Gulp. In our portfolio commentary from just four weeks ago, we said that "the market continues its heady ascent," and "if this keeps up unabated, it probably won’t end well.” A few days later, the Dow plummeted more than 500 points in just a few hours before partially recovering later in the day. After climbing back, it took another 250 point drop this past week. Nevertheless, due to big gains earlier in the year, the Dow is only down about 2%. The S&P 500, Nasdaq, and Russell 2000 (small cap index) are also all down for the year.

Thanks to our above-average cash and bond stakes (Daredevil portfolio aside), all of our model portfolios are showing slight gains through the end of February. However, that's not to say that our stock funds are suffering in comparison, as many of them are doing fine as well.

Investors finally got scared in February. Suddenly the idea of paying higher and higher prices for riskier "alternative" investments like REITs (real estate investment trusts), commodities, emerging market bonds, and stocks  no longer seemed like a sound investment strategy.

While this abrupt market pullback has made stocks more appealing, we’re watching for more fund sales to increase our stock positions . Stay tuned - it could happen shortly.

Our second-best performer, the Conservative portfolio, was up 0.58% in February as a general feeling of impending economic doom led to lower interest rates and bond prices rose in response.

Harbor Bond (HABDX) was also up 1.74% for the month as manager Bill Gross appeared to have successfully predicted yet another rate decline.

American Century International Bond (BEGBX) was up strong at 2.36% as the U.S. dollar continued to sink. We don’t expect a great deal of dollar weakness going forward, however, especially with interest rates going down.

When stocks sink, funds like Bridgeway Balanced (BRBPX) that utilize options demonstrate their low-risk benefits. The fund was down just 0.24% in the same month that the Dow was down over 2%.

One of our newer holdings, Janus Global Research (JARFX), somehow only fell 0.30% in February even though the fund is 98% invested in stocks. Perhaps that's due to its heavy weighting in large-cap "safer" foreign stocks, which did well in February in comparison to the rest of the world. Other stock funds like Vanguard U.S. Value, down 2.27%, and  Bridgeway Blue-Chip 35, down 3.19%, weren’t so fortunate.

Healthcare stocks generally fare well when the economy turns south, but that didn’t stop them from getting hit right along with the rest of the market this time. Health Care Select SPDR (XLV), our exchange-traded healthcare fund, was down 2.29%, right in line with the rest of the market.

In a market where investors are moving away from risk, sub-investment grade "junk" bonds had a surprisingly strong showing in February. Once again, falling interest rates drove up most bond prices, regardless of their rating. Vanguard High Yield Corporate (VWEHX) returned 1.51% in February, but we do not expect that level of success to last.

Gulp. In our portfolio commentary from just four weeks ago, we said that "the market continues its heady ascent," and "if this keeps up unabated, it probably won’t end well.” A few days later, the Dow plummeted more than 500 points in just a few hours before partially recovering later in the day. After climbing back, it took another 250 point drop this past week. Nevertheless, due to big gains earlier in the year, the Dow is only down about 2%. The S&P 500, Nasdaq, and Russell 2000 (small cap index) are also all down for the year.

Thanks to our above-average cash and bond stakes (Daredevil portfolio aside), all of our model portfolios are showing slight gains through the end of February. However, that's not to say that our stock funds are suffering in comparison, as many of them are doing fine as well.

Investors finally got scared in February. Suddenly the idea of paying higher and higher prices for riskier "alternative" investments like REITs (real estate investment trusts), commodities, emerging market bonds, and stocks  no longer seemed like a sound investment strategy.

While this abrupt market pullback has made stocks more appealing, we’re watching for more fund sales to increase our stock positions . Stay tuned - it could happen shortly.

Our Growth portfolio was down slightly (0.52%) in  February as stock declines cancelled out gains on the bond side, but that's not too bad compared to the 2%+ drops in the S&P 500, Dow, and Nasdaq.

American Century International Bond (BEGBX) was up strong at 2.36% as the U.S. dollar continued to sink. We don’t expect a great deal of dollar weakness going forward, however, especially with interest rates still going down.

Japan bucked the downward trend in stocks (for now…) with a 1.27% gain in our T. Rowe Price Japan (PRJPX) fund. We recently upgraded Japan following a year of poor performance.

Buffalo Mid Cap (BUFMX) scored a 0.71% return in an otherwise down market, partially due to its pre-minicrash (early February) strength in small-cap stocks.

When stocks sink, funds like Bridgeway Balanced (BRBPX) that utilize options demonstrate their low-risk benefits. The fund was down just 0.24% in the same month that the Dow was down over 2%.

Healthcare stocks generally fare well when the economy turns south, but that didn’t stop them from getting hit right along with the rest of the market this time. Health Care Select SPDR (XLV), our exchange-traded healthcare fund, was down 2.29%, right in line with the rest of the market.

p>In December, the S&P500 climbed 1.40% and the Dow 2.11%, while the NASDAQ slipped 0.68%. Small cap stocks rose, but only 0.34% (as measured by the Russell 2000 index), and bonds were weak as interest rates inched back up. The Lehman Brothers Long Term Treasury Index was down 2.14%, while the Vanguard Total Bond Index, which is less sensitive to interest rate shocks, fell by just 0.48%.

Stocks performed very well in 2006. Other than Japan, you would be hard pressed to find a stock market index anywhere in the world that was not up (and most by 10% or more) for the year. Even the fund categories that were lagging a few months ago, such as emerging markets and small cap, rebounded and then some.

Investors did not have to get too creative. The boring old Dow Jones Industrial Average led U.S. indexes with a 19.05% return in 2006. The Russell 2000 managed to post a strong 18.36% showing, beating out the S&P500’s 15.79% move by a small margin. The NASDAQ was the real laggard, with “just” a 9.51% return. The larger, better known stocks from the NASDAQ – those in the NASDAQ 100 – were even weaker, up just 6.82% - barely above a good low-fee money market fund.

Bonds performed poorly in 2006, though not as bad as many feared.  The long-term bond index posted a total return of about 2%, while the Vanguard Total Bond Index was up 4.27%. In such an environment, shorter term bond funds (like our Vanguard Short Term Investment Grade - VFSTX) performed better than many bond funds.  High yield bonds had nearly double-digit returns in 2006 as investors flocked into higher risk asset classes, helping some of our portfolios.

Most of our stock funds were up nicely in 2006, with just a few missing double digit territory (only T. Rowe Price Japan was negative for the year). The laggards, like Buffalo Mid Cap (BUFMX), up just over 6% in 2006, were mostly in NASDAQ stocks and healthcare names. Healthcare, notably biotech stocks, was a weak sector in 2006.

We have just added biotech funds to some of our higher risk portfolios. Unlike last year’s big sector allocation, telecom, these funds are quite risky. We have already seen downward swings of almost 10% in recent weeks. For the record, last year’s telecom selection, Vanguard Telecom ETF (VOX), was up 36.85% – the #11 best performing ETF of the year, and the #2 ETF investing in U.S. markets.

In general, indexes were harder to beat in 2006 than in recent years, as larger cap stocks – heavily weighted in most indexes - stopped lagging behind smaller cap stocks.

With the S&P500 up 15.79% and the Vanguard Bond Index up 4.72%, we are happy with something between those two extremes, given that in 2006, all of our portfolios held bonds for the entire year. Our portfolio returns ranged from a low of 7.57% (Safety) to a high of 12.13% (Aggressive Growth) in 2006. We did better on the low-risk side in 2006, with solid returns of 7.57%, 8.14%, and 11.13% for our Safety, Conservative, and Moderate portfolios, respectively, given the lower risk and higher bond stakes. Growth, Aggressive Growth, and Daredevil were up 10.52%, 12.13%, and 11.04%, respectively. All of our model portfolios have beat the S&P500 since launched in April 2002.

Our Conservative Portfolio was up 0.33% in December, and was up 8.14% for the year.

The driving force behind the higher returns for a portfolio largely composed of bonds for most of the year was our 5% stake in Vanguard Telecom ETF (formerly VIPER) (VOX), which we sold at the end of October.

International stocks continued to outperform U.S. stocks. SSgA International Growth (SINGX) was up 19.93% in 2006 and 3.08% in December alone.

The Vanguard U.S. Value Fund has been helping of late, and we are up 10.34% since we added the fund at the end of February. 

High yield (junk) bonds beat investment grade bonds in 2006. The Vanguard High Yield Corporate Fund (VWEHX) rose 8.24% for the year, boosting the portfolio. The fund was up almost 1% in December, while other bonds fell.

The U.S. dollar had another bad year, which boosted the American Century International Bond (BEGBX). The fund was up 8.26%.

In December, the S&P500 climbed 1.40% and the Dow 2.11%, while the NASDAQ slipped 0.68%. Small cap stocks rose, but only 0.34% (as measured by the Russell 2000 index), and bonds were weak as interest rates inched back up. The Lehman Brothers Long Term Treasury Index was down 2.14%, while the Vanguard Total Bond Index, which is less sensitive to interest rate shocks, fell by just 0.48%.

Stocks performed very well in 2006. Other than Japan, you would be hard pressed to find a stock market index anywhere in the world that was not up (and most by 10% or more) for the year. Even the fund categories that were lagging a few months ago, such as emerging markets and small cap, rebounded and then some.

Investors did not have to get too creative. The boring old Dow Jones Industrial Average led U.S. indexes with a 19.05% return in 2006. The Russell 2000 managed to post a strong 18.36% showing, beating out the S&P500’s 15.79% move by a small margin. The NASDAQ was the real laggard, with “just” a 9.51% return. The larger, better known stocks from the NASDAQ – those in the NASDAQ 100 – were even weaker, up just 6.82% - barely above a good low-fee money market fund.

Bonds performed poorly in 2006, though not as bad as many feared.  The long-term bond index posted a total return of about 2%, while the Vanguard Total Bond Index was up 4.27%. In such an environment, shorter term bond funds (like our Vanguard Short Term Investment Grade - VFSTX) performed better than many bond funds.  High yield bonds had nearly double-digit returns in 2006 as investors flocked into higher risk asset classes, helping some of our portfolios.

Most of our stock funds were up nicely in 2006, with just a few missing double digit territory (only T. Rowe Price Japan was negative for the year). The laggards, like Buffalo Mid Cap (BUFMX), up just over 6% in 2006, were mostly in NASDAQ stocks and healthcare names. Healthcare, notably biotech stocks, was a weak sector in 2006.

We have just added biotech funds to some of our higher risk portfolios. Unlike last year’s big sector allocation, telecom, these funds are quite risky. We have already seen downward swings of almost 10% in recent weeks. For the record, last year’s telecom selection, Vanguard Telecom ETF (VOX), was up 36.85% – the #11 best performing ETF of the year, and the #2 ETF investing in U.S. markets.

In general, indexes were harder to beat in 2006 than in recent years, as larger cap stocks – heavily weighted in most indexes - stopped lagging behind smaller cap stocks.

With the S&P500 up 15.79% and the Vanguard Bond Index up 4.72%, we are happy with something between those two extremes, given that in 2006, all of our portfolios held bonds for the entire year. Our portfolio returns ranged from a low of 7.57% (Safety) to a high of 12.13% (Aggressive Growth) in 2006. We did better on the low-risk side in 2006, with solid returns of 7.57%, 8.14%, and 11.13% for our Safety, Conservative, and Moderate portfolios, respectively, given the lower risk and higher bond stakes. Growth, Aggressive Growth, and Daredevil were up 10.52%, 12.13%, and 11.04%, respectively. All of our model portfolios have beat the S&P500 since launched in April 2002.

Our Aggressive Growth Portfolio was up just 0.26% in December. For the year, the portfolio was up 12.13%.

Helping our portfolio most of the year was our 5% stake in Vanguard Telecom ETF (VOX) (formerly Vanguard Telecom VIPER). Since adding this to the portfolio at the end of February 2006, the fund is up 24.69%.

International stocks continued to greatly outperform U.S. stocks, but Japan was a near stand-alone laggard in 2006. T. Rowe Price Japan (PRJPX) was down 5.67% for the year. If Japan continues to underperform other fund categories, we may increase our stake and raise our category outlook (both lowered in recent years after strong performances).

Larger cap stocks have been strong most of the year, with Bridgeway Blue-Chip 35 (BRLIX) up 15.43% in 2006.

The healthcare sector performed poorly in 2006 – particularly late in the year when healthcare stocks stalled and other stocks took off. The Healthcare Select Sector SPDR (XLV) was up just 7.09% in 2006.

Biotech stocks fell sharply in December, with the new high-risk holding of SPDR Biotech (XBI) down 8.70% for the month.

The conservative portfolio was up 1.14% in October. While the bond funds did well on generally lower interest rates, the real action was in stocks, particularly larger-caps, internationals, and telecoms. SSgA International Growth Opportunities (SINGX) was up 3.48%, Vanguard U.S. Value up 2.61%, and Vanguard Telecom Services ETF (VOX) was up 3.77%. 

We are making trades in the Conservative portfolio, effective November 30th, 2006.

Because of the relative complexity of these trades we have created an easy-to-use <a href="http://maxadvisor.com/newsletter/worksheets/conservativetrades1106.pdf">trade worksheet</a>. Subscribers who invest in the Conservative Portfolio can download, print out, and fill in the worksheet to help them determine how much of their holdings need to be bought and sold to match our post-trade portfolios and to rebalance. You can download the Conservative Portfolio Worksheet by <a href="http://maxadvisor.com/newsletter/worksheets/conservativetrades1106.pdf">clicking here</a>. Please note that the document is an Adobe PDF. If you need to download Adobe Acrobat reader, you can find it by <a href="http://www.adobe.com/products/acrobat/readstep2.html">clicking here</a>.

<b>Sales</b><ul>

<li><b>Sell entire</b> sector: telecom allocation: Vanguard Telecom Services ETF (VOX) from 5% to 0%</ul>

<b>Buys:</b><ul>

<li><b>Buy new</b> large-cap growth allocation: Janus Research (JARFX) to 5%</ul>

<b>Why:</b> Sector funds only belong in low-risk portfolios when they are blatantly out of favor and represent good value compared to the rest of the market (adjusting for growth potential). Even then, higher-risk, sub-sector funds (like funds and ETFs that invest in biotech and internet) almost never belong in a low-risk portfolio. 

Telecom stocks – which in general are lower-risk and higher-dividend than many other types of stocks – are up about 20% since we added the Vanguard Telecom Services ETF (VOX) to this portfolio eight months ago. We can no longer comfortably keep such a sector fund in a low-risk portfolio. 

As we noted when we bought this fund a few months ago, “Similar to why we once had a utility sector fund in this and other portfolios, we are now adding a telecom fund. This category has a favorable rating in our favorite funds report because it is one of the most out of favor with fund investors. As partial proof, this fund has less than $50 million in assets, compared to close to two billion in top utility ETFs, which are now in favor after a few years of strong performance. Unlike other categories we find attractive, this fund is relatively safe, sports a high dividend for income, and is a reasonable choice for a small allocation in a safer portfolio.”

This fund could go up more, as telecom stocks are still relatively undervalued compared to other areas. Recession fears and dividend appeal are still a factor, and more importantly, fund investors have yet to swamp these funds with gobs of new money. The safe returns in Vanguard Telecom Services, however, have been made. If gains continue we will likely sell this holding from our higher-risk portfolios as well.

The days of smaller-cap stocks killing larger-cap stocks are over, and if you’re seriously looking at larger-cap growth stocks you should consider Janus. Although we criticized this company and their funds in 2000, we’ve been open to the company’s turnaround and have been recommending some of their funds in our favorite funds report (and in articles on MAXfunds.com) over the last few years. Other fund analysts who loved the family at the top turned negative in 2002 amidst the scandals, and have not looked back. Hell hath no fury like a fund analyst scorned. Janus Research (JARFX) is a new fund (launched 2/25/05) and is still very small (around $100 million). Compare this to the days when a new Janus fund would bring in well over a billion before it was even fully open and trading. 

<b>Redemption fee information:</b>

There are no short-term redemption fees associated with current trades in the Conservative Portfolio. Please check with your broker if you do not buy directly from the funds to see if you are beyond the time period of any broker-imposed, short-term penalty fees before selling.

The aggressive growth portfolio gained 2.46% in October – our strongest performing portfolio. While the bond funds did well on generally lower interest rates, the real action was in stocks, particularly larger-cap and telecoms. 

Artisan International Small Cap (ARTJX) jumped 4.83%, Bridgeway Blue Chip 35 (BRLIX) posted a 3.37% gain, and Vanguard Telecom Services ETF (VOX) was up 3.77%. The top spot went to Technology SPDR (XLK), up a solid 4.04% for the month. The only stock fund laggard was Healthcare Select SPDR (XLV), up a slim 0.48%.

We are making trades in the aggressive growth portfolio, effective November 30th, 2006.

Because of the relative complexity of these trades we have created an easy-to-use <a href="http://maxadvisor.com/newsletter/worksheets/aggressivegrowthtrades1106.pdf">trade worksheet</a>. Subscribers who invest in the Aggressive Growth Portfolio can download, print out, and fill in the worksheet to help them determine how much of their holdings need to be bought and sold to match our post-trade portfolios and to rebalance. You can download the Aggressive Growth Portfolio Worksheet by <a href="http://maxadvisor.com/newsletter/worksheets/aggressivegrowthtrades1106.pdf">clicking here</a>. Please note that the document is an Adobe PDF. If you need to download Adobe Acrobat reader, you can find it by <a href="http://www.adobe.com/products/acrobat/readstep2.html">clicking here</a>.

<b>Sales</b><ul>

<li>Sell entire international small-cap allocation: Artisan International Small Cap (ARTJX) from 5% to 0%

<li>Sell entire blend allocation: FMI Common Stock (FMIMX) from 15% to 0%</ul>

<b>Buys:</b><ul>

<li>Buy new sector: healthcare: SPDR Biotech (XBI) to 5%

<li>Buy new large-cap growth allocation: Janus Research (JARFX) to 10%

<li>Increase short-term bond allocation: Vanguard Short Term Corp (VFSTX) from 15% to 20%</ul>

<b>Why:</b>

Although we’ve been cutting back on Artisan International Small Cap (ARTJX) from our original 20% stake in 2002, the time has come to divest ourselves of the last 5% position. As of the end of October this stake is up 194.29% – a big driver of our market-beating returns in a portfolio that has had some bonds exposure the entire way (and lower volatility than the S&P500). (Note that this trade applies to the alternate we have in this category, Forward International Small Companies [PISRX - up an equally impressive amount].)

FMI Common Stock (FMIMX) has beaten the S&P500 over the trailing 1 year, 3 years, 5 years, 10 years, and 15 years. We’re up around 60% since early 2002 (this fund has been in our portfolio since the beginning), more than any major market index (and on par with the smaller-cap indices). With a five-year average annual return of around 14%, shareholders in this fund barely knew there was a crash in the market.

Back patting aside, much of FMI Common's impressive gains are because smaller-cap, value-oriented stocks have been all the rage for years now (though this fund has been in the top tier of its category since we’ve owned it). The fund closed on April 15th 2004. Since then we’ve been recommending Fairholme [FAIRX] as an alternate. Fairholme has actually been beating FMI Common Stock by a decent margin over the last few years – and is a slightly cheaper fund to boot.

We think aggressive investors should be light on valueoriented funds going forward, and we can do better than either of these funds. We’re more concerned about Fairholme – the only fund new subscribers can buy – due to the large inflows of cash.

The days of smaller-cap stocks killing larger-cap stocks are over, and if you’re seriously looking at larger-cap growth stocks you should consider Janus. Although we criticized this company and their funds in 2000, we’ve been open to the company’s turnaround and have been recommending some of their funds in our favorite funds report (and in articles on MAXfunds.com) over the last few years. Other fund analysts who loved the family at the top turned negative in 2002 amidst the scandals, and have not looked back. Hell hath no fury like a fund analyst scorned. Janus Research (JARFX) is a new fund (launched 2/25/05) and still very small (around $100 million). Compare this to the days when a new Janus fund would bring in well over a billion before it was even fully open and trading. 

We're adding a biotech fund to the portfolio (believe it or not)! As longer-term readers of MAXfunds.com know, we have an illustrious history of badmouthing biotech funds. We kicked into high gear with our mid-2001 article titled, “Biohazard – Why I hate Biotech Funds”. This article pointed out the ridiculous valuations on stocks in the portfolios of biotech funds. To get an idea how crummy biotech stocks have done since we wrote that article, the stocks we highlighted in it are STILL down (some 80%). There was a quick plunge of 50% and more in most biotech funds in 2001-2002. We probably should have chosen a biotech fund for the model portfolios at this time, but there were other opportunities in the market then as well. We did choose some “life sciences” healthcare funds (which are usually biotech stocks mixed with less risky healthcare names) in our favorites list (Exeter Life Sciences EXLSX, now called Manning & Napier Life Sciences). 

Biotech stocks rebounded, and by early 2004 they were overpriced again relative to the market. We wrote another negative article on the MAXfunds site called

“Why You Should Avoid Biotech Funds”. Since that article, the biotech stock we noted as being overpriced has fallen (while the entire stock market is up) and the biotech ETFs have underperformed the S&P500 by a wide margin (though some actively managed funds have done a little better – something they have been doing five of the last six years).

Why now? While biotech stocks are far from bargains (they almost never are), all other fund categories are much hotter and more attractive to fund investors. There is still money in biotech funds, but not much historically speaking and compared to other fund categories. The largest fund in the category has under $2 billion – and that’s an ETF. In a world with $10 trillion in mutual funds, $2 billion is chump change. Try to find a biotech fund that isn’t sitting on huge losses from when investors bought high and sold low – usually a good indication of contrarian opportunity.

Biotech now offers a chance for higher-risk investors to catch the next wave of speculative money to roll in. We can’t put this new ETF (which is the lowest cost biotech fund – including other ETFs – in the business) in our lower-risk portfolios because…it’s still a biotech fund. 30% drops, even from these levels, are par for the course. We’re going with a smallish allocation. We’d want to see a real biotech wreck – like the kind that was last seen in the early 1990s – to consider the big 20% allocations we do when we’re very optimistic about a category.

Our shift to short-term bonds reflects our feeling that owning longer-term bonds when the ten-year government bond yields around 4.5% isn’t much of an idea. There is a risk that we could see a recession next year and shorter-term interest rates will fall. 

This is a poor scenario if you are in shorter-term bonds as, while you don’t lose money or see the fund price drop, you haven’t locked in higher rates and will be missing returns. You would have experienced such a drop in income had you owned shorter-term bonds in 2000. By 2003 you’re earning less than 2% and those in longer-term bonds saw big gains in bond prices. We think this risk is slim because if we get another recession the federal reserve is apt to lower rates enough to cause inflation fears – which will hurt longer-term bonds as we go back to a more normal upward-sloping yield curve. They almost have no choice but to cause inflation in order to save the housing market if we get a recession.

<b>Redemption fee information:</b> If you sell Artisan International Small Cap (ARTJX) within 90 days of purchase, you will get hit with a 2% redemption fee. If you sell Forward International Small Companies (PISRX) within 180 days of purchase you will get hit with a 2% redemption fee. While we’ve owned this allocation for over four years, if you are a new investor, wait until you can sell the fund for no redemption fee.

There is no redemption fee to sell FMI Common Stock (FMIMX), but there is a 2% redemption fee for sales made within 60 days of purchase for Fairholme (FAIRX). If you purchased Fairholme recently please wait until the redemption fee period has elapsed.

Please check with your broker if you do not buy directly from the funds to see if you are beyond the time period of any broker-imposed, short-term penalty fees before selling.

August was a surprisingly good month on Wall Street. A solid chunk of the losses incurred in the stock market from earlier in the year was erased. Factor in gains posted so far in September and the media is once again back to reminding us how close we are to an all time high in the Dow. Interest rates continued lower, and are now almost back to where they were before the big scary move up in rates started – the one that spelled housing market crash from rising mortgage rates. Now we’re back to worrying about why longer term rates are so much lower than short term rates – one warning sign of a possible looming recession. 

The Dow was up 2.09% in August, while the S&P500 climbed 2.38% and the smaller cap Russell 2000 index rose just under 3%. The tech and growth rebound was stronger – the Nasdaq was up 4.41% for the month. But then, the Nasdaq fell harder on the way down. Bonds were strong as well, with longer term bonds climbing 2.8% and the Vanguard Total Bond Index rising 1.64%.

Our Conservative portfolio rose 1.46% in August. With bonds and stocks up, it was hard to lose money investing last month. None of the funds in our Conservative Portfolio posted losses in August – though Bridgeway Balanced eked out only a slim .08% gain – odd given the returns in the market. There must have been some losses on written option contracts that were worthless earlier in the month, but with hot stock returns became liabilities to the fund as the month wore on.

Investors continue to like junk bonds, even though many are concerned about a slowing economy – if not a full bore recession. Generally speaking, lower credit quality debt gets hurt going into a weak economy because as times get tough, those with lower prospects of repaying debts can slip into default. Vanguard High Yield Corporate (VWEHX) rose 1.44% in August.

Telecom stocks have been hot for most of the year and last month was no exception. Vanguard Telecom ETF (formerly knows as Vanguard Telecom VIPER) rose 3.42% and is up 8.72% over the last three months.  As this fund was in our Hotlist for 2006, we’re doubly pleased.

Healthcare stocks have been as strong as telecom stocks in recent months. We’re glad to see our chosen sectors outperforming the market. Healthcare Select SPDR was up 3% in August and is up 8.56% over the last three months. Stocks like Merck and Pfizer are near 52 week highs and way off the lows hit when lawsuit and revenue related fears were peaking.

August was a surprisingly good month on Wall Street. A solid chunk of the losses incurred in the stock market from earlier in the year was erased. Factor in gains posted so far in September and the media is once again back to reminding us how close we are to an all time high in the Dow. Interest rates continued lower, and are now almost back to where they were before the big scary move up in rates started – the one that spelled housing market crash from rising mortgage rates. Now we’re back to worrying about why longer term rates are so much lower than short term rates – one warning sign of a possible looming recession. 

The Dow was up 2.09% in August, while the S&P500 climbed 2.38% and the smaller cap Russell 2000 index rose just under 3%. The tech and growth rebound was stronger – the Nasdaq was up 4.41% for the month. But then, the Nasdaq fell harder on the way down. Bonds were strong as well, with longer term bonds climbing 2.8% and the Vanguard Total Bond Index rising 1.64%.

Our Aggressive Growth portfolio rose 2.85% in August. With bonds and stocks up during the month, it was hard to lose money investing. 

Telecom stocks have been hot for most of the year and last month was no exception. Vanguard Telecom ETF (formerly knows as Vanguard Telecom VIPER) rose 3.42% and is up 8.72% over the last three months.  As this fund was in our Hotlist for 2006, we’re doubly pleased.

Healthcare stocks have been as strong as telecom stocks in recent months. We’re glad to see our chosen sectors outperforming the market. Healthcare Select SPDR was up 3% in August and is up 8.56% over the last three months. Stocks like Merck and Pfizer are near 52 week highs and way off the lows hit when lawsuit and revenue related fears were peaking.

Mega cap stocks continue to outpace the market. Bridgeway Blue Chip 35 was up 3.03% in August. There was strength in many large caps ranging from big techs to drug companies.

June started out a little rocky but recovered somewhat as the month progressed. The S&P500 was up just .14% while the Dow was essentially flat (down .05%). Tech was a touch weaker, with the Nasdaq off .31% in June.

Investors were happy that the recent downward move in stocks seemed to have passed, particularly in hard hit foreign stocks, as well as in commodities. 

Interest rates continued to drift downward after a slight jump earlier in the year. Longer term bonds returned .75% while a total bond index climbed about .10%. Fears that the economy is slowing down seems to be trumping concerns over rising inflation.

Inflation is punishing to bond investors and could send interest rates on the ten year government bond to 6 or 7% (from the current 5%) – levels that could damage the economy, especially home prices.

The weakness we’ve seen in tech stocks largely reflects worries that future economic activity is going to stall – with tech spending to be among the hardest hit. Companies don’t buy new computers when times are tough. And if you’re not hiring, you are also not buying new laptops and software.

The newest economic unease is rooted in the latest flareup in the middle east. While the spreading conflict in Israel doesn’t directly affect world oil production, there is always the possibility that such trouble will spread to major oil producers. 

While the odds of a major disruption in the oil market might be slim, they are real enough to lead to several big hits to the market, as we’ve recently starting seeing again in July. So much for the calm of June. 

As for our portfolios, we’re close to buying back into a semiconductor ETF in our highest risk portfolio, given the recent carnage in the area. A few more hundred points of downside in the market and we’ll likely increase our stock fund exposure slightly in some of our portfolios.

Our Conservative portfolio rose just .18% in June. Junk bonds were the weakest part of the U.S. bond market as investor’s aversion to risk spread to the bond market. Vanguard High Yield Corporate (VWEHX) dipped .40%, even though most investment grade bond funds were up slightly. This means the spread between high risk and low risk debt is widening. When we get to the really wide spread (or reward as we like to call it) for taking on risk as we saw a few years ago, we’ll increase our junk bond exposure significantly. For now we may just increase it slightly if this keeps up. Corporations are swimming in cash and are in pretty good shape to pay back debt, even with a mild recession. For the record, Vanguard High Yield Corporate now yields 7.55%. If we see 8%, we’re doubling down.

Harbor Bond (HABDX) was down -0.10%, a bit of a head scratcher as longer term bonds were up. Manager Bill Gross must have a bit more foreign bonds and likely some higher risk (lower credit quality) corporates to explain the flat return in June.

Short term bonds made back their recent small loss last month. Vanguard Short Term Investment Grade (VFSTX) climbed .27% - which means shorter term bonds fell in value slightly because the return on this fund in a normal month is about .4%. 

Foreign bonds took a small hit after a strong few months as the dollar came back in value when investors fled formerly hot international markets. American Century International Bond (BEGBX) was down .89% for the month.

Owning bonds and stocks and writing covered calls for income on equities was a good strategy in June, as increased market volatility means higher option premiums.. Bridgeway Balanced (BRBPX) gained .40% for the month. 

Mega cap stocks have been performing quite well compared to the rest of the market during the recent rough patch. Bridgeway Blue Chip 35 Index (BRLIX) was up .84% as relatively cheap and safe giant companies attracted some money when investors fled riskier fare.

Telecom was one of the lone standout performers in June – almost gaining back the big hit in May. Vanguard Telecom VIPER (VOX) rose 3.16%. Big cap telecom stocks like Verizon can handle inflation better than most. 

Although healthcare stocks have many of the same perks as telecom in a recession with an inflation chaser, healthcare stocks were merely flat in June (which was slightly better than stocks in general). Healthcare SPDR (XLV) was down .01%.

International markets stabilized for the time being. SSgA International Growth (SINGX) was up .17% in June.

June started out a little rocky but recovered somewhat as the month progressed. The S&P500 was up just .14% while the Dow was essentially flat (down .05%). Tech was a touch weaker, with the Nasdaq off .31% in June.

Investors were happy that the recent downward move in stocks seemed to have passed, particularly in hard hit foreign stocks, as well as in commodities. 

Interest rates continued to drift downward after a slight jump earlier in the year. Longer term bonds returned .75% while a total bond index climbed about .10%. Fears that the economy is slowing down seems to be trumping concerns over rising inflation.

Inflation is punishing to bond investors and could send interest rates on the ten year government bond to 6 or 7% (from the current 5%) – levels that could damage the economy, especially home prices.

The weakness we’ve seen in tech stocks largely reflects worries that future economic activity is going to stall – with tech spending to be among the hardest hit. Companies don’t buy new computers when times are tough. And if you’re not hiring, you are also not buying new laptops and software.

The newest economic unease is rooted in the latest flareup in the middle east. While the spreading conflict in Israel doesn’t directly affect world oil production, there is always the possibility that such trouble will spread to major oil producers. 

While the odds of a major disruption in the oil market might be slim, they are real enough to lead to several big hits to the market, as we’ve recently starting seeing again in July. So much for the calm of June. 

As for our portfolios, we’re close to buying back into a semiconductor ETF in our highest risk portfolio, given the recent carnage in the area. A few more hundred points of downside in the market and we’ll likely increase our stock fund exposure slightly in some of our portfolios. 

Our Aggressive Growth portfolio fell .08% in June.

Mega cap stocks have been performing quite well compared to the rest of the market during the recent rough patch. Bridgeway Blue Chip 35 Index (BRLIX) was up .84% as relatively cheap and safe giant companies attracted some money when investors fled riskier fare.

Telecom was one of the lone standout performers in June – almost gaining back the big hit in May. Vanguard Telecom VIPER (VOX) rose 3.16%. Big cap telecom stocks like Verizon can handle inflation better than most. 

Although healthcare stocks have many of the same perks as telecom in a recession with an inflation chaser, healthcare stocks were merely flat in June (which was slightly better than stocks in general). Healthcare SPDR (XLV) was down .01%.

Most international markets stabilized for the in June, but investors still sold smaller cap and emerging market stocks. While our larger cap oriented international funds were largely flat last month, Artisan International Small Cap (ARTJX) was down 3.49%.

Japan has been week for a few months now. The Bank of Japan is on the edge of increasing their short term rates from the current rock bottom level of 0%, where they have been for a few years. Apparently investors are concerned that Japan’s economy won't be able to handle the increase (and to think we don’t worry about this sort of thing until our short term rates climb over 5%). T. Rowe Price Japan (PRJPX) slid 3.22%. 

Tech has been weak on recession fears. Technology SPDR (XLK) was down .72% in June. 

Short term bonds made back their recent small loss last month. Vanguard Short Term Investment Grade (VFSTX) climbed .27% - which means shorter term bonds fell in value slightly because the return on this fund in a normal month is about .4%.  

Harbor Bond (HABDX) was down -0.10%, a bit of a head scratcher as longer term bonds were up. Manager Bill Gross must have a bit more foreign bonds and likely some higher risk (lower credit quality) corporates to explain the flat return in June.