Money Matters Newsletter:

August 4, 2015

 Will the Market Feel the Heat in August?

The Investment View from Prescott, Arizona

HeatAfter six years or rampant government money creation investors everywhere are focused upon when our Federal Reserve Bank will start draining the excess cash from the liquidity pool it created. The debate centers around whether they should begin raising rates now while the economy is still sluggish, or wait until the economy is stronger and give inflation time to really take hold.

I will be surprised if the Fed waits very much longer to begin raising rates. Most of the cash created is not in the general economy, but is being hoarded by banks that needed rescuing a few years ago, but are no longer in danger of failing. The amount of money the Fed created is so large that a slow drain may take a generation or more to complete, so why put it off? Let’s get on with it!

Interest rates go down when the Fed stimulates the economy, so they can be expected to go up when the Fed begins to pull back. Interest rates affect our lives much more than the price of IBM stock, too, so when rates rise everyone is going to feel it.

Many of you have expressed worry that your bonds and bond funds will lose money when interest rates rise. That’s right, as we all could see when rates jumped up in the first half of 2015. I have included my ideas about what to do to protect you from rising rates in the What’s Happening in Your Portfolio section of this newsletter.

But a key thing to remember is that stocks have been in a bull market largely because of bonds. If bonds turn down, they could easily take stocks with them.

It has been a boring spring for the stock markets, but it looks like things are going to be livelier soon, with a lot of negative influences coming to bear in the next few months, a time in which the stock market is normally weak, anyway. Some of the things I am seeing are:

U.S. consumer confidence suffered its biggest drop in four years last month on a less upbeat jobs outlook, plus home appreciation in major cities appears stalled, suggesting a pause in housing demand.

Consumer spending makes up about 60% of the economy and a drop in oil prices normally leaves consumers feeling good because of extra money left in their pocket after gassing up the car, but consumer confidence is sagging when it should be growing – not a good thing.

Transport stocks – trucking, railroads, etc., have been falling all year, another bad sign. Raw materials moving to factories and finished goods moving to market make transport stocks the first to react to changes in the economy. Last week United Parcel Service Inc. said that U.S. economic growth appears to be slowing. And with transports being weak for months, this looks like a trend, not a blip to be ignored.

Pullout 8-4-15The stock market has been stalled out for over five months now, and although the US stock market indices have not declined much, more stocks have been falling than rising. This Advance/Decline indicator is the same one that flashed warning signals months before the major market tops in 2000 and 2007 and it has been flashing a caution sign for over 5 months now.

No one can predict short-term events that might cause the market to sell-off, and most bull markets don’t end with a bang, but with a whimper. The markets began to decline more than a year before both the 9-11 crash and the 2008 crash. At first the declines were so gradual that they could be shrugged off. This market has been whimpering for over five months now. How lucky do you feel?

The market may just slowly drift down avoiding a spectacular drop. However with so much electronic trading available, declines could be more jarring. I am also seeing a large number of indicators and analyses pointing to a market decline beginning fairly soon.

Despite what popular media would have you believe, it really is possible to successfully avoid protracted downturns, and in fact, I believe that dodging them is critical for long term investment success.

My strategies are built on the idea that minimizing/avoiding major stock market declines matters far more to wealth preservation and generation than being up over any one bull market cycle. There have been no real down periods in which to prove this over the past few years, but the longer we go without such a major decline, the more shocking and meaningful it will end up being when it does happen.

At HCM, we are in position to quickly defend client portfolios in the event of a market decline. If you worry about potential investment losses, please call the office to set up a free telephone consultation to review your situation and talk about how I help clients manage the risks of being invested. 928.778.4000


Slice of Life

The Women I Work For

YvetteA little over 10 years ago I interviewed 19 year-old Yvette Zurita for an administrative position at Hepburn Capital. Although Yvette could not work the hours I thought I needed, she was everything I could want in an employee; bright, articulate and dependable. But, there was also an intangible quality to this young woman that I later identified as her unflappability, so I gave her a shot. What a good move that turned out to be for me and the company.

Yvette is one of those people to whom you never have to tell anything twice, and her attention to detail greatly compliments my big picture style of work. Over the years she has grown to become my operations manager and Yvette makes running a very complex business look easy.

In October, Yvette got married and since her husband is part of a family business in Fresno, CA, she moved there. Advanced technology allows Yvette to work seamlessly from Fresno. She continues to make Hepburn Capital run very smoothly, and I am grateful!



How Are The Markets Doing?


The bond markets stabilized a bit in July after a sharp decline that began in late January and picked up steam in the second quarter. High yield bonds, a big part of our income portfolios until recently, have also been weak this year.

Even municipal bonds have had problems this year. Puerto Rico recently defaulted on a small portion of its $73 billion dollar municipal bond debt. There is speculation that this could be a “rats leaving a sinking ship” kind of event. Investment News reports on a statement by Morningstar Analyst Beth Foos, that “…half of U.S. open-end municipal-bond funds hold some exposure” to Puerto Rican debt, so defaults there could ripple across the bond markets.

Gold broke down sharply in July, and the charts of gold prices do not indicate that a bottom has been reached. Even after 4 years of mounting losses, this is shaping up to be a really bad summer for long-suffering gold bugs.

Beginning in May, European stock markets suffered a sharp 10% drop while Japanese markets merely drifted lower. Both look pretty good compared to the Chinese stock markets which experienced a 26% decline over 2 ½ months beginning in late April.

As I mentioned elsewhere in this newsletter, the stock market continues to bounce up a few percent and then down a few percent without making any real progress. As of this writing on July 31, 2015 the market is below where it was on February 20th, more than five months ago. This market presents lots of risk with little reward. Not a good combination.

With few markets anywhere in the world looking good, I worry that the only thing holding the U.S. stock market up is money from overseas traders looking to invest in anything that is not going down. The problem is that this hot money can move out of the US stock markets in a hurry, adding one more reason to be ready for a sharp decline rather than a slow one.





Greecing The Skids


With the news being dominated by Greece's default, I wanted to give you my thoughts on the issue:

First of all, Greece is small.  Their entire economy is about the size of the state of Missouri so the ramifications of its default are greatly exaggerated by the bad news sellers.  The French banks have the greatest exposure.  US Institutions, almost none.
My only concern is will this be the thing that begins a domino effect of cascading debt defaults, which could bring us another 2008.  That is possible, but that won’t happen overnight and I’ll have time to react and move to cash, gold, etc. as safe havens - IF and when I see that beginning to happen.

The market wend down yesterday, but has opened up today (Tuesday, June 30th), underscoring the fact that this is a reaction to news, and not a financial earthquake.
And we need to keep perspective on this Greek default.  This is not the first.  In fact, Wikipedia says “Greece has spent 90 years of its 194 years as an independent country in default or debt restructuring, that’s nearly 50%.”  The world has survived 90 years of Greek defaults.  I think we can survive a few more.


 What's Going On In Your Portfolio?


Income portfolios everywhere, including ours, came under pressure in the second quarter of 2015 as interest rates began to rise. I have reacted to this change by adding a conservative bond model to our Flexible Income* strategy. It is designed to crank out modest returns, using one of the most stable of all bond funds.

To further bolster Flexible Income* portfolios, beginning in July, I am hiring long-time friend John McClure, of ProfitScore Capital Management, Inc., to run a Treasury bond strategy that moves back and forth between traditional bond funds and inverse bond funds, enabling it to make money in either up or down markets. John’s strategy won the 2015 NAAIM Shark Tank (patterned after the popular TV show) run by the National Association of Active Money Managers, so I am excited to be working with John on this. John’s business is described on his Form ADV which you can see here.

Growth portfolios have made modest gains this year, primarily due to the great success of my Future Technologies* strategy which invests in stocks of companies involved in biotech, nano-tech, robotics and Internet of Everything work. Future Tech* is one of the underlying strategies that makes up my Shock Absorber Growth* portfolios.

Bragging Rights: HCM’s Future Technologies* strategy is rated #1 over the past 3 months among all money managers being tracked by Independent Verification firm Theta Research ( and in the top 3% over the past 6 months.

I began offering this strategy in August, so I do not have a full year of history yet, but this is about as good as I can be doing. I am excited!

Because of changes in the bond markets, I am encouraging Flexible Income* clients to move a little bit toward growth in their allocations using my Adaptive Balance* strategy instead. You can see its description below.


 College Classes Coming...


Yavapai College Logo

Mark your calendars for the Yavapai College Class, Understanding Investments, that begins in September.

This course is designed to help investors become more confident about their financial decisions. In an easy to grasp format this class provides a broad knowledge of investments preferred by investors approaching or already in retirement. Learn the ins and outs of stocks, bonds, mutual funds, annuities and more. Topics include recognizing risk, controlling the tax impact of IRA withdrawals, avoiding common investment mistakes and simple risk reducing strategies that anyone can use.

I try to keep the classes lively, and the most fun has been when friends wanting to learn brought other friends and the social level is high. If you know someone who has complained about their finances or who has financial decisions to make, why not suggest this class to them. Telling your friends about me is one of the nicest things you can do.

Mark your calendars for Wednesdays, September 9th through the 23rd, from 3:00 to 5:00 p.m. Call the college at 717-7755 to register for course #FA15-135. Tuition is $65.




  Scottsdale Office 



 If it is more convenient to meet with Will in Scottsdale, please call the office to schedule your appointment. 



 Our Spotlight Strategy


The Adaptive Balance* portfolios are a blend of Flexible Income* and Shock Absorber Growth* strategies. The word Adaptive in the name refers to a mix that can change from 50/50 income and growth in strong stock markets, to 90% Flexible Income* in weak stock market times.

On paper, Adaptive Balance* does some stock market investing, so it would appear to have higher risk than Flexible Income* portfolios which avoid growth stocks. However, with the specter of rising interest rates hampering the bond markets, I believe the risks in the two strategies to be similar, but with better potential rewards with Adaptive Balance*.

Click here to read more about Adaptive Balance.



Mental Flossriddle


Did you hear the one about the Buddhist monk who approaches a hotdog stand and says "make me one with everything"?



  The Women I Work For

Mary PhotoJust about the time that my Operations Manager, Yvette Zurita was making plans to marry a fellow from Fresno, a good friend and tax prep guru Shari Graham was retiring. We took the opportunity to snag Shari’s assistant, Mary O’Neill, to administratively fill the position that Yvette was going to leave in the office when she moved.

As it turned out, we had almost two years to cross-train Mary before Yvette actually moved, so that and the fact that Mary is such a quick learner, made the transition very smooth.

On days Mary is not in the office, she is running Prescott Acupuncture working her passion of helping people heal. And it works, too! I’ve had Mary do acupuncture on me and it feels great. You can check her out at

So, thank you Mary, for being one of the people who make my life run so smoothly. 







Science Teachers




If you would like a current copy of our Privacy Policy or our SEC Form ADV, Part 2, you can find them at our website at or respectively.

 *    The model accounts mentioned in this article are hypothetical examples of how the strategy may work as designed.   Performance and activity in client accounts may be different from that in the model in amount of each investment, specific timing of trades, and actual security used, which may vary from account to account.  Not all trades are profitable.  It should not be assumed that current or future holdings will be profitable.   A list of all trades in these accounts for the past 12 months will be provided upon written request.

**  Indexes are unmanaged lists of stocks considered representative of a broad stock market segment.  Investors cannot invest directly in an Index.

Flexible Income
Adaptive Balance
Adaptive Growth
Shock Absorber Growth

This newsletter may contain forward-looking statements, including, but not limited to, statements as to future events that involve various risks and uncertainties. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual events or results to differ materially from those that were forecasted. Information in this newsletter may be derived from sources deemed to be reliable, however we cannot guarantee its accuracy.  Please discuss any legal or tax matters with your advisors in those areas.  Neither the information presented nor any opinions expressed herein constitute a solicitation for the purchase or sale of any security.

 In all investing, past performance cannot assure future results, and as such, our efforts are not guaranteed. Losses can occur. All strategies offered by Hepburn Capital Management, LLC adapt to changes in the markets by changing the investments they hold, therefore, comparisons to broad stock market indexes such as the unmanaged indexes mentioned may not be appropriate. Sometimes client accounts are invested in stocks or markets not included in these indexes. Past performance does not guarantee future results. Investment return and principal value will vary so that when redeemed, an investor's account values may be worth more or less than when purchased. Mutual fund shares and other investments used in our managed accounts are not insured by the FDIC or any other agency, are not obligations of or guaranteed by any financial institution and involve investment risk, including possible loss of principal.  Advisory services offered through Hepburn Capital Management, LLC, an Arizona Registered Investment Advisor.  Adviser will not transact business unless properly registered and licensed in the potential client's state of residence.
Copyright (C) 2014 William T. Hepburn. All rights reserved.


The Edge We Can Provide . . .

happy_coupleOver the years we have found that the secret to successful investing is to have more money in investments that are going up and less money in investments that are going down.

This is a simple yet powerful concept! At Hepburn Capital Management, LLC, we systematically move our clients into investments that are showing superior performance. To protect the value of your portfolio, we also move funds out of those investments that are showing weakness. Although the concept is simple, it is not easy. Our sophisticated investment management system is what gives our clients a significant edge over buy and hold investing.






Our Strategies Adapt to Changing Markets®

Respecting your comfort (or lack of comfort) with risk, our advisers will help you select the Adaptive Market Strategy® designed to provide the easiest path to your financial goals.consultation

Once these core decisions are made, the managers of HCM’s various Adaptive Market Strategies® take over the management of your account, and begin to make investment selections with the results you want as our guideline.


We will watch the financial markets for you—so you no longer have to worry about them. And, when the financial markets change we take the responsibility to change your investments because HCM’s strategies are specially designed to Adapt to Changing Markets®.



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