Normally when you spawn an object, that object is automatically "picked" so that any actions you perform on that object in the same event after spawning will apply to the new object.
However, you already have a specific instance of that object picked in the condition, so it appears the selected object list is getting confused as to which instance you mean to perform actions on. What is happening is that the newly spawned bullet shoots off at 0 degrees and fades out quickly, while the original bullet turns 90 degrees, and because you set it's type to 2 it no longer spawns any more bullets when the timer clicks on.
Try this:
<img src="http://i48.tinypic.com/2d8kigz.png">
By using the System object to create new instances at the bullet's location you're interrupting the normal picking. The original bullet continues to sail onward, and spawns four bullets before fading out. Is that the result you were going for?
You may also want to check out a trick known as "Family picking." By assigning two families to the same object you have much greater control over picking and actions. If your bullet belongs both to the Red and Blue families, then you can pick by Red, and spawn Blue, and perform all of the actions you want on the newly spawned objects by using Blue in the actions. That might be just the exact thing you need for this situation. If you need any help with it, feel free to ask.