2010 Price to Earnings (P/E) 15.5 Price to Book 4.6 Price to Sales 3.1 Est. Earnings Per Share $4.18 PEG Ratio 1.4 Market Cap ($bil.) 80.1 Beta 0.99 Price Change Quarter-to-Date -0.3% Price Change Year-to-Date -0.3% ALMOST EVEN In the first few months of 2010, P1 has been up four percent and then down slightly more. By the end of February, it was just shy of its yearend closing price, but ahead of the benchmark S&P 500   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: Netgear (NTGR) +16.9% PF Changs China Bistro (PFCB) +11.9% OM Group (OMG) +9.7% Poorest Performer(s) Year-to-Date EPIQ Systems (EPIQ) -16.9% Dionex (DNEX) -7.6% PORTFOLIO 2 Ratios and Returns As of 2/28/2010 Price to Earnings (P/E) 20.1 Price to Book 13.0 Price to Sales 1.5 Est. Earnings Per Share $2.49 PEG Ratio 1.9 Market Cap ($bil.) 1.12 Beta 0.92 Price Change From Inception (7/1997) 78.65% Price Change Quarter-to-Date 1.2% Price Change Year-to-Date 1.2% QUITE A DUEL P2 closely tracked the Russell 2000 in 2009, besting it by a mere 0.04%. This year has been more of the same with the two trading tightly together. P2 did manage a slight lead at the end of February.   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: February 16, 2010 Next Reoptimization: Mid April, 2010 PORTFOLIO 3 Ratios and Returns As of 2/28/2010 Price to Earnings (P/E) 23.7 Price to Book 9.1 Price to Sales 3.9 Est. Earnings Per Share $2.62 PEG Ratio 0.9% Market Cap ($bil.) 14.8 Beta 1.14 Price Change From Inception (7/2000) -48.2% Price Change Quarter-to-Date -1.8% Price Change Year-to-Date -1.8% ROUGH GO Until late February, P3 was steadily losing ground to the S&P 500. In the final days of the month it managed to close the gap, but not completely.   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: 49 Last Reoptimization: December 14, 2009 Next Reoptimization: Mid June, 2010 PORTFOLIO 4 Ratios and Returns As of 2/28/2010 Price to Earnings (P/E) 26.7 Price to Book 7.9 Price to Sales 3.8 Est. Earnings Per Share $2.59 PEG Ratio 1.9 Market Cap ($bil.) 20.2 Beta 1.01 Price Change From Inception (7/2000) -25.33% Price Change Quarter-to-Date -2.3% Price Change Year-to-Date -2.3% FALLING BEHIND P4 has had a hard time keeping pace with the S&P 500, particularly when stocks started to recover in mid-February.   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: January 29, 2010 Next Reoptimization: Late April 2010 RIGHT CAPITALIZATIONS P5's style bet favors growth which lagged behind value. Nevertheless, with over 85 percent in small and mid caps it's been able to build a nice lead over its benchmark, the S&P Super Composite 1500.   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: January 29, 2010 Next Reoptimization: Late April 2010 COMPOSITION COMPARISON BETTING ON A WEAK DOLLAR P5 has a heavy weighting in foreign stocks. Couple that with the 34 percent in domestic bonds and P5 needs a weak dollar to help it out. Unfortunately, the dollar strengthened in February dropping P5 behind its 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