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Ducks of the Dow Update

Dow Jones Industrial Average   11,109
Value Line Arithmetic Index   2095
30-Year Treasury Index   4.89%
20+ Year Treasury Bond Price (TLT)   86.87
Gold 1/10 Ounce (GLD)   $58.10

The Big Picture for Stocks
The 4-year cycle is negative into late 2006.

Technical Trendicator (1-4 Month Trend):
Stock Prices   Down
Bond Prices   Down
Gold Price   Up

Ducks of the Dow

Our Ducks of the Dow ("usually float, sometimes fly") strategy for the five stocks selected one year ago underperformed performed the Dow average over the intervening 12 months. The five stocks a year ago were American International Group, Disney, Intel, Coke, and Merck. The average performance for the five was a positive 1.89% compared to a positive 5.77% for the Dow as a whole. The Ducks of the Dow strategy is ahead of the market since inception in 1999 a bit less than 1% per annum. Thus, the model has beaten the market over a significant period of time. We have also beaten the market in 3 of the last 4 rolling 12 month periods. While not a spectacular performance, at least it has been better than an index fund.

Remember that this approach is not a very dynamic one, as we have arbitrarily limited ourselves to exactly 12-month time periods for holding each stock. Each quarter we use 15 technical and fundamental criteria to select 5 stocks in the Dow Jones Industrial Average. The model is largely formula driven, with very little subjective input except as needed to interpret the data. See the spreadsheet in the Archives and Performance section of our website for complete details.

My five picks for the next 12 months are:

Alcoa (AA, 30.56)
IBM (IBM, 82.47)
International Paper (IP, 33.61)
Microsoft (MSFT, 27.21)
Verizon (VZ, 34.06)

Most notable among the Dow 30 is not what groups look the best, but rather which are deteriorating. The most notable is the weakening picture of the financials. I would avoid this group.

General Motors is a tempting pick among the Dow stocks. One would think that sooner or later they will get their act together. But I was reminded this week of their root problem -- the quality of their fleet. I needed a rental car while my Toyota Tundra is in the body shop for a few days. The car rental company picked me up at the body shop in a Chevy. They gave me a Hundai to use while my vehicle is in the shop. So I got a nice chance to compare the two vehicles -- Chevy versus Hundai.

The Chevy was the same old utilitarian vehicle that I remember from days past -- a bit of a bumpy ride, a bit noisy, very plain. The Hundai, on the other hand, is a really nice car. It is very quiet, responsive, comfortable, with a snappy engine -- a pleasure to drive.

Yes, sooner or later GM will get its act together. As a proud American, I hope it is sooner rather than later. But I am skeptical.

The Markets

Bond market prices are in a free fall. Fortunately, our Technical Trendicator model has kept us out of the bond market. I just wonder how long it will take before this weakness spills over into the stock market.

Special Situations

Meanwhile, our aggressive stock-picking strategy is having a good year. The strategy is heavily weighted with metals and mining stocks which are zooming. Since inception, the rate of return on all stocks closed from the portfolio has been in excess of 200% per annum on average. This is a rate that cannot be sustained in the longer run. But it is fun while it lasts.


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