Money Matters Newsletter:
November 3, 2015
Cash Outlawed for Certain Transactions
The Investment View from Prescott, Arizona
More and more institutions are trying to make it harder for you to move your money into cash as reported on the Zero Hedge blog (Oct 12, 2015).
The expense of printing and maintaining the money supply is a burden the government would like to eliminate. How absurd is it that it costs 1.7 cents for the government to mint a penny? Or for a nickel to cost 8 cents to produce? Thinking that the high cost keeps counterfeiters from wanting to make our coins is only something a government official could embrace.
Plus the government does like to keep track of your money, and perhaps be able to tax the black market. Eliminating a means of payment for smugglers and drug dealers is also a tempting goal for the government. They can’t do that with a large cash economy.
The worldwide trend toward zero or even negative interest rates is pushing governments toward this goal of controlling currencies.
Globally, over $5 trillion in debt currently has negative interest payments, meaning buyers of these bonds buy them knowing they will lose money. Currently, these negative yield debt investments are bonds or bank deposits that investors literally pay to own because there is no risk of default. Governments don’t default; they merely create more money to pay off their debts. They are very secure investments, but you pay for that security these days. Literally pay for it.
Bonds are not unique in this regard. The European Central Bank as well as the Swiss, Swedish and Danish central banks are now charging depositors at their banks. In my April 28, 2015 newsletter I reported that JP Morgan and Chase were charging large depositors a 1% fee.
When you have to pay banks to take your money, something is really wrong. Do you think that maybe the government has printed too much of the stuff?
France and Italy have banned any transaction over €1,000 Euros from using physical cash. Spain has already banned transactions over €2,500. Uruguay has banned transactions over $5,000; and the secessionist Catalonia area around Barcelona, Spain is planning a new currency that will be exclusively electronic – no cash.
This trend can also be seen in the US. Louisiana has made it illegal to purchase second hand goods using cash. This is just the beginning. The War on Cash is spreading.
The reasoning is simple. Most large financial entities are insolvent. Most transactions are already conducted electronically but if a significant amount of digital money is converted into actual physical cash, the bank or country’s economy would very quickly implode.
This emerging anti-cash trend has gained a startling amount of momentum in the past year, and may be coming soon to a state near you. Stay tuned . . .
A Holiday Gift from Hepburn Capital
Our office maintains a UPS account, complete with the ability to weigh packages, pay for and print UPS labels online. Bring your packages to Hepburn Capital’s Prescott office and in a few minutes our staff can weigh, process and take your payment for your shipping costs.
Since we won’t have to wait in line, we will even take them to the UPS store for you.
This is just Hepburn Capital’s way of saying thank you and making the holidays a little brighter for those in our circle of clients and friends.
How Are The Markets Doing?
The risk of a 1987 style crash, which was very high two months ago, has faded, but once the current market rally has run its course, the possibility of a slow bear market decline of 20-30% over the next year or so will still be very real.
Transportation stocks are weak, signaling weakness in the economy. Energy prices remain low, signaling weakening demand for energy from industry. A smaller and smaller number of stocks rising is producing another sign of a weak market.
Interest rates, which are really the price of money, remain at historic lows, showing weak demand for borrowed money. If businesses won’t borrow to expand because they can’t earn more than the few percent that borrowed money now costs, it says something about how poor the economy is right now.
I saw my friend and newsletter writer Tom McClellan yesterday in Dallas. Tom uses the analogy of a brood sow to illustrate how liquidity is the mother’s milk of the financial markets. The biggest, strongest piggy’s (large company stocks) get all the milk (cash) they want before any of the runts (small company stocks) can get a turn at the teat. The runts thrive when milk is plentiful, but are the first to starve when it runs dry. Small company stocks thrive when liquidity is plentiful, and can crash when liquidity dries up.
Small company stocks have significantly underperformed large companies for many months now, signaling the kind of liquidity shortage that often causes markets to decline.
Last month I wrote about how China was pulling cash out of the world economy by selling bonds, causing markets everywhere to drop sharply. During October, both China and the European Central Bank took steps to greatly increase liquidity, causing world markets to bounce back up.
How long can markets keep it up in the face of weak economies? The world economy is now like the junkie hooked on easy money. When will withdrawals begin in earnest? We got a taste of what “the Jones” can be like in August when the S&P 500** dropped 11% in six days due to a lack of money moving into the market. How long will the current buzz last? That is the big question. No one really knows.
Long ago, I recognized that the only certainty in the investment markets is that things will change at some point. My advice for investors is to always be prepared for changes in the markets. With the certainty of change, to do anything else is just plain foolish.
Hepburn Capital specializes in strategies that Adapt to Changing Markets®. If you don’t know exactly what to do when the markets change, please call for an appointment to discuss how to protect your savings. Waiting until after markets decline is a recipe for disaster. Call today.
And, I am never too busy to be a resource for your friends.
What’s Going On In Your Portfolio?
It was a good month as all of HCM’s strategies in accounts held at Trust Company of America performed well. We had a positive month through October 30th and are also showing gains for the year-to-date period in all strategies.
The stock market appears to have begun another uptrend fueled by more easy money from central banks. A month ago, I had our Shock Absorber Growth* portfolios invested for a declining market, but a few weeks back I recognized the change in the market and began shifting once again from capital preservation back to growth.
Currently, growth portfolios are still about 1/3 in cash, but our stock selection is working very well and has our growth accounts outperforming the market while experiencing much lower fluctuation in account values.
Flexible Income* accounts saw modest gains in October. July through September saw truly great gains, so October gains, while lower, were still excellent for low risk income portfolios. October gains in Flexible Income* accounts were around 1/2%, several times what bank CDs are paying – and I earned that for you in just one month after all fees and expenses. Life is good!
My secret to investment success is having systems to move your money out of investments that are going down and into investments that are going up. This manages short term risk.
I also have a system to manage long term risk, called Adaptive Allocation, to move money between stocks and bonds. This is designed to keep us on the right side of long term trends. Although the stock market had a good October, the S&P 500** has still been declining for five months as of this writing on November 1st. Because of this, my Adaptive Allocation system is staying to reduce allocations to stocks and increase allocations to bonds.
So, if your accounts are managed with our Adaptive Balance* objective, you will notice an allocation closer to 60% Flexible Income* and 40% Shock Absorber Growth*, a change from the 50/50 allocation we have held for several years. Adaptive Growth* portfolios are now allocated 70% to growth and 30% to income, down from 80/20. If market weakness continues, expect to see more money allocated to bonds and away from stocks. This is a very sophisticated risk management technique which you can see working in your accounts.
The new face around our office is that of CPA Jay Lode.
Although Jay’s business and mine are not affiliated, Jay has proven helpful to both me and our clients on several occasions. Jay did my personal taxes this year, and I was impressed with the depth of his work and the savings he found for me. I have also found his year-end planning for next year’s taxes to be particularly helpful.
CPA Jay graduated from Montana State University Bozeman and is the founder of Granite Mountain Accounting in Prescott, AZ. He has over 20 years experience in tax and accounting. His firm specializes in helping businesses grow and individuals thrive through strategic tax planning.
Jay is a member of the Arizona Society of CPA’s and is licensed as a Certified Public Accountant in both Arizona and Montana. You can reach Jay at (928) 308-2010.
If it is more convenient to meet with Will in Scottsdale, please call the office to schedule your appointment. 928-778-4000
Our Spotlight Strategy
With With our Shock Absorber Growth strategy we strive to provide an acceptable rate of capital appreciation while experiencing one half of the risk of the S&P 500 Stock Index*, using primarily equity investments.
Your money will be invested primarily in stocks and commodities mutual funds and ETFs, both foreign and domestic, inverse and leveraged, and a money market fund. The proprietary HCM Safety Net indicator is designed to warn of potentially sudden declines in which case stock market exposure may be quickly reduced.
Click here to read more about Shock Absorber Growth.
Do Well By Doing Good
Rather than sucking all of the tax revenues into the State’s General Fund, Arizona allows you to direct some of your tax dollars to benefit students through its Education Tax Credit programs.
There are a couple of different ways to get these tax credits, one in return for donations to public school extra-curricular activities or character programs, and a second one for donations to a qualified School Tuition Organization for scholarships to private schools.
A tax deduction only returns a percentage of your gift (matching your tax bracket), while a tax credit reduces your tax bill dollar for dollar. If you are in the 25% tax bracket, a credit is worth four times what a deduction is worth.
Consult your tax advisor to see how much credit you can qualify for. Details are available at this link.
A Thank You from Hepburn Capital
This time of year is when we reflect on the many good things that have happened in our lives, and take the time to be thankful for them. For us at Hepburn Capital, you are one of those good things. Thank you for your business and your good wishes.
The staff at Hepburn Capital would like to wish you a Happy Thanksgiving!
Laurel Taylor Fitzhugh
Have You Received a Statement This Quarter?
We have arranged for independent custodians to send you account statements at least quarterly, even if there is no activity in your accounts.
Bernie Madoff made off with billions because he was allowed to produce his own phony statements. Your independently produced statements, mailed directly from the custodian, are for your protection.
Many of you choose to get email notifications of statement availability online, so as to not clutter up your lives with more paper and save printing, handling and mailing costs ($3.75 per statement). You can file electronic statements on your own computer in PDF form in case you need them later, too. Please call the office if you would like to start getting electronic statements rather than paper ones and we will guide you through the process. (928)- 778-4000.
If you prefer paper statements, that is OK, too. We work hard to allow our clients to be comfortable while their money is working, and this personal preference is part of your comfort level. We understand that.
However, it is vitally important that you receive statements one way or the other. If you have not received a statement this quarter, please call the office so we can correct that situation for you. (928) 778-4000.
If you have ever been frustrated trying to find a specific word or phrase on an Internet page, email or Word document? Try using the Control key along with the letter F.
Ctrl+F will open a dialog box, and then move to and highlight the next instance of the phrase you enter in the box. It will find your word, even if it is several pages down and has scrolled off the screen.
Ctrl+F can be your best friend while working on your computer. Well, at least it’s a close second, right after the Undo button.
* 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.
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.