The blog model portfolio registered its worst period of relative performance for quite some time.

The portfolio barely remained in the black throughout Q1, posting just a 1.3% positive return.  This compares quite poorly  to both major world indices as well as the representative peer sample.

http://www.reuters.com/article/idCNLDE62S0QM20100401?rpc=44

13 of the 15 publicly available mutual fund peers in the sample outperformed the blog model portfolio in the first quarter of 2010.

TWWDX ($15.94) posted a 2.8% return in  Q1.

ABIYX ($14.08) posted a 1.2% return in Q1.

DODGX ($102.20) posted a 6.3% return in Q1.

DODFX ($33.03) posted a 3.7% return in Q1.

ANCFX ($34.02) posted a 3.9% return in Q1.

FCNTX ($60.28) posted a 3.4% return in Q1.

BLUEX ($22.92) posted a 6.1% return in Q1.

UMBWX ($29.83) posted a 2.3% return in Q1.

TGVAX ($25.26) posted a 1.8% return in Q1.

HAINX ($55.26) posted a .06% return in Q1.

CGMFX ($30.72) posted a 3.2% return in Q1.

OSMAX ($20.26) posted a 4.3% return in Q1.

PRMSX ($31.02) posted a 3.1% return in Q1.

NTKLX ($34.19) posted a 5.5% return in Q1.

SAHMX ($10.40) posted a 1.4% return in Q1.

The average return for the quarter among the 16 funds (inclusive of the blog model portfolio) was 2.2%.   With a quarterly return of 1.4%, the model portfolio underperformed the average by 36.4%

To attempt rationalizing such a period of near term underperformance would merely be a disservice to readers.  Suffice it to say, the vast majority of equity managers on the planet, both professional and amateur, produced superior results in the first fiscal quarter of 2010.  The blog model portfolio was clearly in the bottom quartile.

The standard of excellence among large cap globally diversified funds was, once again, the Dodge and Cox Stock fund (DODGX). This portfolio demonstrated outperformance vs. all major global indices, irrespective of market, concentration and cap weight.    DODGX has a large cap value emphasis, with the current bulk of its holdings in US companies.

For a change, global markets were led by US, Japan and British equity indexes.

The NASDAQ advanced by 5.7% in Q1.

The Nikkei advanced by 5.15% in Q1.

The FTSE advanced by 4.93% in Q1

The S&P 500 advanced by 4.87% in Q1.

The Dow Jones advanced by 4.1% in Q1.

The TSX composite index advanced by 2.5% in Q1.

The MSCI Asia-Pacific Ex Japan advanced by .98% in Q1

The Shanghai index fell by 5.13% in Q1.

Overall, global equity markets, as reported by the MSCI all country world index, advanced by 2.66%.

The aforementioned appreciation of the US and Japanese markets, in particular the technology weighted NASDAQ and Nikkei, relative to other markets, suggests a rotational shift was underway during Q1. Portfolio managers look to have shifted a portion of portfolios to technology companies.    The rationale for such a move would be anticipation of a sustained up tick in manufacturing orders.

Technology and capital equipment suppliers look to be in the early stages of a cyclical recovery.

In 2009, the CIA.gov website reported that United States gross fixed investment was a lowly 12.6% of GDP.   This placed the US at 144 of the 152 countries in the coverage universe. 

https://www.cia.gov/library/publications/the-world-factbook/rankorder/2185rank.html?countryName=United States&countryCode=us&regionCode=na&rank=144#us

The ONLY nations reporting fewer capital investments in 2009 than the US, on a relative basis, were Malta, Malawi, Burundi, Trinidad and Tobago, Cuba, Cote d’Ivoire, Turkmenistan and Tajikistan.  If 2009 was viewed in isolation, the US would have to be added to a peer group of largely failed nations.

This entry records total business spending on fixed assets, such as factories, machinery, equipment, dwellings and inventories of raw materials, which provide the basis for future production.  It is measured gross of the depreciation of assets, i.e., it includes investment that merely replaces worn-out or scrapped capital.

Taking into account standard actuarial assumptions on useful lives of operating equipment, US industry did NOT invest sufficiently during 2009 to even maintain output at current levels, let alone budget for output increases.  Even the current poster children for fiscal imprudence, the PIIGS (Portugal, Ireland, Italy, Greece and Spain) bested the US in 2009 when it came to capital investments.  These five nations reported investments of 19.7%, 15.4%, 19.2%, 15.6% and 26.6% of their 2009 GDP respectively.   Greece, as an example, invested almost 25% more than the US, during 2009, on a per capita basis.

The inadequate level of  US capital investment during 2009 appears to have a very real bright side, on a go forward basis.

The United States is NOT a failed nation; it is clear that pent up demand for capital investment exists.  If one operates under the assumption that the US economy is NOT operating in a run off mode, US industries need to rapidly increase spending simply to maintain status quo.  In order to reach the global average business investment (23.6% of GDP) , US businesses must immediately invest more than 11%% of GDP, or $1.5 trillion per annum.    If the US business remains content with matching average per capita investments in other developed nations, an investment gap equal to 7% of GDP, or $1 trillion per annum, presently exists. 

Such an amount to be devoted towards capital investment may not be immediately forthcoming, may not be in the amount required, nor may be it sustained.  Nevertheless, the global implications, for even a modest influx of US capital equipment orders, seems to be understated by professional investors.  Should US domestic companies make new purchases at a level sufficient to maintain the nation's present economic standing, such an order flow could boost global GDP by about 1.4% per annum.  An investment of this magnitude will be inflationary, no “ifs”, “ands” or “buts” about it.   As interest rates start to advance, banks will move money out of the financial economy, to make loans for businesses in the real economy.  Leading central bankers are already laying the groundwork for a wider inflation band in policy planning.

http://www.bankofengland.co.uk/publications/inflationreport/infrep.htm

I predict that such a capital investment boom, should it not already be underway, appears imminent.   

The beneficiaries of a near term capital equipment boom would initially benefit producers, rather than consumers.

If correct, this would represent an important shift over the previous 2 consumer driven expansion periods, and will have implications upon investment allocation models.  The much maligned capital goods sectors might generate relative outperformance, for several quarters to come. 

Large capital equipment suppliers all around the world will benefit.  At some point in the middle of the cycle, small companies could see a meaningful increase in orders.  I  continue to emphasize ownership of larger companies at this stage in the cycle, but would NOT suggest the sale of smaller manufacturing companies that seem to be lagging, all else being equal.   As the marginal output in any economy, smaller companies generally only produce meaningful increases in revenue and profit, in latter stages of economic upswings. By the time investors see evidence of this trend, a considerable portion of the move to smaller cap investments is usually complete.


http://finance.yahoo.com/tech-ticker/yes-it's-a-v-shaped-recovery-risk-of-double-dip-%22relatively-low%22-liz-ann-sonders-says-461290.html?tickers=%5EDJI,%5EGSPC,SPY,TLT,UUP,TBT,SCHW

The economic upswing appears to be real and sustainable, in my view. 


In the quarter ahead, there may be some meaningful earnings surprises from sectors which have been laggards since early 2008.   There will not likely be any large scale changes to the portfolio, despite the trailing period of poor results.  With a philosophy of being wholly invested in equities, I am comfortable with the prospects of higher inflation.  

http://finance.yahoo.com/tech-ticker/bear-market-in-bonds-could-trigger-%22melt-up%22-in-stocks-sonders-says-461389.html?tickers=%5Edji,%5Egspc,spy,dia,%5Eixic,qqqq,TBT

Purchases for the blog model portfolio will occur this quarter, based upon an expected flow of dividends that have been declared.  I am now paying particular attention to companies which were acquisitive during the economic slowdown.    At least one new prospective investment will be reported on in detail, in the coming months.