Week Ending 9/21/12 S&P 500, Asset Class & Sector Performance

*** Health Care was the big winner this week.  With gold & precious metals equities posting yet another weekly gain.  GDX has now made over 28% since July 26th when we told AFL newsletters subscribers to pick it up.

S&P 500 Index	-0.36%
Asset Classes		Sectors
Domestic Large Cap Value	-0.66%	Technology	-1.07%
Domestic Mid Cap Value	-1.51%	Consumer Discretionary	-0.24%
Domestic Small Cap Value	-1.50%	Financials	-1.38%
Foreign Large Cap Value	-1.06%	Telecom	0.83%
Foreign Small/Mid Value	-0.98%	Industrials	-2.04%
Domestic Large Cap Growth	-0.41%	Utilities	-0.21%
Domestic Mid Cap Growth	-1.23%	Natural Resources	-1.99%
Domestic Small Cap Growth	-1.11%	Real Estate	-2.96%
Foreign Large Cap Growth	-0.72%	Health Care	1.77%
Diversified Emerg Markets	-0.97%	Energy	-1.79%
Gold & Precious Metals	1.31%	Consumer Staples	0.44%
Real Estate	-2.96%
Broad-Basket Commodities	-3.14%
Regions
Europe Stock	-1.09%
China Region	-1.18%
Japan Stock	-0.83%
Latin America Stock	-1.65%

 

 

Jon R. Orcutt, founder of Allocation For Life, is an asset allocation strategist and author of “Master the Markets with Mutual Funds: A Common Sense Guide To Investing Success”; Manager/Creator of the AFL Model Portfolios available for members of Allocation For Life in self-directed accounts at Folio Investing

http://www.allocationforlife.com/

The Total Return Approach

With the Fed unwilling to take their foot off of the gas pedal to try and stimulate the economy, I thought it would be wise for long-term bond investors to re-examine the total return approach.  We are already starting to see insitutional money locking in gains on long-term bonds.

http://www.learnbonds.com/the-total-return-approach/

Jon R. Orcutt, founder of Allocation For Life, is an asset allocation strategist and author of “Master the Markets with Mutual Funds: A Common Sense Guide To Investing Success”; Manager/Creator of the AFL Model Portfolios available for members of Allocation For Life in self-directed accounts at Folio Investing

http://www.allocationforlife.com/

Week Ending 9/14/12 S&P 500, Asset Class & Sector Performance

****Notice the continued strength in gold & precious metals.  After lagging the hard assets for nearly two years the miners have started to surge.  How much have they surged?  On July 26th I sent a note to subscribers to my Allocation For Life newsletter and told them I was swapping out the SPDR Gold Shares (GLD) for the Market Vectors Gold Miners ETF (GDX) in all of my models.  Since the swap GLD is up 9.68%, while GDX is up 25.69%!

Jon R. Orcutt, founder of Allocation For Life, is an asset allocation strategist and author of “Master the Markets with Mutual Funds: A Common Sense Guide To Investing Success”; Manager/Creator of the AFL Model Portfolios available for members of Allocation For Life in self-directed accounts at Folio Investing

http://www.allocationforlife.com/

S&P 500 Index	1.99%
Asset Classes		Sectors
Domestic Large Cap Value	2.14%	Technology	2.11%
Domestic Mid Cap Value	2.60%	Consumer Discretionary	1.93%
Domestic Small Cap Value	3.05%	Financials	3.42%
Foreign Large Cap Value	3.83%	Telecom	1.96%
Foreign Small/Mid Value	3.65%	Industrials	2.43%
Domestic Large Cap Growth	1.88%	Utilities	0.62%
Domestic Mid Cap Growth	1.84%	Natural Resources	4.79%
Domestic Small Cap Growth	2.33%	Real Estate	1.55%
Foreign Large Cap Growth	3.03%	Health Care	0.63%
Diversified Emerg Markets	3.76%	Energy	3.82%
Gold & Precious Metals	6.75%	Consumer Staples	0.60%
Real Estate	1.55%
Broad-Basket Commodities	2.98%
Regions
Europe Stock	3.53%
China Region	4.18%
Japan Stock	3.86%
Latin America Stock	3.67%

Telefonica - Yield? Dig Deeper

With yet another round of firepower launched by the Fed this week, investors will continue to hunt for yield.  In many cases I agree with this approach with the many high quality dividends that are available from some of the largest companies in the world.  However, when searching for yield it is important to make sure that the information you are looking at is accurate.  That brings me to shares of Telefonica (TEF).  Many websites still show this stock trading with a dividend yield.  Check that…..a tremendous dividend yield.  The problem with these sites posting a current dividend yield for TEF, is the fact that TEF is currently not paying a dividend.  In Fact, the dividend was suspended months ago.

I can certainly understand the lure of TEF (especially when being presented with a dividend yield that does not actually exist).  It was hit very hard with the problems in Europe, and especially within the Spain region.  For those of you that do not know, TEF is the incumbent fixed-line and wireless telephone operator in Spain and the Czech Republic. It has the second-most wireless subscribers in the United Kingdom and a big position in Germany. It has substantial fixed-line and wireless assets in Latin America, where 66% of its customers reside. However, they provide only 47% of its revenue and 54% of EBITDA. TEF also owns stakes in Telecom Italia and China Unicom.  I understand the desire to play a European rebound with TEF.  In the AFL Multi-Cap Value Folio I manage, I did just that.  At the close yesterday I decided to take the 16.49% gain after examining TEF’s financials a bit further.

The suspension of the dividend really bothered me as an investor.  When a company generates as much free cash flow as TEF, they should not have a problem paying a dividend.  I looked at the financials a bit further and noticed that TEF may have trouble funding short-term liabilities.  Their current debt-to-equity ratio as of last quarter is 2.62.  It has been well over 2 for several quarters.  A high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt, and this can result in volatile earnings as a result of the additional interest expense.  Couple the high debt-to-equity ratio with a very small quick ratio, and it becomes clearer as to why TEF suspended their current dividend.  TEF’s quick ratio has always been below 1 and as of last quarter it was .68.  The quick ratio measures a company's ability to meet its short-term obligations with its most liquid assets. The higher the quick ratio, then the better positioned the company is to meet its short-term debt obligations.  A company with a Quick Ratio of less than 1 cannot currently pay back its current liabilities.

I understand that these numbers vary by industry.  However, when you look at TEF’s unsuccessful attempts to sell assets in Europe, then it does shed more light on the suspension of the dividend.  Consider the following passage from a recent analyst at Morningstar who covers the stock:  “While we thought the previously announced continual increases in the dividend to EUR 1.75 per local share were aggressive, to not only stop the increases, but to cut the existing dividend makes us question management's grasp on the firm's ability to generate free cash flow.”  I’m not saying that there is not tremendous value in the shares of TEF.  There may be.  I am simply encouraging investors to not simply search for yield without doing further research.  If you are using sites that have not updated their quotes with the suspension of the dividend, then you may buy a stock simply for the dividend yield, and sadly you will find out there is no dividend.  TEF is obviously worried about short-term liquidity, and as a shareholder you should be as well. 

 

Jon R. Orcutt, founder of Allocation For Life, is an asset allocation strategist and author of “Master the Markets with Mutual Funds: A Common Sense Guide To Investing Success”; Manager/Creator of the AFL Model Portfolios available for members of Allocation For Life in self-directed accounts at Folio Investing

http://www.allocationforlife.com/

Conversations With The Distraught

Acquaintance: Hi Jon.  It’s been a long time.  It looks like things are going well.  I just ordered your book.  Congratulations!

Me: Thanks I appreciate it.

Acquaintance:  I was wondering if you could look at my investment statements for me?

Me:  No.  Why would I look at your statements?  They aren’t my investments.

Acquaintance:  I know but my accounts have not done very well and I don’t know what is going on.

Me: Are you working with a financial advisor?

Acquaintance: Yes.

Me:  What is your advisors philosophy?

Acquaintance: I don’t know.

Me: What is his or her methodology?

Acquaintance:  I don’t know.

Me:  So you wake up every day not knowing why your money is invested the way it is or what your investments are designed to do for you?

Acquaintance:  Yes.

Me:  And how much do you pay for that?

Acquaintance:  1% a year.

Me:  Of your total assets?

Acquaintance:  Yup.

Me:  And how much in dollars is that?

Acquaintance:  Around $6000 a year.

 

I shared this conversation with you today because it is one of the primary issues I address with subscribers to my Allocation For Life newsletter.  That issue is to know what you own and why you own it.  This conversation was not unique.  Many investors who have not taken the time to learn how to invest often hand their dollars off to a financial advisor, and end up not really knowing what they own and why.  This is not an indictment against financial advisors.  I know many advisors who can easily translate their philosophies and why they make the suggestions that they do to clients.  On the other hand I have also met many advisors who do not have a philosophy or method behind their madness.

Conversations like this illustrate the importance of taking responsibility for your investment decisions and investments being made on your behalf.  I can clearly explain why and how every investment dollar I have is invested the way it is.  My methods have been well documented both in my book and in the investment newsletter I author.  My models are even available to subscribers at Folio Investing.  However, those investors that own my models in self-directed accounts at Folio and subscribe to my newsletter have taken personal responsibility for their investments.  They have simply found a philosophy that they understand and they wake up each day knowing what they own and why they own it. 

The conversation above was with a very intelligent hard working woman.  She has a high stress career and makes very good money for that stress.  She simply admitted that she lost her way.  The busier she became the more she did not have time to keep an eye on things and thus felt the need to use an advisor to do that for her.  In many cases that is a correct decision, but the lesson to be learned is that as an investor you still need to take the time to educate yourself and understand how your money is working for you.  In this case it was not working too hard.  I believe most of us have the ability and common sense to seek our own philosophies, and that it does not have to cost you 1% of your total assets per year to do so.  At the end of the day the burden falls on us to be able to clearly define our own investment decisions.

 

Thank you and good luck everyone.

 

Jon R. Orcutt, founder of Allocation For Life, is an asset allocation strategist and author of “Master the Markets with Mutual Funds: A Common Sense Guide To Investing Success”; Manager/Creator of the AFL Model Portfolios available for members of Allocation For Life in self-directed accounts at Folio Investing

http://www.allocationforlife.com/

Week Ending 9/7/12 S&P 500, Asset Class & Sector Performance

*** The market obviously responded nicely to news out of Europe and hopes of QE3 (though I don't consider that bit of news positive).  Perhaps most noteable was the action on Wednesday before Thursdays big market move.  On Wednesday Small Caps surged.  It has been a while since small caps have led the way.  For the last two years we have been in a strong large cap S&P 500 market.  The moves we have been seeing recently are broad-based and I consider this a sign that the market has much more room to the upside.

S&P 500 Index	2.28%
Asset Classes		Sectors
Domestic Large Cap Value	2.30%	Technology	2.56%
Domestic Mid Cap Value	2.82%	Consumer Discretionary	1.96%
Domestic Small Cap Value	3.36%	Financials	3.22%
Foreign Large Cap Value	2.95%	Telecom	2.47%
Foreign Small/Mid Value	2.86%	Industrials	2.51%
Domestic Large Cap Growth	2.48%	Utilities	1.64%
Domestic Mid Cap Growth	2.99%	Natural Resources	3.86%
Domestic Small Cap Growth	3.38%	Real Estate	1.42%
Foreign Large Cap Growth	2.61%	Health Care	2.76%
Diversified Emerg Markets	2.48%	Energy	2.41%
Gold & Precious Metals	6.08%	Consumer Staples	1.32%
Real Estate	1.42%
Broad-Basket Commodities	1.06%
Regions
Europe Stock	3.75%
China Region	1.36%
Japan Stock	-0.16%
Latin America Stock	3.85%

 

 

Jon R. Orcutt, founder of Allocation For Life, is an asset allocation strategist and author of “Master the Markets with Mutual Funds: A Common Sense Guide To Investing Success”; Manager/Creator of the AFL Model Portfolios available for members of Allocation For Life in self-directed accounts at Folio Investing

http://www.allocationforlife.com/

My Latest Article

http://seekingalpha.com/article/841471-august-and-ytd-s-p-500-asset-class-and-sector-performance

Jon R. Orcutt, founder of Allocation For Life, is an asset allocation strategist and author of “Master the Markets with Mutual Funds: A Common Sense Guide To Investing Success”; Manager/Creator of the AFL Model Portfolios available for members of Allocation For Life in self-directed accounts at Folio Investing

http://www.allocationforlife.com/