December 2005 TeraDime Newsletter

Review of April 2005 picks:

This is what I have written in my April newsletter:

�If you hold REITs for income purposes, then no change is needed, but be prepared for a big hit when the real estate bubble bursts (�when� being the key word here).�

As of December 23, 2005 real estate bubble did not burst (yet) and REITs when up 19% since April including dividends.

��Bonds � long end bonds are going to take a hit.� Try to re-allocate some of your money either into really long maturities (20+ years), or really short maturities (3 � 6 months). Everything in the middle will take a hit.�

As of December 23, 2005 the index of US treasury bonds with very long maturities (20+ years) is up 6% including interest payments; short term rates continue to rise and you can find money market rates of 4%. This means that strategy of keeping your money in money market accounts or CDs maturing every 3 to 6 months would produce on average 3.25% guaranteed return. Everything in the middle: 1-3 year maturities are up only 2% including interest payments and 7 � 10 year maturities are up only 3% including interest payments.

�International funds � emerging markets will outperform since most of the emerging markets export natural resources (Russia � oil, Brazil � iron ore for steel).� If commodity prices will move up (because of inflation), emerging markets will do well. Emerging markets however are highly volatile, so make sure you are in an index like EEM or a very well diversified mutual fund.�

As of December 23, 2005 the international index (EEM) is up 32%.� I know that �there is no inflation� but commodity prices are moving up like technology stocks used to move in 1999.� If you do not believe me, check your latest utility bill.

�Gold � it is an insurance policy. Everyone should have some Gold (GLD) and hope that it will never appreciate because if it does, then everything else will go down.�

As of December 23, 2005 Gold (GLD) is up 18%.� This development makes me happy, since I bought Gold, but it concerns me from a long term perspective (i.e. inflation).� It is really not good news (in the long term) to have Gold moving up in price (or dollar fall in price in respect to Gold), since I am still getting paid in dollars and not in gold.� Unfortunately (for the long term), technical indicators are very bullish on Gold as of today and Gold over many years had been a better predictor of inflation than short term rates that the Federal Reserve controls.

So, between April 1^st (when the April newsletter was published) and today (December 23, 2005):

S&P 500� ������������������������������������������������������� � up 9%

REIT�������������������������������������������������������������� � up 19%

Emerging Markets ����������������������������������������� � up 32%

Long term government bonds (20+ years)����� � up 6%

Gold��������������������������������������������������������������� � up 18%

The numbers above include dividends and interest payments.

So this year, a typical asset allocation strategy of a well diversified portfolio with the core of the assets distributed among S&P 500 index, bonds, and international stocks would fare really well if it was tweaked to concentrate more on Gold, REIT, Emerging markets, and long-end bonds as was suggested in the April 2005 Newsletter.

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