August 6, 2019
Elections and Policy Changes
With the Democrat debates underway, concerns abound among investors about the election outcome and what victory for Democrats might mean with their proposed radical program changes that could affect health, banking, tech and energy – which are all highly regulated industries. I don’t know what the outcome will be but as usual, I expect to recognize it when I see it. In the meantime, I would suggest that investors develop plans to hedge investments in these areas when needed, as that is what we professionals are doing.
Both the House and Senate committees have called executives from the major tech companies to testify before Congress. The pressure is bi-partisan as Republicans accuse them of censorship and voter manipulation, while Democrats are concerned about user privacy. Globally, governments are increasing data regulation. The E.U. has largely taken the lead by fining technology companies that mismanage data. Headline risk related to data scandals and governmental oversight is significant for these companies.
The Trump administration has been vocal in pushing its efforts to lower prescription drug prices. It now appears they have a partner in Nancy Pelosi and House Democrats with legislation for the Prescription Drug Pricing Reduction Act recently introduced. Lowering prescription drug prices is very politically popular. Potential changes may relate to drug rebates or how Medicare pays for prescription drugs. The headline risk is also significant for pharma companies.
The most common question I have received over the past year or so is how to invest in the burgeoning marijuana industry. My friends at Eventshares, an ETF sponsor that invests based upon governmental policies and their changes, mentioned this about the industry in a recent report:
“There are significant policy implications that come along with legalizing marijuana . . . We also question the attractiveness of investing in marijuana. If marijuana is legalized, what is defensible about a grower’s business? Does marijuana simply become another commodity with unattractive grower economics? Questions like these and marijuana stock volatility leave us cautious.”
Looking at the price of The Alternative Harvest ETF (symbol: MJ) that holds stocks of most of the major players in the industry, one can see the price is down 32% from its 2018 high, and is currently in a steady 6-month downtrend. Right now, investors seeking exposure to the marijuana industry are doing the equivalent of throwing darts at the Wall Street Journal to select your stocks, as there is little hard data to go on and the cannabis industry is changing quicker than one’s footing in a room full of marbles. I would recommend holding off on any investments in the Marijuana industry until things shake out, a general uptrend has begun and the winners and losers can be determined.
Big Changes – What the Markets Are Doing
What a change a few days can make. My original comments for this article, penned at the end of last week, reflected the slowing pace of the US stock market. As of this morning (Monday, August 5th), the sharp drop in stock markets around the world has changed the outlook from one of caution to alarm as all stock markets, both here and abroad, are looking like they are rolling over and entering clear downtrends.
A bright spot on the horizon is that US Money Market Assets keep rising due to investor nervousness about economic conditions, and are now at the highest levels in 9 years. This means there are a lot of potential buyers out there, and leading me to think that the current stock market decline is probably just seasonal weakness expected at some point during summer months.
Dramatic weakening of European economies has driven interest rates on European government bonds into negative territory as investors who flee their stock markets have to put their money somewhere, preferably somewhere safe, and that safest somewhere is government bonds. As more and more investors bid on a relatively fixed amount of available bonds, the winning bids go to investors willing to take the least interest to hold a default-proof investment. As of July 29th, depositors at the European Central Bank were being charged .4% for the privilege of parking their money securely. Note, I said charged, not paid. This is a radical departure from the way we expect banking to act.
LeggMason reports: “Economic uncertainty in the Euro area is on the upswing, as measured by Bloomberg’s composite measure, which combines readings on three key areas: financial markets, general economic policy, and surveyed business sentiment. The composite has now reached a level not seen since the European financial crisis of 2011-12: no wonder European Central Bank (ECB) President Mario Draghi last week described the Eurozone’s economic outlook as “worse and worse.”
That’s in contrast with the generally sanguine outlook of several indicators designed to look at similar factors in the U.S., according to Brandywine Global.
China’s economy is also in a swoon, with growth rates at their lowest levels in 30 years. The iShares China Large Company ETF (symbol: FXI) is trading today at a price 25% below its highs of early last year. That is bear market territory, and the trend is still downward.
John Mauldin has been monitoring the New York Federal Reserve’s Recession Predictor over the past year. And the probability of a US recession in 12 months, according to this indicator, has shot to a level that has preceded prior recessions. I’m guessing that the economic slowdowns in Europe and China are beginning to affect our economy, too. The big question is: If China sneezes, will the US catch a cold?
However, “Since 1970, the U.S. has never experienced a recession without oil prices first doubling,” Nicholas Colas, co-founder of DataTrek Research, noted last month. Light sweet crude bottomed at $42.36 on Christmas Eve. A doubling would take it to $84.72. West Texas Intermediate crude oil price closed on August 2nd at $55.19 and is declining, so this indicator is saying no recession is imminent.
Which one is going to be right? That is what makes this business so interesting. My advice, don’t sell until economic conditions actually begin to drive stock prices down in a meaningful way. Predicted recessions are always a talking point even when the economy is strong, but are often described as a long way off. We must remember that the economy and the stock market are two different things, and a lot of investment gains can be made before a recession actually arrives.
We are in the midst of the weakest months of the year for stocks. To have had the stock market hit highs a week before writing this newsletter (July 26, 2019) tells me that the weakness last week is more likely to be part of the seasonal pattern rather than a change in the primary trend of the market.
When respected market indicators point in different directions as they are doing now, this is the time when strategic diversification of your portfolios becomes more important. When the economy rolls over and pulls some segments of the stock market down, other parts of the markets will flourish. Do you really want to risk your life savings by putting all of your money on a single investment strategy, like the popular “buy and hope it works out” strategy? Or, would you sleep better with Investments that Adapt to Changing Markets® as we offer at Hepburn Capital? Diversifying among different buy/sell systems can protect your investments in changing markets like we have now.
My Adaptive strategies currently have 5 active systems to suggest times to buy and times to sell investments. If you agree that diversification reduces risk, then adding a level of strategic diversification can reduce your risk even more. If you want to stay invested with less risk, call the office today for an appointment to talk about how our Adaptive Market Strategies can work for you. And, please note that you will have much better results if you call before the market declines rather than after.
College Classes Coming
Tax Tips for Arizona Newcomers
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 previously lived. Tax deductions, tax credits, investment and estate planning considerations unique to Arizona will all be discussed. Monday, September 9th from 2:00-4:00 pm at Yavapai College. Register online with the link below or call the college at 928-717-7755 to register for class #FA19-041. Tuition is $45.
Register for the class online: Tax Tips for Arizona Newcomers
Fun-damentals of Investing for Retirees
Coming in October, along with a new class on IRA Strategies – stay tuned for details!
What’s Happening in Your Portfolio
I made significant changes yesterday (Monday, August 5th) in all of our portfolios, greatly reducing stock market risk in the process. My Shock Absorber Risk portfolio,* a suite of 4 different growth strategies, moved from 96% exposure to the stock market to having only 61% risk. This was accomplished by selling off riskier investments and holding about 30% in a money-market fund, along with buying a small hedge which goes up as the stock market goes down, cushioning account values in a decline.
I expect the market will continue its rise after a scary dip, and when it does, we will have cash to invest in new leading stocks.
Current Shock Absorber Growth* strategies include Future Technologies* (40%), Targeted Growth* (35%), Ultra Focus* (20%) and Gold (5%)
Flexible Income* portfolios currently include a mix of low volatility income funds and low-cost bond index ETFs and is much more stable than the stock market.
Adaptive strategies (Adaptive Growth* and Adaptive Balance*) are being cushioned from market volatility because they are blends of growth and income strategies.
- 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.
A Peek into the Future
I think Tesla stock stinks. I’ve said that here before. Its price is down 31% in the past 9 months and the numbers of investors who bet it will go down even further with short selling has risen to include 30.7% of shares available. Only a handful of the 7,772 stocks I can screen have a greater number of short sellers.
Despite that, I have come to admire Tesla founder, Elon Musk as much for his marketing savvy as his vision.
The recent Mensa “nerd camp” had a presentation on Hyperloop, a Musk idea to develop high speed subways capable of transporting people and goods at up to 760 miles per hour with a vacuum tube affair sort of like bank drive-ups use.
What I found fascinating is the way Musk “open-sourced” the project and quickly had 115 universities around the world form teams of students to participate in design and engineering competitions. He harnessed an incredible amount of brain power, essentially for free. Now that is an entrepreneur!
Oh, and I forgot to mention that Musk owns a tunnel boring company, too, which I presume will have an inside track on doing all the tunnel digging that will be required. Now that is a real Entrepreneur (with a capital E!).
So, I have incredible respect for Musk’s brilliance and savvy. But I still won’t buy Tesla stock and I can’t imagine what my face will look like with the G-forces required to go from 0-760 mph and back.
Mental Floss
My stomach is FLAT…
The L is just silent.
Our Spotlight Strategy – Shock Absorber Growth
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.
A Slice of Life
As some of you know, I spent 15 years living in Alaska after being taken there by the Army in 1971. Alaska looked a lot better than Vietnam during the war, so I was grateful and happy to be there despite the long winters.
I went on an Alaskan cruise last month, one that I had dismissed for many years thinking I had lived there so I didn’t need to visit. But then I realized I had never visited Ketchikan, Juneau and Skagway, places in the “Southeast” which are as much as 762 miles away from my home in Anchorage. So, we went, and the dry and moderate temperature we asked for arrived on schedule. The trip was great!
My favorite part was the narrow gauge train ride up the pass in Skagway. Etched into my memory from my days in Alaska are photos of men during the Klondike gold rush standing in line on the steep path up snowy Chilkoot Pass.
Also vivid in my memory of my Alaska days, is the poetry of Robert Service’s Spell of the Yukon. Service was a wonderful storyteller, rivaling our colorful Cowboy Poets here in Arizona. My favorite of his stories is “The Cremation of Sam McGee.” Check it out here if you have a couple minutes:
The Cremation of Sam McGee
BY ROBERT W. SERVICE
There are strange things done in the midnight sun
By the men who moil for gold;
The Arctic trails have their secret tales
That would make your blood run cold;
The Northern Lights have seen queer sights,
But the queerest they ever did see
Was that night on the marge of Lake Lebarge
I cremated Sam McGee.
Now Sam McGee was from Tennessee, where the cotton blooms and blows.
Why he left his home in the South to roam ’round the Pole, God only knows.
He was always cold, but the land of gold seemed to hold him like a spell;
Though he’d often say in his homely way that “he’d sooner live in hell.”
On a Christmas Day we were mushing our way over the Dawson trail.
Talk of your cold! through the parka’s fold it stabbed like a driven nail.
If our eyes we’d close, then the lashes froze till sometimes we couldn’t see;
It wasn’t much fun, but the only one to whimper was Sam McGee.
And that very night, as we lay packed tight in our robes beneath the snow,
And the dogs were fed, and the stars o’erhead were dancing heel and toe,
He turned to me, and “Cap,” says he, “I’ll cash in this trip, I guess;
And if I do, I’m asking that you won’t refuse my last request.”
Well, he seemed so low that I couldn’t say no; then he says with a sort of moan:
“It’s the cursèd cold, and it’s got right hold till I’m chilled clean through to the bone.
Yet ’tain’t being dead—it’s my awful dread of the icy grave that pains;
So I want you to swear that, foul or fair, you’ll cremate my last remains.”
A pal’s last need is a thing to heed, so I swore I would not fail;
And we started on at the streak of dawn; but God! he looked ghastly pale.
He crouched on the sleigh, and he raved all day of his home in Tennessee;
And before nightfall a corpse was all that was left of Sam McGee.
There wasn’t a breath in that land of death, and I hurried, horror-driven,
With a corpse half hid that I couldn’t get rid, because of a promise given;
It was lashed to the sleigh, and it seemed to say: “You may tax your brawn and brains,
But you promised true, and it’s up to you to cremate those last remains.”
Now a promise made is a debt unpaid, and the trail has its own stern code.
In the days to come, though my lips were dumb, in my heart how I cursed that load.
In the long, long night, by the lone firelight, while the huskies, round in a ring,
Howled out their woes to the homeless snows— O God! how I loathed the thing.
And every day that quiet clay seemed to heavy and heavier grow;
And on I went, though the dogs were spent and the grub was getting low;
The trail was bad, and I felt half mad, but I swore I would not give in;
And I’d often sing to the hateful thing, and it hearkened with a grin.
Till I came to the marge of Lake Lebarge, and a derelict there lay;
It was jammed in the ice, but I saw in a trice it was called the “Alice May.”
And I looked at it, and I thought a bit, and I looked at my frozen chum;
Then “Here,” said I, with a sudden cry, “is my cre-ma-tor-eum.”
Some planks I tore from the cabin floor, and I lit the boiler fire;
Some coal I found that was lying around, and I heaped the fuel higher;
The flames just soared, and the furnace roared—such a blaze you seldom see;
And I burrowed a hole in the glowing coal, and I stuffed in Sam McGee.
Then I made a hike, for I didn’t like to hear him sizzle so;
And the heavens scowled, and the huskies howled, and the wind began to blow.
It was icy cold, but the hot sweat rolled down my cheeks, and I don’t know why;
And the greasy smoke in an inky cloak went streaking down the sky.
I do not know how long in the snow I wrestled with grisly fear;
But the stars came out and they danced about ere again I ventured near;
I was sick with dread, but I bravely said: “I’ll just take a peep inside.
I guess he’s cooked, and it’s time I looked”; … then the door I opened wide.
And there sat Sam, looking cool and calm, in the heart of the furnace roar;
And he wore a smile you could see a mile, and he said: “Please close that door.
It’s fine in here, but I greatly fear you’ll let in the cold and storm—
Since I left Plumtree, down in Tennessee, it’s the first time I’ve been warm.”
There are strange things done in the midnight sun
By the men who moil for gold;
The Arctic trails have their secret tales
That would make your blood run cold;
The Northern Lights have seen queer sights,
But the queerest they ever did see
Was that night on the marge of Lake Lebarge
I cremated Sam McGee.
* 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) 2019 William T. Hepburn. All rights reserved.
