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The market took off in the second quarter, despite rising interest rates and the nattering from nabobs that it inspired.
My model portfolio of exchange-traded funds, or ETFs, spurted 5.4% in the period (which for production reasons ended June 21, having begun March 22). In the first quarter, it gained only 3.4%.
The market did even better in the second quarter, with Standard & Poor's Depositary Receipts (SPY, news, msgs) marching ahead 6.5%. Year to date, however, my model continues to beat the index, with a return of 8.9% vs. SPY's 8.2%.
I predicted the market's rise three months ago and recommended some aggressive moves. But now I see the seas changing, and I'll take a more-cautious tack in the three months just ahead.
The reason: Dumb money is flooding into stocks. In the MSN Money Start Investing community, a member who calls himself "Talquan" nails it: "As when the legendary Sam Zell sold his REIT empire (Equity Office Properties), several months ago, thereby shouting, 'Top!,' (CEO Stephen) Schwartzman letting the public in on Blackstone (Group) shouts 'Top!' as far as private equity is concerned."
Sure enough, real estate was the portfolio's worst performer in the second quarter, with iShares Cohen & Steers Realty Majors (ICF, news, msgs) plunging 12.2%.
Blackstone Group's (BX, news, msgs) IPO last Thursday was one of Wall Street's biggest ever, with stock pricing at $31 -- the top of the underwriters' range -- valuing the firm at $33.6 billion. (The stock was at about $32 at Monday's close.) The epitome of investment savvy, Blackstone didn't sell itself cheap.
Talk about dumb money: The largest single investor in Blackstone's IPO was the government of China, which displays its investment prowess running the world's most speculative stock market, that of A shares of Chinese companies, which are limited to domestic shareholders. That market has corrected sharply twice this year, even as foreign-owned shares in the same companies have not.
As my friend Talquan noted in the Start Investing community, "Think Japan buying Rockefeller Center in the late 1980s." Americans bought back Rockefeller Center just a few years later for half the price.
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Meanwhile, those higher interest rates are causing me to recast my bonds as well as my stocks. Rising rates will cramp borrowers, including hedge funds and private-equity firms like Blackstone.
What's more, summer is usually a limp period for stocks. Then comes September, historically one of the market's worst months as returning portfolio managers scramble to make all the mistakes they weren't around to make in August.
Time to mix it up
| Fund | Shares | Price | Percent change | Value | Percent of portfolio |
|---|---|---|---|---|---|
136 | $151.98 | 6.53 | $20,669 | 13.38 | |
313 | $62.66 | 6.05 | $19,613 | 12.69 | |
390 | $47.74 | 7.93 | $18,619 | 12.05 | |
199 | $83.49 | 4.20 | $16,615 | 10.75 | |
83 | $123.26 | 18.36 | $10,231 | 6.62 | |
393 | $81.09 | 6.25 | $31,868 | 20.63 | |
63 | $133.20 | 14.45 | $8,392 | 5.43 | |
140 | $97.8499 | - 1.49 | $13,699 | 8.87 | |
71 | $92.75 | - 12.19 | $6,585 | 4.26 | |
Schwab Inv MMF | 8705 | $1 | 0.12 | $8,705 | 5.62 |
Total | $154,995 | ||||
Notes: As of June 21. % change is total return: price change plus dividends paid since March 22. Cash includes $401 in dividends received, plus $103 in interest. Sources: MSN Money, Nasdaq, Morningstar |
The period was especially good for big-cap stocks, represented by S&P 500 Spiders and PowerShares Nasdaq 100 (QQQQ, news, msgs). Energy continued a rally that could last for a decade, if not a generation. Emerging markets prospered.
Bonds were battered as long-term interest rates spurted to five-year highs. Rising rates bolstered the dollar, and foreign developed markets lagged domestic big caps after currencies were taken into account. Real estate corrected after seven years of mostly double-digit gains.
What's next? Well, opportunities for gains are likely to be harder to find, so I've tried to look harder to find them. Here's the rejiggered portfolio, and why it looks like this:
| Fund | Shares | Price | Value | Percent of portfolio |
|---|---|---|---|---|
102 | $151.98 | $15,502 | 10.00 | |
694 | $22.34 | $15,504 | 10.00 | |
207 | $75.02 | $15,529 | 10.02 | |
83 | $123.26 | $10,231 | 6.60 | |
94 | $82.53 | $7,758 | 5.01 | |
334 | $81.09 | $27,084 | 17.47 | |
58 | $133.20 | $7,726 | 4.98 | |
198 | $39.12 | $7,746 | 5.00 | |
142 | $109.50 | $15,549 | 10.03 | |
84 | $92.75 | $7,791 | 5.03 | |
Schwab Inv MMF | 24576 | $1 | $24,575 | 15.86 |
Total | $154,995 | 100 | ||
Notes: As of June 21. Sources: MSN Money, Nasdaq, Morningstar |
Here's what's changing
Domestic stocks: I'm taking profits in big caps, cutting them back to 10% of total assets. All will be in Spiders. The value-tilted PS FTSE RAFI US 1000 (PRF, news, msgs) and PS Nasdaq 100 Trust are being eliminated.The explosive growth of ETFs since this portfolio was launched in late 2003 -- there are now more than 500, from fewer than 200 then -- has opened new groups for investment, including midcap stocks.
Continued: The market's sweet spot
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