The folio exceeded my expectations in 06. It came out of the gate in mid-September to beat the S&P500 nine times out of the 16 weeks it traded. I can’t get an accurate comparison to the S&P’s 13.6% year return - the folio regularly changes in size through addition of funds – but the return on the last trading day registered 4.70% (excluding dividends).
As an aspiring money manager I think a 56% success rate against the market benchmark is not a chest thumper but it’s not bad. I aim for at least a 70% success rate in 07. My proudest achievement in 06 was not that the folio hung in there with Wall Street but that there was not a day when all the stocks closed down. Even on days when the three major indices - the Dow, Nasdaq, and S&P - all saw red, the strength of the diversity of the folio ensured that it saw some green. This is definitely a folio I can roll with in 07.
Here’s how the stocks closed shop in 06 (MA – Moving Average):
How They Ended 2006 by Return to Date (RTD)
| Stock | RTD(12/29/06) | Rank | MA(12/29/06) | Rank |
| NHP | 10.20% | 1 | 7.19% | 3 |
| IGE | 8.71% | 2 | 8.82% | 2 |
| EEM | 7.51% | 3 | 6.72% | 4 |
| ADBE | 6.87% | 4 | 5.08% | 6 |
| MSFT | 5.44% | 5 | 5.69% | 5 |
| EFA | 4.99% | 6 | 4.60% | 8 |
| IWR | 4.52% | 7 | 4.27% | 9 |
| IJR | 3.33% | 8 | 3.22% | 10 |
| PG | 2.63% | 9 | 1.89% | 13 |
| BAC | 2.43% | 10 | 2.36% | 12 |
| COST | 2.39% | 11 | 2.83% | 11 |
| SLV | 0.66% | 12 | 9.87% | 1 |
| PBW | -0.64% | 13 | 1.62% | 14 |
| EBAY | -2.75% | 14 | 4.74% | 7 |
The Most Defensive Stock
In 2006 there were only four occasions when all but one stock closed down. On two of these occasions PG, the consumer staples giant, defied gravity. SLV and EFA closed up on the other two occasions. Conversely, there were five occasions when all but one stock closed up. On two of these occasions SLV saw red. PG, EFA and IGE saw red on three occasions.
However, PG is the only stock that’s been negatively correlated to the S&P. Therefore, PG is the most defensive stock. This makes sense. When investors are spooked and there’s a “flight to quality” PG is one of those stocks that tend to benefit. What’s the next best thing to PG for defense? SLV.
The prospects for PG and SLV in 2007 look good. PG should benefit from a slowing economy if consumers tighten purse strings. Having detergent to wash clothes and toothpaste to brush their teeth will matter more to consumers than a PS3 or a gas guzzler when pocketbooks get stretched!
Both stocks should benefit from a weak greenback. PG earns more overseas than it does in the US so those extra dollars from foreign currency conversions should do wonders for the bottom line. A weak dollar is bound to stoke inflationary pressures as imports become more expensive for US consumers. SLV, like gold, is a good play on concerns about rising inflation.
I hope you got defensive stocks similar to PG and SLV in your folio. Otherwise you’re playing Football without Linebackers. Good luck!
Technical Leaders
These stocks closed 2006 above their Moving Averages:
| Stock | Size of Gap-up | Rank |
| NHP | 3.01% | 1 |
| ADBE | 1.79% | 2 |
| EEM | 0.79% | 3 |
| PG | 0.74% | 4 |
| EFA | 0.39% | 5 |
| IWR | 0.25% | 6 |
| IJR | 0.11% | 7 |
| BAC | 0.07% | 8 |
Whether or not the economy loses steam NHP, a health-care real estate investment trust (REIT), should hold its own in 07. By design a REIT pays “buku” dividends, which is going to matter more when stocks lose traction in a sluggish economy, but a health-care REIT is like a covered call option on the economy. What do I mean? Well you get downside protection in form of a regular dividend, and since health-care is a growth sector – think of retiring Babyboomers – you’re perfectly placed to benefit from any upside in economic growth.
However, REITS are generally viewed as financial stocks by investors so any rate hike in an inverted yield curve environment could throw a spanner in the works of REITs. Luckily for NHP, its mortgage business accounts for only 5% of revenue so it shouldn’t be that vulnerable to any increase in interest rates. Allez NHP!
What can I tell you about ADBE? In 2007 it’s coming out with one of the most highly anticipated software products in the industry, and I dare you to find a firm that is as strategically placed to benefit from the Web 2.0 migration of digital content to mobile devices. So don’t act a fool and dump the stock once the new product is out because you’d be missing out on the real gravy train. The firm has also decided to stop giving intra-quarter guidance, which made the stock very volatile.
I don’t need to preach about EEM and EFA. The rest of the world no longer catches a cold when the US economy sneezes so if you don’t hold positions in foreign stocks in 07 then which planet are you from?!
BAC is good to go in 2007 unless interest rates start to creep up instead of down as expected by most economists. Rising interest rates will put the stock under pressure but the firm has deliberately expanded its non-consumer banking businesses to pick up the slack in the consumer banking business.
Actually, BAC seems to doing the opposite of what Citigroup is doing, which is to go on an international buying spree of commercial banks. Interesting. That BAC is also a high-yielding stock will pacify investors should sentiment turn against banking stocks.
Technical Laggards
These stocks closed 2006 below their Moving Averages:
| Stock | Size of Gap-down | Rank |
| IGE | -0.11% | 9 |
| MSFT | -0.25% | 10 |
| COST | -0.44% | 11 |
| PBW | -2.26% | 12 |
| EBAY | -7.49% | 13 |
| SLV | -9.21% | 14 |
EBAY, which had been riding high after reaching a low point in August, suddenly lost its mojo in mid-December when it swallowed its pride and admitted it couldn’t go it alone in China. This prompted many investors to drop the stock like a bad habit. Honestly, I’m a little concerned about EBAY. The online auctions division has lost considerable steam. Also, if the economy fizzles so will online listings.
EBAY’s performance in 07 will almost entirely be tied to the success (or otherwise) of its PayPal and Skype units. Do I think Google’s Checkout will threaten PayPal? Not in 07. Actually, PayPal has such a headstart that I doubt Checkout will ever threaten its growing popularity for online payments. I know Google keeps saying Checkout is not out to take market share from PayPal but please!
As for Skype, its future actually looks a little brighter after AT&T agreed, as part of its recent deal to acquire BellSouth, not to bundle its telephone services with internet access for Digital Subscriber Line (DSL) subscribers. Had AT&T not offered this concession, it would probably have been able to shut out Skype and other voice-over-internet-protocol (VOIP) players that have been able to offer subscribers cheaper call rates partly because they spend no money to lay wires down like Telcos do.
Skype has also started to charge for previously free calls to landlines and mobile phones in the US and Canada. So things are looking up for Skype. All told, PayPal and Skype could pick “some” slack in online listings for EBAY in 07.
Silver collapsed! This is not how I expected SLV to end 2006 but it dropped almost 10% in mid-December. The bloodshed happened in a week when investors were particularly jittery about inflation and “irrationally” sensitive to economic data. SLV is a hedge on rising inflation so when data came out that suggested inflation was easing investors bailed out of SLV in droves. I remember watching in horror on December 15 as SLV dropped like a waterfall!
However, I expect SLV to bounce back in 07 due to a weakening greenback. Interest rates are expected to go up in the UK and the Eurozone so the dollar is bound to bleed some more at least against the other major currencies.
So there you have it. The folio stumbled out of the gate in September but quickly regained its footing as I added some stocks and rebalanced – gave more weight to some stocks than others. Rebalancing will continue in 2007. I can’t assign equal weights to all stocks and just sit back and watch the folio trade; not all stocks are created equal so doing that is not an intelligent way to manage a folio for four seasons.
The worst-known manager intends to build on the experience acquired in 06 to “bring home the bacon” in 07. Do not adjust your sets!
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