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Tim Middleton

Mutual Funds6/30/2009 12:01 AM ET

Think recovery in year's second half

The bottom is in, so you should stick with stocks -- even if they pull back -- and lighten up on bonds. That's what I'm doing in my ETF portfolio.

By Tim Middleton
MSN Money

Finally. For the first time in a year, the stock market has made money for a full quarter. And my model portfolio of exchange-traded funds did exceptionally well, spurting 13.5% in the second quarter.

Most of my positions racked up double-digit gains as they rebounded from the bear market bottom reached in the first quarter of 2009. The model trounced the performance of the stock market itself, as the Standard & Poor's 500 Index ($INX), represented by SPDR 500 Index Trust (SPY, news, msgs), advanced just 11.3%.

Despite this achievement, I'm going to substantially reorganize my portfolio for the months to come. I'm going to stay in stocks because, although we may see a brief pullback, the rebound has begun. I'll also cut back on bonds and dump gold until the inflation so many anticipate actually materializes.

If you agree with my outlook, you might plot a similar strategy.

The moves

Notably, I'm eliminating leverage from the domestic equity positions. The two-times ETFs I have owned, designed to rise twice as much as their benchmarks, performed decently in the quarter. But over the longer term, their results have been lousy.

Eliminating leverage decreases the effective weighting of equities within the portfolio, and I don't want to do that as the market finally moves up. So I'm also slashing my holdings of bonds. They have served me well in the bear market, but their outlook is not so promising. As the economy recovers from recession, interest rates will tend to rise, which takes the prices of bonds lower.

Finally, I'm selling gold. I added it three months ago as a hedge against inflation. No such prospect has arisen, and SPDR Gold Shares (GLD, news, msgs) has declined 0.6% in the past three months. Until the inflation threat becomes more concrete, I think gold is likely to wallow.

(For MSN Money production reasons, my second quarter is the period beginning March 26 and ending June 24.)

Here's how the model portfolio stands with the moves that took it into the third quarter:

FundSharesPriceValue% change% portfolio

SELL ProShares Ultra S&P500 (SSO, news, msgs)

0

$25.02

$0

20.9%

0.0%

BUY Vanguard Value Index (VTV, news, msgs)

423

$38.67

$16,357

0.0%

15.0%

SELL ProShares Ultra MidCap400 (MVV, news, msgs)

0

$25.33

$0

26.2%

0.0%

BUY Vanguard Mid Cap Value (VOE, news, msgs)

329

$33.09

$10,887

0.0%

10.0%

SELL ProShares Ultra SmallCap600 (SAA, news, msgs)

0

$19.15

$0

29.0%

0.0%

BUY Vanguard Small Cap Value Index (VBR, news, msgs)

262

$41.65

$10,912

0.0%

10.0%

iShares S&P North American Natural Resources (IGE, news, msgs)

220

$27.11

$5,964

8.6%

5.5%

iShares MSCI EAFE Value (EFV, news, msgs)

401

$41.34

$16,577

19.9%

15.2%

Vanguard Emerging Markets Stock Index (VWO, news, msgs)

213

$31.05

$6,614

28.1%

6.1%

Claymore/BNY Mellon BRIC (EEB, news, msgs)

221

$31.09

$6,871

26.0%

6.3%

TRIM Vanguard Total Bond Market Index (BND, news, msgs)

141

$77.11

$10,873

1.9%

10.0%

TRIM iShares iBoxx $ Investment Grade Corporate Bond (LQD, news, msgs)

55

$99.59

$5,477

9.2%

5.0%

TRIM iShares Barclays MBS Bond (MBB, news, msgs)

52

$105.06

$5,463

0.2%

5.0%

BUY Vanguard Short Term Bond Index (BSV, news, msgs)

93

$78.92

$7,340

0.0%

6.7%

iShares Cohen & Steers Realty Majors (ICF, news, msgs)

160

$34.79

$5,566

23.1%

5.1%

SELL SPDR Gold Shares (GLD, news, msgs)

0

$91.45

$0

-0.6%

0.0%

Schwab Money Market Fund (SWMXX, news, msgs)

22

$1

$22

0.0%

0.0%

Totals

$108,924

13.5%

100.0%

Data as of June 24

The leveraged letdown

The model finished the quarter with 9.6% of assets in ProShares Ultra S&P500 (SSO, news, msgs), 6.6% in ProShares Ultra MidCap400 (MVV, news, msgs) and 5.5% in ProShares Ultra SmallCap600 (SAA, news, msgs).

In each case, the fund is designed to deliver two times the performance of its benchmark, effectively doubling the weight of these allocations.

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Intriguing ETF plays for right now © Glowimages/Getty Images
Intriguing ETF plays for right now
Tim Middleton says the best investment bets this year are exchange-traded funds that short Treasury bonds and profit from a weaker dollar.

In the second quarter, these leveraged funds delivered on their promise pretty well, but it turns out that was happenstance. I had owned all three funds for six months, and in the first quarter they did much worse than promised. That was largely due to the extreme turbulence and downward trend in the first period, but the more favorable conditions in the second quarter did not erase the blot.

Continued: Leveraged ETFs were useless

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Fund data provided by Morningstar, Inc. © 2009. All rights reserved.
StockScouter data provided by Gradient Analytics, Inc.
Quotes supplied by Interactive Data.
MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.
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Tuesday, June 30, 2009 5:48:36 AM
Tim Middleton:  Although I haven't always agreed with your strategies, I've still enjoyed reading your columns.  Good luck in your future endeavors and God bless.
Tuesday, June 30, 2009 7:04:22 AM
Not gonna happen.  People are not in a position to begin spending.  If they do, they are fools.  Many have had their savings wiped out and need to replenish.   Unwise spending and credit card debt is still out there , unabated.  So, how do you spend when your savings is gone, salaries not kept up, credit card debt maxed and the lending institutions supposedly will be doing a better job of lending based on better debt analysis and ability to repay?  Unless. we go back to old habits which means the coaster is just rsing ready for another fall.
Tuesday, June 30, 2009 7:46:31 AM

The recent gains in the stock market are no indication of a recovery or even a bottom for that matter. What it reflects is investors taking one last opportunity to snatch some profits before pulling out when the sh_t hits the fan at the end of the third quarter when the Obama administration’s policies begin to be felt by companies, investors and consumers.

Tuesday, June 30, 2009 8:10:50 AM
Tim Middleton, Jim Jubak... I wonder if MSN is going to replace their top-notch commentators with other financial columnists?  Isn't that what my monthly membership payment is for?
Tuesday, June 30, 2009 8:14:08 AM

The last three bloggers are obviously going through a rough time.

Also all Obama bashers. Too bad. With their attitude there is no hope for them.

Fact is, we are moving slowly away from recession and one year from now the growth will be back although at slower pace than in the past which is a healthier prospect than the boom & bust of the previous decade.

Good luck Tim. Most of us appreciate your experience & insight.

Tuesday, June 30, 2009 8:33:38 AM

Davetheraver,

I work in the energy industry. My last job with an alternative energy company laid off everyone on November 14, ten days after Obama got elected. Most of the employees there voted for Obama for selfish reasons. They thought a green President would be good for business. NOT. I believe there is some correlation because in August, our CEO was very optimistic, with several projects getting ready to kick off and others on the horizon. Why do you supposed a green energy company which specializes in products such as hydrogen and biofuels collapsed at a time when our president is saying green energies will create millions of jobs? Can it be that this company, like all others, do not trust this President? We were told the $787 billion stimulus bill will keep unemployment under 8%. It is 10% now. As for the recovery, any gains in people's incomes will be negated by inflation caused by the trillions of worthless printed money for bailouts.

 

Tuesday, June 30, 2009 8:47:38 AM
Any gains seen in this quarter represent a suckers rally. With the policies being pushed by this administration, hopes for national healthcare, green energy, anti business, tax and spend, hyper inflation and another market dive is around the corner. Brace yourself.
Tuesday, June 30, 2009 8:53:34 AM
Well said heartwarmer.  For those of you not paying attention, here's a history of the US CPI, a measure of the prices on the things we buy: ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt
Note the continual escalation of prices which corresponds to the increase in the money supply. Printing money=inflation.  And the criminal federal reserve has doubled the money supply since 2008.  The unemployment rate, not the BS one the government throws around, but the more real measure, the U6 jobless report, reflects somewhere between 27,000,000 and 28,000,000 million Americans are unemployed and cannot find work.  You only have to visit Buffalo, all of Michigan, Florida, most of California, most of New England, and many other areas to know American society is in decline, crime is on the rise, and tent cities with homeless families are popping up and growing all over America.  Rely on the Dow Jones? Huh!  More like the Davie Jones. Take a look at the ten year history and draw a baseline.  That's right, is under what it was 10 years ago.  http://moneycentral.msn.com/investor/charts/chartdl.aspx?D4=1&ViewType=0&D5=0&ShowChtBt=Refresh+Chart&DateRangeForm=1&ComparisonsForm=1&CE=0&D3=0&Symbol=%24INDU&C9=2&DisplayForm=1&CP=0&PT=10
Good luck making a net gain in that crooked system.  Home ownership, same deal.  The housing market is in permanent decline, and you will not recover your interest cost in the short or long term when you sell.  You'd be lucky to break even, only to pay more for the house you trade up to. 
And every law the US government passes either taxes those of us lucky enough to still be working even more, or curtails our freedoms by making even more mundane things illegal.  States are going bankrupt, and despite the US Constitution preventing it, the federal government is now ordering the states to take the stimulus money, which are essentially loans that have to be paid back.  But more importantly, as a creditor to the states, the US government will be able to order the states around.  I suggest you people read the Declaration of Independence, and replace "he" meaning the king, to the US government.  It basically describes all the injustices that have been done to us that caused us to have a revolution.  Its what was needed then, and is all that will turn things around now.  Recovery my XSS!

Tuesday, June 30, 2009 9:06:49 AM
I think a lot of these people who write here live in a bubble.  Gas in Southern California is now way over $3  a gallon.  When this happened in the winter and spring of 08, and by summer of 08 went  on to way over $4 gallon, things feel apart.  The only difference this time is that  we have official unemployment of close to 12%.  I see a repeat of last fall if this does not change.  But the one thing I hate most is the people who try and make this about Obama.  He has been in office less than 6 months.  We did not get to where we are in 6 months, more like last 8 years, and it's easier to get in a mess, than get out of one.  This mess will take years to recover from and get back to where we were.  The masses are not stupid and know who got us into the mess.  As for me, I am still sitting on my cash until I can  trust that a system is in place to keep and eye on   CEO's/Boards that  will make buying stock less of a fool's game. 
Tuesday, June 30, 2009 9:07:11 AM

Well said heartwarmer.  For those of you not paying attention, here's a history of the US CPI, a measure of the prices on the things we buy: ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt
Note the continual escalation of prices which corresponds to the increase in the money supply. Printing money=inflation.  And the criminal federal reserve has doubled the money supply since 2008.  The unemployment rate, not the BS one the government throws around, but the more real measure, the U6 jobless report, reflects somewhere between 27,000,000 and 28,000,000 million Americans are unemployed and cannot find work.  You only have to visit Buffalo, all of Michigan, Florida, most of California, most of New England, and many other areas to know American society is in decline, crime is on the rise, and tent cities with homeless families are popping up and growing all over America.  Rely on the Dow Jones? Huh!  More like the Davie Jones. Take a look at the ten year history and draw a baseline.  That's right, is under what it was 10 years ago.  http://moneycentral.msn.com/investor/charts/chartdl.aspx?D4=1&ViewType=0&D5=0&ShowChtBt=Refresh+Chart&DateRangeForm=1&ComparisonsForm=1&CE=0&D3=0&Symbol=%24INDU&C9=2&DisplayForm=1&CP=0&PT=10
Good luck making a net gain in that crooked system.  Home ownership, same deal.  The housing market is in permanent decline, and you will not recover your interest cost in the short or long term when you sell.  You'd be lucky to break even, only to pay more for the house you trade up to. 
And every law the US government passes either taxes those of us lucky enough to still be working even more, or curtails our freedoms by making even more mundane things illegal.  States are going bankrupt, and despite the US Constitution preventing it, the federal government is now ordering the states to take the stimulus money, which are essentially loans that have to be paid back.  But more importantly, as a creditor to the states, the US government will be able to order the states around.  I suggest you people read the Declaration of Independence, and replace "he" meaning the king, to the US government.  It basically describes all the injustices that have been done to us that caused us to have a revolution.  Its what was needed then, and is all that will turn things around now.  Recovery my XSS!

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