Going Into 2010 Locked and Loaded

It may be boring, but end of year rebalancing is a good time to take stock of your current assets and position yourself for the coming year. Based on my risk profile and age, my strategic asset allocation is the following:

Stocks
Domestic Large Cap 30%
Domestic Small Cap 10%
International Large Cap 10%
International Small Cap 5%
Bonds
Domestic Short-Term Duration 5%
Domestic Intermediate-Term Duration 10%
International Short-Term Duration 5%
International Intermediate-Term Duration 5%
Commodities 5%
Cash 15%

There are many other assets that people may consider, from managed future contracts to hedge funds, private equity and even real estate. However, the ones I've chosen are the essential assets every middle-class investor should own to provide maximum diversification (or simply the best bang for your buck).

For the past two weeks, I've been optimizing my domestic equity holdings, which numbered more than a dozen active mutual funds. I've cut that number in half, while maintaining diversity in everything from stock holdings to the management company itself. (You don't want one company, say Vanguard, managing all your assets because they rely on the same research for all of their funds, you want maximum diversity in research and thought leadership.) Out of full and fair disclosure, here are my U.S. stock funds:

Large Cap

• American Funds Growth Fund of America (AGTHX) - Hardly a better active fund out there.
• Fidelity Balanced Fund (FBALX) - A solid performing conservative large-cap blend fund with some fixed-income holdings.
  
• AIM Diversified Dividend Fund (LCEIX) - A great value fund with large dividend component expected to do well as the market stabilizes.
• iShares S&P 500 Growth Index (IVW) - A passive growth index fund chosen for maximum short-term return (play on technology) with ease of entry and exit (highly liquid, no short-term trading penalties)

Small/Mid Cap

• Royce Small Cap Value Fund (RYVFX) - Like American Funds, a top-notch active small cap fund manager. You want active managers (not index funds) to oversee your small cap assets because these markets are much less efficient than large cap markets (not a lot of people looking at the small companies) and an active manager can exploit this.
• Scout Mid-Cap Fund (UMBMX) - This is a new fund for me, so we'll see how it does. Gives greater diversity when paired with a small cap fund like Royce. Has a good track record and is managed by a fellow CFA charterholder, which gives me confidence.
  

Consumers Aren't Playing Grinch This Christmas

Ho, Ho, Ho!
Early indicators are pointing toward another strong corporate earnings season for the ending fourth quarter of 2009. Contrary to fears, revenue growth is picking up steam. Don't count the consumer out yet, the Blizzard of 2009 notwithstanding.
As always, the question is: How much of this is already baked into stock prices?

Experts are predicting stronger than average GDP growth this quarter (3.7%) and preliminary estimates show that such rosy expectations may be justified. GDP forecasts indeed may be too low. Could we see a 4.4% GDP number?? A blowout quarter by the US economy would be welcome relief to many. However, the specter of higher interest rates would send stocks lower if GDP is overheating. The Federal Reserve would raise rates sooner to cool off the economy and protect against the threat of inflation.

At best, earnings match or slightly beat expectations and fourth quarter GDP (announced at the end of Janurary) comes in as forecast. No reason to suggest it won't. So stay invested and even overweight in stocks.

The next possible bump in the road will be the end of March when the Fed ceases making the market in mortgaged-backed securities (home loans). Will the private sector step in and take over? If not liquidity will dry up and the market will suffer. Stay posted.

Merry Christmas!

Is this guy reading my blog?

Another expert concurs with my prediction that stocks gain north of 15% by early next year as I described in my earlier post Time to Put Money to Work

Read his analysis here:

Market to rise another 15%-20% by mid 2010: Strategist

Deal Shows Stocks Remain Undervalued

Comcast and General Electric have just agreed to a deal for a joint stake in media giant NBC Universal, which is currently a unit of GE. They value NBC at $30 billion.

For some investors like myself, this represents another strong signal that the stock market remains highly undervalued. The reason is that this is a real-time valuation that puts the network at almost 2 times annual sales ($30 billion/~$15 billion annual sales), while the average media network today is selling at just over 1 times sales.

Why are these companies valuing NBC at twice the market? Either because NBC is twice as valuable as the average media network, including stalwarts like Time Warner and Disney, (this I doubt) or that the overall market is undervalued.

One of the greatest mutual fund managers of all time, Bill Miller, uses current deals like this and asset valuations from recent bankruptcy filings as a basis for valuation of all his holdings. His record attests to this process.

As I explained in my earlier post, Time to Put Money to Work, there remains significant upside to this market based upon its current valuation. The bottom line is that the stock market's value is whatever investors are willing to pay for it. And today, for GE and Comcast, that is a lot more than what it costs.