Market Haven Monthly Newsletter - March 2011

8/7/2019 Market Haven Monthly Newsletter - March 2011

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MARKET HAVEN MONTHLYPAGE 1

W

e wanted to let our readers know that we

are making some changes to the strategy this

month. We will be replacing our old Timing

Model with a new Timing Model.

The old Timing Model essentially used three

variables in allocating between stocks and cash.

We have known of the deficiencies of the model

for some time and have been researching

enhancements to the strategy for a number of

months now.

Let us give you some examples of its

shortcomings. Over the last decade, the Timing

Model handled the 2000-2002 downturn very

well by pulling out of stocks at the end of 1999

just before they went on their three year losing

streak. Great, right? Unfortunately, because

p/e’s were still very high, the model missed the

rally in stocks from 2003 to 2007. When stocks

capitulated from their overvalued levels in

2008, then the strategy worked fabulously. It

also picked stocks as a buy at the beginning of

2009. Nice job. Again, unfortunately, due to the

secular environment, the model was only

invested for part of the rally, getting out in the

third quarter of 2009. It was then out of the

market for much of 2010. Ouch.

In longer term measurements, the strategy has

been satisfactory in delivering returns. Over the

last four years, returns totaled +80% versus the

market’s -13%. However, we believe that a

portfolio manager utilizing the old Timing

Model would be too susceptible to job risk based

on some of the model’s decisions. For example,

who can afford to wait for five years on the side

lines as the market advances +80% before being

justified? Most people stop believing you after a

year of being wrong and the rest quit on you

after three years. The model just couldn’t

address the market during some of these key

moments.

Happily, we have a replacement model, which

we will still refer to as our Timing Model. We’ve

backtested it to 1926 and are pleased with its

performance all along the way. No model is

perfect and our new model is no exception to

that. However, we believe this model will be a

dramatic improvement over our last model.

Market Haven Monthly

2011

MARCH




We’ve kept the three factors used previously and

added four more. These factors encompass such

things as market valuation, earnings

expectations, secular investor sentiment, the

monetary landscape, and the interest rate

environment.

We understand that

it is fundamentally

undesirable to

makes change in

mid-stream. At thesame time, we want

to set the

expectation that we

are constantly

striving to grow and

learn. That doesn’t

mean we take model

changes lightly. We

don’t. Rigorous

testing has been

conducted over an

extended time frame

and we believe this

strategy will yield

better results goingforward.

Let us share with you some of our conclusions.

Hopefully you’ll find confidence in these results.

Nearby are two tables which show the results of

a long-only portfolio that is simply either 100%

invested in the stock market or completely out

of the market based on the application of our

seven factor model. Rebalancing was conducted

quarterly. No leverage was applied and no

shorting was used. We just wanted to assess the

ability of the model to

pick good times to be in

the market and out of

the market.

The top table comparesfive year period gross

returns of the market to

the model. The model

shows well. It

outperformed the

market in all but one

five year period. The

average

outperformance for the

five year increments is

+31%, which works out

to +4.8% annualized.

The bottom table shows

annual numbers since

2000. This has been a

volatile decade in particular. In our view, if a

model can navigate both the long-term and the

more recent environment well, then it shows

some promise. You can see that the comparative




You need to know that the decision to switch to

the new model was not based on these recent

return results in an effort to cherry pick the best

returns. Yes, we want to do our best to improve

returns going forward. The last thing we want is

to delude ourselves into thinking we’re better

than we are by revising history. That’s a course

destined for future doom. We are hoping that by

spending several pages outlining our thought

process that our sincerity will come through.

At the same time, it is very easy for investors tofall in love with their own ideas and processes to

the point that they never evolve. We must stay

humble because the markets will continue to

humble us.

Where’s the Va lue?

Stocks

Our Static Model is an easy way to hedge out

much of the market risk in an unemotional way.

Through regular rebalancing and a fairly

conservative asset allocation, the portfolio has

done a good job of dampening volatility risk.

Additionally, the beta of our long portfolio has

historically been about 1.3 allowing investors to

get full market exposure while leaving some

cash on the sidelines. Net long exposure for the

Static Model is +50%. Our Timing Model, on the

other hand, factors in market valuations. Net

long exposure is -30%.

Strategy StaticModel

TimingModel

Long Exposure +80% 0%

Short Exposure -30% -30%

Net Exposure +50% -30%

P/E’s are at 17.5x which means limited upside

and lots of downside potential. Earningsinformation, the rising yield environment, and

even price momentum all point to a weakening

rally. The only pause at this point is the Fed’s

loose monetary policy which still has the

potential to provide some more strength to

equities. Nevertheless, we wouldn’t advise

investors to be greedy and try to time the tops.

When conditions are iffy, move some money to

the sidelines while you know you have it.

Sectors

Relative to the market as a whole, our screens

are showing that the best places to find value are

in consumer discretionary, materials, and

financials.




Rising bond yields have steepened the yield

curve, making the profit environment for

financials a more attractive place to be. It has

had the opposite effect on utilities whichcontinue to be an unattractive space. Oil

continues to run, and with it oil stocks, as civil

unrest spreads throughout the middle east.

Interestingly, you’d think that there would be

less attractive values in the energy space, but

our screens are finding more value. But we’d be

very selective here. We still like energy longer-

term for the greater secular forces, but these

skirmishes in the news currently, while

significant to the countries that experience

them, will only have a temporary effect on oil

prices.

Market Cap

Mega cap stocks became cheaper relative to

smaller companies in February. It is a general

rule of thumb that loose monetary policy

benefits smaller companies and this most recent

experience seems to be no different.

Nevertheless, large, stable, profitable,

diversified behemoths are becoming better

values every month and that’s a good thing. The

most short opportunities continue to exist at the

lower capitalization ranges.

Recent Price Streng th

For the last 120 days, energy has been the story.

The sector has significantly outperformed all

other sectors. The higher yielding stocks in the

utilities, telecommunications, and consumer

staples sectors continue to lag in a big way. The

disparity is significant.




Volatility

Last month was a volatile one for volatility. (Can

we say that?) The VIX began the month at 19.5,

promptly dropped to 15.7, spiked to 22.1, and

then ended the month at 20.4 as if not much

happened. If you observed our entry levels, you

would have had a nice month. Below 16.6 we

target 100% exposure to volatility. Up to 22.7 we

are 75%, and only 50% exposed to volatility up

to 28.9.

Commodities

GLD rallied almost +8% during February.

Hopefully all of our readers used the last

pullback to add to their gold holdings.

With all of the political unrest in the world (e.g.,

Libya, Egypt, Tunisia, Ivory Coast) and thenatural disasters (e.g., Russian droughts,

Australian floods) dominating the headlines, it’s

no wonder that agricultural prices have run up

dramatically. While we are bullish on

commodity prices longer term, these short-term

factors are a bit different than our long-term

reason for investing in commodities. We

continue to hold our commodity positions.




Some Investment Ideas

Here are a few names that have shown up

recently as potential investment ideas on our

screens. Some of these may appear in the

portfolios. Some may not simply because the

names currently in the portfolio haven’t worked

their way yet.

Diversification is an important part of our

investment process. We like to have between 30

and 40 names in the long portfolio and morethan that in our short portfolio. We let the ideas

that are working continue to run. Conversely,

the ideas that are not working become a smaller

proportion of the portfolio simply by the

diminishing market cap they exhibit. This also

lends to the comfort we have taking chances on

stocks that may have headline or operational

risk from time to time.

Don’t forget to do your own homework. We’re

not your financial advisor so we do not know

your specific financial situation and what makes

sense for you individually.

CNOOC Limited (CEO) - long

CEO is China’s largest offshore producer of

crude oil and natural gas. Based in Hong Kong,

it is also one of the largest offshore producers in

Indonesia. Its market cap is $102 billion. The

company is conservatively capitalized,

immensely profitable, and focused on the

biggest growth area of the world. Based on last

year’s cash payouts, the dividend yield is around

2.3%, which is better than the S&P 500. ROE

has hovered between 25% and 35% for much of

the last 10 years, yet the price-to-earnings ratio

is only 10.4x. There doesn’t seem to be a lot of

risk with the stock in our opinion.

Credicorp Limited (BAP) - long

BAP is the largest financial services company in

Peru and also one of the oldest. With a market

cap of $8 billion, BAP provides commercial

banking, investment banking, and insurance

services internationally. It has a yield of 2%. It’s

ROE has expanded from single digits to over

20% over the last decade while its tangible book

value has doubled. We admit that at 3x p/b, the

stock isn’t crazy cheap, but it seems cheap for

what you are buying and makes sense as part of

a diversified portfolio focusing on emerging

growth. Earnings are expected to grow at a

+25% clip over the next few years and the p/e of

the stock is only 11.6x.

Ab bott Laboratories (ABT) - long

ABT is a $74 billion drug company with a

diversified revenue stream that covers areas

relating to diabetes, diagnostics, molecular




analysis, nutrition, animal health, and vascular.

The stock has suffered from much of the same

overhang that the rest of the healthcare sector

has experienced. We believe long-term

demographics will eventually become the

overwhelming tailwind. ABT’s yield has steadily

risen year after year and is better than 10-year

Treasuries at 4%. Earnings are expected to grow

around 9% per year and with ROE’s in excess of

25%, investors at these levels will be well-served

longer-term.

Newmont Mining Co rp (NEM) - long

NEM is one of the world’s largest gold producers

and also mines copper. They cover the world

from the U.S. to Australia, Peru, Indonesia,

Ghana, Canada, Bolivia, New Zealand, and

Mexico. We believe that strong gold and copper

prices will continue to contribute to solid growth

in NEM’s bottom line. The $27 billion company

is trading at 10.5x earnings and is expected to

grow at 14% per year for the near future. The

dividend isn’t great, but better than nothing at

1%. To boot, the company raised its dividend

50% in 2010 from 10 cents/qtr to 15 cents/qtr.

NEM has low debt and should be able to

withstand some volatility in the metals markets.

Harris Corp (HRS) - long

One of the hardest things to do sometimes is

recommend a stock after you’ve owned it and

watch is appreciate +45%. Nevertheless, that’s

what we’re doing with the $6 billion

manufacturer of communications equipment for

the commercial and governmental markets. New

products have bolstered recent sales at the

company. The company’s primary business has

been tied to military operations which could

experience some volatility as government

officials try to reduce spending. At the same

time, the global trend is toward greater

integration which means more exposure to other

economies and political regimes. HRS provides

products that are sure to stay at the center of

that global progress. The stock is attractively

priced even after its recent run. It sports an

earnings yield of 9%. The dividend yield is 2.1%.

The dividend has grown 80% since 2007. The

stock is a buy in our opinion.




Newsletter Portfolio Performanc e



MARKET HAVEN MONTHL

Symbol Name Price

Portion Of

Fund Shares Held Value

Current

Rating

CTSH COGNIZANT TECH SOLUTIONS'A' $76.51 7.3% 980.00 $74,979.80 HoldNOV National Oilwell Varco Inc $79.83 6.2% 800.00 $63,864.00 HoldDECK DECKERS OUTDOOR $88.30 4.6% 540.00 $47,682.00 Hold

WDC WESTERN DIGITAL $31.19 4.3% 1,400.00 $43,666.00 HoldJOYG Joy Global Inc $93.93 4.1% 450.00 $42,268.50 HoldCOH COACH INC $54.53 3.7% 690.00 $37,625.70 HoldINT WORLD FUEL SERVICES $41.36 3.5% 880.00 $36,396.80 HoldFCX FREEPT-MCMO COPPER & GOLD CL B $52.45 3.2% 620.00 $32,519.00 HoldESV Ensco PLC $55.41 3.0% 560.00 $31,029.60 HoldHLF Herbalife, Limited $78.20 3.0% 390.00 $30,498.00 HoldMUR MURPHY OIL $73.47 2.6% 360.00 $26,449.20 HoldMIDD MIDDLEBY CORP $89.99 2.6% 300.00 $26,997.00 HoldNTRI NUTRI/SYSTEM INC $13.89 2.5% 1,820.00 $25,279.80 HoldPCP PRECISION CASTPARTS $142.23 2.4% 170.00 $24,179.10 HoldARLP ALLIANCE RESOURCE PARTNERS LP $76.40 2.4% 320.00 $24,448.00 BuyMA Mastercard Inc $246.71 2.4% 100.00 $24,671.00 BuyGD GENERAL DYNAMICS $75.94 2.2% 300.00 $22,782.00 BuyHUM HUMANA INC $62.60 2.2% 360.00 $22,536.00 HoldBHP BHP Billiton Ltd $93.91 2.2% 240.00 $22,538.40 BuyHRS HARRIS CORP $46.45 2.1% 470.00 $21,831.50 BuyGPN Global Payments Inc $47.96 2.1% 460.00 $22,061.60 BuyBYI Bally Technologies Inc $38.42 2.0% 540.00 $20,746.80 HoldANR Alpha Natural Resources Inc $54.65 2.0% 370.00 $20,220.50 HoldTPC Tutor Perini Corp $23.43 1.9% 830.00 $19,446.90 HoldFRX FOREST LABORATORIES INC $31.88 1.8% 580.00 $18,490.40 HoldKCI Kinetic Concepts,Inc. $47.34 1.8% 380.00 $17,989.20 HoldATW ATWOOD OCEANICS $45.59 1.8% 410.00 $18,691.90 HoldJCOM J2 GLOBAL COMMUNICATIONS NEW $29.13 1.8% 650.00 $18,934.50 HoldGRMN GARMIN LTD $33.17 1.7% 520.00 $17,248.40 HoldNE Noble Corp $44.19 1.6% 380.00 $16,792.20 HoldACN Accenture Plc $52.18 1.6% 320.00 $16,697.60 HoldENDP ENDO PHARMACEUTICALS HLDS INC $34.33 1.5% 460.00 $15,791.80 Buy

CEPH CEPHALON INC $56.22 1.5% 270.00 $15,179.40 HoldWMT WAL-MART STORES $51.75 1.4% 280.00 $14,490.00 HoldAMED AMEDISYS INC $35.32 1.4% 420.00 $14,834.40 HoldLHCG LHC Group, LLC $30.24 1.4% 460.00 $13,910.40 BuyMDT MEDTRONIC INC $39.88 1.1% 290.00 $11,565.20 HoldALGT Allegiant Travel Company $41.10 1.1% 280.00 $11,508.00 HoldESLT ELBIT SYSTEMS $50.51 1.0% 200.00 $10,102.00 BuyBBY BEST BUY CO INC $32.37 0.9% 290.00 $9,387.30 Hold

Long Portfolio



MARKET HAVEN MONTHL

Symbol Name Price

Portion Of

Fund Shares Held Value

Current

Rating

WY WEYERHAEUSER CO $24.20 3.8% -3,541.00 ($85,692.20) ShortARMH ARM HOLDINGS ADS $30.11 3.2% -2,410.00 ($72,565.10) ShortN NetSuite Inc $30.69 2.4% -1,760.00 ($54,014.40) Hold

FXEN FX ENERGY INC $11.73 2.1% -4,010.00 ($47,037.30) ShortPEGA PEGASYSTEMS INC $40.31 1.8% -1,030.00 ($41,519.30) HoldVRX Valeant Pharmaceuticals Intern $40.11 1.8% -1,033.00 ($41,433.63) ShortEBS Emergent BioSolutions, Incorporated $21.24 1.8% -1,920.00 ($40,780.61) HoldHUSA Houston American Energy Corporation $16.27 1.8% -2,490.00 ($40,512.30) ShortSFE SAFEGUARD SCIENTIFICS $21.08 1.8% -1,900.00 ($40,051.81) ShortMAKO MAKO Surgical Corporation $20.78 1.7% -1,890.00 ($39,274.20) ShortNATI NATL INSTRUMENTS $31.24 1.7% -1,215.00 ($37,956.60) ShortPXD PIONEER NATURAL RES $102.86 1.6% -350.00 ($36,001.00) ShortHNR Harvest Natural Resources Inc $13.88 1.5% -2,510.00 ($34,838.80) ShortCRR CARBO CERAMICS INC $119.57 1.5% -290.00 ($34,675.30) ShortBAGL Einstein Noah Restaurant Group $16.12 1.4% -1,990.00 ($32,078.80) ShortHOT STARWOOD HOTELS&RESWORLDWIDE $61.55 1.4% -520.00 ($32,006.00) ShortAH Accretive Health Inc $20.50 1.4% -1,560.00 ($31,980.00) ShortIGTE iGate Corporation $18.47 1.3% -1,660.00 ($30,660.20) HoldTLM TALISMAN ENERGY $24.52 1.3% -1,210.00 ($29,669.20) ShortFL Foot Locker Inc $19.29 1.3% -1,530.00 ($29,513.70) HoldMCHP MICROCHIP TECHNOLOGY $37.33 1.3% -790.00 ($29,490.70) HoldBCO Brink's Co/The $30.90 1.3% -950.00 ($29,355.00) ShortACXM ACXIOM CORP $17.12 1.3% -1,710.00 ($29,275.20) HoldSWK Stanley Black & Decker Inc $75.11 1.3% -383.00 ($28,767.13) HoldCMO CAPSTEAD MORTGAGE(NEW) $13.06 1.3% -2,190.00 ($28,601.40) HoldNOG Northern Oil & Gas, Incorporated $31.70 1.3% -900.00 ($28,530.00) ShortBG Bunge Ltd $71.49 1.2% -380.00 ($27,166.20) ShortCOG CABOT OIL & GAS 'A' $45.79 1.2% -590.00 ($27,016.10) HoldPTIE PAIN THERAPEUTICS $6.71 1.2% -4,020.00 ($26,974.20) HoldDUF Duff & Phelps Corporation $16.44 1.2% -1,640.00 ($26,961.60) HoldEXP Eagle Materials Inc $31.85 1.2% -830.00 ($26,435.50) ShortMCCC MEDIACOM COMMUNIC'A' $8.81 1.1% -2,950.00 ($25,989.50) Short

FICO Fair Isaac Inc $28.40 1.1% -910.00 ($25,844.00) HoldMNTA Momenta Pharmaceuticals Inc $13.81 1.1% -1,850.00 ($25,548.50) HoldGEO Geo Group Inc/The $25.03 1.1% -1,010.00 ($25,280.30) HoldFO FORTUNE BRANDS $61.57 1.1% -410.00 ($25,243.70) ShortMF MF Global Holdings Ltd $8.49 1.1% -2,960.00 ($25,130.40) ShortTIF TIFFANY & CO $61.15 1.1% -410.00 ($25,071.50) HoldSTMP STAMPS.COM INC $13.39 1.1% -1,870.00 ($25,039.30) ShortNOVL NOVELL INC $5.91 1.1% -4,220.00 ($24,919.10) ShortLTD Limited Brands $32.32 1.1% -770.00 ($24,886.40) HoldMAN MANPOWER INC $64.51 1.1% -380.00 ($24,513.80) ShortMSCC MICROSEMI CORP $22.35 1.1% -1,080.00 ($24,138.00) ShortLUX LUXOTTICA GROUP ADS $30.78 1.1% -780.00 ($24,008.40) HoldKW Kennedy-Wilson Holdings Inc $11.00 1.1% -2,180.00 ($23,980.00) HoldALX ALEXANDER'S, INC $393.55 1.0% -60.00 ($23,613.00) ShortBMS BEMIS CO $32.65 1.0% -720.00 ($23,508.00) HoldSTEI STEWART ENTERPRISES INC CL A $7.63 1.0% -3,080.00 ($23,500.40) ShortEQT EQT Corp $48.72 1.0% -480.00 ($23,385.60) ShortFDX FEDEX CORP $89.88 1.0% -260.00 ($23,368.80) HoldGKSR G & K SERVICES CL'A' $32.74 1.0% -710.00 ($23,245.40) ShortLGF LIONS GATE ENTERTAINMENT $5.96 1.0% -3,860.00 ($23,005.60) ShortBMRN BIOMARIN PHARMACEUTICAL INC $24.58 1.0% -920.00 ($22,613.51) ShortPFS Provident Financial $14.78 1.0% -1,510.00 ($22,317.80) HoldCRTX Cornerstone Therapeutics Inc $5.49 1.0% -4,030.00 ($22,124.70) ShortALE Allete Inc $37.56 1.0% -580.00 ($21,784.80) HoldVVUS VIVUS INC $7.64 0.9% -2,820.00 ($21,544.80) HoldCFR CULLEN/FROST BANKERS $59.39 0.9% -360.00 ($21,380.40) HoldPC Panasonic Corp $13.42 0.9% -1,590.00 ($21,337.80) HoldWTR Aqua America Inc $22.32 0.9% -930.00 ($20,757.60) HoldNVEC NVE Corporation $59.15 0.9% -350.00 ($20,702.50) Hold

Short Portfolio



MARKET HAVEN MONTHL

BTX BIOTIME INC $7.01 0.9% -2,940.00 ($20,609.40) ShortRIGL RIGEL PHARMACEUTICALS $7.30 0.9% -2,800.00 ($20,440.00) HoldHTLD HEARTLAND EXPRESS $16.63 0.9% -1,200.00 ($19,956.00) HoldCBSH COMMERCE BANCSHARES $40.00 0.9% -497.00 ($19,880.00) HoldXXIA IXIA $17.71 0.8% -1,090.00 ($19,303.90) ShortTXI TEXAS INDUS $40.13 0.8% -480.00 ($19,262.40) HoldCADX Cadence Pharmaceuticals, Incorporated $7.61 0.8% -2,510.00 ($19,101.10) ShortCYN CITY NATIONAL $59.49 0.8% -320.00 ($19,036.80) HoldCMA COMERICA INC $38.83 0.8% -470.00 ($18,250.10) Hold

CVC CABLEVISION SYS'A' $36.98 0.8% -480.00 ($17,750.35) HoldAA ALCOA INC $16.68 0.8% -1,060.00 ($17,680.80) HoldMYGN MYRIAD GENETICS $18.47 0.7% -920.00 ($16,992.40) HoldOMER Omeros Corp $6.56 0.7% -2,580.00 ($16,924.80) HoldLM LEGG MASON INC $36.12 0.7% -460.00 ($16,615.20) HoldOMX OfficeMax Inc $13.77 0.7% -1,150.00 ($15,835.50) HoldXNPT XenoPort, Incorporated $7.18 0.7% -2,110.00 ($15,149.80) HoldONB OLD NATL BANCORP(IND) $11.17 0.6% -1,130.00 ($12,622.10) HoldMLM MARTIN MARIETTA MATERIALS $88.08 0.5% -140.00 ($12,331.20) ShortCWT CALIF WATER SVC GRP DELAWARE $35.13 0.5% -350.00 ($12,295.50) HoldCGA China Green Agriculture Inc $8.00 0.5% -1,510.00 ($12,080.00) ShortOREX Orexigen Therapeutics, Incorporated $3.30 0.5% -3,620.00 ($11,946.00) HoldIDRA Idera Pharmaceuticals Inc $2.70 0.5% -4,000.00 ($10,800.00) ShortCNW Con-way Inc $32.19 0.5% -330.00 ($10,622.70) HoldJNY The Jones Group Inc $13.50 0.5% -770.00 ($10,395.00) HoldBXS BANCORPSOUTH $15.78 0.4% -640.00 ($10,099.20) HoldHQS HQ Sustainable Maritime Indust $4.17 0.4% -2,290.00 ($9,549.30) HoldFTR Frontier Communications Corp $8.42 0.4% -1,040.00 ($8,756.80) HoldPBCT PEOPLE'S BANK $13.11 0.4% -660.00 ($8,652.60) HoldBKS BARNES & NOBLE $13.71 0.4% -600.00 ($8,226.00) Hold

Market Haven Monthly Newsletter - March 2011

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Transcript of Market Haven Monthly Newsletter - March 2011