The model portfolio is composed of international investments and is priced in US dollars. All foreign currency holdings are converted to US dollars, based upon closing currency valuations as of the date of publication. Views are solely that of the author, and will differ materially from conventional analysts as well as the investing public at large. The purpose of the model portfolio is to monitor performance of investments written about in this blog, and is not to be construed as research. The blog is written for entertainment purposes only, and does not represent investment advice in any way, shape or form. Always consult an advisor prior to engaging in any investment activity.

The blog model portfolio declined 2.06% in the 2nd quarter of 2012.

At the close of the fiscal quarter, the account was valued at $2,160,006 US.   This decline was the smallest among the peer group sample in Q2 and placed the account in the #1 spot among the peer group funds for the quarter.

For the year to date, the blog model account had produced a net return of 12% US. This placed the account in the #1 spot among the peer group funds.

Returns of the representative peer group for the quarter were as follows.

1.     TWWDX ($15.51).   -5.2% in 2nd quarter. 

2.      ABIYX ($10.65).     -11% in  2nd quarter. 

3.      DODGX (($110.47).  -3.6% in 2nd quarter.

4.      DODFX ($30.21).  -8.3% in 2nd quarter.

5.      ANCFX ($37.81).  -3.9% in 2nd quarter.

6.      FCNTX ($74.81).  -3.5% in 2nd quarter. 

7.      BLUEX ($23.57).  -12.4% in 2nd quarter.

8.      UMBWX ($29.24).   -8% in 2nd quarter. 

9.      TGVAX ($24.67).  -7.5% in 2nd quarter. 

10.   HAINX ($55.71).   -7.2% in 2nd quarter. 

11.   CGMFX ($26.11).  -12.4% in 2nd quarter. 

12.   OSMAX ($19.68).  -7.1% in 2nd quarter. 

13.    PRMSX (29.74).  -7.4% in 2nd quarter.

14.    NTKLX ($34.47). -9.5% in 2nd quarter.

15.    SAHMX ($8.96).   -9.8% in 2nd quarter.  

16.   SEQUX ($153.17).  -5% in 2nd quarter.

Overall, the peer group posted an average decline of 7.6% in the second quarter of 2012.

A new peer group fund was added to the comparison list in the second quarter of 2012.

The world reknowned Sequoia Fund, which was named as Morningstar's fund of the year, and was the only major equity fund in the United States to have posted a strongly positive return in 2011, had been included in the appraisal sample. 

http://quote.morningstar.com/fund/f.aspx?t=sequx

The Sequoia Fund has many attributes that makes it an appropriate peer to use as a benchmark for the blog model account.  SEQUX has a policy of not trading; the average holding period for stocks within the fund is typically in excess of 7 years.  The fund lets winners ride, to the point that the fund can hold, by broadly based fund standards, a concentrated portfolio.   

http://www.morningstar.com/cover/videocenter.aspx?id=450975

For what has been, thus far, a highly typical economic cycle, and for what would certainly be considered a decent first half of the fiscal year for investment returns, investors sure seem to be down in the dumps.

The top performing major market index, thus far in 2012, has been the NASDAQ. For the six months ended June 30th, 2012, the NASDAQ composite rose by 12.66%.

The NASDAQ holds few cyclical businesses; this, in no small part,  aided the relative outperformance vs other indexes.  A smaller allocation in energy, mining and financial services also helped the results of RMG#1.  RMG#1 held less than 16% of the account in those sectors, vs a 28% June 30th weighting by the S&P 500. 

On the year to date, the Dow Jones Industrial Average is up by 5.4%.   The S&P 500 is up by 8.3%. 

Such index performance, +5.4%, +8.3% and +12.66%, in the first half of 2012, by the three major American indexes, are completely at odds with outpourings of terror and despair foisted upon the public by mass media thus far in 2012.   The undue attention paid to Greece, and most recently, to the banking crisis in Spain, all seemed a bit surreal.  Investors have, as of late, been obsessed with macro information that is really completely irrelevant to the daily business activities of many publicly traded companies. 

From afar, the fixation appears manic.   If an investor wants to avoid the business risk of Greece, Italy and Spain, just don't own stocks that are  Greek, Italian and Spanish; there's no need to blow out one's entire portfolio to minimize the long term risk of owning bad businesses in weak economies.  The treatment for contact dermatitus is NOT amputation, it is avoidance of the specific irritant. I am persistently irritated by Greece, my solution is to avoid Greek investments. It's really that simple.

Italy's problems; please!  A number of the fiscal issues noted in that nation were entirely self-inflicted; the former prime minister had eliminated property taxes on personal residences four years ago.  This blew a gaping hole into the national accounts; property taxes generally represent a significant amount of fiscal revenue.  In the case of France, property tax income generates more than 8.5% of national revenues.  In Italy, the elimination of personal property taxes has resulted in net property taxes dropping to less than 4.8% of national receipts, the lowest percentage in the eurozone.  

Italy's revenue problems can easily be remedied; charge residential property taxes on primary residences, based on current market assessments, and the whole issue of budget deficits and refinancing in Italy should abate rather quickly.  It will also stop a myriad of tax avoidance schemes that spring from the seemingly innocuous residential exemption. An astonishing number of residential properties in Italy are nothing of the sort, they are massive businesses in disguise.  For example that large acreage of wine producing grapes, of which whose owner provides "free room and board" to "tourists" from Africa whose holiday time  is spent harvesting and processing said grapes into wine; said wine is then subsequently gifted in volume to third parties outside of Italy, who gift the residential wine grower in return,for example, with a "small personal watercraft" (an expensive yacht for delivery in another country), which is then sold for tax free cash as the yacht is personal property and not Italian business income; this is clearly a multinational business, and should be taxed as such.   As this multinational winery has no employees, doesn't charge any rental income on the many properties that it's "guests" reside at and generates no taxable income, Italian law considers the vast acreage to be a personal residence, and is therefore tax exempt.   When one cuts off the head of the snake, that being the personal property tax exemption, entire tax avoidance plans collapse immediately and Italy would  quickly find itself with an enormous revenue base.    The current non-elected technocratic leader of italy, Mario Monti, is working on just that premise, as I write this blog. His problems don't come from a lack of resolve, Monti's issues are that of effective implementation; many prominent Italians in office or those in key bureaucracies often benefit from such schemes, either personally or for family members. To stamp out Machiavellian practises and the parallel economies that have evolved and flourished over hundreds of years; that will take more than a few fortnights.

So, let's all take a deep breath and think dispassionately about investments for a quarter or two.  Not everything in the world depends upon the machinations of some scofflaws and tax evaders in Europe. Mexico, for example, had domestic stock markets that were very positive in the quarter that just ended.  Mexican GDP surpassed 4.6%, on an annualized basis in Q1, the highest growth rate in the Americas.  As a result, the Mexican themed investments in the blog model portfolio proved their mettle.  FMX touched an all time high.  After factoring in the substantial cash dividend payment in the quarter, ASR also touched a record high.  PVD advanced 6% in the quarter that just ended.  Chraui.b rose by 3.6% in the quarter.

http://news.investors.com/article/617471/201207091728/mexico-etf-at-top-of-world-markets.htm?ven=yahoocp,yahoo

If the blog model portfolio, a private account that doesn't have hundreds of analysts fussing around terminals and setting out on global inspection tours, if that account is able to own investments taking out ALL TIME HIGHS during periods of supposed panic and gloom, then maybe the world is not coming to an end.   Candidly speaking, for many companies that are poorly run, that generate low profit margins and that have no distinguishing characteristics to make them investment worthy, this media spate of bad sentiment is just another convenient excuse, in a decade of convenient excuses, to blame the global economy for the CONTINUED subpar performance of their businesses.  Perhaps, just perhaps, there's a whole bunch of businesses out there that are really, really poor investments to begin with.  

As investors, we don't have to own bad businesses that provide perpetual excuses for shortcomings.

We can choose to own high quality companies that deliver on their business models at all times.   If you, the reader, have a lousy equity account, then for goodness sake, just fix it.  If you own poorly performing and lesser rated mutual funds that don't deliver and all you do about the issue is to mope away about the poor global economy, well, stop moping and fix it.  And if you were under the assumption that you were a great stock picker and that has turned out to be incorrect; well, you can choose to fix that too.   Believe me, it is far more satisfying to own great companies than poor ones; the entire business of stock ownership is infinitely more profitable when you own many, many successful companies, as opposed to trying to time failures and bottom fish the lesser-thans.  And, at the end of the day, are we doing this for ego, or to make some money?

Investors that held a disproportionate percentage of their accounts in cyclical stocks such as energy, materials and financials, WERE hit hard in the current quarter.

Those who are overweight in cyclical indexes, such as the energy and financially oriented TSX in Canada, are now also down on the year.    The key word here is disproportionate; Canada has few consumer products companies of size and even fewer pharmaceutical giants.  

There has been a rather belated realization that high energy prices, in fact, represent a direct tax on consumers and manufacturers alike; when oil prices are high, this serves to dampen global economic growth.  Accordingly, global GDP revisions for 2012 have taken the forecast growth rate down to the range of 3.1%.   Should all continue to hold true for the balance of 2012, this will be the third year of declining growth in global GDP.    Such reduced growth levels are important, because it will have a bearing upon the sector weights that investors should hold to earn optimum returns. 

Companies that perform exceedingly well during periods of low commodity prices and low inflation are generally cash rich, high margin consumer products companies.

Consumers are the single largest beneficiaries of low energy prices.   I estimate that every $10 change in oil prices adds or subtracts about $100 billion US from the American pocketbook.    This same benefit/detriment applies for any consumer on the planet, to varying degrees.   The substantial year to date drop in energy, food and commodity prices should soon be evident in the pocketbooks of consumers and also on the bottom lines of companies that use such inputs in their daily business. 

Global GDP growth of 3.1%, when coupled with an abatement of inflation,  few wage pressures, declining costs of inputs and rising consumer discretionary incomes, suggests a near perfect business environment for producers of consumer staples and some consumer discretionary producers.

The blog model portfolio will be putting all of the cash balance to work in the days ahead.

The account received the proceeds from tendered shares of CVI Energy.  This has been augmented by the annual dividend payments that tend to accrue from most of the European and foreign ADR's on the market. 

I'll be looking to add to existing non cyclical position and build a couple of new position in large companies. Further, the portfolio will also look to add to an existing business that greatly benefits from the growing glut of Bakken crude in the North American market.  

In the days to come, I'll select the new names to add to the portfolio and will duly report the details, on the day of purchase.