Einstein Portfolio Update: 30 November 2012

On this last trading day of November the Einstein comes up for its monthly review.  Overall, the portfolio is in good shape as all asset classes are within the 25% target limits set in the Dashboard of the TLH Spreadsheet.

Einstein Dashboard:  The purpose of these Dashboards is to quickly show the Strategic Asset Allocation plan for the portfolio.  In the case of the Einstein, we use all seventeen asset classes.  I am considering adding an 18th asset class which I would classify as Special.  A Special asset might include investments in energy, utilities, or even specialized individual stocks.  Anything that falls outside the current seventeen (17) asset classes would go into the Special asset class.  This possible addition to the Dashboard is still in the “consideration” bin.

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What To Do As Congress Debates and Postures

Investors are faced with many questions as Congress continues to waste precious time in solving what has become known as the “Financial Cliff.”  How are you going to handle your portfolio over the next few months and what are the best practices to follow?  My advice is to do very little to next to nothing, but to expect a bumpy ride.  When I say “very little,” I would not be adding large shares to any asset classes.  Let cash build.  “Nothing” means going about your investment business as usual and invest as if nothing is going on in the political world.  Going “off the cliff” will not be the worst event in history as cuts will go into action that neither the Democrats or Republicans would otherwise approve.  These cuts will be good for the deficit and could strengthen the market.  Granted, the different parties want cuts in different programs so look at this as forced compromise.

The real hurt will be placed on the middle class and the poor as tax rates will rise.  I expect the increases on those earning below $250,000 will be walked back.  The number may go up to $500,000 as recommended by Warren Buffett.  If the rates on those earning below $250,000 are not walked back the economy will shrink and we could easily go back into recession.  That is the game of chicken being played out by 535 elected officials.

If you are fearful no agreement will be reached among the two parties, one might place trailing stop loss orders (TSLOs).  I would set them at 2% to 3% to preserve capital.  Another move is to place TSLOs on only a few holdings within the portfolio.  This way one is hedging their bets.  Another possibility is to use the ITA Risk Reduction model.  Yet another choice is to purchase some short ETFs such as SDS.  This option only requires available cash and one does not need to sell off investments that you prefer to hold in the portfolio.

When investors look back upon this period five years from now, the visible action will likely be no more than slight wrinkles in a broad market graph.  Remember October of 1987.  That 22% drop in the DJI is barely noticeable now 25 years later, yet it was a real shocker when it happened.  Overall, this economy is improving and that is where we need to focus our attention.

QPP Analysis of Portfolioist Portfolio

In the last blog entry I referenced a recent article in Geoff Considine’s blog, Portfolioist.  This “QPP Analysis” post collects those asset classes and rebuilds them into a portfolio that is analyzed below using the software, Quantext Portfolio Planner (QPP).  Platinum members are familiar with the analysis that comes from this software.  If not, select the QPP option found in the right sidebar under QPP Analysis and read through some of that information.

Assumption:  Readers need to know that I am still assuming the S&P 500 will grow at a rate of 7% over the next six to twelve months.  I have my doubts about this percentage gain as my gut tells me it will be somewhere between 5% and 6%.  Nevertheless, for this analysis I am using the 7% value.

QPP Analysis:  Since Considine did not set up percentage allocations in his article, I was on my own to make those assumptions.  The strange starting date of December 19, 2007 was the launch date for EMB.  This avoids the problem of the short-term data.  All other ETFs have been operational more than five years.  I also included VEU and VEA even though Considine does not include them in his article.  In the second slide I will show readers why Considine omits them.

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How Many Asset Classes or ETFs Are Required to Construct Diversified Portfolio?

One of my favorite blog writers is Geoff Considine of the Portfolioist.  Yesterday, November 28th, Dr. Considine published an interesting article that begins to answer the above question – How many asset classes or ETFs are necessary to build a well-diversified portfolio?  Considine posits ten (10) asset classes will provide sufficient diversification.  David Swensen argues in his book, Unconventional Success, six asset classes are adequate.  Here is a link to the Swensen Six Portfolio for readers interested in the specific ETFs one might find in a Swensen portfolio.  Here at ITA we frequently use up to seventeen asset classes including cash.  That leaves sixteen (16) asset classes to be populated by an array of different ETFs or index funds.

There are common ETFs found in ITA, Considine, and Swensen portfolios.  One finds VTI, VWO, VNQ, and TLT in all these portfolios.  Considine does not include VEU or VEA as he finds a high correlation between developed international markets and the U.S. Equities market.  ITA and Swensen include developed international markets as a useful asset class, while recognizing the high correlation between international markets and U.S. markets.  In a later post one can see if adding international markets is important.

Considine separates himself from ITA and Swensen by including utilities (IDU) and energy (VDE) as separate asset classes.  In a later post I will run a Quantext Portfolio Planner (QPP) analysis so Platinum readers can see if these two additional ETFs add diversity to the portfolio.

This morning I ran into yet another way to build a portfolio, Modern Portfolio Theory 2.0.  I need to do more research and find a way to program the equation into an Excel™ spreadsheet so as to test its reliability.

Stryker (SYK): Is It Priced To Buy?

When I think about an individual stock, at least two questions quickly come to mind.  1) What is the quality of the company?  2) Is it priced to buy?  Stryker (SYK) is a company I owned back in the late 1990s and early 2000s.  I’ve always considered it a high quality company.  It certainly has outperformed the S&P 500 over the past 25 years.  I hope this Yahoo! link will show the comparison.  If not, manipulate the graph so you can see the comparison.

Here are two more graphs I would examine before moving on to my individual analysis.  The first I will call the Price/195-Day EMA graph and the second is the PnF graph.  The current yield is 1.57% and the Price/Book is 2.5.  This P/B ratio is moderate, but on the high side if one is looking for deep value stocks, or the type Masters is recommending in this market.  Readers will see my analysis below reinforces this conclusion.

Is the stock priced to buy?  Below is a very conservative projection of what one might expect from this company.

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Curie Portfolio Update: 28 November 2012

Once more it is time to review and update the Curie Portfolio.  The following Dashboard lays out the Strategic Asset Allocation plan and the color coding identifies which asset class are above, below, or within the 25% target limits.  For smaller portfolios I expand the target limits, but for a portfolio of this size, the 25% threshold works quite well.  Since the last review the only transaction, other than recording dividends, was to sell off most of DBC, our commodities ETF.  I did this as DBC slipped below its 195-Day Exponential Moving Average.  Since selling DBC, the price moved up about 20 cents.

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Are Stocks and Bonds Dead?

The November 26th issue of Time magazine carries an article by Rana Foroohar focusing on Bill Gross and Mohamed El-Erian, PIMCO executives, who are frequently quoted about the market outlook and reasons why they are both so pessimistic.  Gross and El-Erian don’t differ all that much from Grantham’s On The Road To Zero Growth projections.

Quoting from the Time article, “Gross recently stunned the markets by calling equities a Ponzi scheme and warning investors they will never see 6% real returns again and would be lucky to get 3%.  Gross and El-Erian believe there will ultimately be a price to pay for the Fed’s money infusion in the form of return eroding inflation and other economic distortions.  When that happens, real growth (already sluggish) will stagnate further, borrowing cost will skyrocket, stocks will swoon, real estate will struggle and consumers will hunker down.”

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Oracle of Omaha Speaks Out (Again) On Taxes

Warren Buffett wrote a clear and reasonable article for the New York Times titled, A Minimum Tax for the Wealthy.  Check it out.

Madison Portfolio Update: 26 November 2012

It is again time to update the Madison, one of the five portfolios we are using to test the ITA Risk Reduction model.  Since the last update the only changes were to include dividends and add a few shares of VWO to bring the emerging markets asset class closer to target.  Platinum members can see that the portfolio is in good shape based on the Strategic Asset Allocation plan.

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Christmas With Robert Shaw: CD Recommendation for 25 November 2012

My CD collection is not filled with Thanksgiving music.  Thanksgiving is not widely celebrated and that likely contributes to a thin collection of music related to this holiday.  Hymns Triumphant, as mentioned in this blog entry, is about as good as I can recommend.  Now we move into the Christmas season where music abounds.  And it ranges from the trivial to the majestic.  I’ll try to stay with what I think are higher quality recommendations.  Among my favorites are the classics directed by Robert Shaw.

Even if I’ve recommended this recording in the past, it is worth another plug.  Christmas With Robert Shaw is my first choice for this coming holiday season.  I cannot speak to the differences between the 1995 and 2008 versions so I am linking to the older one as that is what I have.

And now a word about the above photograph.  It looks like my wife and I will adopt Kipling, a rescue Bichon Frise needing a good home.  He is still thin and his hair was matted, hence the close crop.  Over the next few months we hope to return this lively dog to his natural beauty.  We have not had a dog for about 30 years so this will be a change in our household.  I hope Kipling will learn to enjoy music as much as I do as he is not going to have much choice in the matter.