February 4, 2020

Coronavirus and Your Investments

If you are like me, you are thinking that it would be optimal if the Coronavirus stayed contained over in China and didn’t bother us over here in the US. The virus may not become a health issue here as it is in China since we have a well-developed public health system. But it may become a financial issue if it begins to affect your investments.

The SARS epidemic in 2003 knocked the S&P 500** Index down over 14%.

The Ebola virus scare in 2015-16 only knocked the S&P 500** down 13%, but the leading US small company stock index dropped 22% and emerging markets dropped 33% with China leading the way down with a 44% loss between July of 2015 and February, 2016.

The Coronavirus hit the news in a big way the week of January 20th. On Thursday, January 23, I began seeing a troubling trend in the reports of new cases and deaths from Coronavirus.

I think this has the makings of a big scare for people everywhere, and investors may feel it hard, regardless of whether they get sick or not. All it takes is for buyers to get nervous about the future and think “I’ll just wait and see,” and an ordinary number of sellers can depress the stock market. A wave of sellers without buyers can make a market get downright ugly.

US Stock markets are down only a little bit from their January highs, but wise stock investors will take action to protect their money until the Coronavirus blows over. I have already moved into a capital preservation mode for Hepburn Capital clients as described elsewhere in this newsletter.

This is a good time to be an active investor and move your investments into safe harbors. If you or your financial adviser does not know how to protect your money in a down market, I do. Call my office at 928-778-4000 to discuss how we can help you deal with this crisis. And, don’t delay, call today! Time is money in this environment.

What the Markets Are Doing

Stock indexes in the US topped out on January 17th and have been rattled by the Coronavirus scare over the past two weeks. As of Friday, January 31st, money has been flowing out of stocks on the New York Stock Exchange. The “smart money” which are big institutions such as hedge funds, pension funds and mutual funds are selling holdings in increasingly large quantities, reducing their holdings of stocks.

Although as of January 31st, the S&P 500** stock Index is down only 3.13% from its highs of January 17th, the leading US small company index is down over 5%.

You may feel that 3-5% losses in US stocks may not be all that concerning but, if the US indexes follow overseas markets, big trouble may be brewing. Double-digit losses have already been registered in China since January 17th, so stocks are a high-risk place to be right now. Any security with ties to China such as: the travel industry, emerging market countries where public health systems are not well developed, or tech companies who have supply lines into and out of China may be affected.

The added safety of corporations with deep pockets have caused large companies to outperform smaller companies lately, and growth stocks are outperforming value stocks, too.

The bond markets are benefiting from the flight to quality, as it is known. Money coming out of stocks has to go somewhere, so it usually goes into the bond markets, driving the price of bonds up. High Yield (junk) bonds are the only bond sector that struggled in January.

Gold should be in a cyclical downtrend, due now, but gold buying by people worried about Coronavirus is offsetting the downward market forces, keeping gold prices relatively flat.

Commodity prices including copper, industrial metals and oil are declining rapidly as manufacturing supply lines are disrupted by quarantined regions in China, reducing the demand for energy to run factories. Even coffee prices are plummeting this month. Go figure.

1099 Update

Tax reporting seems to get later every year and I understand your angst in waiting for 1099s.

Congress fiddles with tax laws and the IRS does not fully know what the final laws look like until December 31st, delaying the publishing of final IRS regulations into January sometime.

Following this, these new regulations must be digested by CPAs and corporations reporting taxable distributions, etc. Only then can that information flow to mutual funds which have to sort out short term gains, long term gains, dividends, qualified dividends, return of capital and more. These are then reported to the custodians, like E*TRADE Advisor Services, who can finally compute your overall tax report and provide it to you.

Unfortunately, each step takes time, and rushing the process at any point, including you filing your taxes early, increases the chances of some number needing to be recharacterized and then reported down the line. This causes you to have to make a decision to wait for final numbers or possibly have to file an amendment to your tax return if changes occur after you file.

My advice is to be patient and wait. Most tax preparers can begin working on your return and plug in items, like your 1099, at the very end, shortening the process a bit.

What’s Happening in Your Portfolio

Being Aggressively Defensive

With the specter of Coronavirus growing at an alarming rate, it makes sense to get ready for a significant dip in stock market prices. The Ebola scare in 2015-16 and the SARS epidemic in 2003 each knocked US stock prices down by double digits and foreign markets even more.

The US stock markets are only a few percent off their January highs primarily due to the Coronavirus scare, but history shows me that all large declines start out as small ones, and one cannot tell the difference right away. As a result, wise investors should respect all small declines just as I have done recently in HCM portfolios.

Almost three weeks ago, when Coronavirus first started making headlines, I sold all of our stocks dealing with China, travel, and many tech stocks whose supply lines out of China may be disrupted. As of February 1st, we have only 13 stocks remaining in our Shock Absorber Growth* suite of strategies, down from 35 stocks two weeks ago. That in itself tells you what I think of the stock market right now.

The stocks we still hold have the greatest gains, and are protected from decline by some “inverse” index funds I bought last week in a tactic called hedging. If the stock market goes down, our hedges will go up, acting like airbags for your investments in case of a market decline.

Right now, Shock Absorber Growth* portfolios are what I call aggressively defensive, so if the stock market dives, we will probably make a nice profit. If the market doesn’t go down, I’ll merely sell the hedges and get back to investing normally. Right now, however, I believe capital preservation is a better goal than growth and that is why I have gotten your investments substantially out of the stock market.

Money coming out of the stock market has to go somewhere, and that usually is the bond market. Our Flexible Income* suite of strategies is doing well as prices of bonds and dividend producing stocks are buoyed by money coming out of stocks and flowing into bonds.

And our Municipal Income* strategy is becoming like our own Energizer Bunny, having one good month after another.

And that is how we are staying in sync with this market.

Shock Absorber Growth* is our 100% growth portfolio.
Flexible Income* is our 100% income portfolio.
Adaptive Growth Portfolios* are currently allocated with 80% Shock Absorber Growth* and 20% Flexible Income*.
Adaptive Balance* is 50/50 between growth and income.

Capitalism Does Work

(This piece was published by my friend Bill DeShurko at 401kAdvisor.com)

Critics of 2018’s tax cut package immediately condemned the cuts as benefiting the wealthy at the expense of the middle class. Unfortunately for the naysayers, a year or two later the effects began to show up, exactly as we learned they would in Economics 101 class.

For 2019 wage growth for low earners nearly doubled that of high earners. Even in the industry most used as an example of “unlivable wages” we’ve seen examples of $15.00 an hour starting wages with medical and health care…at McDonald’s! And recently Bloomberg news reported that Taco Bell is raising manager’s wages in some areas to $100,000 a year.

As qualified help becomes scarce, employers increase wages to compete for better employees. Econ 101. The key is maintaining an economy where labor demand slightly exceeds the labor supply.

No, a 5% raise at the bottom of the wage scale doesn’t end income inequality, but it does mean more money in consumers’ pockets and an improvement in overall household financial condition. That bodes well for the 2020 stock market as consumers still make up nearly 70% of our overall economy.

Refer a Friend and Save Money

Recently a client referred a relative to me, and when I applied our Family and Friends Discount to their investment management fees, they will each be saving several hundred dollars each quarter through reduced fees.

We give a volume discount based on the total amount of money we work with for a family or other grouping of clients, including friends. The higher the total amount of assets being managed for the group, the lower the fee percentage becomes for everyone in that group.

Would you like to save serious money, too? Simply refer family and friends to Hepburn Capital.

Besides being one of the nicest things you can do for us (and them), mentioning Hepburn Capital to your friends can save you real money. The easiest way to introduce someone to our work is to ask us to send them a complimentary copy of my new book, Why Bad Things Happen to Good Investments, or forward our newsletter to them.

Mental Floss

Why are a “wise man” and a “wise guy” opposites?
Why do “overlook” and “oversee” mean opposite things?
Why is “phonetic” not spelled the way it sounds?
If work is so terrific, why do they have to pay you to do it?
If all the world is a stage, where is the audience sitting?

Our Spotlight Strategy – Future Technologies

With our Future Technologies Strategy we strive to provide a high rate of capital appreciation using primarily equity investments in emerging technologies.

We invest primarily in stocks, mutual funds or ETFs, and a money market fund. The proprietary HCM Safety Net suite of indicators is used to warn of potential stock market declines in which case exposure may be quickly reduced or hedged using inverse funds.

Click here to read more about our Future Technologies Strategy.

College Classes Coming

Fun-damentals of Investing for Retirees

Investing does not need to be dry. I try to make investing come alive with insights, humor and insider tips that allow you to discover how the principals being taught relate to you personally. This course can help you become more confident about your financial decisions.

In an easy format, we discuss 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, IRA strategies, planning to get the results you want, avoiding common investment mistakes and proven risk-reducing strategies that anyone can use.

3 Thursdays: February 20th, February 27th, and March 5th from 1:00-3:00 pm each day at Yavapai College. Tuition is $45.

Tax Tips for Arizona Newcomers

This is a class I present with Gidget Schutte, CPA. Tell your new friends that they can discover valuable tax savings from details about Arizona taxation that may differ from states in which they have lived in the past. Tax deductions, tax credits, investment and estate planning considerations unique to Arizona will all be discussed.

Thursday, February 6 from 1:00-3:00pm at Yavapai College. Tuition is $45.

A Slice of Life

Prescott Elks Theater

The Prescott Elks Theater is one of our local jewels. Recently restored to its 1902 opulence, it features opera boxes, gilded curtains, comfortable seats and frescoed ceilings. More importantly, it has wonderful entertainment at reduced prices for those of us over, ahem, a certain age.

There are many tribute bands playing music of famous performers. If you are like me, I never went to many concerts when I was young, so I don’t know what most of the performers actually look like. I can just close my eyes and the music is so good it seems like the real thing.

Whether you like the Rolling Stones, Frank Sinatra, Reba McEntire or anything in between, check out https://www.prescottelkstheater.com/ to see the list of upcoming shows including flamenco virtuoso Esteban, classic movies and stage productions. There are several offerings each week, and it is one of the best entertainment values around.

The Elks Theater is another slice of Americana that makes Prescott so special.

* 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.