October 25, 2011
A Light at the End of the Tunnel?
The Investment View from Prescott, Arizona
Despite all the negative economic news and financial challenges that face both America and the entire world, there are little rays of sunshine poking through the gloom, and just like the first crocuses of spring, they are a welcome sight.
State and local tax revenues overall have been increasing steadily for 5 quarters in a row when measured against the year-ago figures, according to the Census Bureau. Significantly, sales tax revenues, a basic measure of economic activity, have been increasing, too. People are beginning to spend money again. Yippee!
I refer occasionally to the importance of the ripple effects of money being spent and re-spent in our economy. A big part of our economic malaise the past few years is that people were saving more, paying down debt and spending less because the outlook seemed so uncertain. For whatever reason, people are again spending a little and that bodes well for everyone as that money ripples through the economy.
Another leading indicator pointed out by my friend Tom McClellan in his Market Report newsletter (www.mcoscillator.com) is the level of billings at architectural firms. The real estate development cycle for large projects can take years to complete. Before building permits are sought, workers hired or materials purchased, the architects begin making plans. By tracking the activity of architects we can get a peek into the economic future.
The American Institute of Architects surveys member firms to see what recent billing activity is like. The latest data shows an uptrend in billings. This suggests that there is some life coming into the real estate market, and therefore the economic soft patch that we are coming through might not become a full blown recession. That would certainly be good news for us all.
Even the much maligned junk bond market is showing signs of life after a rough summer. This implies that concerns about default are lessening for these lower-credit bonds and this is another positive indicator for the economy.
The 800 pound gorilla in the room is the yet-to-be-settled European financial crisis. Hopefully our similar experience in 2008 can help them handle their issues in a manner that will not impede global economic growth. Time will tell.
Let’s just hope that it is daylight appearing at the end of the tunnel and not just the headlight of another train coming at us.
Smoothing the Way
Being in this business, I frequently get to help clients and heirs sort things out when someone dies. Over the years I have suggested that clients use a “Letter of Last Instruction” and I haven’t mentioned it in my newsletter for a while, so here goes . . .
Such a letter can be a tremendous help to those who must administer your affairs if you become incapacitated or die. This can be an informal letter, list or ledger, separate from your will.
Keep one copy at home with your records. Give copies to your attorney, the executor or personal representative of your estate, and perhaps a close friend who can pass it along to your beneficiaries at the appropriate time.
The Letter of Last Instruction should be signed and dated, but no notary stamp is necessary. It should include:
1. Location of the original will, trust documents, living wills, powers of attorney, organ donor statements, military discharge papers, birth certificates, and other important documents.
2. Funeral and burial instructions. (Your will may not be read until after the funeral.)
3. Statements that you might not want made public. Wills become a matter of public record available to anyone who asks, so instructions which might be misconstrued or sound inconsiderate but might prove useful to a personal representative or trustee can be conveyed this way.
4. Suggestions as to the continuance of a business interest, if one exists. (As public documents, wills are inappropriate forums for certain business intentions.)
5. An explanation of unusual bequests or actions requested in the will. For instance “I left my house to Mrs. Smith who was so nice to me . . . I left only $1 to Aunt Tilley because . . .”
6. A list of professionals who render service to you, including your lawyer, investment advisor, doctor, accountant, minister and veterinarian, if you have pets.
7. Names and locations of all banks and brokerage firms at which you have accounts.
8. Location of retirement plan statements.
9. Location of safes and safe deposit boxes and their keys or combinations.
10. Locations of savings bonds, stock and bond certificates if not held in an account.
11. Names of insurance carriers and location of policies for insurance and annuities.
12. Locations of previous year’s tax returns, bill files, mortgage documents, etc.
13. How they can find computer passwords, usernames, etc.
14. List of persons who should be notified of your death. (Name, address, phone numbers and email addresses)
15. List of persons who have a copy of this letter (who will need to be notified of future changes).
16. Any other information which you feel would prove useful to your personal representative or to your successor trustee.
Update this letter as often as your circumstances change. Keeping it on a computer will make future changes very simple, especially if you can also email the changed document to those who should get updated copies.
Note: Do not make bequests or appoint an executor in your Letter of Last Instruction, since this document is for information purposes only and will not have legal standing.
Mental Floss
Q: I never was, am always to be,
No one ever saw me, nor ever will,
And yet I am the confidence of all
To live and breathe on this terrestrial ball.
What am I?
A: Tomorrow
How’s The Market Doing?
A New Uptrend…..Maybe
During the first 3 weeks of October, virtually all of the world’s stock markets staged rebounds off their bear market lows. This was a great relief for many investors since the average index’ loss was over 25%, including losses of 34% in Brazil and 36% hits in both China and India. By contrast, the S&P 500 Index** lost “only” 19.39% between April 29th and October 3rd. Ugh!
After spending a week stalling out at levels from which the market had stumbled several times over the past few months, the markets finally broke through this “ceiling”. We now have a pattern of higher highs for the first time in months, and that pattern is one thing required to define an uptrend.
This is a marked change in the risk presented to investors, going from very high risk of another decline to merely “normal”. Risk of a significant decline in stock prices, while far from zero, appears to be at much more acceptable levels than a few weeks ago.
What’s Going On In Your Portfolio?
We often make money for you at different times than the normal market cycles. Being a bit of a contrarian is what allows me to spare you from the deep, deep losses traditional investing has delivered several times this past decade. It keeps our overall risk lower than blindly following a certain part of the market and this creates a lot of the value that Hepburn Capital is known for.
When the trend turns up, it ought to be good, unless one is in sync with a down market – doing one of those “different times” things, like I was earlier this month. So, the beginning of October was not good to us and resulted in some losses.
I have made the changes to the portfolios necessary to get them in sync with the new direction of the market, but I am still 
embarrassed when we post numbers like we have this month.
At the beginning of October, the risk of another leg down was high as the market rose to a level it had already retreated from several times in recent months. Changing investments at that point could become like jumping out of the frying pan into the fire if the market headed down one more time.
The probabilities told me to sit tight, but it didn’t work out this time. As a result, the past few weeks have been among the most difficult for us in a while as we found ourselves on the wrong side of the market.
Even the relatively stable Flexible Income* accounts experienced losses in the 4% range in early October, as both the dollar and bond investments both suddenly turned around and went south.
Although that kind of loss is only about half of our 8% average annual return since the strategy was first offered in 2001, it is more volatility than we are used to. We have had this level of draw-down in account values before and have always bounced back, and I am sure we will do so again, it is just not fun waiting for it.
Naturally I quickly closed out the declining investments and the new floating rate and high yield bond funds bought last week are already showing gains.
Our Careful Growth* model also dropped during early October, showing a month to date loss of 7.61% through last Friday, the 21st, and down around 15% for the year. This is much less than the losses sustained by the average investment represented by the market indexes at their low points, but not nearly as good as the performance as we work to produce for you.
On a good note, several of my indicators have shifted to green lights this week, signaling that a more positive trend for the markets may be underway. As a result, Careful Growth* accounts are currently about 50% invested in a group of stocks and funds that have been recently outperforming the S&P 500**. If the up-trend continues, I would expect us to recoup our losses with the current mix of growth investments.
Balanced accounts*, being a blend of our growth and income strategies are performing in the middle of this range showing a 5.74% month-do-date loss as of October 21st.
Throughout history, every decline in the markets has been followed by a recovery. The recovery from the losses mentioned above is already underway, so now is the time to be patient and let the recovery take hold.
Our Spotlight Strategy
With our Careful Growth Stategy we strive to outperform the U.S. stock market while taking only a fraction of the risk.
* 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.
