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May 2012 Performance Review

June 2, 2012

Apparently somebody jumped the gun on the whole stock market ‘sell in May and go away’ cliché. U.S. stocks have been going down since early April, but the selling picked up last month - resulting in a 6% S&P 500 slide and turning the 1-year return for the benchmark negative. 

The S&P remains up about 5% for the year, unlike foreign markets which started sliding earlier and harder. Emerging markets and larger foreign markets are back in a bear market (20% off highs) from year ago levels, after a brief comeback following the last euro area panic in late 2011. Though the main problems remain in the euro region, emerging market stocks are moving in lockstep with the EAFE index, which is heavily weighted with larger country stocks. Certainly this isn’t what all the decoupling talk by the experts about emerging markets from the U.S. a few years ago was all about.

In May, our Conservative Portfolio dropped 1.11%; our Aggressive Portfolio fell 3.73%. Benchmark Vanguard index funds for May: Vanguard 500 Index (VFINX) down 6.02%, Vanguard Total Bond Market (VBMFX) up 1.14%, Vanguard International Index (VTMGX) down 11.26%, and Vanguard Emerging Markets Stock Index (VEIEX) down 11.08%

The S&P 500 has been a very tough benchmark to beat in 2012 – our portfolios included. We’re doing our best work with long term bond funds. The government can now borrow at under 1.5% a year for ten years (so much for the great inflation fears ). Now is a pretty good time to refi a mortgage, though don’t expect 5% 10-year government bond rates anytime soon. We’re still concerned that the future of interest rates in America is Japan: semi-permanent 1-2% yields. We honestly hope we are wrong on this one as it doesn’t bode well for economic growth. An economy that doesn’t heat up when such cheap money is available is a weak economy.

Long/Short fund PowerShares DB Crude Oil Double Short (DTO) soared 35.38% in May, better than the S&P 500 by 41.4% as high oil prices can’t handle a slowing global economy.

Vanguard Extended Duration Treasury (EDV) jumped 14.09%, beating the bond market by 12.9%. Long term treasury bonds remain the best hedge against a second recession, but this protection is weaker than it was given today’s ultra-low rates.

Our alternative fund PowerShares DB US Dollar Index (UUP) rose 5.41% as the US dollar once again was the currency of choice for frightened investors.

American Century Utility Income (BULIX) increased 0.13% last month as scared money ran back into safer stocks. 

Vanguard Long-Term Bond Index ETF (BLV) climbed 4.93%, better than the bond market by 3.8%

Health Care Select SPDR (XLV) fell 3.63% in May as healthcare stocks tend to be somewhere between the market and utilities stocks when it comes to perceived risk.

Vanguard European ETF (VGK) sank 11.97% in May, worse than the S&P 500 by 6.0% while Vanguard Europe Pacific ETF (VEA) dropped 11.17% and Scout International Discovery (UMBDX) fell 10.19%.

Our alternative fund Satuit Capital Micro Cap (SATMX) dropped 8.95% as investors ran from riskier small and micro cap stocks.

iShares MSCI Japan Index (EWJ) fell 8.73% last month, worse than the S&P 500 by 2.7% as a looming diminishing export situation (due to Europe’s troubles) dragged on stocks.