The Big Picture For The Week of September 18, 2005

I had several questions come in during the last few days. Here are the questions (paraphrased) and my answers.

One asked about my thoughts about the hit Walmart took during the switch to the float method of calculating the S+P 500.

If you don't know, a lot of Walmart stock came out of the index as a result of the changes. I'm not sure if the question behind the question is should Walmart be bought here. All I can say is I have no interest in the name. From a market cycle stand point, companies larger than $100 billion have lagged and I think will continue to do so.

From a fundamental stand point the growth has slowed dramatically in the last few years and I am not sure how it can ramp up again. I live in the biggest town in my county, our town has only 35,000-40,000 people and we have two Walmarts. The point being there will be no more Walmarts here.

There are many other parts of the country that are also saturated to the point that there will be no new Walmarts. Sure they can expand overseas but there might be easier places in big box retail to make money while Walmart figures out how to market bok choi and Dodger's t-shirts in China.

One emailer asked about ADR sites. I use two of them. One is ADR.com and the other is the Bank of New York's ADR site.

A third question asked about small cap stocks. The emailer mentioned that he has read several multicap managers have been rotating out of small cap lately thinking the run is over.

I have touched on this before in a couple of different ways. The first thing here is the market history on this. Small cap typically leads at the start of a bull market cycle. The average period of time that small cap leads is about 3 years. There have been times where small cap has lead for as long as 5 years.

So far this year small cap has out performed by a matter of basis points. If small cap outperforms large cap this year, that would be six years in a row. I believe that would be a record. So it makes sense to at least question whether small cap will soon lag large cap. In some of the six years the lead of small cap has been very narrow, perhaps that invalidates the six year issue, I'm not sure.

With the history lesson out of the way, the reader wants to know what I think. I doubt he will like my answer. I don't think in terms of how much small cap or large cap I have. The way I look at it is by average cap size of the portfolio. The average cap size of the S+P 500 is about $90 billion. These days the average cap size of client portfolios is around $40 billion up from $35 billion a few months ago.

Depending on what is going on at the time, increasing cap size might mean selling a smaller name
or it might mean adding a a larger name with out selling anything. Hence the logic behind thinking of cap size in this way.

While I don't know exactly when, I imagine my next move will be to make the average cap size a little bigger than it is now. The visibility to this is that if things go I think they might next year I would add a little more foreign to the mix, some of which will increase the average cap size of the portfolio.