May 1, 2018

Dance Steps of the Elephants

The Investment View from Prescott, Arizona

Someone recently asked me how I compete with the huge firms that dominate the financial services industry, and my reply was that it is easy since they can’t do what I do. They can’t match my nimbleness and flexibility, and considering that everything about an investment can change, that flexibility is worth a lot when change occurs.

Mega-firms, many of whose names you would recognize, cannot move in and out of investments quickly like I can. Let’s use IBM as an example. The largest holder of IBM shares recently owned almost $10 billion worth of IBM. If they wanted to cut their exposure to IBM in half, they would have to sell more IBM shares than those traded in most weeks. If they tried to dump that much stock at one time they would cause the price of IBM to plummet, unless they slowly fed their shares into the market over many weeks or months.

Because Hepburn Capital generally buys in blocks of less than $1 million, our shares can be liquidated in minutes without worrying about disrupting the market for that investment. This nimbleness is a big benefit when those relentless market cycles eventually turn against us as we know they eventually will.

In addition, I have developed systems that tell me what stocks the big institutions are buying and selling, so I can go with the flow of their large moves. In short, I have learned how to dance between the feet of the elephants.

College Classes Coming

Tax Tips for Arizona Newcomers – Discover valuable tax savings from details about Arizona taxation that may differ from States in which you have lived in the past. Tax deductions, tax credits, investment and estate planning considerations unique to Arizona will all be discussed. June 14th from 2:00-4:00 pm at Yavapai College. Register online at https://www.yc.edu/ or call the college at 928-717-7755 to register for class #SU18-119. Tuition is $45.

Why Bad Things Happen to Good Investments – This new class is the Cliff’s Notes version of my new book, Why Bad Things Happen to Good Investments, all in 2 hours on June 21st at 2:00. Register at https://www.yc.edu/ or call 928-717-7755 for class #SU18-120, Tuition is $45. 

What the Markets Are Doing

Stock markets throughout the world are in a topping formation, which in the past has led to lower stock prices. Since a picture is worth 1,000 words, here is a picture of the price of the S&P 500 Index** showing the topping pattern that caught my attention. I show the S&P 500** because it represents about 80% of all dollars in US stocks:

The basic definition of a downtrend is declining tops and declining bottoms on a chart like this. Clearly, we have declining tops, and as time goes on the price will either have to break above the declining tops trendline, suggesting that a new uptrend is beginning, or break down through the bottom trendline confirming that the downtrend is the dominant force.

History suggests that from this chart pattern a breakdown in prices occurs more often than an upward breakout does, so this is called a topping pattern, something prices are expected to move down from.

There has been almost no gain in US stocks this year, but there has been lots of risk. Much risk and no reward should indicate a time of caution for stock market investors.

The cause of the recent stock market unrest seems to be rising interest rates. Although interest yields on 10-year treasuries are at 3% as of this writing on April 28th, and that is still about ½ the historic average of nearly 6%. The current 3% rate is almost double that of 2016. It is the change of trend to upward rates that has the market spooked. Rising rates also cause losses for investors who are holding bonds.

With the dividend yield on the S&P 500** index at 1.85%, now lower than most Treasury bonds, higher yields make bonds more attractive relative to stocks than they have been in past years. Please note: I am not recommending anyone buy bonds, because bond yields can go much higher, driving bond prices down.

Gold prices continue to be stuck in the narrow trading range that they have been in all year.

As you can tell by looking at a gas pump, oil prices have risen and are at $67 a barrel today. The Saudis have rattled the market by implying they would cut production to try to move prices up to $100 per barrel, but I don’t think they can do it with our fracking industry ramping up production that can offset Saudi cuts. Institutional investors, which tend to be the smart money, are betting that prices will be lower by the end of summer, so don’t sweat the talk of higher oil prices. Ain’t gonna happen, in my opinion.

What’s Happening In Your Portfolio

With the S&P 500** Index chopping sideways, our model growth portfolio, Shock Absorber Growth*, has done likewise and is right about where it started in April as well as the beginning of the year. The S&P 500**, however; has had similar performance but with wild volatility, while the risk reducing properties of my Shock Absorber Growth* model are making it a much smoother ride for you.

We are largely “out of the market” these days. Shock Absorber Growth* portfolios are almost 50% in cash as of this writing on April 28th, which tells you what I think about this market. The balance is in stocks that are protected with hedges that go up if the stock market goes down, offsetting the risk of holding the few stocks we still own.

Both the bond market index, as represented by the Vanguard Total Market Bond Fund (Symbol: VBMFX), and our Flexible Income* model portfolio were down for April and for the year. Flexible Income* now holds 28% cash and the three remaining holdings are outperforming the index.

Our gold investments have been sold and that allocation is sitting in cash waiting for the gold market to let us know which direction it wants to go.

• 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.

If you haven’t had a review of your account for a while, please call the office to arrange a time to talk in person or on the phone. The number is 928-778-4000.

Mental Floss

Am I Meeting Your Expectations?

My style is to not call you and bug you about things you hired me to take care of. That stereotype is born of commissioned salesmen whose managers tell them to call you frequently so they can sell you on the newest, latest, better-than-the-last-one investment prompting another commission.

I just quietly take care of your accounts so you can go about your life and don’t have to worry about where your money is or isn’t. After all, would you rather have me doing market research or making phone calls?

This newsletter works well as my primary means of communication with you. You can see what I think about the markets and changes I am making in portfolios to manage the current conditions.

But this medium does not tell me what you are thinking, feeling and experiencing in your lives.

If you have changes in your life circumstances or your sensitivity to risk, or if something is just bothering you, please let me know so I can make sure that I am using the appropriate investments for your situation.

If I am not meeting your expectations, please tell me. If I am meeting your expectations, please tell your friends. Or better yet, get them a copy of my book, Why Bad Things Happen to Good Investments. That is one of the nicest things you can do for me.

Our Spotlight Strategy – Shock Absorber Growth

With our Shock Absorber Growth portfolio, 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.

A Slice of Life… 

Orlando was the site of this year’s NAAIM conference, the National Association for Active Investment Managers, and it turned into an excellent book marketing opportunity having a big roomful of money mangers all in the same place at the same time.

The book was very well received with advisers waiting in line to get copies several times. Comments like “It reads like butter compared to most Wall Street pieces” and invitations to do webinars for mutual fund companies’ advisers, who hopefully will, in turn, recommend the book to their investor clients. I returned home feeling really good about the conference.

If you have read my book, please send me your comments, and please rate Why Bad Things Happen to Good Investments on Amazon. Your ratings are very important to the success of this book and greatly appreciated by me. Thank you.  

* 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) 2018 William T. Hepburn. All rights reserved.