Market Continues Strength Through the Earnings Season
During this time last month, market uncertainty was swirling around our next Federal Reserve chief, the government was still shut down and we were heading toward a possible government default. Fortunately, these uncertainties have been cleared up and our earnings season was strong enough for the market to continue on its upward path. The bandages that our government put in place gave lawmakers some more time to hammer out a long-term policy to reduce our federal spending deficit; however, this looming issue has to be addressed sooner rather than later.
For October, the Model Shadow Stock Portfolio pulled back slightly after its strong recent gains, losing 0.6% and underperforming the Vanguard Small Cap Index fund (NAESX), which gained 3.3%, and the DFA US Micro Cap Index fund (DFSCX), which was up 3.5%. Year-to-date, the Model Shadow Stock Portfolio has now gained 46.7%, well ahead of the Vanguard Small Cap Index fund, which has gained 30.7%, and the DFA US Micro Cap Index fund, which is up 34.9%. The Model Shadow Stock Portfolio has a compound annual return of 17.9% from its inception in 1993, while the Vanguard Total Stock Market Index fund (VTSMX) has gained 9.1% annually over the same period.
The Model Fund Portfolio was up 3.4% for October and the Conservative Portfolio (75% Model Fund Portfolio and 25% iShares Barclays 1-3 Year Treasury Bond ETF) was up 2.6%. This compares to a 4.2% gain for the Vanguard Total Stock Market Index fund (VTSMX). Year-to-date, the Model Fund Portfolio has gained 21.5% and the Conservative Portfolio is up 15.9%, compared to 26.3% for the Vanguard Total Stock Market Index fund. The Model Fund Portfolio has a compound annual return of 9.3% from its inception in June of 2003, while the Vanguard Total Stock Market Index fund has gained 8.8% annually over the same time period.
NEW THIS MONTH
There were no transactions for any of the Model Portfolios during the month.
Note: Model Shadow Stock Portfolio Update: Emergency Sale of FAB Universal Corp. (FU)
FAB Universal Corp. (FU) is a leader in digital media entertainment sales and distribution. FAB delivers media to its customers worldwide through intelligent kiosks, retail stores and franchises, and online through Apple iTunes and the Google Android Store. FAB has distributed billions of movie, music, podcast, TV show and other digital files to consumers in 240 countries through three business units: digital media services, retail media sales and wholesale media distribution. FAB Universal promotes itself as the toll booth for the world’s emerging markets through FAB’s intelligent media kiosk networks, where customers can download copyright-protected movies and music to their portable storage devices.
Allegations have been raised that FAB may have issued materially misleading business information to the investing public. On November 14, 2013, the blog Alfredlittle.com issued a report asserting that FAB Universal misstated its financial performance and engaged in piracy. Alfredlittle.com is owned and operated by Jon Carnes, who uses the blog to publish his investment opinions of publicly traded companies around the world, with a special focus on companies operating in China. Carnes claims on his blog that FAB’s media kiosks are loaded with pirated movies and that FAB has overstated the number of media kiosks that it deployed. He asserts that FAB’s business in China is a fraction of what it purportedly claims in its filings with the U.S. Securities and Exchange Commission.
FAB Universal denies the allegations. The company issued a press release in which it states its “vehement denial of the recent allegations raised by short-sellers in their self-serving ‘reports’ and reaffirmed its commitment to providing the company’s shareholders with accurate information. FAB’s board of directors is working expeditiously to gather all the relevant information necessary to respond to these misleading and inaccurate reports in an appropriate manner and to report back to its shareholders as quickly as possible.”
We are selling FAB Universal (FU) on an emergency basis. While there is still a lot of debate about the company, it is clear that, at the very least, the data used in the decision to buy the company was flawed and, at worst, there may be extensive fraud. The January 2014 AAII Journal Model Portfolios column will discuss this in more detail.