MPG Core Tactical 60/40: November 2014 Performance Update

MW-BB798_sm6040_20130422180557_MDDear Mr. Market:

Are you scared of flying? Even if you’re a seasoned traveler and airplane turbulence never fazes you, there are certain flights that would get your attention. If the stock market behavior in October was an airplane flight you undoubtedly survived a violent voyage. It would make the month of November seem like the smoothest flight ever, although anyone in their right mind didn’t trust in a safe landing until the wheels actually touched the runway.

After October brought triple-digit moves for the Dow Jones in 16 of the 23 trading sessions, we only experienced one such day in the entire month of November. Even though the Fed announced the end of its bond-buying program, the markets yawned and continued to stretch out to new highs. Small caps were also on a tear for about six straight weeks until literally the last trading day of November and they ended up sputtering in for a negative month.

Another developing story that most sectors of the market have shrugged off is the huge plunge in oil prices. The largest monthly percentage drop in West Texas Intermediate (WTI) crude oil occurred in November. Trading lower than $65 per barrel, crude oil has not seen this long of a losing streak (five straight months down) since the sky was falling back in 2008. We’ll touch more on this in our closing section but prices could fall even into the $45-$50 range which would obviously cause continued mayhem for energy and oil stocks.

Here’s the current summary of the MPG Core Tactical 60/40 portfolio mix, which is updated as of this writing (December 1, 2014).

Click here to compare our portfolio against the benchmark.

What adjustments did we make? 

The following moves were made during the month of November:

11/21/14:  Sold 47 shares of Vanguard REIT index (VNQ) @ $79.20 (~$4k worth). REITs continue to do well as we have noted before but with about 21% profit we rebalanced our exposure down to roughly 5% of the portfolio.

11/25/14:  Sold 300 shares of iShares Investment Grade Corporate Bond Index (LQD) @ $119.12 (~$36k total). Freed up some additional cash to add to some positions that have been hit.

11/25/14:  Bought 1,000 shares of Clean Energy Fuels (CLNE) @ $6.30 (~$6k)

11/25/14:  Bought 1,000 shares of InvenSense Inc. (INVN) @ $14.99 (~$15k)

11/28/14:  Bought 400 more shares of Vanguard All-World Index (VEU) @ $49.18 (~$20k)

We’re not going to brag about “timing the market” because it’s (1) a futile endeavor (2) not what this exercise is trying to prove; quite the opposite actually, and (3) go back reason #1.

That being said, however, the small adjustments we made in October all worked out well. (Quick recap: We sold some TIP to raise cash and bought back Tesla (TSLA) at $221.65, opened a new position in Target (TGT) at $60.15, and bought more S&P 500 (IVV) at $194.01.)

TSLA went as high as $258/share before pulling back a bit and Target is up over 20% for us in just a month. Even with these short-term “homeruns”, the above stinkers in the portfolio are true performance anchors right now. The idea here is to ideally lower our cost basis and should any of these get a bounce on news that we are waiting for (such as an acquisition) or institutional buyers realizing that they are simply oversold, it will allow us to sell and move on.

This ‘invisible handcuff’ is what hampers most investors and that’s what the MPG Core Tactical Portfolio exercise is all about. Overall we have a stock market that is much like a “rising tide and it should lift all the boats”, but that’s not always the case. In some instances an index is buoyed up by a huge stock like Intel (INTC)…and although we don’t own it in this portfolio, it was one of our best holdings for My Portfolio Guide clients over the past year and a half. After unrealized profits north of 60% with INTC shares, we finally had to sell it but of course still own the stodgy index! When we wrap up next months final MPG Core Tactical Portfolio summary for 2014, you’ll undoubtedly see that the boring index and passive use of Exchange Traded Funds (ETFs) works.

With our standard and passively managed 60/40 Benchmark we made the monthly and automated adjustment to the allocation. On the first trading day of the month we sold some equities (what went up) and with the proceeds we bought back more bonds (what went lower):

12/1/14:  Sold 23 shares of IVV @ $208.58 (S&P 500 Index)

Bought 69 shares of BND @ $82.87 (Vanguard Total Bond Index)

As of this writing the MPG Core Tactical Portfolio is at +4.08% YTD. The passively managed 60/40 Benchmark is at +11.13% YTD. The S&P 500 is solidly back in double digit return territory at +13.13% but the International index we track is still negative at -1.13%. Emerging markets, on the other hand are +4.95% YTD. The leading asset class still remains to be in REITs at +23.92% YTD!

Where are we going from here?

In this section last month we touched on looking at some investments that have been beaten up and could potentially bounce. In particular, we talked about Gold (GLD) as it’s been oversold and in a downward trend since mid-2011. Gold (and some other precious metals) finally had a positive month and even kept pace with a hot stock market as it rose almost 3% for the month. What’s the old crystal ball telling us this month?

Tying back into our initial notes about oil, it can drop quickly but also come back just as fast. While we don’t suggest buying any oil related companies right this instant, keep your pencils sharp and begin crafting your shopping list. In our next edition you will likely see a purchase or two that is related purely to how oversold some of these oil and energy companies are.

The timing of this crude oil slide couldn’t have been better for the global economy! You can make an argument that the almost 40% haircut in oil prices is almost like a global tax cut. Had this not happened so dramatically (mainly due to OPEC and simple supply issues), the Fed’s QE tapering would have caused a lot more noise and market pain. That day will come but not this month! For the time being consider lower oil prices as pure global fiscal stimulus.

Lastly, we always mention how Mr. Market could care less about what month we’re in and whether it’s up or down historically. As of late anyone who tries to loosely connect the dots and either scare you or hype up their hypothesis with data on monthly returns…has been flat out wrong. How does that bode for the month of December?

December has actually been the best month of the year since 1950 as it averages a return of about +1.7% for the S&P 500. December returns are even more robust after mid-term elections. Although a nasty and quick correction is always a possibility, the reality is that the world and its central banks continue to “kick the can down the road”. Struggling economies in Europe, Japan and China will stay afloat for just a bit longer with all of them announcing additional stimulus programs.

In summary, even though it doesn’t feel right to stay fully invested in these markets, the odds favor the bulls in the near-term and it’s therefore forcing us to let the “trend be your friend”.

See you next month!

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