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The Powerfund Portfolios posted solid gains in May, with both the Conservative and Aggressive portfolios beating Vanguard's main U.S. stock index and total global fund. As we're taking less risk than these funds it's harder to do this in an up market (as May was), than a down one.

We've been more or less lagging benchmarks indexes since the Trump election upset so it is a little early to spike the football, but our year-to-date figures are now closing in on these hard to beat funds. Adjusting for risk we more often beat both Vanguard's U.S. stock index and total global fund, as will probably become apparent again in any meaningful stock market drop.

In May, our Conservative portfolio gained 2.03%. Our Aggressive portfolio jumped 1.92%. Benchmark Vanguard funds for May 2017 were as follows: Vanguard 500 Index Fund (VFINX) up 1.39%; Vanguard Total Bond Market Index Fund (VBMFX) up 0.67%; Vanguard Developed Markets Index Fund (VTMGX) up 3.41%; Vanguard Emerging Markets Stock Index (VEIEX) up 1.22%; Vanguard Star Fund (VGSTX), a total global balanced portfolio, gained 1.86%.

While the stock market's brief sharp drop in mid-May has largely been erased in recent days, most of our upside has been from the U.S. dollar declining as the euro, and foreign stock markets, have been hot (after a long spell of underperformance for both).

In the U.S. the strongest funds in May were in large-cap growth stocks. Small-cap value funds where down nearly 3% on average. We're short small-cap but the hedge has mostly been a bust in this hot market led by riskier small-caps. In general, we would prefer shorting small-cap value as that category has been the most overpriced of late, but this is not easy to do with inverse ETFs.

Almost all foreign markets beat the S&P 500 in May, except for Latin American funds which were the sole big category loser, down about 3%. This dragged on our iShares MSCI BRIC Index (BKF) stake which posted only a 1.36% return.

Long-term investment-grade bonds were top performers as interest rates declined. We had a 3.2% gain in Vanguard Extended Duration Treasury (EDV) and a 1.9% jump in Vanguard Long-Term Bond Index ETF (BLV). The falling dollar helped boost SPDR Barclays Intl. Treasury (BWX) 1.92%. Higher-risk bonds did fine but the bigger gains where in more interest rate sensitive bonds. We're considering exiting our strong performing high yield bond fund Artisan High Income Fund (ARTFX), which was up 0.58% in May.

In sectors, financials and energy were weak — high beta stocks that have done well since Trump's election. The only real drags were Vanguard Telecom Services ETF (VOX), down 3.06%, and iShares Mortgage REIT (REM), down 1.47%. The former's poor performance was a bit of a surprise as safe and yield have been doing well. The latter's rough month was probably just a bit of a correction after big recent gains.

Other than a basically flat month shorting gold, our shorts were helping returns (it has been awhile..) with Proshares Ultrashort NASDAQ Biotech (BIS) up 7.49%, ETRACS 1xMonthly Short Alerian MLP (MLPS) up 6.38%, PowerShares DB Crude Oil Dble Short (DTO) up 5.31%, and Proshares Ultrashort Russel2000 (TWM) up 3.67%. With mostly big returns abroad — iShares MSCI Italy Capped (EWI) up 5.37%, and Vanguard European ETF (VGK) up 4.91% — AND good returns in bonds, we couldn't help but have a good May.

Stock Funds1mo %
Proshares Ultrashort NASDAQ Biotech (BIS)7.49%
ETRACS 1xMonthly Short Alerian MLP (MLPS)6.38%
iShares MSCI Italy Capped (EWI)5.37%
PowerShares DB Crude Oil Dble Short (DTO)5.31%
Vanguard European ETF (VGK)4.91%
Artisan Global Equity (ARTHX)4.04%
Vanguard Utilities (VPU)4.00%
Proshares Ultrashort Russel2000 (TWM)3.67%
Vanguard Europe Pacific ETF (VEA)3.41%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX)3.41%
[Benchmark] Vanguard 500 Index (VFINX)1.39%
iShares MSCI BRIC Index (BKF)1.36%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX)1.22%
Homestead Value (HOVLX)0.40%
Vanguard Value (VTV)0.06%
Gold Short (DZZ)-0.19%
iShares Mortgage REIT (REM)-1.47%
Vanguard Telecom Services ETF (VOX)-3.06%
Bond Funds1mo %
Vanguard Extended Duration Treasury (EDV)3.20%
SPDR Barclays Intl. Treasury (BWX)1.92%
Vanguard Long-Term Bond Index ETF (BLV)1.90%
[Benchmark] Vanguard Total Bond Index (VBMFX)0.67%
Artisan High Income Fund (ARTFX)0.58%
Vanguard Mortgage-Backed Securities (VMBS)0.50%

April 2017 Performance Review

May 3, 2017

April was a good month for stocks and bonds across the board in April, with foreign markets performing best of all. With longer-term rates declining and foreign markets strong, our model portfolios logged a decent month — even with the drag of shorting.

Our Conservative portfolio gained 1.62%. The Aggressive portfolio rose 1.06%. Benchmark Vanguard funds for April 2017 were as follows: Vanguard 500 Index Fund (VFINX) up 1.22%; Vanguard Total Bond Market Index Fund (VBMFX) up 0.96%; Vanguard Developed Markets Index Fund (VTMGX) up 1.74%; Vanguard Emerging Markets Stock Index (VEIEX) up 0.32%; Vanguard Star Fund (VGSTX), a total global balanced portfolio, gained 1.53%.

Growth stocks led the charge in the U.S. market with returns between 2 and 3% typical. Big value stocks were barely positive (as seen in our Vanguard Value (VTV) holding, which was down fractionally).

European stocks were up just over 4% as anti-EU candidate Marie La Pen was denied victory in French elections (at least for now). This also boosted the Euro and helped our foreign bond fund SPDR Barclays Intl. Treasury (BWX) with a 1.43% return.

The hottest area was Indian stocks (again), up just over 5% and the best area abroad with solid double-digit annualized three-year numbers. Close behind was Japan stocks (and not much else) as foreign stocks have been weak for much of the last few years.

Shorting stocks and gold meant losses in April but oil slipped, sending PowerShares DB Crude Oil Dble Short (DTO) up 7.42% for the month.

Longer-term government bonds led the bond markets in April even outperforming high-yield bond funds. Over the last year higher-risk debt has done better with high-yield bond funds up just over 10% while long-term government bonds are still down slightly over this period.

In general, safer debt (including muni bonds) are more attractively priced than high-yield debt now. Reach for yield has pushed bond prices up, and we're benefiting with Artisan High Income Fund (ARTFX) — up 1.37% in April — and iShares Mortgage REIT iShares Mortgage REIT (REM), which delivered a 3.6% return. iShares Mortgage REIT iShares Mortgage REIT (REM)'s big month means it's up 14.16% YTD and 32.77% in the last year.

Stock Funds1mo %
PowerShares DB Crude Oil Dble Short (DTO)7.42%
Vanguard European ETF (VGK)3.90%
iShares Mortgage REIT (REM)3.60%
Artisan Global Equity (ARTHX)2.85%
iShares MSCI Italy Capped (EWI)2.76%
Vanguard Europe Pacific ETF (VEA)2.21%
Vanguard Telecom Services ETF (VOX)2.19%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX)1.74%
iShares MSCI BRIC Index (BKF)1.46%
[Benchmark] Vanguard 500 Index (VFINX)1.22%
Vanguard Utilities (VPU)0.67%
Homestead Value (HOVLX)0.48%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX)0.32%
Vanguard Value (VTV)-0.03%
ETRACS 1xMonthly Short Alerian MLP (MLPS)-0.52%
Gold Short (DZZ)-2.56%
Proshares Ultrashort Russel2000 (TWM)-2.64%
Proshares Ultrashort NASDAQ Biotech (BIS)-3.06%
Bond Funds1mo %
Vanguard Extended Duration Treasury (EDV)1.84%
Vanguard Long-Term Bond Index ETF (BLV)1.58%
SPDR Barclays Intl. Treasury (BWX)1.43%
Artisan High Income Fund (ARTFX)1.37%
[Benchmark] Vanguard Total Bond Index (VBMFX)0.96%
Vanguard Mortgage-Backed Securities (VMBS)0.56%

March 2017 Performance Review

April 4, 2017

The rally in stocks fizzled in March and bonds didn't offer much help as rates drifted up slightly. Foreign stocks performed better as the valuation gap — after years of underperformance to the U.S. stock market — may be attracting more money.

Our Conservative portfolio gained 0.69% in March. The Aggressive portfolio rose 0.85%. Benchmark Vanguard funds for March 2017 were as follows: Vanguard 500 Index Fund (VFINX) up 0.10%; Vanguard Total Bond Market Index Fund (VBMFX) down 0.06%; Vanguard Developed Markets Index Fund (VTMGX) up 3.00%; Vanguard Emerging Markets Stock Index (VEIEX) up 2.25%; Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 0.85%.

We beat the benchmarks this month (finally…) largely on the strength of foreign stock funds, and fair performance from our shorts (including a 10% gain in PowerShares DB Crude Oil Dble Short (DTO)). At the top of the traditional fund heap was iShares MSCI Italy Capped (EWI), up 8.84% for the month and leading the already strong European markets (Vanguard European ETF (VGK) also performed well, up 4.43%)).

Emerging markets were hot with iShares MSCI BRIC Index (BKF) up 2.57%, largely on the work of Indian stocks.

Mortgage REITs also sizzled, with the Conservative portfolio's iShares Mortgage REIT (REM) up 2.88%. In general we're seeing risky yield-reach again by investors.

Our only notable bad performers from March: Vanguard Telecom Services ETF (VOX), down 2.11% — and now quite attractive again given recent lagging. Value stocks in general were weak with Homestead Value (HOVLX) down 0.72% and Vanguard Value (VTV) down 0.92%. We had mild declines in longer-term bond funds like Vanguard Long-Term Bond Index ETF (BLV), down 0.70%, and Vanguard Extended Duration Treasury (EDV) down 0.97% — though longer-term bonds are not attractively priced after the big gain in U.S. stocks over the last year.

Large-cap growth was the strongest U.S. category with a roughly 1% return, but we're not directly exposed here now.

Foreign stocks aren't really that cheap when you factor in the likely slower earnings growth than the U.S. market in larger markets and the heighted risk in emerging markets, but with our currency expensive after a multi-year rise large gains can be made investing abroad in unhedged funds solely on our currency weakening. Bottom line: you are now getting more diversification benefit from owning foreign assets than probably anytime in the last 10 years.

Non-emerging market foreign stock fund categories generally have higher ratings on our proprietary category rating system because the returns have been relatively weak and money flows have been less positive recently. Ideally we'd see huge outflows from foreign stock funds, which we'd buy into. But there may just be too many investors today who diversify to any and evertying, in contrast to the sort of 1990s style performance chasing we used to witness. Emerging market stock funds have done well and have beaten U.S. markets this year but are still seriously underperforming from levels hit in early 2011 — actually going in a different direction completely through much of this time. Right now, emerging market stocks are not that attractive given the recent gains, and interest by investors we'll likely focus more on larger foreign economies.

Stock Funds1mo %
PowerShares DB Crude Oil Dble Short (DTO)10.00%
iShares MSCI Italy Capped (EWI)8.84%
Vanguard European ETF (VGK)4.43%
Vanguard Europe Pacific ETF (VEA)3.06%
ETRACS 1xMonthly Short Alerian MLP (MLPS)3.06%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX)3.00%
iShares Mortgage REIT (REM)2.88%
iShares MSCI BRIC Index (BKF)2.57%
Artisan Global Equity (ARTHX)2.49%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX)2.25%
Proshares Ultrashort NASDAQ Biotech (BIS)1.42%
Gold Short (DZZ)1.04%
[Benchmark] Vanguard 500 Index (VFINX)0.10%
Vanguard Utilities (VPU)-0.05%
Proshares Ultrashort Russel2000 (TWM)-0.62%
Homestead Value (HOVLX)-0.72%
Vanguard Value (VTV)-0.92%
Vanguard Telecom Services ETF (VOX)-2.11%
Bond Funds1mo %
SPDR Barclays Intl. Treasury (BWX)0.76%
Artisan High Income Fund (ARTFX)0.18%
Vanguard Mortgage-Backed Securities (VMBS)0.10%
[Benchmark] Vanguard Total Bond Index (VBMFX)-0.06%
Vanguard Long-Term Bond Index ETF (BLV)-0.70%
Vanguard Extended Duration Treasury (EDV)-0.97%

February 2017 Performance Review

March 3, 2017

Maybe it is the buzzy Snap IPO, maybe the daily stock market record highs, but we seem to be getting closer to that ole' irrational exuberance again.

U.S. stocks where the clear winners again in February, but risky global assets, from emerging markets to junkier debt, posted good numbers as well.

Our Conservative portfolio gained 1.60% in February and the Aggressive portfolio gained 1.12%. Benchmark Vanguard funds for February 2017 were as follows: Vanguard 500 Index Fund (VFINX) up 3.96%; Vanguard Total Bond Market Index Fund (VBMFX) up 0.66%; Vanguard Developed Markets Index Fund (VTMGX) up 0.99%; Vanguard Emerging Markets Stock Index (VEIEX) up 3.28%; Vanguard Star Fund Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 2.11%.

The portfolios hung in there versus the benchmarks thanks to exposure to said emerging markets and junk debt. Shorts and our foreign bonds were the main drag, as were foreign non-emerging market stocks, which barely budged. We're just not taking enough stock risk in general to keep up with high-stock-allocation balanced portfolios like Vanguard Star Fund Vanguard Star Fund (VGSTX) have which is about 60% stocks, mostly U.S. It's worth noting that in down markets we don't fall as much as VGSTX either and have outperformed it with our aggressive portfolio since early 2002.

Hot areas for the month include emerging market stocks from India, China, and Latin American which is why iShares MSCI BRIC Index (BKF) was up 3.51% — just short of the U.S. Index. Other winners were iShares Mortgage REIT (REM) up 5.68% as investors flocked to riskier yield and a surprise 4.95% jump in Vanguard Utilities ETF (VTU) as utilites rebounded sharply without a major drop in interest rates.

For now, the mentality of investors is stocks will win and bonds will lose. The economy is still improving and fears of a pending recession have vanished. Upbeat inflation and employment data supports the rising stock picture, as well as the rising rate story.

The economy has finally become strong enough for the Federal Reserve to speed up the rate increases (and maybe kill all the fun in the process). This fear of rising rates has been around for quite some time now, but recently the fear has morphed into angst over rising inflation from of economic activity rather than Federal Reserve mischief.

It's possible stocks will continue to rise while bond prices decline and yields go up. We had near 1% dividend yields on stocks in early 2000 during the epic bubble, and over 5% yields on bonds when investors didn't care for bonds. Today the stock market yields about 2% while 10-year government bonds yield just shy of 2.5%. Heck, stocks could double and bonds fall by half. Or stocks could crash like they did they last time famed economist Robert Schiller's valuation measures were as high as today.

Sure, either a big rise or '29 style crash are unlikely, even if either happened it would likely end as badly as it did in 2000 when treasury bonds basically outperformed stocks for the next 15 years. It's more likely stocks will get a little more inflated but rates will stay near current levels.

Stock Funds1mo %
iShares Mortgage REIT (REM)5.68%
Vanguard Utilities (VPU)4.95%
Homestead Value (HOVLX)4.75%
[Benchmark] Vanguard 500 Index (VFINX)3.96%
Vanguard Value (VTV)3.58%
iShares MSCI BRIC Index (BKF)3.51%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX)3.28%
Vanguard Europe Pacific ETF (VEA)1.06%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX)0.99%
Artisan Global Equity (ARTHX)0.74%
Vanguard European ETF (VGK)0.59%
iShares MSCI Italy Capped (EWI)-0.38%
PowerShares DB Crude Oil Dble Short (DTO)-1.29%
Vanguard Telecom Services ETF (VOX)-2.77%
ETRACS 1xMonthly Short Alerian MLP (MLPS)-3.69%
Proshares Ultrashort Russel2000 (TWM)-4.25%
Gold Short (DZZ)-6.20%
Proshares Ultrashort NASDAQ Biotech (BIS)-12.73%
Bond Funds1mo %
Vanguard Extended Duration Treasury (EDV)1.95%
Vanguard Long-Term Bond Index ETF (BLV)1.80%
Artisan High Income Fund (ARTFX)1.29%
[Benchmark] Vanguard Total Bond Index (VBMFX)0.66%
Vanguard Mortgage-Backed Securities (VMBS)0.48%
SPDR Barclays Intl. Treasury (BWX)0.30%

January 2017 Performance Review

February 4, 2017

The interest rate increase that accelerated when President Trump won in November ended in December.

Rate-sensitive investments across the board have performed well in recent weeks, pushing our Conservative portfolio up more than our Aggressive portfolio in January.

Stocks remained strong, though the overall investor shift from bonds to stocks has slowed.

Upside in stocks (and downside in bonds) could be limited without actual tax-and-spend policy taking shape and with no signs of rising inflation.

The Federal reserve just took a break on rate increases because economic growth and inflation just aren't there yet to warrant much higher short term rates.

Our Conservative portfolio gained 1.11%. Our Aggressive portfolio advanced 0.69%. Benchmark Vanguard funds for January 2017 were as follows: Vanguard 500 Index Fund (VFINX) up 1.88%; Vanguard Total Bond Market Index Fund (VBMFX) up 0.29%; Vanguard Developed Markets Index Fund (VTMGX) up 3.66%; Vanguard Emerging Markets Stock Index (VEIEX) up 4.94%; Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 2.11%.

Our strongest area was in emerging markets with iShares MSCI BRIC Index (BKF) up 7.31%, well above broader emerging market index returns.

Europe was strong but Italy took a breather after a hot streak. iShares MSCI Italy Capped (EWI) was down 1.94% in January — our only negative returning stock or bond fund last month that wasn't shorting.

Speaking of, PowerShares DB Crude Oil Dble Short (DTO) was the lone area of shorting success in January.

Junk bonds led the bond market again with Artisan High Income Fund (ARTFX) up 1.64% but recently hit foreign bonds rebounded with SPDR Barclays Intl. Treasury (BWX) up 1.46% as the U.S. dollar's rise may have also reached a limit. The rebound in junk bonds has now been significant and is increasing downside risk if the economy appears to weaken. As investment grade yields are higher than a few months ago the spread in yields between higher-risk and lower-risk debt isn't as appealing.

Stock Funds1mo %
iShares MSCI BRIC Index (BKF)7.31%
PowerShares DB Crude Oil Dble Short (DTO)6.79%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX)4.94%
Vanguard Europe Pacific ETF (VEA)3.67%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX)3.66%
Artisan Global Equity (ARTHX)3.09%
Vanguard European ETF (VGK)2.96%
[Benchmark] Vanguard 500 Index (VFINX)1.88%
iShares Mortgage REIT (REM)1.36%
Vanguard Utilities (VPU)1.17%
Homestead Value (HOVLX)0.55%
Vanguard Value (VTV)0.49%
Vanguard Telecom Services ETF (VOX)0.38%
Proshares Ultrashort Russel2000 (TWM)-0.89%
iShares MSCI Italy Capped (EWI)-1.94%
ETRACS 1xMonthly Short Alerian MLP (MLPS)-4.37%
Proshares Ultrashort NASDAQ Biotech (BIS)-10.20%
Gold Short (DZZ)-10.58%
Bond Funds1mo %
Artisan High Income Fund (ARTFX)1.64%
SPDR Barclays Intl. Treasury (BWX)1.46%
Vanguard Extended Duration Treasury (EDV)1.25%
Vanguard Long-Term Bond Index ETF (BLV)0.56%
[Benchmark] Vanguard Total Bond Index (VBMFX)0.29%
Vanguard Mortgage-Backed Securities (VMBS)0.17%

December 2016 Performance Review

January 4, 2017

The Powerfund Portfolios started 2016 well and ended 2016 well, but the underperformance during the interest rate increase was a post-election drag on our bond and foreign funds which lowered both portfolios' annual return numbers. Too little in stocks in general and U.S. stocks in particular and too much shorting led to so-so 2016 returns of 3.9% and 3.82% respectively in the C­onservative and Aggressive portfolios.

In December our Conservative portfolio gained 0.98% and the Aggressive portfolio jumped 1.81%. Benchmark Vanguard funds for December 2016 were as follows: Vanguard 500 Index Fund (VFINX) up 1.96%; Vanguard Total Bond Market Index Fund (VBMFX) up 0.26%; Vanguard Developed Markets Index Fund (VTMGX) up 2.49%; Vanguard Emerging Markets Stock Index (VEIEX) down 0.16%; Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 0.90%.

For the year the Vanguard S&P 500 gained 11.81% while the Vanguard Total Bond portfolio rose 2.51%, so a 50/50 U.S. portfolio should have been up just over 7%. Unfortunately we were under 50% stocks and our short positions, while a relatively small part of the overall portfolio allocations, experienced big losses. Outside of our short fund we actually did well by and large, even though we were too heavy in some interest-rate-sensitive stock funds.

All that said, the Powerfund Portfolios experienced very low volatility and downside compared to just about any benchmark in 2016. Our benchmark fund-of-funds, Vanguard STAR, fell 3.74% in January 2016 when the S&P 500 dropped almost 5%, while our Aggressive was down only 0.46% for the month.

Our Aggressive's month-by-month performance in 2016 was only down more than 1% in a single month: November. In the post election market mayhem the Aggressive portfolio fell by a whopping 2.76%. We were positioned well for U.S. stock weakness and economic turmoil, not growing domestic optimism.

In December we had some nice rebounds in Vanguard Telecom Services ETF (VOX) up 7.43% and iShares MSCI Italy Capped (EWI) up 12.33%, as rate sensitive stocks did well and shorting gold and biotech's worked after a rough year.

December was one of our best months of picks relative to benchmarks. The main dogs were shorting oil and small cap stocks, though iShares MSCI BRIC Index (BKF) was down 2.29% even though Russian stocks have been strong all year, China has been a slight drag. Artisan High Income Fund Artisan High Income Fund (ARTFX) rose 1.45% as investors continued to favor riskier debt over less economically sensitive but more rate-sensitive debt.

Our stock funds were, on average, in the top half of their category for 2016 with most in the top third or higher. The only real dog from a pure relative fund performance was Artisan Global Equity (ARTHX) in the bottom 10%. This fund has never been in the bottom half since launch in 2010, but the portfolio mix was too defensive to do well in this market.

On the bond side other than Artisan High Income Fund Artisan High Income Fund (ARTFX) our relative performance was more average.

Bottom line, it wasn't a year to short or be lean on U.S. stocks. Of course, neither was 1999. I'm not impressed with our 2016 returns but those looking for a low downside found it. Those looking for more risk and reward would have been better off in almost any mix of our stock funds, skipping the bonds and shorts. We've never matched a hot stock market but our strong relative performance during declines have always made up for it.

Stock Funds1mo %
iShares MSCI Italy Capped (EWI)12.33%
Vanguard Telecom Services ETF (VOX)7.43%
Proshares Ultrashort NASDAQ Biotech (BIS)5.52%
Vanguard European ETF (VGK)4.92%
Vanguard Utilities (VPU)4.79%
Gold Short (DZZ)4.02%
Vanguard Value (VTV)2.73%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX)2.49%
Vanguard Europe Pacific ETF (VEA)2.45%
Homestead Value (HOVLX)2.02%
[Benchmark] Vanguard 500 Index (VFINX)1.96%
iShares Mortgage REIT (REM)0.66%
Artisan Global Equity (ARTHX)0.32%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX)-0.16%
iShares MSCI BRIC Index (BKF)-2.29%
ETRACS 1xMonthly Short Alerian MLP (MLPS)-3.59%
Proshares Ultrashort Russel2000 (TWM)-6.17%
PowerShares DB Crude Oil Dble Short (DTO)-12.47%
Stock Funds1mo %
Artisan High Income Fund (ARTFX)1.45%
Vanguard Long-Term Bond Index ETF (BLV)0.80%
[Benchmark] Vanguard Total Bond Index (VBMFX)0.26%
Vanguard Mortgage-Backed Securities (VMBS)-0.10%
SPDR Barclays Intl. Treasury (BWX)-0.27%
Vanguard Extended Duration Treasury (EDV)-0.36%

November 2016 Performance Review

December 7, 2016

It was a November to remember.

November was Donald Trump's month in the markets. Nobody saw him winning much less U.S. stocks going up in the wake, but weirdly many of the stocks that did well after the surprise Trump victory started doing so before the election. Maybe this oddity — which could be a mere coincidence — will show up in the fake news that permeates the conspiracy circles online. Talk about a bull market…

One global equity strategist for Barclays — one of the largest asset managers — predicted that in the event of an unlikely Trump win stocks would fall around 7%. Wrong and wrong.

The most important takeaway for investors here is no matter how you feel about Trump, don't stop investing and hide for four or eight years waiting for America to burn. (That is a fire that some have expected since the dawn of the republic.) I said the same thing over the last eight years to those who were certain that Obama was going to destroy America and its economy. Those who stayed in cash, commodities, and gold — perhaps with seed and water-purifiers— missed out on perhaps the greatest average annual returns in stocks during any president's time in office. I'm trying not to jinx it…

The political pendulum has swung, but that doesn't mean Trump will destroy the economy either. Around half of the people probably think his policies will help the economy. This doesn't mean your portfolio needs to look the same as it did in 2009. The scary period after the Trump victory was in the first few hours. Futures that trade on stocks after hours were down sharply — like 5% sharply. This trend reversed by the time regular trading began and became the full-fledged "Trump rally" that is now getting too much attention in the press. Sort of like Trump.

While there were some intriguing moves up and down post-Trump — biotech stocks moved up, maybe because of less political heat on pricing — the overall global asset picture was not impressive. The total value of all assets declined, while the U.S. stock market and U.S. dollar "won." We have a global portfolio of stocks and bonds that is tied fairly highly to interest rates and took a blow.

As an example of how fleeting the Trump bump can be, and the inherent unpredictability of Trump policy can be, Biotech stocks are now (as of December 7th) falling fast on a comment from Trump that, "I`m going to bring down drug prices. I don`t like what has happened with drug prices." It's like having Bernie Sanders, Ross Perot, and Ronald Reagan share the presidency.

Our Conservative portfolio declined 3.50%. Our Aggressive portfolio declined 2.76%. Benchmark Vanguard fund performance for November 2016 was as follows: Vanguard 500 Index Fund (VFINX) up 3.70%; Vanguard Total Bond Market Index Fund (VBMFX) down 2.64%; Vanguard Developed Markets Index Fund (VTMGX) down 1.53%; Vanguard Emerging Markets Stock Index (VEIEX) down 4.36%; Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 0.41%.

It is very rare to see these benchmarks down so much relative to the S&P 500. Of the over 100 fund categories (large-cap value, technology, muni bond, small-cap growth, utilities, etc.), about 85% underperformed the S&P 500 in November. The average category was down about a half percent. Considering that most fund categories are composed of U.S. stocks, this wasn't a very good month overall. If you factor in real estate prices, which likely slipped with rising rates, global wealth almost certainly declined.

Our portfolios also underperformed the S&P 500. All the bond funds were down, with long-term bond funds such as Vanguard Long-Term Bond Index ETF (BLV) down 6.3%, while SPDR Barclays Intl. Treasury (BWX) slid 5.72% on the double hit of a rising U.S. dollar and falling bond prices with rising yields. Only our gold short fund Gold Short (DZZ) scored a big win — up 17%. We did well with value funds: Vanguard Value (VTV) up 6% and Homestead Value (HOVLX) up 5.66%. Besides shorting stocks, which was a disaster, utilities and our foreign funds were down for the month. While both are still up for the year, we are now well behind the S&P 500's near 10% rise with dividends.

As an investor, the question is: does this continue and the U.S. dollar and U.S. stocks become "great again" at the expense of other assets, in a Trumpian zero-sum game where we win only if Mexico and China start to lose? Unlikely. We're near the tail end of a long run in the U.S. dollar, which is why we are fairly heavy abroad now in the first place, which is not how our portfolios looked in 2008.

The problem is that it's hard to win without everybody winning on some level. We can put punitive tariffs on imports and give tax breaks to those that play by the new rules, but eventually, others will do this; for every 1,000 jobs that are "saved" here, we'll lose as many to another country that's trying to save its jobs. And all the while, governments around the world go broke by lowering taxes and increasing spending, while incentivizing companies to stay put pushing interest rates and borrowing costs up as borrowing increases to finance the gap in revenues and spending.

So why do investors seem to like the current situation? It is unlikely that if Bernie Sanders won the election and proposed similar anti-free trade initiatives to solve income inequality and boost the pay of the working person, Wall Street would cheer. It is possible that companies will benefit at the expense of governments (stop clapping) as tax incentives and bribes to fight the natural forces of globalization lead to higher after-tax profits, while consumers spend more as after-tax wealth increases. This scenario assumes tariff trade wars don't start, we don't get buried in debt with increasing rates needed to entice our new enemies abroad to buy, and economic growth increases enough to cover these shortfalls.

This all could just be the trigger event for investors to pile back into U.S. investments after years of investing abroad instead of in underperforming U.S. markets. The latest fund flow data shows investors leaving foreign markets and going into U.S. stocks post-election. This could be short lived and lead to foreign funds outperforming again soon. Late 2014 was a period of down foreign markets and up U.S. markets, and investors started to favor U.S. markets heavily for a few months. Foreign markets then spent the next few months outperforming U.S. markets. Or this trend could signal the end of the popularity of foreign investing, much like what happened in the late 1990s, eventually setting us up for years of foreign stock outperformance like the first part of the 2000s as the U.S. sinks.

The main question here is how high can interest rates go on expectations of a higher growth economy after a Trump tax-cut-and-spend stimulus package, one that presumably will kick in without a recession in place or particularly high unemployment. Global interest rates are very low for a reason; most countries face deflation and weak economies. If our rates go way up relative to other countries, the dollar will continue rising until it causes economic and earnings problems for U.S. companies.

The strange part of this Trump rally is that all the "pre-Trump" stocks were getting expensive and popular — rate-sensitive plays such as utilities and "low-volatility" stocks. We were setting up for outperformance in "high beta" stocks like financials and energy as a contrarian call. Then Trump won, and the fix happened in days. Bummer for us still stuck in October's portfolio, although we were migrating slowly to higher beta in client accounts this year. Too slowly. We weren't migrating because of a bold Trump prediction, but because the money was all going low risk, and taking on risk was going to pay off, as it did in November — with a bang. The proof, as we noted before, was the launch of dozens of low-volatility, "smart beta" ETFs and the almost total lack of new high beta or riskier-than-the-market funds.

Investments to consider adding or increasing post-Trump include:

TIPs — In theory, they offer more protection against rising inflation, though not against rising rates without much inflation. In that situation, they will do as poorly as regular bonds or worse.

Gold (to short) — Many of the calls for gold were based on American declinism, however unfounded that view was. A rising dollar and America being great again, even if that is a largely psychological phenomenon, could lead to those hoarding coins (and seed…) to unload and consider assets more tied to American prosperity.

High Beta — Risky and economically sensitive stocks and small-cap stocks have already done well in recent weeks, so big moves here, months before any policy change, could be too much risk based on expectations alone, but these are still a better idea than low-volatility stocks.

Oil (short) — While there may be some stocks that benefit, actual barrels of oil will get cheaper with more exploration. OPEC is already trying to get ahead of this new glut with production cuts that temporarily sent oil prices back up.

Foreign bonds — This could be risky in the short run, but in the long run, our dollar is near the top of how high it can go without self-correcting economic activity kicking in. Moreover, unless Trump-style politics spreads (beyond Brexit), you'd rather lend money to governments that don't increase spending and cut taxes. This is ultimately why buying, say, California Muni bonds worked out in recent years after panic lows post-2008. Those governments didn't cut taxes to try and grow out of the deficit; they raised tax revenue faster than spending. Stinks if you are a taxpayer; doesn't stink if you are a bondholder.

Emerging markets — Limit exposure to emerging markets, except maybe to Russia (our new BFF). Any plans to keep jobs in America doesn't hurt, say, Germany as much as it does emerging markets where those jobs were heading.

Bonds
— Just because everybody is looking for the end of the great bull market in bonds doesn't mean interest rates are going back to 6% any time soon.

??? — This Trump investing guessing game can be dangerous, unpredictable, and not based on repeatable logic. Nobody knows what is going to happen. In general, we're going to keep the focus on less-favored investments and wait for the stories to push these areas back up in price, which is essentially what happened in recent weeks. I'm mad at myself, not for not predicting a Trump win and U.S. stock rally but for pushing off buying out-of-favor financials, energy stocks (not oil itself), and high beta stocks with more economic than interest-rate sensitivity. Trump was just the catalyst. Don't think of news driving the investment returns so much as the news following the investment returns — which in turn are driven significantly by how much money is trying to earn returns in various investments.

And to the half of the country that thinks the 1980s are back, there are many differences between 2017 and 1981. We're older. Taxes, interest rates, and inflation are already low. The debt is far higher as a percent of GDP. The current stock-market dividend yield is a lot smaller, and the P/E ratio is a lot higher. Bidding up stocks valuations significantly based on expectations of greatness could make the next crash more like 1929 than 1987.

Stock Funds1mo %
Gold Short (DZZ)17.05%
Vanguard Value (VTV)6.00%
Homestead Value (HOVLX)5.66%
[Benchmark] Vanguard 500 Index (VFINX)3.70%
Vanguard Telecom Services ETF (VOX)3.25%
iShares Mortgage REIT (REM)1.22%
Artisan Global Equity (ARTHX)-1.19%
Vanguard Europe Pacific ETF (VEA)-1.51%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX)-1.53%
Vanguard European ETF (VGK)-2.34%
iShares MSCI BRIC Index (BKF)-3.26%
ETRACS 1xMonthly Short Alerian MLP (MLPS)-3.37%
iShares MSCI Italy Capped (EWI)-3.90%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX)-4.36%
Vanguard Utilities (VPU)-4.54%
PowerShares DB Crude Oil Dble Short (DTO)-7.04%
Proshares Ultrashort NASDAQ Biotech (BIS)-16.03%
Proshares Ultrashort Russel2000 (TWM)-19.77%
Bond Funds1mo %
Artisan High Income Fund (ARTFX)-0.23%
Vanguard Mortgage-Backed Securities (VMBS)-1.82%
[Benchmark] Vanguard Total Bond Index (VBMFX)-2.64%
SPDR Barclays Intl. Treasury (BWX)-5.72%
Vanguard Long-Term Bond Index ETF (BLV)-6.30%
Vanguard Extended Duration Treasury (EDV)-11.49%

October 2015 Performance Review

November 3, 2016

October was a strange one — and not just for the elections. Pretty much everything that was recovering this year slipped in last month. It's not uncommon for risky assets to all move as one and lower risk assets to do well in such times, the so-called 'risk off' trade. What was a little unusual is almost all fund categories were down in October except riskier debt and a few emerging markets.

For example, biotech stocks slid hard, driving our leveraged short Proshares Ultrashort NASDAQ Biotech (BIS) up just shy of 25% and making up some lost ground for us. Gold also slipped. Investment-grade long-term bonds were hit hard as rates rose, driving Vanguard Extended Duration Treasury (EDV) down 6.18% for the month — our worst individual fund showing in October.

Oil was weak near the end of the month driving PowerShares DB Crude Oil Dble Short (DTO) up 4.6%. Riskier income funds like iShares Mortgage REIT (REM) and Artisan High Income Fund (ARTFX) posted gains.

Foreign markets were down yet Brazil was almost the lone big winner up over 7%. China and Russia were weak or our stake in iShares MSCI BRIC Index (BKF) would have beat the S&P 500 by a wider margin with the Brazil sub-allocation. While in general riskier assets fell, some of the hardest hit risky assets from recent years continued to rise.

In all this we did well relatively with the Aggressive Powerfund Portfolio, which benefited from shorts and emerging markets. But the drag of longer-term investment-grade bonds and yield-sensitive stocks was too much for the Conservative portfolio, which had a poor month (though it's still up 6.62% for the year).

Our Conservative portfolio declined 2.16%. Our Aggressive portfolio fell 0.75%. Benchmark Vanguard funds for October 2016: Vanguard 500 Index Fund (VFINX) down 1.83%; Vanguard Total Bond Market Index Fund (VBMFX) down 0.81%; Vanguard Developed Markets Index Fund (VTMGX) down 2.33%; Vanguard Emerging Markets Stock Index (VEIEX) up 0.63%; Vanguard Star Fund (VGSTX), a total global balanced portfolio, down 1.82%.

Stock Funds1mo %
Proshares Ultrashort NASDAQ Biotech (BIS)24.89%
Proshares Ultrashort Russel2000 (TWM)9.30%
Gold Short (DZZ)6.03%
PowerShares DB Crude Oil Dble Short (DTO)4.60%
ETRACS 1xMonthly Short Alerian MLP (MLPS)4.26%
iShares Mortgage REIT (REM)2.82%
iShares MSCI Italy Capped (EWI)2.36%
Vanguard Utilities (VPU)0.90%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX)0.63%
iShares MSCI BRIC Index (BKF)-0.37%
Vanguard Value (VTV)-1.09%
[Benchmark] Vanguard 500 Index (VFINX)-1.83%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX)-2.33%
Vanguard Europe Pacific ETF (VEA)-2.41%
Homestead Value (HOVLX)-3.00%
Artisan Global Equity (ARTHX)-3.39%
Vanguard European ETF (VGK)-3.53%
Vanguard Telecom Services ETF (VOX)-3.61%
Bond Funds1mo %
Artisan High Income Fund (ARTFX)0.71%
Vanguard Mortgage-Backed Securities (VMBS)-0.36%
[Benchmark] Vanguard Total Bond Index (VBMFX)-0.81%
Vanguard Long-Term Bond Index ETF (BLV)-3.06%
SPDR Barclays Intl. Treasury (BWX)-4.20%
Vanguard Extended Duration Treasury (EDV)-6.18%

September 2016 Performance Review

October 4, 2016

September was one of the dullest months in quite some time in the markets. The only broader fund categories up more than 3% where China and Japan funds. Most fund categories were within plus or minus 1%. Even in sector funds no category gained or lost over 5%.

While relatively decent returns in foreign funds helped, our exposure to longer-term government bonds, which were down around 1% for the month after recent strong returns, kept the Powerfund Portfolios a little under benchmarks in September.

Our Conservative portfolio declined 0.07%. Our Aggressive portfolio fell 0.43%. Benchmark Vanguard funds for September 2016 were as follows: Vanguard 500 Index Fund (VFINX) up 0.01%; Vanguard Total Bond Market Index Fund (VBMFX) down 0.07%; Vanguard Developed Markets Index Fund (VTMGX) up 1.40%; Vanguard Emerging Markets Stock Index (VEIEX) up 1.27%; Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 0.53%.

Other drags included shorting oil, with PowerShares DB Crude Oil Dble Short (DTO) down 16% as Texas Tea rebounded fairly strongly in September, Italy, with iShares MSCI Italy Capped (EWI) down 3.08% on continued fears over Europe's shakier economies, and shorting biotech stocks, with Proshares Ultrashort NASDAQ Biotech (BIS) down just over 8% as healthcare and biotech stocks continued to rebound. Our only real winners in September were iShares MSCI BRIC Index (BKF) in stocks, up 2.12% on strength in emerging markets and SPDR Barclays Intl. Treasury (BWX) in bonds, up 0.70%.

Stock Funds1mo %
iShares MSCI BRIC Index (BKF)2.12%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX)1.40%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX)1.27%
Vanguard Utilities (VPU)0.94%
Vanguard Europe Pacific ETF (VEA)0.80%
Artisan Global Equity (ARTHX)0.79%
Vanguard Telecom Services ETF (VOX)0.59%
Homestead Value (HOVLX)0.30%
[Benchmark] Vanguard 500 Index (VFINX)0.01%
Vanguard European ETF (VGK)-0.01%
Vanguard Value (VTV)-0.34%
Gold Short (DZZ)-0.93%
iShares Mortgage REIT (REM)-1.78%
ETRACS 1xMonthly Short Alerian MLP (MLPS)-2.10%
Proshares Ultrashort Russel2000 (TWM)-2.77%
iShares MSCI Italy Capped (EWI)-3.08%
Proshares Ultrashort NASDAQ Biotech (BIS)-6.53%
PowerShares DB Crude Oil Dble Short (DTO)-16.02%
Bond Funds1mo %
SPDR Barclays Intl. Treasury (BWX)0.70%
Vanguard Mortgage-Backed Securities (VMBS)0.54%
Artisan High Income Fund (ARTFX)0.10%
[Benchmark] Vanguard Total Bond Index (VBMFX)-0.07%
Vanguard Long-Term Bond Index ETF (BLV)-0.59%
Vanguard Extended Duration Treasury (EDV)-2.50%

August 2016 Performance Review

September 5, 2016

August was not much of a month for bonds or stocks and was surprisingly tame given swings in global markets over the last year or so. Slightly rising interest rates pushed bond prices down, and with not much in stock market upside to overcome the drag, we had fractional losses in both portfolios.

The 'safe' higher yield stocks that recently got way too hot with investors — particularly utilities which were down about 5% last month — dived in August far beyond what the mild increase in interest rates would call for. Our holdings in Vanguard Utilities (VPU) and Vanguard Telecom Services ETF (VOX) were both down over 5% (these two funds are largely why we underperformed in August). Riskier yield had a good month as seen in our Artisan High Income Fund (ARTFX) holding, up 2.11% for the month.

Our Conservative portfolio declined 0.62%. Our Aggressive portfolio fell 0.20%. Benchmark Vanguard funds for September 2016 were as follows: Vanguard 500 Index Fund (VFINX) up 0.13%; Vanguard Total Bond Market Index Fund (VBMFX) down 0.17%; Vanguard Developed Markets Index Fund (VTMGX) up 0.51%; Vanguard Emerging Markets Stock Index (VEIEX) up 1.67%; Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 0.61%.

The Federal Reserve seems to again be leaning towards increasing interest rates — but the specter of rising rates didn't hit long-term bonds as much as gold. Gold Short (DZZ) was our best performer after several bad months as gold rebounded sharply. Gold almost reached $1,000 months ago — probably a key price for investor psychology, and above which gold is perceived as not being a good long-term holding, even for diversification purposes.

iShares MSCI BRIC Index iShares MSCI BRIC Index (BKF) was our winner in more traditional funds benefiting from an emerging markets rebound. iShares MSCI BRIC Index iShares MSCI BRIC Index (BKF) focuses on the so-called BRIC countries, Brazil, Russia, India, and China, once popular in the emerging market boom. This category is seeing little investor action today, and we've just seen a similar fund shut down for lack of interest. This indifference a good sign for long-term investors — categories with many fund launches are the areas to avoid. That said, there is still too much money in emerging market funds in general to get over-allocated here.

Stock Funds1mo %
Gold Short (DZZ)6.35%
Proshares Ultrashort NASDAQ Biotech (BIS)4.70%
iShares MSCI BRIC Index (BKF)4.68%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX)1.67%
iShares MSCI Italy Capped (EWI)1.61%
Vanguard European ETF (VGK)1.49%
Vanguard Europe Pacific ETF (VEA)1.25%
iShares Mortgage REIT (REM)0.75%
Vanguard Value (VTV)0.55%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX)0.51%
[Benchmark] Vanguard 500 Index (VFINX)0.13%
Homestead Value (HOVLX)-0.24%
Artisan Global Equity (ARTHX)-1.08%
ETRACS 1xMonthly Short Alerian MLP (MLPS)-1.17%
Proshares Ultrashort Russel2000 (TWM)-3.95%
PowerShares DB Crude Oil Dble Short (DTO)-4.65%
Vanguard Utilities (VPU)-5.84%
Vanguard Telecom Services ETF (VOX)-6.34%
Artisan High Income Fund (ARTFX)2.11%
Vanguard Mortgage-Backed Securities (VMBS)-0.12%
[Benchmark] Vanguard Total Bond Index (VBMFX)-0.17%
Vanguard Long-Term Bond Index ETF (BLV)-0.61%
SPDR Barclays Intl. Treasury (BWX)-0.88%
Vanguard Extended Duration Treasury (EDV)-1.33%

July 2016 Performance Review

August 5, 2016

July was another month that the Conservative Powerfund Portfolio outpaced our Aggressive Portfolio. This is largely because rates keep declining globally and theConservative portfolio is heavier on bonds and rate-sensitive stocks. 

Who would have guessed during the Brexit mini-panic that the S&P 500 would be up 7.57% (with dividends) so far this year. The recovery was strong after the brief collapse — but it was mostly on the shoulders of low rates. 

Our Conservative portfolio gained 2.09% in July. Our Aggressive portfolio rose 1.43%. Benchmark Vanguard funds for July 2016 were as follows: Vanguard 500 Index Fund (VFINX) up 3.68%; Vanguard Total Bond Market Index Fund (VBMFX) up 0.64%; Vanguard Developed Markets Index Fund (VTMGX) up 4.41%;Vanguard Emerging Markets Stock Index (VEIEX) up 4.67%; Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 3.42%.

Oil fell in July, which, on top of falling interest rates, smells bad for the global economy and brings the specter of deflation back into play — even though we've seen recently encouraging info on "stuff" prices heading up to levels the Federal Reserve wants to see. This was good for PowerShares DB Crude Oil Dble Short (DTO), which scored a 30.65% gain in July. Shorting just about anything besides oil was a major drag on the portfolios as riskier areas like biotech and small cap stocks rebounded sharply. 

Junk bonds have benefited from the reach for yield — even though such a move is dangerous if the economy weakens. Artisan High Income Fund (ARTFX) climbed 2.65%, though longer-term investment grade bonds performed slightly better. It was a good month to take credit or duration risk, but shorter-term bond investors missed the boat. 

The utility run ran dry with Vanguard Utilities (VPU) slipping 0.89% after a major jump this year. This whole low volatility / high dividend stock thing is getting overdone with a plethora of ETFs sending billions into 'safe' stocks. Investors will do better with a smaller allocation in high volatility stocks if this keeps up. 

We're looking to cut back on utilities, telecom, and maybe value — all areas that lagged in July after solid returns in recent months. We may have to do this inConservative even though these types of stocks historically are lower risk. But they won't be lower risk if they get bid up — growth stocks will have less downside in the next bear market if slow-growth utilities go in with 30 p/e ratios.

Small cap growth was the hottest rebound area of the major U.S. categories, up over 7% for the month but still down over 4% over the last 12 months. There were solid rebounds in foreign markets this month, but pretty much all are still down over the last year with wide gaps over the last five years versus the performance of U.S. stocks. Surprisingly, this hasn't led to major moves of money out of foreign into the U.S. as it did in the 1990s.

Stock Funds1mo %
PowerShares DB Crude Oil Dble Short (DTO)30.65%
iShares MSCI BRIC Index (BKF)4.81%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX)4.67%
Artisan Global Equity (ARTHX)4.67%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX)4.41%
Vanguard Europe Pacific ETF (VEA)4.16%
Homestead Value (HOVLX)4.13%
[Benchmark] Vanguard 500 Index (VFINX)3.68%
iShares Mortgage REIT (REM)3.51%
Vanguard European ETF (VGK)3.47%
iShares MSCI Italy Capped (EWI)3.13%
Vanguard Value (VTV)2.81%
Vanguard Telecom Services ETF (VOX)2.69%
ETRACS 1xMonthly Short Alerian MLP (MLPS)0.73%
Vanguard Utilities (VPU)-0.89%
Gold Short (DZZ)-3.34%
Proshares Ultrashort Russel2000 (TWM)-11.39%
Proshares Ultrashort NASDAQ Biotech (BIS)-22.35%
Bond Funds1mo %
Vanguard Extended Duration Treasury (EDV)3.35%
Vanguard Long-Term Bond Index ETF (BLV)2.72%
Artisan High Income Fund (ARTFX)2.65%
SPDR Barclays Intl. Treasury (BWX)1.12%
[Benchmark] Vanguard Total Bond Index (VBMFX)0.64%
Vanguard Mortgage-Backed Securities (VMBS)0.22%

June 2016 Performance Review

July 6, 2016

With a sharp rebound following a fast drop, a casual market observer reviewing one-month performance numbers might not think much happened in June. But recent days have been anything but ordinary. The cause was Brexit, the British referendum to leave the EU not going as market players though it would.

Thanks to sliding interest rates, our duration heavy portfolios did well. Our Conservative portfolio gained 2.54%. Our Aggressive portfolio gained 2.32%. Benchmark Vanguard funds for June 2016 were as follows: Vanguard 500 Index Fund (VFINX) gained 0.25%; Vanguard Total Bond Market Index Fund (VBMFX) up 1.94%; Vanguard Developed Markets Index Fund (VTMGX) fell 2.25%; Vanguard Emerging Markets Stock Index (VEIEX) up 5.04%; Vanguard Star Fund (VGSTX), a total global balanced portfolio, fell 0.08%.

The most notable consequence of Brexit so far is a low pound-to-dollar exchange rate and significantly lower interest rates globally. Thanks to British nationalism, you can now refi your mortgage at even lower rates.

While we have plenty of foreign stock funds that took a performance hit because of Brexit, in general we had a good month. Our Conservative portfolio is enjoying ongoing interest rates declines and is now up 7.49% for the year. Our recent addition of utilities, which are in essence a rate play, is offering a huge boost - Vanguard Utilities (VPU) is up almost 25% in just a few months.

Dividend rich telecom stocks performed equally well with Vanguard Telecom Services ETF (VOX) up 7.17%. Surprisingly, emerging market stocks did very well, up 5%, while European economies slid. Our own iShares MSCI Italy Capped (EWI) was our hardest hit stock fund, down almost 8% as Italy could be next in line for trouble if the EU unwinds. Italy is swimming in debt and Italian banks are on the verge of a nervous breakdown. Of course such real fears can mean greater upside when the fears wane.

Shorting oil and gold didn't help the portfolios in June as low rates sparked more fears of future inflation. The best portfolio protection last month was in ultra-long-duration government bonds. Our Vanguard Extended Duration Treasury (EDV) holding gained 9.68% for the month.

Our top holding overall was Proshares Ultrashort NASDAQ Biotech (BIS), up 15.42% in June as shorting riskier biotech stocks worked when money ran to the safety of bonds and lower-risk stocks.

In general, Brexit is a signal to begin a gradual to shift from bonds to stocks. At the depth of the panic a few days ago the S&P 500 yielded more than the investment grade bond market as a whole. This is not an opportunity to reach for yield and buy more junk bond funds and any number of investments with impressive yields - we're only making relatively small moves into credit risk with recent buys of iShares Mortgage REIT (REM) and Artisan High Income Fund (ARTFX).

It`s also becoming a good time to get out of the low volatility trade and into higher volatility stocks. Investors have flocked to safer stocks. This is partially because of a boom in 'low volatility' ETFs. The trouble with 'safe' stocks is if too much money floods into them and out of higher volatility stocks, the safe stocks will be the ones with the most downside - they may slide long and slow and with little volatility.

Investors really want lower downside. From these levels 80% in high volatility stocks and 20% in cash will likely produce a better risk/reward than 100% in low volatility stocks. This increasing popularity of low volatility investing could mean our biotech short will need to be unwound.

The only way stocks are going to underperform bonds over the next decade is the one thing - still a longshot hopefully - that can destroy investments across the board: deflation.

Ultimately that is the risk today. Not recessions, not central banks creating inflation to kick dead horse economies. Any asset backed by debt is doomed if the price level goes into steady decline (as happened in Japan through much of the last quarter century). This is why long-term U.S. government bonds have some merit at ridiculously low rates - the U.S. government will pay you back even with deflation and a corporation, especially a higher risk creditor, won't have the cash flow to make the payments years down the road if revenues decline with the price level.

Stock Funds1mo %
Proshares Ultrashort NASDAQ Biotech (BIS)15.42%
Vanguard Utilities (VPU)7.66%
Vanguard Telecom Services ETF (VOX)7.17%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX)5.04%
iShares MSCI BRIC Index (BKF)4.01%
iShares Mortgage REIT (REM)2.94%
Vanguard Value (VTV)1.12%
[Benchmark] Vanguard 500 Index (VFINX)0.25%
Artisan Global Equity (ARTHX)-0.31%
Homestead Value (HOVLX)-1.01%
Proshares Ultrashort Russel2000 (TWM)-1.44%
Vanguard Europe Pacific ETF (VEA)-2.10%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX)-2.25%
Vanguard European ETF (VGK)-4.16%
PowerShares DB Crude Oil Dble Short (DTO)-5.85%
ETRACS 1xMonthly Short Alerian MLP (MLPS)-5.90%
iShares MSCI Italy Capped (EWI)-7.91%
Gold Short (DZZ)-17.89%
Bond Funds1mo %
Vanguard Extended Duration Treasury (EDV)9.68%
Vanguard Long-Term Bond Index ETF (BLV)5.13%
SPDR Barclays Intl. Treasury (BWX)3.77%
[Benchmark] Vanguard Total Bond Index (VBMFX)1.94%
Artisan High Income Fund (ARTFX)1.03%
Vanguard Mortgage-Backed Securities (VMBS)0.90%