Bonds Add Little Other Than Diversification

Using Delta Factor analysis, bonds will add little growth to portfolios over the next six to twelve months.  Their main benefit is to bring down portfolio volatility and I believe one can do a better job of risk reduction with some highly selected stocks and/or implementation of the ITA Risk Reduction (ITARR) model.  Below is the evidence for my tepid view on bonds going forward.

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Einstein Portfolio Update: 30 October 2012

If you compare the performance numbers in this blog post with the prior performance data table, you might find slight differences in the Einstein as the performance table did not include recent purchases of the commodities, DBC or a number of dividends.  Some time ago I sold off DJP as I am no longer a fan of ETNs, a slightly different animal than ETFs.  Platinum members will find the Einstein asset classes are in balance with the exception of Cash.  I don’t worry much about Cash other than to allocate it to under weighted asset classes.

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The key Sortino and Retirement Ratios are positive, a very good sign the portfolio is well-managed.

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Portfolio Performance Data Table: 30 October 2012

Since the last portfolio performance update over a month ago, every portfolio with exception of the Euclid gained ground on the VTSMX benchmark.  All portfolios except for the Euclid and the Einstein gained ground on the ITA Index, the benchmark that is customized to measure relative performance for each portfolio.  These performance gains also improved the Sortino and Retirement Ratios.

In some cases the gains were significant while in others the improvement amounted to one or two tenth of a percentage point.  Nevertheless, October was a tough month and the portfolios, due to the various strategic asset allocation plans, performed reasonably well.  Had commodities (DBC) held up, the results would have been better.

The results are encouraging and we hope this trend will continue through November and December.

Portfolio Performance - 10/29/2012

Portfolio Last Update Launch Date Tracking Tool Port. IRR ITA Index Diff Port. vs. ITA Index VTSMX IRR Diff. Port. vs. VTSMX Index IR SR RR
Curie 10/19/12 12/26/07 TLH SS 4.7% 3.7% 1.0% 2.9% 1.8% 0.32 0.33 0.32
Newton 10/19/12 06/02/08 TLH SS 7.4% 7.9% -0.5% 7.5% -0.1% -0.16 -0.04 -0.04
Schrodinger 10/19/12 12/01/00 TLH SS 4.9% 4.0% 0.9% 3.6% 1.3% NA -0.20 0.8
Einstein 10/19/12 06/30/08 TLH SS 9.8% 9.4% 0.4% 10.5% -0.7% 0.09 0.01 0.01
Kepler 10/19/12 11/01/08 TLH SS 12.9% 13.0% -0.1% 14.6% -1.7% -0.01 0.00 0.00
Bohr 10/19/12 08/14/08 TLH SS 8.9% 8.8% 0.1% 6.4% 2.5% 0.1 0.00 0.00
Kenilworth 10/19/12 08/18/10 TLH SS 6.2% 7.4% -1.2% 11.0% -4.8% 0.88 -0.01 -0.01
Maxwell 10/19/12 12/25/00 TLH SS 1.8% 7.7% -5.9% 5.0% -3.2% NA -0.10 -0.10
Euclid 10/19/12 06/30/99 TLH SS 2.8% 7.0% -4.2% 5.2% -2.3% NA -0.08 -0.15
Madison 10/19/12 03/13/08 TLH SS 5.0% 6.9% -1.9% 8.5% -3.4% -0.84 -1.18 -1.18
Gauss 10/19/12 12/27/11 TLH SS 7.4% 7.4% 0.0% 14.7% -7.3% 0.00 0.00 0.00

Asset Allocation or Risk Parity

A Platinum member sent the following summary of an article and asked me to comment.  Note that my response is framed in the context of constructing portfolios through the use of a strategic asset allocation plan.  The Dashboard of the Curie Portfolio, posted this morning, is an example.  The second part is tied to future performance forecasts using software, Quantext Portfolio Planner (QPP).  Here is the article or a summary brief.

While there is no question about the difficulties of investing in equities during the first 12 years of this century, there are reasons for the difficulties.  Tax cuts, two wars, unpaid prescription drug plan, housing bust, misuse of derivative, etc. all combined to work against long-term investors.  Did Risk Parity work over the last decade.  Yes, but that does not mean it will work again.

The above article sounds as if the author wants to combine both strategic asset allocation and risk parity as a way to put together portfolios.  To a large degree, that is what we are doing here at ITA Wealth Management.  In outline form, here is what we do.

1) Develop a Strategic Asset Allocation plan for each portfolio.  The allocations from portfolio to portfolio do not vary all that much.  All are skewed toward the value side of the investing spectrum.  This is in keeping with academic research.

2) We look at long-term market trends through the use of Delta Factor analysis and Bullish Percent Indicators.  Search these terms on this blog for more information and examples.  Using the laws of probability, we attempt to stay on the right side of market trends.  While this is not a perfect system, it does provide a slight edge toward being successful while reducing portfolio risk.

3) While the portfolios are not built around the concept of Risk Parity, we do make a strong effort to reduce portfolio, particularly in five portfolios, by employing the ITA Risk Reduction (ITARR) model.  This is a slight modification of the Faber-Richardson risk reduction model as explained in their Ivy Portfolio book.

I found the third paragraph to be both confusing and contradictory.  It read as if the writer did not know which side of the fence made the most sense.  Do I think Risk-Parity will work over the next 12 years as it did over the last 12?  In a word – No.  With interest rates as low as they are, the laws of probability are not with bonds.  For this reason, I’m sticking with building portfolios through a thoughtful asset allocation plan and I prefer to control portfolio risk by using the ITA Risk Reduction model.

Curie Portfolio Update: 29 October 2012

Another 32 days rolled around and it is time to review and update the Curie Portfolio.  In the following screen shots Platinum members will see the Dashboard, one of the worksheets within the TLH Spreadsheet, and the performance data, another spreadsheet worksheet.  While the absolute performance is modest, the Curie continues to outperform all benchmarks.  The most important is the ITA Index as it is customized to the Curie strategic asset allocation plan.

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Bullish Percent Indicators Take Hit

As projected for a number of weeks, the market finally took a breather and retraced this past week.  The evidence is clear when one examines the index and sector tables.

Index BPIs:  We find every index below the 70% line or what we think of as an overbought condition.  While we are not rooting for the market to decline, we are well aware that it cannot maintain those lofty heights for an indefinite period.  Therefore, it is somewhat of a relief to experience a week of decline.  The market is simply catching its breath for the next race.  The defense has the ball for all markets except for the most important one, the NYSE.

When the major markets drop below the 50% line it will be time to take a careful look at available cash and think about putting it to work.

Sector BPI Data:  The sector BPI data helps one to focus in on what parts of the market are doing well and which are suffering.  This past week the offense gave the ball over to the defense in Staples, Health, and Materials.  Only the Financial and Industrial offensive teams are in control.  I would need to look again, but I think the Financial sector was one of the few sectors that showed a positive Delta Factor.  It is time to look at that data again.

If you are examining these BPI graphs on your own, be sure to use the percentage scaling model rather than the traditional model.  The traditional model is used when one is making these calculations by hand.  That is not necessary when we have computers and StockCharts as our data source.

Johnson & Johnson (JNJ): A Cornerstone Stock

With new data available I thought it prudent to analyze JNJ, a stalwart of a company.  Johnson & Johnson was one of the requested stocks by a Platinum member and it is found in many portfolios due to its consistent performance over the years.  Where does it stand today?

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Dinner Music: Romantic Saxophone Quintet

If you are looking for soft saxophone dinner music, this inexpensive CD is one for serious consideration.  I’m using several cuts in a few slide shows, one of a new wedding and another of a 50th wedding anniversary.  This music spans the ages.  Several of my favorites are:  Killing Me Softly with His Song, The First Time Ever I Saw Your Face, and Endless Love.

There are no lyrics to distract so one can listen to this music in nearly all situations.

Moving on to investments, portfolios up for review this week are the Einstein and Maxwell.

Investors tracking the ITA Wealth Management Risk Reduction (ITARR) model need to be aware that the commodity, DBC, is currently in the sell zone.  The price of DBC is below its 195-Day EMA.  The only other critical ETFs close to a sell are VNQ and VOT.  All the other basic ETFs seem safe unless we see a major market decline during the new few weeks.

Republic Services (RSG): Another Waste Hauler

The following analysis can be compared to the Waste Management analysis posted earlier this morning.  It comes as no surprise that sales grow at a slow rate.  It is the nature of the business.  After all, there are only so many houses and businesses requiring trash hauling.

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Annaly Capital Management (NLY): Little to Offer Except High Dividend

What does Annaly Capital Management (NLY) have to offer other than a high yield of 12%?  Sales, profits, and earnings are erratic making it difficult to perform any sort of useful analysis.  Check the screenshots below.

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Page 1:  Looking at the graphs one would think they are at Six Flags amusement park.  While it is difficult to make any sort of projections, I stayed in single digits with a 3% sales growth and 2.5% earnings increase.  Those are nothing more than guesses as the history of NLY makes future projections nearly impossible.

Page 2:  Section 2 (Quality Analysis) is clearly telling investors to flee this stocks.  Elimination of several outliers did little to bring the trends into the Even or Up level.  Based on the available data, there is no upside to this company and the signal is Sell.  One might hold on until the next dividend is paid and then release this stock.

Disclaimer:  NLY is held in several ITA portfolios.