2010 was a great year in the markets, and a decent year for the Rayno Portfolio, but let's not get too excited. It's like being happy about getting a new Toyota after your buddy totaled your Porsche. That's how I view the 2009/2010 market in the context of the 2008 financial debacle. Yes, I like the Toyota, but can I get the Porsche back too?
 
The Rayno Model Portfolio delivered a solid 9% gain -- 10.4% total if you include dividends. This is a slight underperformance in the S&P gains. But please keep in mind that we advised readers to go to 100% CASH (or better yet gold) at the beginning of 2008 -- and so our 2008 Model Portfolio lost no money in one of the worst financial crises in history. A 10.4% gain looks a lot better when you managed to avoid the 35% decline two years earlier.

The Rayno Model Portfolio still has a track record of having NEVER LOST MONEY, and the cumulative returns since 2005 are now in excess of 40% total since 2005. Again, a lot of this goes back to the decision of going to 100% cash in 2008.

Sometimes the best way to make money is to avoid losing it.

The results of the model portfolio are below. To summarize, there were some volatile results in our picks. Our best pick was silver, via the Silver ETF (SLV), which was up 70%. As you know we have been fans of the precious metals for many years, and we believe they are in strong, secular bull markets that will continue. I'm still a huge silver bull.

To recap how the portfolio works: In leading up to the January of each year, I use several stock screening and technical analysis methods to pick stocks I believe will have favorable returns. I then buy a hypothetical $10,000 of each stock ($100,000 total portfolio), and we let it ride as a passive portfolio for the entire year. It is never rebalanced or adjusted.

The 2010 Rayno Model Portfolio performance summary:

Symbol Last     Bought                 Value         Net          %Change     Div. Yield         
AMX      56.38   01/04/2010     11,557.90     1,541.85     15.39%         .40%
DO       64.15    01/04/2010     6,415.00     -3,692.00     -36.52%          1%   
LLY       35.07   01/04/2010     9,749.45        -232.39     -2.32%         5.6%      
MSFT     28.07   01/04/2010     9,066.61        -940.24     -9.39%         2.3%   
NYB       19.12   01/04/2010     13,199.70     3,288.20     33.17%         5.2%   
SLV       28.59   01/04/2010     16,582.19     6,578.79     65.76%           N/A   
CTSH     73.08   01/04/2010     15,348.90     5,510.90     56.01%           N/A   
SOHU     64.87  01/04/2010     11,029.59         950.50      9.43%           N/A   
EWZ       74.04   01/04/2010     9,625.20        -419.50     -4.17%        3.54%   
CGA         9.31   01/04/2010     5,865.29      -4,054.59   -40.87%            N/A       

Total     108,439.86     8,531.51                                      8.53%           1.8%

Total Return: 10.4% with dividends

The stocks that prevented us from having a 15% year were Diamond Offshore (DO), a drilling company that took a 35% hit on the British Petroleum Deepwater Horizon disaster, and China Green Agriculture (CGA). As for Diamond Offshore, really nothing good to say about that -- it was an environmental and economic catastrophe that was hard to foresee and resulted in the Obama Administration banning deepwater drilling, which killed DO's numbers. As for CGA, yes, I got suckered into the faddish marketing ploy that included the words "China" and "Green" and "Agriculture." Sorry.

But back to the standouts. America Movil (AMX), the Mexican mobile phone company founded by billionaire Carlos Slim, bounced back with a 15% gain; Cognizant (CTSH), the India IT firm, returned a healthy 56%; and New York Community Bancorp. (NYB), a solid regional bank, not only returned 33% but also paid you a 5% dividend as it benefitted in the restructuring of the banking system.

And yes, I still own Microsoft. I think it's cheap. And it will probably go nowhere, but it has the cash-flow generating power of your local electrity utlility and it pays a 2% dividend, so it's probably worth keeping around in some smallish amount. No, it probably won't make you rich.

As I mentioned, this year's results were more volatile than usual. Usually I focus on a screening discipline results in a less volatile portfolio. As we mentioned, we got hit by two bad losers – one of which was a "Black Swan" type event (Deepwater Horizon), which makes me think I should introduce a new "cut 11% losers immediately" rule for future portfolios, as I think that's always a good portfolio management practice.

What's my outlook for 2011? I think there will be more volatility, but the markets -- especially commodities -- are likely to climb higher in the first half of the year on the back of global central bank accomodation. Those are fancy words for money-printing.

But don't get suckered into complacency. It is still important to have a cautious attitude, especially given the "rah-rah" attitude of the financial media, which appears to have the memory span of the cockroach. Also, as evident in sentiment measures such as the AAII survey, which shows as many bulls as at any time since 2007. If this doesn't make you a bit nervous I don't know what does. A January correction would not be unexpected.

So, given these caveats, what will our approach be in 2010? First off, given some changes to the Rayno Report -- and a new job -- the model will likely take on a new format and be somewhat delayed. More news to come on that!

I continue to be bullish on commodities, and particularly energy, which underperformed in 2010. If the global economy continues the recovery, there is only a narrow slice of marginal oil production capacity to fuel the entire world. I think that one of the most powerful strategic portfolio moves could be to go overweight energy in 2011. This includes energy "blue-chips" such as CVX and EXM, as well as producers such as Hess (HES) and Conoco (COP) (Disclosure: I'm long all of these stocks). For those of you interested in energy limited partnerships and trusts, many of these have good yields and should also continue capital appreciation in 2011.

As for the precious metals "bubble" talk, I think it's overdone. I've noticed many of the people calling for the "bubble top" in gold are the same people that missed the entire gold bull market in the first place (now 9 years running). They can't wait for it to be over because they missed the whole thing. Gold has been averaging a 15% annual return for AN ENTIRE DECADE and people are still talking about this move as if it's a fluke. it's called a secular bull market, folks.

The fact is that secular bull markets don't typically end with the type of action we have seen in gold (a grind higher). They usually end with an explosion (think of Nasdaq stocks circa 1999). I still believe this kind of action is coming in the metals. And with the central banks taking unprecendented action, you need at least a small allocation of precious metals to protect yourself against a full-blown currency meltdown.

With that, a wish you all a Happy New Year! Be safe and happy, and remember, the market is just about a bunch of numbers.

Family, friends, and fun are more important.

(Disclosure: Long pretty much everything discussed in this review)

Sincerely,

R. Scott Raynovich