July 27, 2010
A Big Win for Investors in New Bill
The Investment View from Prescott, Arizona
The new financial reform bill has a lot of gray areas in it, but one bright spot for the average investor is the SEC’s mandate to regulate all financial professionals under the “fiduciary standard”.
A fiduciary is one who is required to act in your best interest, and if a conflict of interests arises, a fiduciary must place your interests in front of their own.
The way the brokerage industry presents itself to the world, you might think “So what’s the big deal? Don’t we have that already?” Not even close.
Right now a commissioned broker is required only to ensure that an investment is “suitable” for you. In a very general sense, if you want an income investment and that is what you get, the broker has fulfilled his legal obligation of suitability, even if you end up with the highest commissioned version instead of the no-load or low-commissioned version.
On the other hand, you could pay a fiduciary a flat fee to work on your behalf to ensure that you get the best possible deal.
Fiduciary standards are a much higher duty for an advisor to fulfill than mere suitability.
Hepburn Capital is a Registered Investment Advisory firm, and as such we can accept no commissions. We have been operating as a fiduciary for our clients for many years, now.
As a result of this regulatory change, the other 98% of investment firms are going to be forced to change for the better the way that they treat their customers, and this item in the bill could add up to a huge win for investors.
Sitting on Top of the World
I am putting the finishing touches on this newsletter after a great day in Yosemite Park, which is just as spectacular as its reputation depicts. My only regret is waiting this long to see it for the first time.
We took the motorhome over the 9,945 foot Tioga Pass, which was quite a chore, but not nearly as exciting as bringing it down the other side on the very narrow, very winding park roads filled with distracted tourists. I’m glad I like adventures.
From here we are headed over to the Lake Tahoe area to visit long time friends Bob Conn and Lisa Durgin who I know from my Virgin Islands days. Later in the week, we will be helping Cathy’s brother Charles move to Prescott from the Reno area. That will be a big change in all of our lives.
How’s the market doing?
Make or Break Time for the Stock Market
The U.S. stock markets have been locked in a trading range for over two months, bouncing sideways between a low of 1,022 and a high of 1,117.
During the past two weeks the market has bounced back toward the top of this range, making this a critical point in the stock market’s future. Either it will continue up and break out of the trading range in a positive manner, or it will break down, perhaps hard.
As regular readers know, my work has suggested significant market weakness is likely this
fall. If the market stalls out right here and enters another leg down, it could lead to a nasty time for stocks.
The market is capable of lots of surprises, though, and my work never produces black and white answers, it just points me toward where the probabilities of success are higher. So, it is possible that I could be wrong and the market moves up from here.
If the market moves up more than 1-2% from current levels, it would indicate that a market bottom is in and a new uptrend is underway.
So it could be make or break time for our stock market, but certainly, not a time to be taking a lot of risk.
As significant as the price level is, the speed at which prices change is even more important. The average daily fluctuation in prices is 3-4 times higher than what it was in April, before the current decline began.
This high daily fluctuation is called price volatility, and it is a key component of risk. If you are on the wrong side of the market – invested during a decline, for instance – you can lose a lot of money in a hurry.
So, investors should be extra cautious during high volatility markets.
I like to be invested when the market is going up. That is the safest time to make money. Right now it is still going sideways, rather than up, and lately, investors have not been paid for taking risk.
Call me chicken, but I think this is a good time to be out of the market.
Incidentally, I have written about Italian mathematician Leonardo Fibonacci several times over the past year, commenting on how his work predicted the markets would have a high probability of turning around at an S&P 500** value of 1,115.
Funny how the top of today’s trading range is bounded by S&P 500** turn around points of 1,110 on May 7th and 1,117 on June 18th. Friday, July 23rd’s close of 1,102 is pretty close considering this is an inexact art, and Fibonacci did his work 800 years ago.
You can read my original explanation about Fibonacci’s work as it applies to the stock markets in my December 15, 2009 newsletter. HCM Newsletter 12-15-2009
Does Your Group Need a Speaker?
Last week, Tonya Mock called me one night to appear on her TV show the next morning to fill a slot. Tonya, as well as several national media outlets, know me as someone they can count on to have timely comments on the market and investment topics.
If your community group or investment club would like to have a speaker for a meeting, just let me know. I can present on a number of topics, and would be happy to do so.
Riddle:
Q: My thunder comes before the lightning;
My lightning comes before the clouds;
My rain dries all the land it touches.
What am I?
A: A volcano
What We Were Saying a Year Ago.
My July 28, 2009 newsletter included an article titled “The Worst Appears Over for Housing”, and according to Standard and Poor’s who maintains the Case-Shiller Home Price Indices upon which my analysis was based, it appears to validate my conclusion.
After dropping over 30% from the 2006 highs, the average home prices across the US appear to have stabilized slightly above where they were a year earlier, so I got that call right. (Most recent data is through April 2010).
Bright spots include San Diego and San Francisco with double digit gains from the lows of last year. Housing markets still drifting downward include Florida, Chicago, Las Vegas, Charlotte, and Seattle, although current rates of decline are now very small.
What this tells me is that if you are a real estate housing investor, the bottom appears to be in. However, that does not mean there is no risk. The big risk of real estate remains its illiquidity.
If you buy for cash flow, fine. But if you are looking for a capital gain, it could be many years before we see meaningful price increases due to the amount of real estate waiting to be sold. Sellers will still be outnumbering buyers for a loooong time.
If you buy real estate, be sure you have a lot of liquid assets to offset the illiquid nature of real estate investing. You might have to hold it for a very long time before turning it for a profit.
What’s Going On In Your Portfolio?
For reasons mentioned elsewhere in this newsletter, I have dialed back the risk exposure in our growth accounts quite a bit during the past three months, and have been very light on stocks since early May.
Flexible Income* portfolios still own 10% in gold with high yield bonds and preferred stocks making up the rest of the portfolio along with about 25% in cash.
If the market completes its bottoming pattern, I will probably add some stocks to the Careful Growth* portfolios, but currently the only stock investments we hold are in India and China. Growth* portfolios also hold 10% in gold, but I sold off the gold mining stocks last week when they began to weaken. Rounding out growth portfolios are some high yield bonds and preferred stocks, plus about 40% in cash.
Our Spotlight Strategy
The CAREFUL GROWTH STRATEGY seeks growth of capital with
greater consistency of returns than traditional buy-and-hold
stock market investing.
Just Let Me Know:
As a client of mine you may know me as an investment manager, but I have years of related experiences to draw upon. Just let me know if there is anything else I can help you with. Membership has its privileges, you know. The only thing I ask in return is that if you have any friends that could use my services that you think of me. I’ll treat them just the way I have treated you. That is the way I do business.
* The model accounts mentioned in this article are hypothetical examples of how the strategy may work as designed. 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.
** The S&P 500 and Nasdaq Indexes are unmanaged lists of stocks considered representative of the broad stock market. Investors cannot invest directly in the S&P 500 Index.
Balanced Strategy Description and Performance Information
Careful Growth Strategy Description and Performance Information
Flexible Income Strategy Description and Performance Information
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.
