Bonds took a dive in March. The roughly 3.5% hit to long-term treasury bonds was the worst hit to bonds since April 2004. The Federal Reserve’s rate-increasing campaign to fight inflation (inflation they may have created) finally caught up with longer-term bonds.

Stocks had a good month, with the S&P500 up 1.24%. More speculative stocks outperformed the big caps that dominate the S&P500 and the Dow – a reversal of recent months. The Nasdaq was up 2.56% while the small-cap Russell 2000 Index was up 4.85% – taking small-cap stocks to all time highs, a fairly stretched valuation compared to larger-cap stocks.

Our Conservative portfolio was up 0.22%. With a rough month for bonds, we’re glad to see a positive return. 

The real action came from our new stake in Vanguard Telecom VIPER (VOX), which is also in our Hotsheet for 2006. The ETF (exchange traded fund) was up 4.78% for the month, and up near 15% for the first three months of the year. Investors are becoming wise to the relatively low valuations and high dividends of out-of-favor (at least compared to the rest of the market) telecom stocks. On the one hand, rising interest rates are a threat to any investment bought for yield – who needs a 2% dividend when you can get, say, 6% in government bonds? However, if inflation fears drive interest rates higher, telecom giants are decent inflation picks because the companies have mountains of debt, and debtors generally like inflation. It’s worth noting the American Century Utility fund, which we sold at the end of February, was down 1.51% in March.

SSgA International Growth (SINGX) was no slouch, up 3.5% for the month riding the continuing strength in international stock markets. Too bad we only had 5% in this fund and 5% in the telecom fund. But then, it is a conservative portfolio. International markets keep attracting so much new money that we’re getting quite negative. We’ve had this fund less than a year and it’s up 28% already.

Bill Gross has been moving into longer-term bonds, apparently confident the economy is on the brink of slipping, which will lead to lower interest rates. The Harbor Bond fund (HABDX) was down 1.1% for the month – slightly worse than the 0.98% hit to the total bond market, meaning Gross is likely taking some duration risk here (owning longer maturity bonds than the benchmark).

Short-term bonds were largely flat, with yield making up for the slight decline in prices. Vanguard Short Term Investment Grade (VFSTX) was up just 0.07% in March.

High-yield (junk) bonds were strong compared to investment-grade bonds. Apparently investors are becoming more confident in corporate America’s ability to pay back debt – given that corporate profit margins are at multi-decade highs, it’s not a half bad assumption. Furthermore, if inflation kicks up, companies with lots of debt may benefit; their existing debt load will become easier to payoff as their revenues inflate with everything else. Vanguard High Yield Corporate (VWEHX) was essentially flat for the month. 

Healthcare stocks slipped – HealthCare Select SPDR (XLV) fell 1.23%, reversing previous strength compared to the broader market.

Bonds took a dive in March. The roughly 3.5% hit to long-term treasury bonds was the worst hit to bonds since April 2004. The Federal Reserve’s rate-increasing campaign to fight inflation (inflation they may have created) finally caught up with longer-term bonds.

Stocks had a good month, with the S&P500 up 1.24%. More speculative stocks outperformed the big caps that dominate the S&P500 and the Dow – a reversal of recent months. The Nasdaq was up 2.56% while the small-cap Russell 2000 Index was up 4.85% – taking small-cap stocks to all time highs, a fairly stretched valuation compared to larger-cap stocks.

Our Aggressive Growth portfolio was up 1.59%. The strong stock funds made up for the weakness in bonds. 

The real action came from our new stake in Vanguard Telecom VIPER (VOX), which is also in our Hotsheet for 2006. The ETF (exchange traded fund) was up 4.78% for the month, and up near 15% for the first three months of the year. Investors are becoming wise to the relatively low valuations and high dividends of out-of-favor (at least compared to the rest of the market) telecom stocks. On the one hand, rising interest rates are a threat to any investment bought for yield – who needs a 2% dividend when you can get, say, 6% in government bonds? However, if inflation fears drive interest rates higher, telecom giants are decent inflation picks because the companies have mountains of debt, and debtors generally like inflation.

If international markets keep attracting so much new money, we’re going to have to cut our stakes further. T. Rowe Price Japan was up 4.16% for the month, Artisan International Small Cap (ARTJX) was up 5.15%.

Short-term bonds were largely flat, with yield making up for the slight decline in prices. Vanguard Short Term Investment Grade (VFSTX) was up just 0.07% in March.

Healthcare stocks slipped – HealthCare Select SPDR (XLV) fell 1.23%, reversing previous strength compared to the broader market.

Bill Gross has been moving into longer-term bonds, apparently confident the economy is on the brink of slipping, which will lead to lower interest rates. The Harbor Bond fund (HABDX) was down 1.1% for the month – slightly worse than the 0.98% hit to the total bond market, meaning Gross is likely taking some duration risk here (owning longer maturity bonds than the benchmark).

We are making trades in the Conservative portfolio, effective February 28th 2006.

Because of the relative complexity of these trades <b>we have created an easy-to-use <a href="https://maxadvisor.com/newsletter/worksheets/conservativetrades0206.pdf">trade worksheet</a>.</b> 

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 Safety Portfolio Worksheet by <a href="https://maxadvisor.com/newsletter/worksheets/conservativetrades0206.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 clicking here.

<b>Sales</b>

<ul>

<li>Sell entire utilities sector allocation: American Century Utility Income (BULIX) from 5% to 0% of total portfolio.

<li>Sell entire large cap value allocation: Vanguard Dividend Growth from 10% to 0% of total portfolio.

</ul>

<b>Buys</b>

<ul>

<li>Buy new telecom allocation: Vanguard Telecom Viper (VOX) from 0% to 10% of total portfolio. 

<li>Buy new larger cap value allocation: Vanguard U.S. Value (VUVLX) from  from 0% to 10% of total portfolio.

</ul>

<b>Why:</b> We're keeping our broad bond/stock allocations in our Conservative portfolio to 70% bond and 30% stock (adjusting for a balanced fund). These are tough times for a conservative investor as bond yields are low and value stocks are not cheap anymore – making large allocations to value-oriented stock funds a bit risky. On the plus side, short-term bonds and money market funds finally offer a reasonable yield thanks to recent Federal Reserve rate increases.

We’ve been cutting back our large utility stakes in our Powerfund portfolios because they have beaten the broader market by a wide margin in recent years and are no longer out-of-favor with fund investors. As money comes in, valuations become stretched. Our Conservative portfolio is the lone standout with a 5% utility fund stake. We are selling this fund at the end of February.

Vanguard Dividend Growth is a fund we sort of inherited. We owned the Vanguard Utility Income fund, which was converted to a plain vanilla dividend-oriented fund. We kept the fund because it was cheap, safe, and had tax loss carryforwards from past losses.  While there is currently nothing blatantly wrong with Vanguard Dividend growth – it has performed well in recent years – we think there are better Powerfund options now that value stocks are a little overpriced. We also think that buying high-dividend-yielding stocks will not be a particularly great strategy going forward. 

Your new holding is Vanguard U.S. Value (VUVLX), already owned in our Moderate Portfolio since April 2005. This superior fund is sub-advised by GMO and remains small by Vanguard standards. We have had this fund on our favorite fund list since September 2002 and have recommended another fund managed by the same company since 2001– a fund that was converted to a load fund and dropped from our list.

Our new Vanguard Telecommunication Services VIPERs (VOX) is an exchange-traded fund (ETF). For a similar reason 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 strong Powerfund rating, as 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 $2 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.

<b>Redemption fee information:</b> There are no short-term redemption fees from the funds associated with these sales. 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.

We are making trades in the Aggressive Growth portfolio, effective February 28th 2006.

Because of the relative complexity of these trades <b>we have created an easy-to-use <a href="https://maxadvisor.com/newsletter/worksheets/aggressivegrowthtrades0206.pdf">trade worksheet</a></b>. 

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 Safety Portfolio Worksheet by <a href="https://maxadvisor.com/newsletter/worksheets/aggressivegrowthtrades0206.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 clicking here.

<b>Sales</b>

<ul>

<li>Sell entire emerging markets allocation: SSgA Emerging Markets Fund (SSEMX) from 5% to 0% of total portfolio.

</ul>

<b>Buys</b>

<ul>

<li>Buy new telecom sector allocation: Vanguard Telecom VIPER (VOX) from 0% to 5% of total portfolio.

</ul>

<b>Why:</b> In late April 2005 we increased our stock allocation to 80% from 75% as stocks were a relatively good deal compared to bonds. We’re sticking with this allocation in our Aggressive Growth portfolio, but are considering dropping the stock allocation if stocks continue up and interest rates rise (hurting bonds).

We’re cutting our SSgA Emerging Markets Stake (SSEMX) completely. This is the first time we have not owned an emerging markets stock fund in this portfolio since we started it in April 2002. This fund has gained 14% so far this year and we are now up around 200% on this fund since we first bought it (though we have cut our stake down from 10% to 5% last year). There is almost $2 billion in this fund and many more billions flowing into other emerging market funds. We expect all the new investors to emerging markets will lose money in the coming years.

Our new Vanguard Telecommunication Services VIPERs (VOX) is an exchange-traded fund (ETF). Telecom has a very favorable Powerfund rating 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 $2 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 and sports a high dividend for income.

<b>Redemption fee/tax information:</b> There could be short-term redemption fees associated with this sale. SSgA Emerging Markets charges 2% for any sale made within 60 days of purchase. This does not apply to many subscribers as we originally added this fund to our portfolio in February 2003. If you bought this fund within the last two months, consider deferring this sale until the redemption period has expired.

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.

Stocks rocketed, but bonds were merely ho-hum in November. The Conservative portfolio rose 0.82% for the month. The S&P500 rose 3.78% while the Lehman Brothers Aggregate Bond Index rose just 0.44%. Smaller-cap stocks were hot, and tech hotter still – areas safe portfolios are light on.

This portfolio slightly underperformed the Safety portfolio – rare in a good month for stocks. The culprit was below market returns for health care and utility stocks. We intend to sell the latter soon.

Once again, the weak link was American Century International Bond, the sole loser here and down 1.71% as the U.S. dollar rose and bonds in general slipped. We’re considering increasing our stake, not quite to the levels we used to run in this fund, but more than 5%.

Healthcare stocks underperformed the broader market, at least larger-cap ones. HealthCare Select SPDR was up just 1.17% for the month, though drug stocks have been strong in recent months.

International stocks were strong; SSgA International Growth Opportunities was up 2.59%. The fund is light on Japan and emerging markets, which were hotter than most foreign markets.

Vanguard Dividend Growth, was the only main area with a large move, notching a 3.3% gain. More conservative Gateway, added 1.31%. Junk bonds were the best part of the bond market, and Vanguard High Yield Corporate rose just under 1%.

There are no major tax distributions slated for December in this portfolio. New investors to our portfolios or those adding new money in taxable accounts should generally wait until after the record dates listed in our 2005 Capital Gains Report for any of the funds.

Stocks rocketed, but bonds were merely ho-hum in November. The Aggressive Growth portfolio rose 3.22% for the month. The S&P500 rose 3.78% while the Lehman Brothers Aggregate Bond Index rose just 0.44%. Smaller-cap stocks were hot, and tech hotter still.

Healthcare stocks underperformed the broader market – at least larger-cap ones. HealthCare Select SPDR was up just 1.17% for the month, though drug stocks have been strong in recent months.

International stocks were strong all around, but Japan was at the top of the heap for non-emerging markets. T. Rowe Price Japan was up 4% for the month, and is up near 15% for the last three months.

Bridgeway Blue Chip 35 Index (BRLIX) scored a 3.87% gain – just beating the S&P500. Mega-cap stocks have recently started outperforming the already large-cap weighted S&P500.  

Tech was strong; the Technology SPDR was up 6.17% for the month. However, our best performer was SSgA Emerging Markets, up near 8% for the month and 156% since we bought it. 

FMI Common Stock has a nice 4.24% gain as well. This portfolio would have been up significantly if not for the drag of 20% bonds.

There are no major tax distributions slated for December in this portfolio. The biggie was Artisan International Small Cap (ARTJX), paying out an 11.27% dividend of mostly long-term gains back in November. We’re up over 125% in this fund so this is to be expected. We sold much of our position a few months before the big dividend anyway (leaving somebody else with it, sadly for them). This fund is paying out fairly large dividends because it has done very well, and is closed to new investors. This last part is key because with less new money piling in, the dividends have to go to a relatively fixed group of investors – not a bunch of new investors who piled in recently. 

As this Artisan fund is closed, new investors following our portfolio are probably in Forward International Small Companies (PISRX) anyway. This alternate fund is also way up (actually up more in 2005 than Artisan, and about the same in 2004. 61.6% in ‘03, 25.6% in ‘04, and 18% so far in ‘05 to be exact). While this small fund is not closed, it has not seen big asset gains, so the shareholder base is not growing enough to water down the dividend. The fund paid out $0.6519 per share in short-term capital gains, and $0.3633 in long-term gains back in November (record date 11/25/05). In total, this was a 6.8% distribution, less than Artisan but high nonetheless. In addition, the fund will pay any income out at the end of December (12/30/05 record date, but this can be ignored).

The only other large dividend was FMI Common Stock, but that was paid out in October.

New investors to our portfolios, or those adding new money in taxable accounts, should generally wait until after the record dates listed in our 2005 Capital Gains Report for any of the funds.

The Conservative portfolio was essentially flat in September, up just 0.08%. Bonds and stocks flipped once again – bonds fell while stocks went up.

The only really weak spot in the portfolio last month was our 5% stake in American Century International Bond. The fund fell 2.5% (reversing August’s gains) as the U.S. dollar rose – surprising given the recent hurricane and near-guaranteed deficit spending. Perhaps that new debt will have to be purchased by foreigners, which means more dollar buying (boosting the dollar) in the near turn.

The Harbor bond fund fell just under 1% – about as far as the aggregate bond index fell. Bill Gross is calling for a period of stagnant economic growth, which he thinks will (and usually does) lead to lower rates (good for bonds). He may have upped his duration (more longer-term bonds) and increased his credit quality in recent months to adjust. This means if rates climb this fund will lose more than it would have before. His view differs from a growing concern of stagnation with inflation and higher interest rates – the higher rates will cause economic slowdown. He takes the opposite view; an economic slowdown will cause lower rates.  We’ll have to wait and see who is right in this chicken-before-the-egg issue. Both scenarios suck eggs of course.

Two hot spots in the portfolio failed to beat out the bond drag by enough to lift the entire portfolio. SSgA International Growth, like most foreign funds, was up (about 4% for the month). We may have seen the last big umpf in utility funds last month; American Century Utility Income was up 3.65% – 94.8% since we added it to the portfolio some two and a half years ago.

The Aggressive Growth portfolio was up just under 1% in September. Bonds and stocks flipped once again – bonds fell while stocks went up.

The portfolio had the punch of foreign stocks. Artisan International Small Cap rose 4.25% while T. Rowe Price Japan climbed a big 9.19% and is now up about 20% over the last three months. 

The latest jump in Japanese stock prices seems mostly related to a growing feeling that one of the greatest bear markets in global stock market history is officially over. We prefer big stakes in Japan when fear is more prevalent, but we’re sticking with our reduced stake, even after the jump. Japan benefits from a rising U.S. dollar and the recent recovery in our dollar means Japanese exports will still have an easy market here. Now if only consumers can keep up the spending . . .

In first place for this portfolio was SSgA Emerging Markets, up 9.27% and now up a remarkable (and somewhat scary) 152% since added to the portfolio. Before you get too excited just remember what happened the last time emerging market funds were all the rage in the early 90s – a sharp drop followed by almost 10 years of tepid performance. We’re getting close to cutting this fund loose completely.

Healthcare stocks were weak; HealthCare Select SPDR was down 0.58%. We see this fund doing better than most going forward, particularly if the market and economy turns south. Technology wasn’t much better; the Technology SPDR was basically flat last month.

The Harbor bond fund fell just under 1% – about as far as the aggregate bond index fell. Bill Gross is calling for a period of stagnant economic growth, which he thinks will (and usually does) lead to lower rates (good for bonds). He may have upped his duration (more longer-term bonds) and increased his credit quality in recent months to adjust. This means if rates climb this fund will lose more than it would have before. His view differs from a growing concern of stagnation with inflation and higher interest rates – the higher rates will cause economic slowdown. He takes the opposite view; an economic slowdown will cause lower rates. We’ll have to wait and see who is right in this chicken-before-the-egg issue. Both scenarios suck eggs of course.

In July the Conservative portfolio rose 0.66%. Bonds suffered as rates finally crept up, while the hot stock market countered the dip in bonds.

Junk bonds were strong, even though higher-grade bonds dragged. This can sometimes happen when investors are optimistic about corporate health. Since ordinary bonds slipped, the extra yield from owning higher risk bonds over safer bonds is slimmer than it was a month ago. Vanguard High Yield Corporate was up 0.92%

Utility stocks continued to perform well – strange in a rising rate month. The same goes (but to a lesser extent) for Vanguard Dividend Growth, which rose 3.11%, even though dividend paying stocks become less valuable as interest rates climb (why settle for a measly 2% dividend when safe bonds pay 5, maybe 6%?). Big market increases trump such considerations, at least in the shorter run. Interest rates are still quite low, notably with longer term bonds, and don’t represent much of a draw from stocks – so far.

Foreign bonds continued on a weaker path, and we’re itching for more dollar weakness to increase allocations here. American Century International Bond was down .80% for the month.

Healthcare stocks moved with the market. The Health Care Select SPDR was up 2.35%. We have yet to see out-performance in this area.

Foreign stocks were strong as well, SSgA International Growth Opportunities was up 3.47%.

In July the Aggressive Growth portfolio rose just over 3%. Bonds suffered as rates finally crept up, while the hot stock market countered the dip in bonds. While our 20% stake in bonds in the Aggressive Growth portfolio was a drag, our higher risk funds took off. Four funds in the portfolio were up over 5% for the month.

Healthcare stocks moved with the market. The Health Care Select SPDR was up 2.35%. We have yet to see out-performance in this area.

Foreign stocks were strong as well, with small cap leading the charge abroad as well as domestically. Artisan International Small Cap was up 6.83% for the month (and 113% since we bought it in 2002 – yikes). Emerging markets were strong as well, with SSgA Emerging Markets up some 6.89% - about 128% since we added the fund and the end of February 2003. On the one hand, high oil prices hurt emerging markets that need fuel to run manufacturing facilities. On the other, some emerging markets produce oil (and other commodities) and the record prices are helping those countries.

Our Technology SPDR was up 5.52% - not quite as good as the Nasdaq’s 6.2% jump in July, but a nice plus for the portfolio. The ETF is up 11.2% since added to the portfolio three months ago.

July was a good month for large cap in general; Bridgeway Blue-Chip 35 rose near 3%.