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September 2004 Trade alert!

October 27, 2004

The Conservative portfolio rose 1.34% in September – a nice move for a lower risk portfolio and well above our Safety portfolio’s return. 

Since mostly longer term bonds did well last month, most of our action was in stocks. The Vanguard Short Term Corporate fund, which makes up 30% of the portfolio, was up just .18%. Since every other fund but one beat the S&P500 and Dow, the portfolio scored a good return anyway. The other small gainer was Harbor Bond.

We thought Bill Gross, Pimco’s bond manager extraordinaire, might be easing up on longer term bonds in response to rates falling (after correctly adding some longer term treasuries after rates rose earlier this year). His moderate risk Harbor Bond fund rose just .28% in September. Junk bonds and longer term bonds did well last month (Vanguard High Yield was up 1.22%), while shorter term bonds were up only slightly. The Vanguard Total Bond Index fund, which represents the entire investment-grade U.S. market, was up .16%. Gross likely has a bit more in lower credit quality bonds than you see in the index, as well as some foreign bonds. 

The yield curve has been flattening out for a few months now, ever since Alan Greenspan started raising rates. Last month longer term rates fell, while shorter term rates remained largely the same. This is flattening out effect – which means shorter term bonds did not go up in price significantly.

Our top performer in our lowest risk portfolio was a 1.86% return in American Century International Bond fund. The dollar is still under pressure as our ongoing trade gap and low interest rates chip away at any dollar strength.

The nice thing from these yield curve moves is money market rates and ultra short term bond funds (our preferred near cash holding) is starting to yield almost as much as inflation.

Falling interest rates are part of the reason Utility stocks have been hot this year. We’ve been big utility investors in our MAXadvisor model portfolios because the category had been one of the most out of favor with fund investors. In fact, many fund companies closed their Utility funds in recent years. As is often the case, this category went on to impress. Our American Century Utility Income fund (BULIX) was up 2.3% last month, and some 43.8% since added in early 2003 – far more than the S&P500. A little more of this and we’ll have to ease up on our stake.

Our most speculative choice in this portfolio, the Forward International Small Company fund, was up a solid 5.18% in September, regaining much of the ground lost in recent months. The whole small cap and emerging market areas have regained some interest in recent weeks.

Real estate, an area we wrote off about 14 months ago in our two lowest risk portfolios - has been hot. We had thought the good times were over for real estate in 2003. We sold our real estate fund holdings too early, but won’t back a stake without a significant pullback.

Bridgeway Balanced recovered nicely from a mysterious setback last month, up 2.28%. This gain was almost as odd as last month’s decline. How could a fund that owns stocks and writes covered calls (which lowers upside) and owns bonds beat both bond and stock indexes for the month?

We are making the following change to our Aggressive Growth portfolio on October 31st, 2004: 


<ul><li><font color="red"><b>SELL</b></font> Total holding of Bridgeway Ul-Sm Co Mkt (BRSIX). This holding was 5% of the total portfolio. 


<li><font color="red"><b>BUY</b></font> Add to existing 15% stake in Bridgeway Blue-Chip 35 (BRLIX) to make this holding 20% of the total portfolio. 


Micro cap has outperformed larger cap for years now, and too much mutual fund money is going into the category. Large cap should beat micro cap for the next 1-3 years.